diff --git a/raw/filings/0000110471/2019/0000110471-20-000008/item1.txt b/raw/filings/0000110471/2019/0000110471-20-000008/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..d43dc7bef151ccae27caab7fc436ec7c6917a4ec --- /dev/null +++ b/raw/filings/0000110471/2019/0000110471-20-000008/item1.txt @@ -0,0 +1,86 @@ +Item 1. +Business +General +Wolverine World Wide, Inc. (the “Company”) is a leading designer, marketer and licensor of a broad range of quality casual footwear and apparel, performance outdoor and athletic footwear and apparel, kids' footwear, industrial work boots and apparel, and uniform shoes and boots. The Company, a Delaware corporation, is the successor of a Michigan corporation of the same name, originally organized in 1906, which, in turn, was the successor of a footwear business established in Grand Rapids, Michigan in 1883. The Company’s products are marketed worldwide in approximately 170 countries and territories through owned operations in the United States ("U.S."), Canada, the United Kingdom and certain countries in continental Europe and Asia Pacific. In other regions (Latin America, portions of Europe and Asia Pacific, the Middle East and Africa), the Company relies on a network of third-party distributors, licensees and joint ventures. +Today, the Company sources and markets a broad range of footwear styles, including shoes, boots and sandals under many recognizable brand names, including Bates ® , Cat ® , Chaco ® , Harley-Davidson ® , Hush Puppies ® , Hytest ® , Keds ® , Merrell ® , Saucony ® , Sperry ® and Wolverine ® . The Company licenses its Stride Rite ® brand under a global license arrangement. The Company also markets Merrell ® and Wolverine ® brand apparel and accessories and licenses some of its brands for use on non-footwear products, including Hush Puppies ® apparel, eyewear, watches, socks, handbags and plush toys; Wolverine ® eyewear and gloves; Keds ® apparel; Saucony ® apparel and Sperry ® apparel. Cat ® is a registered trademark of Caterpillar Inc. and Harley-Davidson ® is a registered trademark of H-D U.S.A., LLC. +The Company’s products generally feature contemporary styling with proprietary technologies designed to provide maximum comfort and performance. The Company believes that its primary competitive advantages are its well-recognized brand names, patented proprietary designs, diverse product offerings and comfort technologies, wide range of distribution channels and diversified manufacturing and sourcing base. The Company combines quality materials and skilled workmanship to produce footwear according to its specifications at both Company-owned and third-party manufacturing facilities. The Company’s products are sold at various price points targeting a wide range of consumers of casual, work, outdoor and athletic footwear and apparel. +The Company’s portfolio of brands is organized into the following two operating segments, which the Company has determined to be reportable operating segments. +• +Wolverine Michigan Group , consisting of Merrell ® footwear and apparel, Cat ® footwear, Wolverine ® footwear and apparel, Chaco ® footwear, Hush Puppies ® footwear and apparel, Bates ® uniform footwear, Harley-Davidson ® footwear and Hytest ® safety footwear; and +• +Wolverine Boston Group , consisting of Sperry ® footwear and apparel, Saucony ® footwear and apparel, Keds ® footwear and apparel, and the Kids footwear business, which includes the Stride Rite ® licensed business, as well as kids' footwear offerings from Saucony ® , Sperry ® , Keds ® , Merrell ® , Hush Puppies ® and Cat ® . +The reportable segments are engaged in designing, manufacturing, sourcing, marketing, licensing and distributing branded footwear, apparel and accessories. Revenue for the reportable operating segments includes revenue from the sale of branded footwear, apparel and accessories to third-party customers; revenue from third-party distributors, licensees and joint ventures; and revenue from the Company’s consumer-direct businesses. +The Company also reports “Other” and “Corporate” categories. The Other category consists of the Company’s leather marketing operations, sourcing operations and multi-branded consumer-direct retail stores. The Corporate category consists of unallocated corporate expenses, organizational transformation costs, reorganization costs, restructuring and other related costs, impairment of intangible assets, environmental and other related costs, a foreign currency remeasurement gain recorded in the second quarter of fiscal 2018 and a pension settlement loss related to the Company's purchase of pension annuity contracts in the fourth quarter of fiscal 2018 . The Company’s operating segments are determined based on how the Company internally reports and evaluates financial information used to make operating decisions. The operating segment managers all report directly to the chief operating decision maker. The Company’s Global Operations Group is responsible for sourcing, distribution, logistics and customer support. +The Company's operating segments and related brands are described in more detail below. +1. +Wolverine Michigan Group +Merrell ® : Merrell ® exists to give you all you really need to discover the simple yet profound power of the trail. We believe the trail is for everyone and our goal is to provide thoughtfully designed, rigorously tested products that over-deliver on performance, versatility and durability. The brand's slogan is "When you’ve got air in your lungs and good shoes on your feet, you’ve got everything you need." Merrell ® designs and creates products (footwear, apparel and accessories) in strategic categories such as technical hiking, trail running, training, lifestyle and work for men, women and children. Merrell ® footwear is sold in a variety of channels including outdoor +5 +Table of Contents +specialty, sporting goods and department stores, internet and catalog retailers, Merrell ® retail stores and an eCommerce site. Merrell ® apparel and accessories helps extend the brand to create a versatile line of apparel built for both performance and lifestyle. Merrell ® also creates and markets a line of accessories including daypacks and duffels fit for adventure. +Cat ® Footwear: Cat ® footwear comes from a world of industry and action. The Company is the exclusive global footwear licensee of Caterpillar Inc., and for over two decades, Cat ® footwear has been designing and engineering quality footwear that lives up to the hard-working reputation of the Caterpillar ® brand. Cat ® footwear originally created a small collection of rugged work boots designed to provide workers with comfort and durability that met the challenges of the worksite. Today, Cat ® footwear offers a wide range of footwear, including work boots, casual shoes and women’s fashion products - sold through a global distribution network. Cat ® , Caterpillar ® , Build For It ® , "Caterpillar Yellow" and "Power Edge" are registered trademarks of Caterpillar Inc. +Wolverine ® : The Wolverine ® brand offers high-quality boots and shoes to deliver comfort and durability. The Wolverine ® brand, in existence since 1883, markets footwear in the trade work, outdoor recreation, and lifestyle and heritage categories. The development of DuraShocks ® and EPX Anti-Fatigue ® technologies, as well as the development of the Contour Welt ® line, allows the Wolverine ® brand to offer a broad line of footwear with a focus on comfort. The Wolverine ® work product line targets skilled trade workers and focuses on work boots and shoes with protective features such as toe caps, metatarsal guards and electrical hazard protection. The Wolverine ® outdoor recreation product lines incorporate DuraShocks ® and other technologies and comfort features into products designed for outdoor sport use and to meet the needs of hunters, fishermen and other active outdoor sports enthusiasts. The brand's lifestyle and heritage line targets consumers looking for rugged and well-crafted casual boots and shoes. The brand also markets a line of work and rugged casual Wolverine ® brand apparel and socks, and licenses the Wolverine ® brand for use on eyewear, gloves and base layers. +Chaco ® : Chaco’s whitewater heritage and 30-year history of outfitting rafting guides has helped cement its place in the high-performance footwear space. Every product Chaco ® makes exists to connect life-loving explorers to the wonders of the world through all-terrain versatility, unmatched durability, and signature LUVSEAT™ footbed arch support. Consumers can demonstrate their own creativity and express themselves through the virtually limitless sandal customization options available through the MyChaco design program. The brand’s products are distributed primarily through leading outdoor and footwear specialty retailers. as well as through an eCommerce site and other leading internet retailers. +Hush Puppies ® : Launched in 1958, Hush Puppies ® has a history of bringing color and optimism to a boring, brown shoe category. Today, Hush Puppies ® exists to inspire our consumers to live life on the bright side. We believe that optimism is contagious and that by encouraging positivity we can help shape a better world. Hush Puppies ® footwear is distributed through wholesale and licensed channels, and through an eCommerce site. In addition, the Hush Puppies ® brand is licensed to third parties engaged in the manufacturing, marketing and distribution of apparel, handbags, eyewear, socks, watches and plush toys sold around the world. Hush Puppies ® , with its basset hound icon, is one of the most well-known and loved brands worldwide. +Bates ® : The Bates ® brand is a leader in supplying footwear to military and civilian uniform wearers. Bates ® utilizes DuraShocks ® , Bates iCS ® , Bates Endurance Performance System and other proprietary comfort technologies in the design of its footwear. Bates ® supplies military footwear to several foreign countries. Civilian uniform users include police officers, security and emergency medical services workers, and others in light industrial occupations. Bates ® products are distributed through sporting goods chains, department stores, uniform specialty retailers and catalog retailers. +Harley-Davidson ® Footwear: Pursuant to a license arrangement with the Harley-Davidson Motor Company, Inc., the Company has footwear marketing and distribution rights for Harley-Davidson ® branded footwear. Harley-Davidson ® branded footwear products include motorcycle, casual, fashion, work and western footwear for men, women and kids. Harley-Davidson ® footwear is sold globally through a network of independent Harley-Davidson ® dealerships and other retail outlets. Harley-Davidson ® is a registered trademark of H-D U.S.A., LLC. +Hytest ® Safety Footwear: The Hytest ® product line consists of high-quality work boots and shoes that incorporate various specialty safety features designed to protect against hazards of the workplace, including steel toe, composite toe, nano toe, metatarsal guards, electrical hazard protection, static dissipating and conductive footwear. Hytest ® footwear is distributed primarily through a network of independently-owned Shoemobile ® mobile truck retail outlets providing direct sales of the Company’s occupational and work footwear brands to workers at industrial facilities and also through direct sales arrangements with large industrial customers. +6 +Table of Contents +2. +Wolverine Boston Group +Sperry ® : Sperry ® is a leading global nautical performance and lifestyle brand offering footwear, apparel and accessories to a broad range of consumers. The brand has been an American favorite since 1935 with the introduction of the industry’s first boat shoe. Today, Sperry ® remains the leader in the boat shoe category, but has also expanded its business into casuals, dress casuals, wet weather, boots and vulcanized product categories. Sperry ® has evolved into a well-balanced, multi-category (footwear, apparel and accessories) and year-round lifestyle brand for men and women. The Sperry core product lines have evolved from the A/O Boat Shoe to include Saltwater in Wet Weather and the CVO, Striper and Crest Vibe. The brand is primarily distributed through leading premium and better lifestyle retailers, as well as through Sperry ® retail stores and an eCommerce site. +Saucony ® : Saucony ® is a purpose driven performance running brand with roots dating back to 1898. Saucony ® targets both elite and casual runners through award winning design, innovation and performance technology. The brand is focused on meeting the functional biomechanical needs of runners while delivering on their emotional style needs as well. Saucony innovations include Powerrun+, a cushioning technology system; PWRFOAM midsole, PWRTRAC outsole, and FormFit, an adaptive fit system. Saucony ® offers five categories of performance footwear products; Competition, Road, Trail, Tread and Walking; as well as the Originals lifestyle footwear inspired by Saucony ® products of the 1970's to 2000's. Saucony ® also offers a complete line of performance running apparel and select lifestyle apparel pieces. Through our Run For Good brand platform and charitable foundation, Saucony ® is strengthening connections with consumers and elevating the positioning of the brand. The brand’s products are distributed primarily through leading run specialty and sporting goods retailers, as well as Saucony ® retail stores and an eCommerce site. +Keds ® : Keds ® is an authentic, casual lifestyle brand brought to life in 1916 with its simple, yet chic take on canvas footwear. Emerging from its popularity came the iconic Champion ® sneaker, a shoe that soon ignited a style revolution, popularized by everyone from fashion icons to the girl next door. Today, Keds ® remains a true American brand, rooted in female empowerment and fueled by a passion for inspiring a new generation of ladies. The brand’s product architecture targets young women consumers with both core offerings and seasonal iterations featuring updated prints, patterns, materials and constructions on lace-up and slip-on silhouettes, all designed specifically for a woman’s foot. Keds ® continues to inspire loyalty through purposeful, innovative and classic, yet modernized footwear and its unwavering support for putting ladies first. +Kids Footwear: The Kids footwear business includes the Stride Rite ® licensed business, as well as kids' footwear offerings from Saucony ® , Sperry ® , Keds ® , Merrell ® , Hush Puppies ® and Cat ® . With a history dating back to 1919, Stride Rite ® is an industry leader in kids' footwear. The Company signed a multi-year license agreement in 2017 to license the Stride Rite ® brand. Kids' footwear offerings from Saucony ® , Sperry ® , Keds ® , Merrell ® , Hush Puppies ® and Cat ® are distributed through premium and better lifestyle retailers, outdoor and sporting good retailers, as well as through an eCommerce site and by a license partner. +Other Businesses +In addition to its reportable segments, the Company operates a performance leather business, sourcing operations and a multi-brand consumer-direct business. +Wolverine Leathers Division - The Wolverine Leathers Division markets pigskin leather for use primarily in the footwear industry. The Company believes pigskin leather offers superior performance and other advantages over cowhide leather. The Company’s waterproof and stain resistant leathers are featured in some of the Company’s footwear lines and also sold to external footwear brands. +Sourcing Division - The sourcing division earns third-party commission revenue by providing consulting services related to product development, production control, quality assurance, materials procurement, compliance and other services. +Multi-brand Consumer-Direct Division - The multi-brand consumer-direct division includes retail stores that sell footwear and apparel from the Company's brand portfolio and other brands. +Marketing +The Company’s marketing strategy is to develop brand-specific plans and related promotional materials that foster a consistent message for each of the Company’s core brands across the globe. Each operating segment has dedicated marketing personnel who develop the marketing strategies for specific brands. Marketing campaigns and strategies vary by brand, but are generally designed to target consumers in order to increase awareness of, and affinity for, the Company’s brands. The Company’s advertisements typically emphasize fashion, comfort, quality, durability, functionality and other performance and lifestyle attributes of the +7 +Table of Contents +Company’s brands and products. Components of brand-specific marketing plans vary and may include print and radio advertising, search engine optimization, social networking sites, event sponsorships, in-store point-of-purchase displays, promotional materials and sales and technical assistance. +In addition to the Company’s internal marketing efforts, each brand provides its third-party licensees and distributors with creative direction, brand images and other materials to convey globally consistent brand messaging, including (i) direction on the categories of footwear and apparel to be promoted; (ii) photography and layouts; (iii) broadcast advertising, including commercials and film footage; (iv) point-of-purchase specifications, blueprints and packaging; (v) sales materials; and (vi) consulting services regarding retail store layout and design. The Company believes its brand names represent a competitive advantage, and the Company, along with its licensees and distributors, make significant marketing investments to promote and enhance the market position of its products and drive brand awareness. +Domestic Sales and Distribution +The Company uses a variety of means to support sales to a variety of domestic distribution channels: +• +The Company uses a dedicated sales force and customer service team, third party sales representatives and point-of-purchase materials to support domestic sales. +• +The Company maintains core in-stock inventories to service department stores, national chains, specialty retailers, catalog retailers, independent retailers, uniform outlets and its own consumer-direct business. +• +The Company uses volume direct programs to ship products to retail customers and to provide products at competitive prices to service major retail, catalog, mass merchant and government customers. +• +The Company also operates brick and mortar retail stores and eCommerce sites. +A broad distribution base insulates the Company from dependence on any one customer. No single customer accounted for more than 10% of the Company’s consolidated revenue in fiscal 2019 , 2018 or 2017 . +International Operations and Global Licensing +The Company’s foreign-sourced revenue is generated from a combination of (i) sales of branded footwear and apparel through the Company’s owned operations in Canada, the United Kingdom and certain countries in continental Europe and Asia-Pacific; (ii) revenue from third-party distributors for certain markets and businesses; (iii) revenue from a network of third-party licensees; and (iv) revenue and income from joint ventures that market the Company’s branded products in Mexico, Colombia and China. The Company’s international owned operations are located in markets where the Company believes it can gain a strategic advantage by directly controlling the sale of its products into retail accounts. License and distribution arrangements enable the Company to generate sales in other markets without the capital commitment required to maintain related foreign operations, employees, inventories or localized marketing programs. The Company believes that joint ventures will provide it with a more meaningful ownership stake and near-term brand impact in fast-growing markets than its traditional licensee and distributor arrangements. +The Company continues to develop its international network of third-party licensees and distributors to market its branded products. The Company assists its licensees in designing products that are appropriate to each foreign market, yet consistent with global brand positioning. Pursuant to license or distribution agreements, third-party licensees and distributors either purchase goods directly from the Company and authorized third-party manufacturers or manufacture branded products themselves, consistent with Company standards. Distributors and licensees are responsible for independently marketing and distributing the Company’s branded products in their respective territories, with product and marketing support from the Company. +Manufacturing and Sourcing +The Company directly controls the majority of the units of footwear and apparel sourced under the Company’s brand names. The Company’s licensees directly control the balance. Substantially all of the units sourced by the Company are procured from numerous third-party manufacturers in the Asia Pacific region. The Company maintains offices in the Asia Pacific region to develop and facilitate sourcing strategies. The Company has established guidelines for each of its third-party manufacturers in order to monitor product quality, labor practices and financial viability. The Company has adopted “Engagement Criteria for Partners and Sources,” a policy that requires the Company’s domestic and foreign manufacturers, licensees and distributors to use ethical business standards, comply with all applicable health and safety laws and regulations, commit to use environmentally safe practices, treat employees fairly with respect to wages, benefits and working conditions and not use child or prison labor. The Company’s third-party sourcing strategy allows the Company to (i) benefit from lower manufacturing costs and state-of-the-art manufacturing facilities; (ii) source high quality raw materials from around the world; and (iii) avoid capital expenditures necessary for additional owned factories. The Company believes that its overall global manufacturing strategy provides the flexibility to properly balance the need for timely shipments, high quality products and competitive pricing. +8 +Table of Contents +The Company’s principal raw material is quality leather, which it purchases from a select group of domestic and foreign suppliers. The widespread availability of common upper materials and specialty leathers eliminates reliance by the Company on a single supplier. +The Company currently purchases all of the raw pigskins used for its Wolverine Leathers Division from one domestic source, which has been a reliable and consistent supplier to the Company for over 50 years. Alternative sources of raw pigskin are available, but the Company believes these sources offer less advantageous pricing, quality and compatibility with the Company’s processing method. The Company purchases all of its other raw materials and component parts from a variety of sources and does not believe that any of these sources are a dominant supplier. +Trademarks, Licenses and Patents +The Company holds a significant portfolio of registered and common law trademarks that identify its branded products and technologies. The Company’s owned trademarks include Hush Puppies ® , Dog Likeness (registered design trademark), Wolverine ® , Bates ® , Chaco ® , Soft Style ® , Wolverine Fusion ® , DuraShocks ® , MultiShox ® , Wolverine Compressor ® , Wolverine ICS ® , Hidden Tracks ® , iTechnology ™ , Bounce ® , Comfort Curve ® , Hytest ® , Merrell ® , M Circle Design (registered design trademark), Continuum ® , Q Form ® , Sperry ® , Saucony ® , Stride Rite ® and Keds ® . The Company’s Wolverine Leathers Division markets its pigskin leathers under the trademarks Wolverine Warrior Leather ® , Weather Tight ® and All Season Weather Leathers™ . The Company has footwear marketing and distribution rights under the Cat ® and Harley-Davidson ® trademarks pursuant to license arrangements with the respective trademark owners. The Cat ® license has a term through December 31, 2024 and the Harley-Davidson ® license has a term through December 31, 2022. Both licenses are subject to early termination for breach. +The Company believes that consumers identify its products by the Company’s trademarks and that its trademarks are valuable assets. The Company has a policy of registering its primary trademarks and vigorously defending its trademarks against infringement or other threats whenever practicable. The Company also holds many design and utility patents, copyrights and various other proprietary rights. The Company protects its proprietary rights under applicable laws. +Order Backlog +At February 22, 2020 , the Company had an order backlog of $ 974 million , compared to an order backlog of $ 964 million at February 23, 2019 . Substantially all of the backlog as of February 22, 2020 relates to orders for products expected to ship in fiscal 2020 . Orders in the backlog are subject to cancellation by customers and to changes in planned customer demand or at-once orders. The backlog at any particular time is affected by a number of factors, including seasonality, retail conditions, expected customer demand, product availability and the schedule for the manufacture and shipment of products. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be predictive of eventual actual shipments. +Seasonality +The Company experiences moderate fluctuations in sales volume during the year, as reflected in quarterly revenue. The Company expects current seasonal sales patterns to continue in future years. The Company also experiences some fluctuation in its levels of working capital, typically including an increase in net working capital requirements near the end of the first and third fiscal quarters. The Company meets its working capital requirements through internal operating cash flows and, as needed, the Revolving Credit Facility, as discussed in more detail under the caption "Liquidity and Capital Resources" in Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations". +Competition +The Company markets its footwear and apparel lines in a highly competitive and fragmented environment. The Company competes with numerous domestic and international footwear marketers, some of whom are larger and have greater resources than the Company. Product performance and quality, including technological improvements, product identity, competitive pricing and ability to control costs and the ability to adapt to style changes are all important elements of competition in the footwear and apparel markets served by the Company. The footwear and apparel industries are subject to changes in consumer preferences. The Company strives to maintain its competitive position through promotions designed to increase brand awareness, manufacturing and sourcing efficiencies, and the style, comfort and value of its products. Future sales by the Company will be affected by its continued ability to sell its products at competitive prices and to meet shifts in consumer preferences. +Because of the lack of reliable published statistics, the Company is unable to state with certainty its competitive position in the overall footwear and apparel industries. The non-athletic footwear and apparel markets are highly fragmented and no one company has a dominant market position. +Environmental Matters +The Company uses and generates certain substances and wastes that are regulated or may be deemed hazardous to the environment under certain federal, state and local regulations. The Company works with foreign and domestic federal, state and local agencies +9 +Table of Contents +from time to time to resolve cleanup issues at various sites and other regulatory issues. Financial information regarding the Company’s environmental remediation activities is found in Note 17 to our Consolidated Financial Statements. +Employees +As of December 28, 2019 , the Company had approximately 4,000 domestic and foreign production, office and sales employees. The Company presently considers its employee relations to be good. +Available Information +Information about the Company, including the Company’s Code of Business Conduct, Corporate Governance Guidelines, Director Independence Standards, Accounting and Finance Code of Ethics, Audit Committee Charter, Compensation Committee Charter and Governance Committee Charter, is available at its website at www.wolverineworldwide.com/investor-relations/corporate-governance . Printed copies of the documents listed above are available upon request, without charge, by writing to the Company at 9341 Courtland Drive, N.E., Rockford, Michigan 49351, Attention: General Counsel. +The Company also makes available on or through its website at www.wolverineworldwide.com/investor-relations , free of charge, the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports (along with certain other Company filings with the Securities and Exchange Commission (“SEC”)), as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. These materials are also accessible on the SEC’s website at www.sec.gov . \ No newline at end of file diff --git a/raw/filings/0000110471/2019/0000110471-20-000008/item9a.txt b/raw/filings/0000110471/2019/0000110471-20-000008/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..e70d0a88fb573e27eafd9a039ed453cf355f35ca --- /dev/null +++ b/raw/filings/0000110471/2019/0000110471-20-000008/item9a.txt @@ -0,0 +1,9 @@ +Item 9A. +Controls and Procedures +Evaluation of Disclosure Controls and Procedures +An evaluation was performed under the supervision, and with the participation, of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on and as of the time of such evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K. +Management’s Report on Internal Control Over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of internal control over financial reporting as of December 28, 2019 , based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013 framework). The Company's management excluded Sportlab S.R.L., acquired on April 30, 2019, from its evaluation of internal control over financial reporting as of December 28, 2019. As of December 28, 2019, Sportlab S.R.L. represented less than 2% of our consolidated total assets and consolidated net sales for the annual period ended December 28, 2019. Based on that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that internal control over financial reporting was effective as of December 28, 2019 . +The effectiveness of the Company’s internal control over financial reporting as of December 28, 2019 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report, which is included in Item 8 of this Annual Report on Form 10-K and is incorporated herein by reference. +Changes in Internal Control Over Financial Reporting +There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended December 28, 2019 that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000110471/2019/0000110471-20-000008/rp_note.txt 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Employer +Identification No.) +2970 Wilderness Place , Suite 100 +Boulder , CO +80301 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: ( 303 ) 417-0500 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading +Symbol(s) +Name of each exchange on which registered +Common Stock, par value $0.001 per share +BDSX +The NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☒ No ☐ +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☐ +Accelerated filer +☐ +Non-accelerated filer +☐ +Smaller reporting company +☒ +Emerging growth company +☒ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +The aggregate market value of the Registrant’s common stock, par value $.001 per share (the “Common Stock”) held by non-affiliates was approximately $ 344,635,079 based upon the December 31, 2020, closing price of $20.16 as reported by the Nasdaq Global Select Market. The Registrant has elected to use December 31, 2020 as the calculation date, which was the last trading date of the registrant’s most recently completed fiscal year, because on June 30, 2020 (the last business day of the registrant’s second fiscal quarter), the Registrant was a privately held company. +The number of shares of Registrant’s Common Stock outstanding as of March 12, 2021 was 26,577,782 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for its 2021 Annual Meeting of Shareholders are to be incorporated by reference into Part +III, as specifically set forth in Part III.) +Table of Contents +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +45 +Item 1B. +Unresolved Staff Comments +100 +Item 2. +Properties +100 +Item 3. +Legal Proceedings +100 +Item 4. +Mine Safety Disclosures +100 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +101 +Item 6. +Selected Financial Data +101 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +102 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +115 +Item 8. +Financial Statements and Supplementary Data +115 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +115 +Item 9A. +Controls and Procedures +115 +Item 9B. +Other Information +115 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +116 +Item 11. +Executive Compensation +116 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +116 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +116 +Item 14. +Principal Accounting Fees and Services +116 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +117 +Item 16 +Form 10-K Summary +117 +i +SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future financial condition, results of operations, business strategy and plans, and objectives of management for future operations, as well as statements regarding industry trends, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions. +We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, factors, and assumptions described under the section titled “Risk Factors” and elsewhere in this annual Report on Form 10-K, regarding, among other things: +• +our inability to achieve or sustain profitability; +• +our ability to attain significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies for our diagnostic tests; +• +difficulties managing our growth, which could disrupt our operations; +• +failure to retain sales and marketing personnel, and failure to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests to generate revenue growth; +• +failure to maintain our current relationships, or enter into new relationships, with biopharmaceutical companies; +• +significant fluctuation in our operating results, causing our operating results to fall below expectations or any guidance we provide; +• +the demand for our COVID-19 and antibody testing program and our ability to meet such demand; +• +product performance and reliability to maintain and grow our business; +• +third-party suppliers, including courier services, contract manufacturers and single source suppliers; making us vulnerable to supply problems and price fluctuations; +• +the impact of a pandemic, epidemic, or outbreak of an infectious disease in the United States or worldwide, including the COVID-19 pandemic on our business; +• +natural or man-made disasters and other similar events, including the COVID-19 pandemic, negatively impacting our business, financial condition, and results of operations; +• +failure to offer high-quality support for our diagnostic tests, which may adversely affect our relationships with providers and negatively impact our reputation among patients and providers; +• +our inability to continue to innovate and improve our diagnostic tests and services we offer; +• +security or data privacy breaches or other unauthorized or improper access; +• +significant disruptions in our information technology systems; +• +the incurrence of substantial liabilities and limiting or halting the marketing and sale of our diagnostic tests due to product liability lawsuits; +• +our inability to compete successfully with competition from many sources, including larger companies; +• +performance issues, service interruptions or price increases by our shipping carriers and warehousing providers; +• +cost-containment efforts of our customers, purchasing groups and integrated delivery networks having a material adverse effect on our sales and profitability; +• +potential effects of litigation and other proceedings; +1 +• +general economic and financial market conditions; +• +our ability to attract and retain key personnel; +• +current and future debt financing placing restrictions on our operating and financial flexibility; +• +our need to raise additional capital to fund our existing operations, develop our platform, commercialize new diagnostic tests, or expand our operations; +• +the acquisition of other businesses, which could require significant management attention; +• +the uncertainty of the insurance coverage and reimbursement status of newly approved diagnostic tests; +• +future healthcare reform measures that could hinder or prevent the commercial success of our diagnostic tests; +• +compliance with anti-corruption, anti-bribery, anti-money laundering and similar laws; +• +compliance with healthcare fraud and abuse laws; +• +our ability to develop, receive regulatory clearance or approval or certification for, and introduce new diagnostic tests or enhancements to existing diagnostic tests that will be accepted by the market in a timely manner; +• +failure to comply with ongoing FDA or other domestic and foreign regulatory authority requirements, or unanticipated problems with our diagnostic tests, causing them to be subject to restrictions or withdrawal from the market; +• +future product recalls; +• +legal proceedings initiated by third parties alleging that we are infringing, misappropriating, or otherwise violating their intellectual property rights, the outcome of which would be uncertain; +• +the volatility of the trading price of our common stock; +• +inaccurate estimates or judgments relating to our critical accounting policies, which could cause our operating results to fall below the expectations of securities analysts and investors; and +• +other risks, uncertainties and factors, including those set forth under Risk Factors. +These risks are not exhaustive. Other sections of this Annual Report on Form 10-K may include additional factors that could harm our business and financial performance. New risk factors may emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. +You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K or to conform these statements to actual results or to changes in our expectations. +In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. +You should read this Annual Report on Form 10-K and the documents that we reference and have filed as exhibits with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. +2 +PART I +Item 1. Business. +Our mission is to improve every patient’s lung disease care by empowering physicians with swift, comprehensive and actionable insights. +Our vision is to be a trusted business partner that the world relies on for data-driven diagnostics in lung disease and beyond. +Business Overview +Biodesix, Inc. (“Biodesix”, “we,” “us,” “our” or the “Company”) is a leading data-driven diagnostic solutions company leveraging state of the art technologies with our proprietary artificial intelligence (AI) platform to discover, develop, and commercialize solutions for clinical unmet needs, with a primary focus in lung disease. By combining a technology agnostic approach with a holistic view of the patient’s disease state, we believe our solutions provide physicians with greater insights to help personalize their patient’s care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe improves overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic Cortex®, to discover innovative diagnostic tests for clinical use. Because of this approach, we believe we are unique in the diagnostics market as this approach allows for a broader and more holistic understanding of each patient’s disease state. Our data-driven and technology agnostic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +We operate in a single segment and derive our revenue from two sources: (i) providing diagnostic testing services associated with blood-based lung and Coronavirus Disease 2019 (COVID-19) tests (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics (Services). We derived 90% and 71% of our total revenues for fiscal 2020 and fiscal 2019, respectively, from our diagnostic testing business. +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. Since our inception, we have performed over 285,000 tests and continue to generate a large and growing body of clinical evidence. We have participated in 27 clinical studies, five of which are ongoing, and have published over 275 peer-reviewed publications and presentations. We have over 140,000 samples and data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development (R&D) initiatives. +We have commercialized six diagnostic tests which are currently on market and we perform over 30 assays for research use as part of our laboratory services that have been used by over 50 biopharmaceutical customers and academic partners. +Blood-Based Lung Tests +We have four diagnostic blood-based tests across the lung cancer continuum of care, which generated $12.6 million and $17.3 million in revenue for fiscal 2020 and 2019 , respectively. +• +Nodify XL2® and Nodify CDT™ tests, together marketed as part of our Nodify Lung ™ Nodule Risk Assessment testing strategy, assess the risk of lung cancer to help identify the most appropriate treatment pathway. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +3 +• +GeneStrat ® and VeriStrat ® tests, together marketed as part of our Biodesix Lung Reflex ® testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to establish the patient’s prognosis and help guide treatment decisions. The GeneStrat tumor profiling test and the VeriStrat immune profiling test have a three-day average turnaround time, providing physicians with timely results to facilitate treatment decisions. +COVID-19 Tests +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe™ testing program. We generated $28.3 million in revenue from COVID-19 testing during fiscal 2020. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two United States Food and Drug Administration (FDA) Emergency Use Authorization (EUA)-authorized tests, a part of our customizable WorkSafe™ program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. +In February 2020, the U.S. Department of Health and Human Services Secretary declared a public health emergency for COVID-19 which justified the authorization of emergency use of diagnostic tests for the detection and/or diagnosis of COVID-19. The Bio-Rad SARS-CoV-2 Droplet Digital™ polymerase chain reaction ( ddPCR) test and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. The Bio-Rad SARS- CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under the Clinical Laboratory Improvement Amendments (CLIA) to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. Using the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab tests, we operate and have commercialized the Biodesix WorkSafe testing program. +Prior to using the Bio-Rad tests as part of our WorkSafe testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Post-launch development support for these tests have included improvements in on-boarding new personnel, logistics of sample collection, sample receipt and data reporting, all required to support our testing program. Additional releases of the laboratory data management software are ongoing and planned for the foreseeable future. +These tests are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems to assist in their back-to-work or back-to-school strategies, a crucial element of restarting economic activity. During 2020, we announced multiple partnerships for COVID-19 testing and have entered into an agreement with the State of Colorado to be one of the diagnostic companies to support wide-spread COVID-19 testing for the State. Additionally, we oversee and manage onsite testing and validating testing for the Big Ten Conference athletic competitions. +COVID-19 Pandemic +The COVID-19 pandemic has disrupted, and we expect will continue to disrupt, our non-COVID-19 testing operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States of Colorado and Kansas’ public health orders and the guidance from the Centers for Disease Control and Prevention. Employees who can perform their duties remotely are asked to work from home and those on site are asked to follow our social distance guidelines. Our sales, marketing and business development efforts have also been constrained by our operational response to the COVID-19 pandemic due to travel restrictions. We expect to continue to adjust our operational norms in an effort to help slow the spread of COVID-19 in the coming months, including complying with government directives and guidelines as they are modified and supplemented. +4 +The COVID-19 pandemic also has started to negatively affect, and we expect will continue to negatively affect, our non- COVID-19 testing- related revenue and our clinical studies. For example, cancer patients may have more limited access to hospitals, healthcare providers and medical resources as they take steps to control the spread of COVID-19. Our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized. As a result of the COVID-19 pandemic, beginning in the latter half of March 2020, we have been receiving fewer samples for non-COVID-19 testing on a daily average basis from our clinical and biopharmaceutical customers than before the outbreak of the COVID-19 pandemic. Further, our clinical studies, such as our ongoing INSIGHT study and our recently launched ALTITUDE study, as well as our arrangements with our biopharmaceutical customers, are expected to take longer to complete than what we originally expected before the outbreak of the COVID-19 pandemic. +Conversely, we are also experiencing an increase in revenues related to an increase in the demand for our Biodesix WorkSafe testing program which generated revenue of $28.3 million during fiscal 2020 of which $21.4 million is attributable to the fourth quarter 2020. As a result, our operating costs to expand capacity for COVID-19 testing also increased substantially during 2020 and we expect that trend to continue into the first quarter of 2021. There is no assurance that our COVID-19 testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. If the pandemic were to dissipate, whether due to acquiring herd immunity based on previous natural infection, and the availability and rapid distribution of vaccines, the evolution of variant strains that impact diagnostic test performance, or otherwise, the need for a COVID-19 test could decrease significantly and this could have an adverse effect on our results of operations and profitability. As a result, the increase in revenue due to any increase in demand for these diagnostic tests may not be indicative of our future revenue. See “Risk Factors” for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations. +Full Year Results for 2020 +For the year ended December 31, 2020, compared to the prior year: +• +Total Revenue was $45.6 million, an increase of 86%; +• +Gross Margin was $23.6 million, an increase of 27%; +• +Operating Expenses, Excluding Cost of Revenue, were $46.5 million, an increase of 3%; +• +Net Loss and Comprehensive Loss was $31.4 million, an increase of 2%; +• +Basic and Diluted Net Loss Per Common Share was $6.48; +• +Net Cash Used by Operating Activities was $21.4 million, compared to $21.7 million used; and +• +Cash and Cash Equivalents was $62.1 million at December 31, 2020, an increase of $56.8 million primarily resulting from our successful initial public offering in October 2020. +5 +Our Market Opportunity +Diagnostic Testing Market Size and Opportunity +Despite significant advances over the last decade, lung cancer is still the deadliest type of cancer in both men and women in the United States today. While diagnostic testing has become routinely used at certain points in the lung cancer continuum of care (diagnosis, treatment and monitoring), we believe there is a substantial need for novel, advanced testing to improve on the current standard of care. We estimate that in the United States, the lung cancer continuum of care currently represents over 10 million annual testing opportunities, and is over a $27 billion market annually for testing alone. +Over the last two decades, the use of biomarker testing in clinical trials has increased, with 55% of oncology trials involving the use of biomarker testing in 2018 versus 15% in 2000. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their research and development pipelines and increase chances of drug development success. We estimate that the biopharmaceutical partnering and research opportunities represent over a $2 billion market annually. +Lung Cancer Continuum of Care – Clinical Unmet Needs +Standards of care in lung cancer have evolved rapidly over the past decade, along with our understanding of the disease. With the introduction of numerous treatment options, physicians need an ever-increasing amount of information in order to select the best treatment plan for each individual patient. We believe that the lung cancer continuum of care has a variety of clinical unmet needs ranging from initial diagnosis of lung cancer after discovery of a lung nodule to treatment guidance for early and advanced stage disease, and monitoring for disease progression. +• +Diagnosis : We estimate approximately 1.6 million new incidental lung nodules and potentially 4 million lung nodules from the adoption of screening could be identified annually in the United States. Following initial discovery of a nodule, patients are typically evaluated by a pulmonologist for risk of lung cancer before an invasive procedure is carried out to obtain a tissue sample to confirm diagnosis. This risk assessment is based on clinical factors such as the patient’s smoking history and age, and radiological features such as the size and location of the nodule, obtained from a computed tomography (CT) scan. On initial assessment, we estimate that approximately 80% of patients are identified as low to moderate risk (5-65%) where guideline recommendations for their care plan are unclear, often resulting in either overtreatment of patients with benign nodules or undertreatment in patients with cancer. An estimated 17% of patients with malignant nodules are initially sent to watchful waiting, where a follow-up CT scan is scheduled in three to six months, potentially delaying their diagnosis. Conversely, we estimate that 62% of biopsies and 35% of surgeries performed on lung nodules find benign disease, representing a significant overtreatment that incurs both risk and cost to the patient and their providers. We therefore believe that there is a clear clinical need for blood-based diagnostic testing to help improve the initial risk assessment of pulmonary nodules, helping direct patients to the relevant treatment pathway, and ultimately improving patient outcomes and saving costs to the system. +6 +• +Treatment Guidance – Early Stage : We estimate that there are over 700,000 testing opportunities annually in the United States in early - stage lung cancer to assess a patient’s risk of recurrence following curative-intent surgery, and to detect potential target mutations for therapeutics. Depending on a patient’s risk of recurrence, they may also receive chemotherapy, radiotherapy or chemoradiation post-surgery. The assessment of risk of recurrence is primarily based on the stage of cancer at diagnosis, with stage I patients typically receiving no additional treatment beyond surgery. However, 20 to 40% of patients with stage I disease do still recur within five years following surgery, representing a sub-group of patients who may have benefitted from more intensive treatment protocol. We believe there is a clear clinical need for blood-based diagnostic testing prior to surgery to identify stage I patients who may benefit from a more intensive treatment protocol and we also believe there is the need for identifying stage II and IIIA patients where low risk patients may benefit from a less intensive treatment protocol. There have also been recent advances in the use of targeted therapies in early - stage lung disease. These therapies typically target specific genomic mutations or alterations found in some tumors. We believe there is therefore an emerging need for testing designed specifically for mutation detection in early -stage disease. +• +Treatment Guidance – Advanced Stage: We estimate that there are over 3 million diagnostic testing opportunities annually in the United States to guide advanced stage lung cancer treatment decisions. With nearly 50 FDA-approved systemic treatment regimens listed in national treatment guidelines for non-small cell lung cancer (NSCLC), there is an elevated need for personalized biomarkers to help physicians identify the right patient for the right treatment. Multiple tissue-based diagnostic tests have been approved to identify patients eligible for targeted therapies and immunotherapy; however, about 50% of patients do not have sufficient tissue collected following diagnosis to facilitate testing. To compound the issue, different molecular tests take varying amounts of time (days versus weeks) to report results back to the ordering physician, which often leads to treatment decisions being made on incomplete information. Therefore, we believe there is an imminent need for a blood-based testing solution that measures tumor mutations and the patient’s immune profile, to provide physicians with more comprehensive and timely information to assess the overall prognosis of the patient and personalize treatment. +• +Monitoring : We estimate that there are over 800,000 testing opportunities in the United States for blood-based tumor and immune profiling to monitor for disease recurrence and progression in NSCLC patients. Unfortunately, advanced stage lung cancer is often terminal, so repeat tissue biopsy to assess the evolution of resistance mutations or to detect disease progression is not feasible from either a cost or risk perspective to the patient, which we believe demonstrates an important need for blood-based testing to help routinely monitor these patients. As a patient progresses through therapies, changes in their immune system occur and blood-based immune profiling could help physicians identify these changes prior to subsequent therapy selection. +Current Limitations in Biomarker Discovery and Companion Diagnostics +We estimate the biopharmaceutical biomarker testing and companion diagnostic market opportunity is $2 billion annually . Over the last two decades, the use of biomarker testing in clinical trials has increased, with 55% of oncology trials involving the use of biomarker testing in 2018 versus 15% in 2000. From 2005 to 2015, a study identified that incorporating biomarkers into clinical development programs increased their probability of therapeutic success rate from phase 1 to FDA-approval by 570%, representing an increase from 1.6% without biomarkers to 10.7% with biomarkers. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their product development efforts and increase chances of drug development success. However, we believe as the market continues to advance, inherent limitations of both biomarker discovery and companion diagnostic development have become more apparent. +Biomarker Discovery : There are many limitations with biomarker discovery in biopharmaceutical drug development, including: +• +Biomarkers with clinical utility are difficult to discover and validate in independent datasets. +• +Classical statistical approaches to biomarker discovery are limited. Single-omic tests fail to see the whole biological picture. +7 +• +Tissue biopsies are limited by the amount of a sample that can be collected: longitudinal testing is difficult and the biology is only from the profile of the tumor (host response is not accounted for). +• +Clinical trials are expensive and take a long period of time. It is often difficult to meet enrollment goals for clinical trials with slow diagnostic testing turnaround times. +Companion Diagnostics (CDx): While developing companion diagnostics is critical to precision medicine, the promise of companion diagnostics has not been fully realized and there are multiple limitations that still need resolution. The path to co-develop a successful companion diagnostic with a corresponding drug has several challenges, including: +• +Traditional companion diagnostic agreements may fail to realize the full value of a testing opportunity, leading to difficulty in funding appropriate commercialization. +• +Drug development is a lengthy, complex and costly process. There can be a financial impact to a pharmaceutical company to have a drug selected by a test. +• +Current diagnostic reimbursement policies may not always support the coverage and payment of new companion diagnostics. +• +Regulatory agencies continue to work on defining the co-development process, but the environment is continually changing. +The Diagnostic Cortex - Our Proprietary Artificial Intelligence (AI) Platform +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic Cortex, to discover innovative diagnostic tests for clinical use. We focus on developing technologies that are capable of single and multi-omic research and development. +The Diagnostic Cortex is an extensively validated deep learning platform optimized for the discovery of clinical diagnostic tests, which we believe overcomes standard machine learning challenges faced in life sciences research. Researchers commonly encounter issues with machine learning-based biological discoveries that cannot be repeated or validated when assessed in additional specimen cohorts. This challenge, commonly referred to as overfitting, occurs when the machine identifies a perfect pattern in an initial training dataset but is unable to identify the same pattern in a new dataset. For over 15 years we have focused on developing our platform to overcome this challenge through proprietary computational techniques to ensure each diagnostic test that is discovered can be further developed to perform consistently in the clinical testing environment. +We are able to combine blood-based biological information related to the tumor, immune system, and host-status with clinical and radiomic data through our proprietary AI platform, which enables us to interpret the holistic disease state of each patient or clinical dataset we encounter. +We continuously evolve and improve the Diagnostic Cortex platform. These improvements range from basic code optimization to complex improvements such as the incorporation of novel computational methods for the optimization of multi-omic diagnostic tests. Any AI platform is inherently limited without the highest quality data inputs. Therefore, all of the technologies that we employ have been chosen and developed to provide high-quality data to enable our Diagnostic Cortex platform. We feel that this level of data integrity is crucial for the development of diagnostic tests that require the advanced pattern matching abilities of deep learning algorithms. +We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and learn about biological discoveries that are clinically meaningful. Additionally, we incorporate clinical and molecular profiling data aggregated through our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or academic partnerships, into our platform. We have over 140,000 samples and data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external development initiatives. With our data-driven and technology agnostic approach as data inputs into the Diagnostic Cortex, we are able to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +8 +The following is a diagram outlining our innovative diagnostic test discovery, development and commercialization infrastructure as outlined in the text above. +We employ multiple technologies, as illustrated below, including genomics, proteomics, transcriptomics, and radiomics, generated by different assay techniques, including ddPCR, NGS, LC-MS, ELISA, and our proprietary DeepMALDI mass spectrometry platform for the blood-based molecular analysis of the tumor, immune system, and host-status of each patient and/or clinical dataset. Through our learning loop, we continuously revisit our technology strategy and roadmap to integrate new technologies into our evolving platform, which ultimately support the addition of new service and product revenue offerings. We focus on developing technologies that are capable of single and multi-omic research and development. +Most diagnostic companies focus their strategy on using a single technology to discover biomarkers for a broad range of clinical questions. We believe that no single technology can interrogate the complexity of the human disease state to help solve all clinical questions. For that reason, we employ a technology agnostic approach to solving diagnostic challenges leveraging our proprietary AI platform. Because of this approach, we believe we are unique in the diagnostics market, allowing for a broader and more holistic understanding of each patient’s disease state. +We are experts in many technologies, but we are a true market leader with over 15 years of experience in the field of clinical proteomics. For over 10 years, we have been discovering and developing proteomic-based diagnostic tests and have a deep understanding of how to incorporate technologies that can be applied to blood samples in order to extract important protein-based biological information in the form of diagnostic tests, which can aid clinicians and scientists in understanding the dynamic biology of their system of interest, such as a patient with cancer. +9 +Our suite of technologies that assist us in discovery, development and commercialization of novel diagnostic tests includes: +DeepMALDI Mass Spectrometry +We have developed DeepMALDI, a proprietary high-density matrix-assisted laser desorption/ionization time-of-flight (MALDI-ToF) mass spectrometry (MS) technology, to produce blood-based proteomic data for disease diagnosis, personalized health care, precision medicine for direct treatment options, and disease screening in lung and other disease states. DeepMALDI overcomes the limitations of conventional MALDI and other mass spectrometry methods to produce highly sensitive, stable, and reproducible data by: (1) utilizing optimized signal-to-noise reduction and signal processing algorithms; and (2) novel batch correction methods and spectral alignment methods. The combination of these improvements yields substantially higher quality data content and is thereby much better suited for the discovery of biomarkers with clinical utility. +Our current DeepMALDI methods allow us to achieve finer mass resolution, greater sensitivity, and 20-times faster imaging speeds than other instruments. Additionally, we believe enhancements to our DeepMALDI methods and MALDI-ToF technology evolution will allow us to measure approximately 1,500 proteins, an improvement from the estimated 900 proteins we can measure today. We intend to maintain our leadership role in the discovery of proteomics-based diagnostic tests. We utilize our DeepMALDI and MALDI-ToF technologies in our discovery and development efforts and as part of our collaborations with our biopharmaceutical customers and academic partners. +Liquid Chromatography Mass Spectrometry MS +We use Multiple Reaction Monitoring (MRM) MS with triple quadrupole mass spectrometers and up-front liquid chromatography (LC) sample injection in the Nodify XL2 test. This mass spectrometry method offers highly sensitive, specific, and cost-effective analysis for simultaneous quantitation of hundreds to several thousands of targeted peptides in a single experiment. We have since included the MRM technologies as part of our services for discovery and development with our biopharmaceutical customers and academic partners. +Enzyme-Linked Immunosorbent Assay +ELISA is the most widely used ligand binding assay platform within and outside the pharmaceutical industry. Formats include direct, indirect and sandwich assays and are typically run in manually or semi-automated modes. We use a semi-automated implementation of ELISA in clinical testing for the Nodify CDT test and the Platelia SARS-CoV-2 Total Ab test for COVID-19. The acquisition of Oncimmune USA in 2019 expanded our ability to conduct very high throughput and cost-effective ELISAs in our clinical testing laboratory. We have now included the ELISA technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +Droplet Digital PCR Platform +We use the ddPCR technology for multiplexed, semi-automated nucleic acid detection. This allows high sensitivity, fast turn-around times, flexibility in our laboratory workflows, rapid scaling from low to moderate analyte complexity, and high-volume scalability. ddPCR is an absolute quantitation method based on the partitioning of circulating nucleic acids into up to 20,000 droplets per reaction and is used for the GeneStrat test and Bio-Rad SARS-CoV-2 ddPCR test for COVID-19. We have included the ddPCR technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +Next Generation Sequencing Technology +We use an NGS technology for broad genomic sequencing of clinical specimens. Our strategy with NGS relies on a menu of off-the-shelf and custom research use assays, which we develop and make available as a part of our biopharmaceutical test services. The NGS technology integrates automated systems to yield high sensitivity results with a rapid turnaround time. Since adoption of this technology, we have included the NGS technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +10 +Our Solutions and Products +To help address the current limitations with standard of care in lung cancer diagnosis, treatment, and monitoring, we use combinations of tumor, immune and host profiling, radiological imaging, patient clinical profiling, and our proprietary AI platform to provide a holistic view of each patient’s dynamic disease state. +We have four blood-based diagnostic tests across the lung cancer continuum of care to help address clinical unmet needs by physicians. +• +Diagnosis : We believe there is a clinical need to help physicians reclassify risk of malignancy in patients presenting with suspicious lung nodules. We offer the blood-based Nodify Lung Nodule Risk Assessment testing strategy to aid physicians in stratifying patients into distinct nodule management treatment pathways: diagnostic procedure or imaging surveillance. Nodify Lung consists of two blood-based proteomic tests: the Nodify CDT test helps identify patients with lung nodules that are likely malignant and the Nodify XL2 test conversely helps identify those that are likely benign. +• +Treatment Guidance : We believe there is an imminent need for a blood-based testing solution that measures tumor-specific mutations and the patient’s immune profile to provide physicians with more comprehensive information to assess the overall prognosis of the patient and personalize treatment plans. We offer the blood-based Biodesix Lung Reflex testing strategy, which consists of the GeneStrat tumor profiling test and the VeriStrat immune profiling test for patients diagnosed with NSCLC. With a three-day turnaround time, we are able to quickly provide critical diagnostic information to physicians to facilitate personalized treatment decisions for their patients. +• +Monitoring : We believe longitudinally monitoring advanced NSCLC patients for the dynamic evolution of their tumor and immune profile while on treatment can provide an earlier indication of treatment resistance and/or disease progression. We offer the Biodesix Lung Reflex testing strategy as a blood-based monitoring tool for physicians to track their patients’ disease evolution. +Diagnosis – Nodule Management +We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our blood-based nodule management offering, Nodify Lung Nodule Risk Assessment assists physicians in reclassifying a patient’s risk of lung cancer by incorporating their protein biomarker results with radiographic imaging and clinical characteristics. Nodify Lung consists of the Nodify CDT and Nodify XL2 proteomic tests, which can be ordered separately or together from a single blood draw to help reclassify risk of cancer to aid physicians in stratifying patients into distinct nodule management pathways: intervention or surveillance. +11 +The Nodify CDT test is used to help identify lung nodules that are likely malignant and the Nodify XL2 test helps identify lung nodules that are likely benign. Nodify Lung is available for patients 40 years or older, with nodules between 8 and 30mm, and less than 65% pre-test risk of lung cancer. The testing strategy starts with the Nodify CDT test to determine if a nodule is likely malignant or at a higher risk of lung cancer. The Nodify CDT test helps physicians identify cancer more quickly by prioritizing patients with a higher risk of malignancy for a diagnostic procedure, such as biopsy or surgery. If the nodule is not identified as having a high risk of malignancy by Nodify CDT, then the Nodify XL2 test is performed to help determine if the patient’s nodule is likely benign or has a reduced risk of lung cancer and may be a candidate for CT imaging surveillance. The Nodify Lung testing strategy is represented graphically in the image below starting with the patient’s pre-test risk of malignancy and ending with the guideline-recommended diagnostic procedure for each risk category. +We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. We launched the Nodify Lung combined offering of Nodify CDT and Nodify XL2 in March 2020. However, the Nodify XL2 test has been available to all physicians since September 2019 and has been available to a select group of physicians since October 2018. We acquired the Nodify XL2 test from Integrated Diagnostics in July 2018, and acquired the Nodify CDT from Oncimmune USA in October 2019. +Nodify CDT +Nodify CDT is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely malignant or at a higher risk of being cancerous. Results allow physicians to identify patients who may be better candidates for timely invasive diagnostic procedures such as bronchoscopy, transthoracic needle biopsy, or surgical resection, with the hope of catching cancer earlier. Nodify CDT enhances lung nodule risk assessment to facilitate compliance with clinical treatment guidelines such as those of the American College of Chest Physicians (ACCP). Nodify CDT is intended for use in patients who are 40 years or older, have nodules between 8 and 30mm, and pre-test risk of lung cancer of less than 65%. +The test measures the levels of seven circulating autoantibodies (P53, NY-ESO-1, CAGE, GBU4-5, SOX2, HuD, and MAGE A4) associated with lung cancer, combined by an algorithm to report out three potential results: High Level, Moderate Level, or No Significant Levels of Antibodies Detected (NSLAD). The seven autoantibodies have shown to be elevated for all types of lung cancer, and from the earliest stage of the disease. +Unlike the tumor antigens themselves, the autoantibody levels can be measured accurately through a blood sample, based upon the signal amplification generated by the immune response to cancer. This mechanism of action likely reflects very early events in a tumor’s evolution; as the immune system initiates a response to the cancer, it can also trigger an expansion of self-reactive antibodies that can be measured in circulation. +12 +In addition to the test result of High Level, Moderate Level, or NSLAD, each test report includes the patient’s pre-test risk of malignancy as calculated by the Solitary Pulmonary Nodule Risk Assessment calculator, and their post-test risk of cancer incorporating the result of the test. The Solitary Pulmonary Nodule Risk Assessment calculator was developed by Stephen Swensen, M.D., of the Mayo Clinic and is designed to provide a risk of malignancy for a patient with a newly discovered incidental nodule. The model incorporates six clinical and radiologic factors into the equation: age, nodule size, smoking status, nodule location, spiculation (nodule edge characteristic), and previous history of lung cancer. Incorporating the autoantibody levels with the risk model provides physicians with a more accurate assessment of risk. The test has been studied in 14 peer reviewed published studies and presentations. +Nodify XL2 +Nodify XL2 is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely benign or at a reduced risk of being cancerous. Results allow physicians to identify patients who may be better candidates for routine CT surveillance to monitor for growth or shrinkage of the nodule over time instead of an invasive diagnostic procedure. Nodify XL2 is used for patients who are 40 years or older, have nodules between 8 and 30mm, and have a pre-test risk of lung cancer of less than or equal to 50%. +Nodify XL2 integrates peptides measured by LC-MS with clinical and radiological characteristics that are combined by an algorithm to report out three potential results: Likely Benign, Reduced Risk, or Indeterminate. Specifically, the Nodify XL2 test measures the relative abundance of two peptides (LG3BP and C163A) in circulation in the patient’s blood. The native proteins from which the peptides are derived, have been associated with an inflammatory response to cancer. The clinical factors are patient age and smoking status, and radiological factors are nodule size, location, and edge characteristics. +In addition to the test result of Likely Benign, Reduced Risk, or Indeterminate, each test report includes the patient’s pre-test risk of lung cancer as calculated by the Solitary Pulmonary Nodule Risk Assessment calculator, and their post-Nodify XL2 risk of malignancy incorporating the result of the test. Incorporating the peptide levels with the risk model provides physicians with a revised assessment of risk incorporating the patient’s biology. +In summary, the inclusion of the Nodify Lung testing strategy into clinical practice helps physicians reclassify risk of malignancy of low to moderate risk lung nodules by incorporating the patient’s own biology into the assessment. The Nodify CDT test helps physicians identify patients with a high-risk lung nodule who may benefit from timely intervention, which can ultimately help identify lung cancer earlier. The Nodify XL2 test helps physicians identify patients with a very low risk lung nodule who may benefit from CT surveillance and could avoid unnecessary invasive procedures. +Blood samples for Nodify XL2 and Nodify CDT can be collected in the physician’s office, laboratory, or at home through use of mobile phlebotomy. Mobile phlebotomy options facilitate testing for patients even if they are not seen in person by the physician and instead are seen through telehealth visits. This benefits the patient as scheduling can be conveniently fit to their needs and can keep them away from a physician’s office or hospital for safety concerns, especially with the evolving coronavirus pandemic. Additionally, mobile phlebotomy benefits the physician as the logistics around a blood draw or tissue sampling are out of their hands. We have a national network of contracted Nurses and Phlebotomists to support at-home or mobile blood collection. +Both tests require a single blood sample shipped at ambient temperature to our certified, high-complexity clinical laboratory in De Soto, Kansas. Nodify CDT requires whole blood and Nodify XL2 requires whole blood spotted onto our proprietary Blood Collection Device (BCD). The introduction of the BCD as a qualified specimen collection method for use with the Nodify XL2 test alleviated the need for serum separation processing steps by phlebotomists at blood draw sites such as centrifugation, and cold chain (dry ice) shipments, which has increased the market access to our proteomic-based tests. Results for Nodify CDT alone are typically available within one day. If both tests are ordered for the patient and Nodify CDT returns a result of NSLAD, then both test results are typically available within 4 to 5 days. All results are available through a portal, fax, hard copy, or mobile device. +13 +Treatment Guidance and Monitoring +Profiling the tumor through blood-based testing can help identify mutations in genes that may be driving growth of the tumor and may be targets for therapeutics. However, tumors also suppress intrinsic mechanisms that prevent the patient’s immune system from identifying and eliminating the cancer cells. Profiling the immune system can show if the patient’s immune system may have been subverted and therefore, is less likely to be responsive to immunotherapies. Our blood-based Biodesix Lung Reflex testing strategy consists of the GeneStrat tumor profiling test and the VeriStrat immune profiling test, which can be ordered together or separately for patients with NSCLC. Together, the tests typically have a 3-day turnaround time, providing physicians with timely results to facilitate treatment decisions. +GeneStrat +GeneStrat is a blood-based tumor profiling test that detects the guideline recommended, actionable mutations in lung cancer: EGFR, KRAS, BRAF, EML4-ALK, ROS-1, and RET. Physicians can order one or any combination of the gene tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat test performance and potential clinical utility have been published in 3 peer reviewed studies. +GeneStrat test results are typically available within 72 hours from our receipt of the sample in our Boulder, Colorado clinical laboratory. In a study at Eastern Carolina University, it was observed that blood-based testing was up to three weeks faster than tissue-based testing, with tissue-based testing taking a median of 26 days from sample collection. With GeneStrat testing, results are typically available in time for the patients first oncology visit, allowing the patient to start front-line treatment as quickly as possible. In the same study, it was observed that only 4% of patients had tissue-based molecular test results prior to start of front-line treatment. Meanwhile, after integrating Biodesix Lung Reflex testing at the institution, 72% of patients had molecular test results available. Testing with the GeneStrat test can help physicians identify driver mutations quickly to help speed up time to treatment. +We believe that rapid, blood-based tumor profiling with the GeneStrat test is complementary to both targeted tissue-based testing (including PD-L1) and broad genomic sequencing. Testing with GeneStrat at diagnosis can help quickly identify patients who are eligible for targeted therapies. Additionally, blood-based testing upfront can help save valuable tissue for diagnostic evaluation, PD-L1 testing and broad genomic profiling for rare mutations to enroll in clinical trials. +14 +VeriStrat +VeriStrat is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. Results help inform physicians whether their patient has a more aggressive cancer and can help with treatment planning. VeriStrat profiles the patient’s immune system by measuring eight protein features measured by mass spectrometry and interpreted by a proprietary machine learning-based algorithm to produce either a VeriStrat Good or VeriStrat Poor test result. +The presence of a VeriStrat Poor result indicates the presence of chronic inflammation and a chronic acute phase immune response. A chronic acute phase immune response can trigger the immune system to provide growth factors to the tumor to increase blood flow and tumor growth. The test has been studied in over 85 peer-reviewed and published clinical studies across many different types of therapies such as chemotherapy, targeted therapies, immune therapies, and combinations. The results consistently show the test to be predictive of outcomes, independent of other prognostic factors including PD-L1 expression and performance status. Patients who test as VeriStrat Poor, on average, have an overall survival that is less than half of those who test as VeriStrat Good, independent of treatment type, demonstrating that the test is strongly prognostic. Conversely, patients with a VeriStrat Good test result typically respond better to standard of care treatments than those patients that test as VeriStrat Poor. By using the VeriStrat test for immune profiling, physicians can help identify the patients with an immune status associated with generally poor prognosis who should be treated with alternate therapies or in clinical trials. +GeneStrat requires whole blood and VeriStrat requires a whole blood sample spotted onto our proprietary BCD. Both samples are shipped at ambient temperature and testing is performed in our certified, high-complexity clinical laboratory in Boulder, Colorado. GeneStrat is performed using the ddPCR technology, and the protein features in VeriStrat are measured using matrix-assisted laser desorption/ionization time of flight (MALDI-ToF) mass spectrometry. Results are typically available within 72 hours through a portal, fax, hard copy, or mobile device. +COVID-19 +Biodesix WorkSafe COVID-19 Testing Program +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe testing program. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two diagnostic tests for the SARS-CoV-2 virus that causes COVID-19. The first test is the Bio-Rad SARS-CoV-2 ddPCR test, which is a molecular test intended for detecting active SARS-CoV-2 infection. The test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under CLIA to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The test was FDA EUA authorized on April 29, 2020. +Within a month of initiating our development collaboration with Bio-Rad, we were able to launch two tests for commercial use. We were able to bring these tests to market as fast as possible due to our scientific diagnostic expertise, technologies and existing commercial infrastructure. In addition to our launch agility, we have been able to rapidly scale our laboratory operations for high-volume testing. We remain committed to delivering rapid test results in 24 to 48 hours on average. +Using the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab tests, we operate and have commercialized the Biodesix WorkSafe testing program. +Prior to using the Bio-Rad tests as part of our testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Post-launch development support for these tests have included improvements in on-boarding new personnel, logistics of sample collection, sample receipt and data reporting, all required to support our testing program. Additional releases of the laboratory data management software are ongoing and planned for the foreseeable future. +15 +Our tests are utilized by healthcare providers, including hospitals and nursing homes and are also offered to businesses and educational systems to assist in their back-to-work or back to school strategies. Recently, we announced multiple partnerships for COVID-19 testing, and Colorado Governor Jared Polis announced at a press conference on July 23, 2020 that we will now be supporting wide-spread COVID-19 testing for the State of Colorado. Additionally, we announced a partnership as the official COVID-19 testing partner for the Major League Lacrosse as they competed in their 2020 tournament. We also announced on September 30, 2020 that we will oversee and manage onsite testing and testing validation for the Big Ten Conference athletic competitions. +Bio-Rad SARS-CoV-2 ddPCR test +The Bio-Rad SARS-CoV-2 ddPCR test, also known as a molecular or viral test, is intended for the qualitative detection of nucleic acid from SARS-CoV-2, the virus that causes COVID-19. The test targets detection of the nucleic acid from SARS-CoV-2 (not from any other viruses or pathogens) in respiratory specimens to identify and isolate infected individuals. Recent studies have shown that ddPCR-based testing is more sensitive than qPCR for detecting SARS-CoV-2, specifically in the reduction of false negative results. In one study, the ddPCR test demonstrated 95% accuracy vs. 47% for other “bulk” RT-PCR technologies used in other molecular tests Specimens are shipped at ambient temperature or dry ice depending on the viral transport media (VTM) used, and testing is performed using ddPCR in our certified, high-complexity clinical laboratory in Boulder, Colorado. Results are typically available through fax, hard copy, or encrypted email within 24 to 48 hours on average from receipt of the sample. +Platelia SARS-CoV-2 Total Ab Test +The Platelia SARS-CoV-2 Total Ab test (also known as a serology or antibody test) is intended for use as an aid in identifying individuals who have developed an adaptive immune response to the SARS-CoV-2 virus, indicating recent or prior infection. The test uses whole blood to detect circulating antibodies against the virus. The sensitivity is 98% and specificity is 99% eight days after the onset of symptoms. At this time, it is not known how long antibodies persist following infection and if the presence of antibodies confers protective immunity. The test is intended for the qualitative detection of total anti-SARS-CoV-2 nucleocapsid antibodies (IgG, IgM and IgA) in human serum or plasma specimens. The test requires a 3 mL blood draw, and samples are shipped at ambient temperature. Testing is conducted using semi-automated ELISA technology in our certified, high-complexity clinical laboratory in De Soto, Kansas. Results are typically available within 24 to 48 hours from receipt of the sample through fax, hard copy, or encrypted email. +Biopharmaceutical Diagnostic Discovery, Development and Testing Services Business +We believe our leadership in clinical proteomics and our technology agnostic approach to probe the cancer disease state provides our customers with a clear and distinct advantage over other diagnostic service providers who solely focus on either genomics or proteomics. Similar to our commercial clinical testing business, our biopharmaceutical diagnostic discovery, development and testing services business leverages the Diagnostic Cortex to provide an extensively validated and deep learning approach to discovering new biomarkers, which in turn helps drive the clinical development of therapeutics. We recognize each clinical development program is complex, which is why we offer end-to-end diagnostic solutions, ranging from initial biomarker discovery and feasibility projects to commercialization of companion diagnostics. +To address the increasing complexity of disease biology and new drug mechanisms of action, we employ a technology agnostic approach to uncover insights about the tumor biology and patient’s immune response to cancer for therapeutics in clinical development. With our broad technology and service offering, including the performance of over 30 assays for research use as part of our laboratory services (see diagram below), we are able to provide the depth and breadth of biomarker tools for our partners for multi-omic analyses across their product development efforts. Although we recognize the importance of a multi-omic, technology agnostic approach in translational research, we are experts in discovering and developing proteomic-based diagnostic tests to help interrogate the immune profile and host disease state of patients on particular therapeutics. Traditionally, oncology biomarkers have been discovered from tumor tissue, but with the increased trend in the number of programs featuring immuno-oncology agents in therapeutic development, we believe there is a clinical unmet need for blood-based tumor markers and host/immune biomarkers to complement information obtained from tissue. +16 +We believe we provide benefit to our biopharmaceutical customers as they integrate strategies for increasing the probability of success for pivotal clinical trials. Specifically, our diagnostic testing services may help enable quicker enrollment rates for patients in prospective clinical trials, ranging from phase 1 to phase 3, and could help identify patient populations who may experience the greatest benefit from new therapeutics. Ultimately, our goal is to help biopharmaceutical customers realize greater efficiency in their clinical development programs. Additionally, we have the ability to access and leverage our large sample and data biobank for our partners’ data mining needs, including new test discovery. +While our biopharmaceutical discovery, diagnostic development and testing revenue continues to grow, it is important to note that we benefit greatly from these partnerships in many ways that expand beyond revenue. We are continuously expanding our knowledge and biological understanding of multiple diseases and the rapidly evolving treatment landscape, while our Diagnostic Cortex continues to be powered through these biomarker analyses. Additionally, our sample and data biobank continue to grow and can be further leveraged for internal test development and external partnering. Importantly, we look to supplement our product development efforts with companion diagnostics as they are developed. +To date, we have over 50 biopharmaceutical customers and academic partners who have utilized our diagnostic tests and services. The following are a few case studies of early-stage biomarker discovery and development with our biopharmaceutical customers. +• +AstraZeneca: We provided services to AstraZeneca to retrospectively analyze samples from the FLAURA clinical trial (NCT02296125). The goal of this analysis was to interpret and establish the clinical utility of blood-based longitudinal monitoring of EGFR sensitizing and resistance mutations by ddPCR in advanced NSCLC patients treated with osimertinib. The data demonstrated that these circulating DNA mutations could be tracked in blood to interpret the patient’s prognosis, and could help AstraZeneca to identify disease progression 3 months (median) in advance of standard imaging. +• +Genentech: We partnered with Genentech to discover a novel proteomic classifier for advanced NSCLC patients treated with atezolizumab. The test was discovered on a small clinical cohort (n=77) and was independently validated on blinded samples (n=270) from the POPLAR clinical trial (NCT01903993). The validation revealed that the proteomic test was predictive of progression free survival and overall survival for atezolizumab versus the control arm docetaxel. Additionally, an analysis compared the correlation between our proteomic classifier with standard of care biomarkers (PD-L1 expression status and tumor mutation burden), which revealed there was no significant correlation. This implies that our classifier provides unique and valuable information in the treatment of patients with advanced NSCLC. It is our belief that Genentech could use this strategy to identify patients that could derive a longer progression free survival from atezolizumab. +17 +• +Merck KGaA & Pfizer: We announced the initiation of a clinical phase development program for the anti-PD-L1 checkpoint inhibitor, avelumab with Merck KGaA and Pfizer on February 12, 2020. The new proteomic test was developed through retrospective analysis of the circulating proteome combined with our proprietary AI platform. We have completed initial discovery of the test that identifies likely responders to avelumab and efforts are now focusing on transferring the test into our CLIA lab in Boulder, Colorado for clinical phase test validation. +Our Competitive Advantages +We believe the following are our key competitive advantages: +• +Our proprietary extensively validated deep learning platform, which is tailored to discover diagnostic tests that address clinical unmet needs. Our platform is an extensively validated deep learning platform optimized for discovery of diagnostic tests. By combining our data-driven and technology agnostic approach with deep learning techniques, we believe we have overcome many standard machine learning challenges. This has enabled us to develop commercial tests for clinical unmet needs and collaborate with our biopharmaceutical customers and academic partners. +• +Our data-driven approach to precision medicine combined with our biobank, which enables us to accelerate development of new tests. We have over 140,000 samples and data in our biobank, including tumor profiles and immune profiles, used for both internal and external research and development initiatives. Our biobank, clinical trials, commercial testing and other partnerships provide an ongoing source of new data that further enhances our proprietary AI platform. We are continuously identifying and incorporating new market insights and input from our customers, key opinion leaders, and scientific experts to leverage this data in developing our diagnostic tests. +• +Our leadership in clinical proteomics, demonstrated research, development, and scientific expertise, combined with our intellectual property portfolio. Our leadership in clinical proteomics and our technology agnostic approach, we believe provides us with a distinct advantage over our competitors, who focus on any single technology, such as genomics or proteomics. Our certified, high-complexity laboratories offer significant advantages in development of commercial tests. +• +Our proprietary technologies and processes are protected by a portfolio of approximately 87 issued patents in the United States and internationally, and 22 uniquely registered United States trademarks. We take efforts to protect our proprietary position using a variety of methods, such as a pursuit of United States and foreign patent applications related to our proprietary technology, use of trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities. +• +Our demonstrated success commercializing diagnostic tests in lung disease. With six diagnostic tests launched and three currently in development, our commercial portfolio of blood-based solutions currently addresses clinical unmet needs within diagnosis, treatment and monitoring of lung cancer. Our diagnostic tests provide rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan. We have displayed agility in our R&D and commercial launch efforts and within a month of initiating a development collaboration, launched two diagnostic tests for COVID-19 for commercial use. +• +Our depth and breadth of point of care access to physicians allows us to drive adoption of our diagnostic tests while incorporating real-life feedback to inform new product development. Our commercial team’s primary focus is to articulate the scientific and clinical evidence behind our tests, how they impact clinical care and can ultimately help to improve patient outcomes. Our demonstrated scientific expertise, leadership in clinical proteomics and breadth of data, including peer-reviewed publications, presentations and clinical studies, forms the basis of our relationships with major hospitals and physician networks across the United States. +18 +• +Our commercial infrastructure, which includes our extensive knowledge and experience in sales, marketing, reimbursement and operations, provides us with the ability to launch, scale and drive revenue. We believe our commitment to commercial excellence helps us to leverage insights, operational excellence and proven approaches to deliver revenue growth and enhance the brand of our company and products. We are able to deploy rapid clinical testing turnaround times and develop commercial tests at scale. Scaling of our test capacity to meet volumes is then achieved by adding instrumentation and qualified personnel to our quality systems. +Our Strategy +We strive to provide swift, comprehensive and actionable insights to improve patient outcomes across lung disease and to help answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. To achieve this, we intend to: +• +Drive increased awareness, adoption, and reimbursement coverage of our diagnostic tests by: +• +continuously educating physicians, key opinion leaders, hospital systems, advocacy groups, patients, payers, academic research organizations, and technology assessment and guideline organizations on the clinical data and benefits of our tests; +• +utilizing our pulmonology-focused sales force and commercial reach with targeted awareness campaigns to employ highly targeted sales and marketing tactics in pulmonology clinics specializing in the management of lung nodules and the diagnosis of lung cancer; +• +continuing to invest in the expansion of our sales force and commercial support team; +• +incorporating our testing services into diagnostic pathways and protocols via a top-down strategy that introduces our diagnostic tests to the largest United States health systems; and +• +leveraging our clinical data to gain broad coverage from public and private payers for our tests. +• +Deepen our relationships with current biopharmaceutical customers and establish new customer opportunities by: +• +selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally; +• +leveraging existing projects and relationships to expand sales with our current biopharmaceutical customers; and +• +targeting companies developing novel companion diagnostic strategies and drug development projects best suited to our platform for new test discovery, development and commercialization. +• +Further demonstrate the clinical utility and economic benefits of our diagnostic tests by: +• +investing in commercial clinical testing, research studies and clinical trials to further demonstrate the clinical utility of our tests; +• +providing rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan; and +• +providing timely and actionable clinical information to help improve overall patient outcomes and lower the overall healthcare cost. +• +Introduce new diagnostic tests in lung disease by: +• +engaging with our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and to identify additional clinical unmet needs; +• +entering strategic partnerships with biopharmaceutical companies, academic research organizations, technology providers, and other diagnostic companies; and +19 +• +developing companion diagnostic tests to support the therapeutics’ regulatory approval and adoption process for our biopharmaceutical customers. +• +Enhance our proprietary AI platform and expand our technology portfolio by: +• +continuing to invest in R&D capabilities to foster innovation in test discovery and development; +• +identifying, acquiring technologies and integrating new data types into our proprietary AI platform; and +• +entering strategic partnerships across our commercial product portfolio and product development efforts in order to further our development capabilities, accelerate launch of commercial products, or expand our service offering. +• +Continue to expand and leverage our biobank by: +• +expanding and enhancing the robustness of our samples and the data set, including through our collaborations and partnerships; +• +pursuing commercial opportunities with companies and researchers who are interested in utilizing our biobank for their own discovery and development efforts; and +• +monetizing these commercial opportunities. +Our Diagnostic Tests in Development +With the goal of finding solutions for clinical unmet needs related to diagnosis, treatment and monitoring in lung disease, our diagnostic tests in development include the following: +Early-Stage NSCLC—Risk of Recurrence +Currently, surgical resection of the tumor without systemic or radiation therapy is standard of care for stage I NSCLC patients. However, 20 to 40% of surgically treated patients will suffer a recurrence within 5 years after surgery. From market research with pulmonologists, thoracic surgeons, and medical oncologists, we identified a significant clinical unmet need for a blood-based test to help identify stage I NSCLC patients who are at a higher risk of recurrence and may benefit from neoadjuvant or adjuvant systemic treatment. With this information, we discovered the Risk of Recurrence (ROR) test, which is a pre-surgery blood-based proteomic test, designed with the Diagnostic Cortex to predict whether a stage I NSCLC patient has a higher risk of recurrence post-surgical resection. Knowing this information early and before surgery may support treatment decisions such as neoadjuvant or adjuvant therapy, which have the potential to reduce tumor volume and address micro-metastatic disease as early as possible. Our ROR test validated in an independent sample set, and we are currently working with major academic institutions across the United States to further validate the test. +Late-Stage NSCLC—Immunotherapy Treatment Guidance +In 2015, the first immunotherapy-based treatment regimen was approved by the FDA for use in lung cancer. Currently, there are 9 immune checkpoint inhibitor (ICI) regimens (single agent or combinations) recommended by the NCCN guidelines for treatment of advanced NSCLC patients. For a portion of patients treated, these drugs can result in significant improvement in overall survival compared with platinum-based chemotherapy options. +The combination ICI regimens see some improvement in performance over single agent ICI, but side effect profiles are worse, and costs are higher than for single agent ICI. In addition, recent data have shown that a subset of patients experience more rapid disease progression on ICI compared with chemotherapy. We utilized the Diagnostic Cortex platform to discover our Primary Immune Response (PIR) test. PIR is a blood-based proteomic test designed to profile a patient’s immune response to their cancer and stratify by who is likely to respond to ICI treatment. Our PIR test has been validated in multiple independent sample sets for advanced stage NSCLC patients treated with single agent ICI, and we are currently working with major academic institutions across the United States to further validate the test in a prospective study called BEACON-Lung. +20 +Monitoring – Progression & Resistance +Blood-based monitoring with our ddPCR technology may offer a feasible method to non-invasively evaluate therapeutic mechanism of action, disease progression, and the emergence of resistance mutations in patients treated with targeted therapies. Our internal validation studies have shown the utility of the GeneStrat EGFR ddPCR test in all three of these indications. The test can identify disease progression up to 3 months (median) in advance of standard imaging. Using ddPCR for longitudinal blood-based monitoring of EGFR cell-free DNA mutations is a cost-effective testing method while patients are being treated with targeted therapies. +COVID-19 Viral Infection – Risk of Severe Outcomes +Despite significant medical advances in the prevention and treatment of COVID-19, the virus continues to place health systems under pressure, with COVID-19 hospitalization rates in the United States exceeding 417 hospitalizations per 100,000 population the week ending January 31, 2021. Better understanding of how to identify which patients are at greatest risk of developing severe lung disease, requiring intubation, or dying from COVID-19 would help inform physicians of the risks and benefits of treatments, target higher risk patients for clinical trials, compare outcomes between patients with similar risk, and prioritize resources in a time of shortage. In partnership with an academic institution, we have developed an artificial intelligence (AI)-based algorithm for clinical decision support to help stratify patients hospitalized with COVID-19 who are likely to require intervention, such as treatment with ventilators, admission to intensive care units, or those patients who may develop acute respiratory distress syndrome (ARDS), versus those who will likely not require intervention. Our COVID-19 AI-based algorithm validated in a blinded, independent study, and uses 26 easily obtainable variables from the emergency department at time of initial evaluation to classify patients, including patient characteristics, vital signs, and readily available laboratory test values. We are working with a United States and International COVID-19 consortia consisting of major academic institutions to perform additional large, blinded, independent validation testing of the classifier and we are currently exploring options for making the algorithm widely available to hospitals for future patient use. +Clinical Trials +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. We have participated in 27 clinical studies, 5 of which are ongoing, and have published over 275 peer-reviewed publications and presentations. The following are our ongoing clinical studies for our diagnostic testing solutions. +ORACLE Registry Study (NCT03766958) +The ORACLE registry study was designed to develop real-world clinical utility data for Nodify XL2 and is titled “An Observational Registry Study to Evaluate the Performance of the Nodify XL2 Test”. The study objectives are to show a reduction in invasive procedures on patients with benign nodules compared to a historical control obtained from chart review. The first patient enrolled on October 16, 2018. As of May 1, 2020, 423 patients have been enrolled and are undergoing primary endpoint analysis, with 2-year follow-up estimated to be completed by the first half of 2022. +ALTITUDE Clinical Utility Study (NCT04171492) +The ALTITUDE clinical utility study is designed to evaluate the performance of Nodify Lung (Nodify XL2 and Nodify CDT) in a randomized controlled study (RCT). The study is titled “A Multicenter, Randomized Controlled Trial, Prospectively Evaluating the Clinical Utility of the Nodify XL2 Proteomic Test in Incidentally Discovered Low to Moderate Risk Lung Nodules”. We received central investigational review board (IRB) approval in December 2019 and have an enrollment goal of 2,000 patients. The study objectives are to evaluate how the addition of the Nodify Lung test result impacts the clinical decision making for patients with new, incidentally identified solid lung nodules assessed as low to moderate risk of lung cancer. The trial has an adaptive study design with a blinded standard of care arm and 2:1 randomization for open-label results for Nodify XL2. The study launched in December of 2020. Phase 1 of the study with only Nodify XL2 is expected to enroll 500 patients. Phase 2 of the adaptive study design will include an open-label arm for Nodify CDT, which is aligned with our commercial testing algorithm. +21 +INSIGHT Observational Study (NCT03289780) +The INSIGHT observational study is designed to evaluate the real-world clinical utility and performance of the Biodesix Lung Reflex (GeneStrat and VeriStrat) testing strategy. The title is “Observational Study Assessing the Clinical Effectiveness of VeriStrat and Validating Immunotherapy Tests in Subjects with Non-Small Cell Lung Cancer (INSIGHT)” and the first patient enrolled was on May 11, 2016. To date, we have over 3,500 patients enrolled with a target 5,000 enrollment goal. Final analysis with 3-year follow-up is estimated to be completed by 2024. Results of an interim analysis were presented at ASCO 2020. The study rationale is to guide the adoption of VeriStrat and inform medical decision making, including treatment choice, and enable the validation of additional mass spectrometry-based proteomic tests. The primary study objective is to describe the impact of the VeriStrat test results on treatment decisions, including but not limited to the percentage change in treatment decision, differences in chosen treatments between patients classified as VeriStrat Good and those classified as VeriStrat Poor, and the percentage of patients receiving systemic therapy or supportive therapies only. +BEACON-Lung Clinical Study (Trial in Progress) +In partnership with ALCMI (Addario Lung Cancer Medical Institute), the BEACON-Lung clinical study is intended to evaluate the performance and utility of our proteomic product currently in development, PIR, in advanced stage NSCLC patients who express high PD-L1. The study title is “A Biomarker Analysis in High PD-L1 Expressing NSCLC Patients Treated With An Immune Checkpoint Inhibitor (ICI) With or Without Platinum-Based Chemotherapy.” The study design is an observational, multicenter, open-label study to assess biomarkers (serum, microbiome, radiomics and tissue) as predictive of early progression in 390 treatment-naive patients with advanced stage NSCLC and PD-L1 greater than or equal to 50% treated with two standard of care regimens, triplet therapy (platinum-based chemotherapy plus ICI regimen) and ICI monotherapy (single agent ICI). The objectives are to collect biospecimens and evaluate candidate biomarkers, with a focus on PIR, to detect early progression on ICI monotherapy versus triplet therapy. +DROPLET (Pending IRB Submission) +Droplet is an exploratory direct to patient study to assess the utility a novel gene linkage phenomenon as measured by the Bio-Rad SARS-CoV-2 ddPCR test, on the correlative immune response in individuals previously infected with the COVID-19 virus. The primary objective of this study (titled “ddPCR Linkage, Viral Load and Immune Response in Individuals Infected with COVID-19”) is to evaluate the correlation between linkage, viral load and the immune responses in individuals who have had a natural infection with SARS-CoV-2. Fifty patients will be enrolled and serially tested for viral load and immune responses for up to 12 months. +Commercialization +For our lung cancer and nodule management tests, commercial efforts are focused on the promotion of our testing strategies to healthcare professionals actively involved in the diagnosis and treatment of lung cancer. Primarily focusing on pulmonology, the commercial team, consisting of specialty sales representatives, medical affairs, marketing and customer care representatives, works to educate and inform the entire patient care group consisting of physicians, nurses, office staff, laboratory personnel, and administration as to the appropriate use and value provided by our testing. The team’s goal is to drive test adoption through articulating the scientific and clinical evidence behind our tests, how they impact the clinical care of a patient, and how the tests can ultimately help to improve patient outcomes. +Patients with pulmonary nodules are concentrated in this sub-specialty, where additional resources such as lung cancer screening and nodule management clinics may exist to provide an increased level of care. We are also engaging large hospital systems in a “top-down” approach, with a goal of incorporating our tests into system wide pathways and protocols. +After a physician orders our tests, blood is collected either in the physician office or laboratory, third-party “store front” patient service centers, or it can be collected in the patient’s home or workplace. We have contracted with a network of patient service centers and mobile phlebotomy services to be enable collection of blood samples outside of the physician office, at home or work for patients across the United States. +22 +For our Biodesix WorkSafe COVID-19 testing program, we have a dedicated outreach team that works with the State of Colorado healthcare providers and hospitals, and employers looking to safely return to work across many industries, including food services, oil and gas, biotechnology and pharmaceuticals, sports teams, universities, and many small businesses. We recognize everyone’s COVID-19 situation is unique, which is why we provide end-to-end customized solutions to support testing for our different customers, such as risk assessment tools, physician ordering services, on-site testing, phlebotomy services, shipping logistics, and ongoing client support. +Our business development team is focused on selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally. Our team consists of customer facing business development associates that work with our biopharmaceutical customers to identify projects, draw up statements of work and negotiate service agreements. Alliance managers help to manage the contractual obligations and scope of the project, whereas our operations team assures the project is managed with adequate resources and delivers on time. We take a two-pronged approach generating business in this segment. Primarily, we leverage existing projects and relationships to expand sales in current accounts. We also actively map ongoing drug development projects in biopharmaceutical companies and target programs best suited to our platform for new test development. +Coverage and Reimbursement +The primary source of reimbursement for our tests in the United States is from third-party payers including government payers, such as Medicare, and commercial payers, such as insurance companies. For our COVID-19 testing program, the primary source of reimbursement is through contracts with hospitals, companies providing wellness testing for their employees, or direct pay from patients. We believe that our lung cancer tests can both improve patient outcomes and help guide cost-effective treatment choices for patients with and at-risk of lung cancer. Achieving broad coverage and adequate reimbursement for each of our tests is a key component of our financial success and will continue to be important over time. +Under the Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief, and Economic Security Act (CARES), Congress has imposed a broad requirement that Medicare fee-for-service, Medicare Advantage, Medicaid, and commercial payers generally cover clinical diagnostic laboratory tests administered during the Public Health Emergency for the detection of SARS-CoV-2 or the diagnosis of the virus that causes COVID-19. Where applicable, the FFCRA and CARES require payers to cover COVID-19 tests without cost sharing or medical management techniques like prior authorization. Medicare fee-for-service does not require cost sharing or prior authorization for any clinical diagnostic laboratory tests. +The Department of Health & Human Services (HHS) has indicated in guidance that the coverage requirements of the FFCRA and CARES can apply both to infection and serological testing, but that they are only applicable to testing that is “diagnostic,” which “may include testing of individuals with signs or symptoms compatible with COVID-19, as well as asymptomatic individuals with known or suspected recent exposure to SARS-CoV-2.” Testing that is “not primarily intended for individualized diagnosis or treatment of COVID-19 or another health condition,” including “testing conducted to screen for general workplace health and safety,” is beyond the scope of the statutory coverage requirements. We believe these coverage requirements apply to the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test when performed for diagnostic purposes. In some cases, we submit claims to insurance payers for the Bio-Rad SARS-CoV-2 ddPCR test and/or the Platelia SARS-CoV-2 Total Ab test. In these cases, insurance payers may have a different position on the scope of mandatory coverage of our tests under the FFCRA and CARES. More commonly, we enter into a rrangements with clients under which the client pays us directly for testing. +Compliance with applicable laws and regulations, as well as internal compliance policies and procedures adds complexity to the billing process. The Centers for Medicare & Medicaid Services ( CMS) is responsible for overseeing the establishment of new Healthcare Common Procedure Coding System (HCPCS) codes for billing the Medicare program and other payers. CMS continuously evaluates and implements changes to the Medicare billing, coding, and reimbursement processes. To receive reimbursement from third-party payers, we bill our tests using a variety of HCPCS codes or Current Procedural Terminology (CPT) codes, as defined by the American Medical Association. For some of the tests we conduct, there may not be a specific CPT or HCPCS code, in which case the test may be billed under a miscellaneous code for an unlisted molecular pathology procedure or unlisted multiple analyte test with algorithmic analysis (MAAA) procedure. Because these miscellaneous codes do not describe a specific service, the third-party payer claim may be examined to determine the service provided, whether the service was appropriate and medically necessary and whether payment should be rendered. This process can result in a delay in processing the claim, a lower reimbursement amount, and/or denial of the claim. +23 +Competitors +We primarily face competition from lung cancer diagnostic solutions companies in the United States, Europe and Asia seeking to answer clinical questions in the space, all of whom provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories and other medical facilities. +Diagnosis—Nodule Management +We are not aware of any other company that offers two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. We are aware of efforts by Veracyte, Inc. to develop and validate a test that may be competitive to the Nodify XL2 and/or Nodify CDT tests in the future. Additionally, Veracyte currently markets a test that is used post-bronchoscopy that is not competitive with our pre-bronchoscopy nodule risk assessment tests. +Prognosis, Treatment Guidance and Monitoring—NSCLC +We are unaware of any other diagnostic test available, commercially or in development, that will compete with our VeriStrat immune profiling test. There is substantial interest and activity in tumor profiling through liquid biopsy. Our genomic test offering, GeneStrat, faces competition from academic hospital laboratories, and companies such as Guardant Health and Foundation Medicine. We believe that there are several companies and academic research institutions in the process of developing tests for monitoring patients on or following treatment for recurrence or progression of lung cancer. +COVID-19 Testing +We believe that our competitors include university and state laboratories, national reference laboratories such as Lab Corporation and Quest Diagnostics, in-hospital laboratories, and a number of other diagnostic providers. We are aware that a number of other companies have announced development efforts to develop COVID-19 tests. +Biopharmaceutical Diagnostic Discovery, Development & Testing Services +We are aware of a number of companies who compete with our diagnostic tests and services, including diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. From the perspective of tumor profiling, we believe Guardant Health and Foundation Medicine are our most significant competitors. Conversely, in the immune profiling market, we believe Adaptive Biotechnologies and Personalis are our most significant competitors. +Clinical Laboratory Operations +We perform the VeriStrat, GeneStrat, and COVID-19 ddPCR tests in our Boulder, Colorado clinical laboratory. The laboratory is CAP-accredited, CLIA-certified, New York Department of Health (NYSDOH)— permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified, along with all other states that require licensing: California, Maryland, Pennsylvania, and Rhode Island. All aspects of the testing process from receipt of the test requisition form through to delivery of test results are performed in the Boulder, Colorado facility. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within 3 days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +The Nodify XL2, Nodify CDT, and COVID-19 total antibody tests are performed in our De Soto, Kansas clinical laboratory. This clinical laboratory is CLIA-certified, COLA-accredited, New York Department of Health—permitted and licensed, and licensed by California, Maryland, Pennsylvania, and Rhode Island. Efforts are underway with the NYSDOH to become permitted and licensed to perform Nodify XL2 and Nodify CDT testing for samples from the state of New York. Receipt of requisitions and testing is performed in our De Soto, Kansas clinical laboratory. Delivery of the test results is performed by personnel from our Boulder, Colorado headquarters. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within 5 days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +Personnel in both facilities are responsible for quality assurance oversight, licensing, and regulation compliance and maintenance to ensure data integrity and consistent, validated processes. +24 +Supply Chain +We rely on third-party suppliers, including in some instances single source suppliers, to provide us with certain components of our diagnostic tests. The number of suppliers feeding into the production of our diagnostic tests is in excess of 65 worldwide. We consider a select few of these suppliers, located in the United States, Europe and China, as critical single source providers of components. Bio-Rad, as described below, is the sole source supplier for our GeneStrat test and COVID-19 and antibody testing program. Oncimmune is also the sole source supplier for our Nodify CDT tests but there are known secondary suppliers for these materials. We have initiated the second source qualification process for the majority of these critical components. +In addition, we purchase supplies through purchase orders without long-term supply agreements with, or guaranteed commitments from, many of our suppliers, including single source suppliers. Additionally, at present, we rely on contract manufacturers for the production of our diagnostic tests. We depend on our suppliers and contract manufacturers to provide us and our customers with materials in a timely manner that meet our and their quality, quantity and cost requirements. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test, but these supplies are able to be supplied by known suppliers. A disruption to this supply would negatively impact our ability to perform the GeneStrat and SARS - CoV-2 tests until alternatives could be validated. +While we have initiated the second source qualification process for the majority of these critical components, we may not be successful in securing second sourcing for all of them at all or on a timely basis. A disruption to this supply would negatively impact our ability to perform these tests until an alternative supplier could be validated. +All materials for our VeriStrat test and Nodify XL2 tests have alternative suppliers readily available, and a disruption in any single supplier would not materially impact our ability to deliver the test. +The COVID-19 pandemic has allowed us to pressure-test our supply chain and logistics processes as we purchased additional manufacturing capacity above our normal run rates to ensure that supply to execute on tests for the foreseeable future was available in-stock and in-house. Our suppliers have been able to allocate sufficient capacity to meet this increased demand with reasonable lead times and therefore we believe sufficient capacity exists for all tests for the next 24 months. +Intellectual Property +Our success depends, in part, on our ability to obtain and maintain intellectual property and proprietary protection for our products and other know-how, to operate our business without infringing, misappropriating or otherwise violating the intellectual property and proprietary rights of others, and to defend and enforce our intellectual property and proprietary rights. We take efforts to protect our proprietary position using a variety of methods, which include pursuit of United States and foreign patent applications related to our proprietary technology, inventions and improvements that we determine are important to our business. We also may rely on trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities to develop and maintain our proprietary position. For more information regarding risks relating to intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property.” +We have invested heavily in the protection of our key assets, namely the VeriStrat® and GeneStrat® tests, and we acquired a patent portfolio relating to the Nodify XL2® and Nodify CDT™ tests in our acquisitions of Integrated Diagnostics in June 2018, and of Oncimmune USA in October 2019 from Oncimmune Limited (Oncimmune). We own patents and patent applications as well as trade secrets relating to our products currently in development, collection device for whole blood, business strategy, client lists and business methods. Further, we have expanded our access to key intellectual property through license and co-development agreements, including our Non-Exclusive License Agreement with Bio-Rad (the Bio-Rad License), which allows us to use the Droplet Digital PCR™ technology developed by Bio-Rad and which we employ in our GeneStrat test. +25 +Our patent strategy has focused on creating and acquiring protection for our VeriStrat and Nodify XL2 proteomic tests, while utilizing trade secret and some methods patent protection for our genomic test (the GeneStrat test) and ELISA test (the Nodify CDT test). We have entered into a non-exclusive license agreement with Bio-Rad, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. For more information regarding this license and supply agreement, please see “— Material Agreements—Agreements with Bio-Rad.” Bio-Rad owns patents relating to ddPCR and to which we have a non-exclusive license to utilize for the performance of ddPCR in cancer detection testing for third parties as set forth in the Bio- Rad License Agreement. In addition, we have separately been granted permission by Bio-Rad to use the Bio-Rad SARS-CoV-2 ddPCR test and Platelia SARS-CoV-2 Total Ab test for commercial diagnostic services. For more information regarding the permission granted to us by Bio-Rad with respect to such tests, please see “Business—Material Agreements—Agreements with Bio-Rad.” We are unaware of patents owned by Bio-Rad relating to its COVID- 19 antibody test but acknowledge that Bio-Rad has know-how and trade secrets relating to this test . We have patent protection in the United States and other countries around the world for the primary use of the VeriStrat test for profiling of patients with NSCLC, and various other uses of the VeriStrat test, such as breast cancer, prostate cancer, head and neck cancer have received patent protection. We have also received patent protection relating to our core classifier development program, our Diagnostic Cortex ® technologies and our approaches to using mass shot matrix-assisted laser desorption time of flight (MALDI-T oF ) technology (DeepMALDI ® techniques). Additionally, our first device patent was issued in 2019 for our internally designed blood co llection device. +As of October 21, 2020, our patent portfolio includes approximately 49 issued United States patents, 38 issued foreign patents, which includes 3 European patents that were nationalized in multiple European countries, and 40 pending applications (including 23 foreign patent applications). With regard to our product development efforts, provisional applications have been filed around new developments relating to ARDS and COVID diagnostics, and national stage applications are now in active prosecution to protect our ROR and PIR tests. +The patent portfolio can be broken down into 5 categories: +1) +Issued patents and patent applications relating to the VeriStrat and Nodify tests and uses of these tests; +2) +Issued patents and patent applications relating to methods for developing classifiers using the Diagnostic Cortex and DeepMALDI technologies; +3) +Issued patents and patent applications relating to tests currently in development; +4) +Issued patents and patent applications relating to our novel blood collection device; and +5) +Issued patents and patent applications relating to tests developed for our third-party partners. +The patents relating to the VeriStrat test are scheduled to expire between 2026 and 2032. The patents relating to the Nodify XL2 test are scheduled to expire beginning in 2031 (excluding any patent term extension granted by the USPTO), and the patents relating to the Nodify CDT test are scheduled to expire in 2027. The patent related to the blood collection device is scheduled to expire in 2039. Should our current patent applications in prosecution in the United States issue, the resulting patents would be scheduled to have expiration dates between 2036 and 2040 (excluding any patent term extension(s) granted by the USPTO). +While we do not currently have any pending PCT applications, we often convert provisional patent applications to PCT applications. PCT patent applications are not eligible to become issued patents until, among other things, we file such PCT applications as national stage patent application(s) within 30 months in the countries in which we seek patent protection. If we do not timely file any national stage patent applications, we may lose our priority date with respect to any such PCT patent applications and any patent protection on the inventions disclosed in such PCT patent applications. Provisional patent applications are not eligible to become issued patents but can become the basis of PCT foreign stage and United States non-provisional patent applications, if such applications are filed within 12 months of filing the related provisional patent application. If we do not timely file any non-provisional patent applications, we will lose our priority date and any patent protection on the inventions disclosed in any such provisional patent application. +26 +In addition, the term of individual issued patents depends upon the legal term for patents in the countries in which they are obtained. In most countries in which we have filed, including the United States, the patent term is generally 20 years from the earliest filing date of a non-provisional patent application, assuming the patent has not been terminally disclaimed over a commonly-owned patent or a patent naming a common inventor, or over a patent not commonly owned but that was disqualified as prior art as the result of activities undertaken within the scope of a joint research agreement. The life of a patent, and the protection it affords, is therefore limited and once the patent lives of our issued patents have expired, we may face competition, including from other competing technologies. In the United States, the term of a patent may also be eligible for patent term adjustment for delays within the USPTO. The term of a patent that covers a biological product may also be eligible for patent term extension when FDA approval is granted for a portion of the term effectively lost as a result of the FDA regulatory review period, subject to certain limitations and provided statutory and regulatory requirements are met. Any such patent term extension can be for no more than five years, only one patent per approved product can be extended, the extension cannot extend the total patent term beyond 14 years from approval, and only those claims covering the approved biological product, a method for using it or a method for manufacturing it may be extended. We may not receive an extension if we fail to exercise due diligence during the testing phase or regulatory review process, fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. There can be no assurance that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. +Our ability to maintain and solidify our proprietary and intellectual property position will depend on our success in obtaining effective patent claims and maintaining and enforcing claims that are granted. However, our owned and licensed patents could be invalidated or narrowed or otherwise fail to adequately protect our proprietary and intellectual property position and our pending owned and licensed patent applications, and any patent applications that we may in the future file or license from third parties, may not result in the issuance of patents. +Because branding is as much a part of any intellectual property strategy as patent or trade secret protection we have a number of registered and pending trademarks relating to our company and products. We have received or filed for trademark protection in the United States for our tradename (Biodesix), the names of four of our commercial tests (namely the VeriStrat, GeneStrat, Nodify XL2 and Nodify CDT tests), and a suite of research tests (ImmunoStrat), as well as having trademark protection for our core development and methodological platforms, such as our Diagnostic Cortex and DeepMALDI technologies. In all, as of September 21, 2020, we have 22 uniquely registered United States trademarks 10 of which (including Biodesix, VeriStrat, and GeneStrat) have received foreign issuances as well. We will continue to pursue protection in the United States and abroad for our branded assets and will continue to use branding to protect products currently in development, key Biodesix developments and non-trade secret methodologies. +We also rely on trade secrets, including know how, confidential information, unpatented technologies and other proprietary information, to strengthen or enhance our competitive position, protect and maintain aspects of our business that are not amenable to, or that we do not presently consider appropriate for, patent protection, and prevent competitors from reverse engineering or copying our technologies. We have decided that some technologies, such as our laboratory methodologies (including sample preparation and assay development), and some information (such as client and billing information) are best kept as trade secrets. However, trade secrets and confidential know-how are difficult to protect. To avoid inadvertent and improper disclosure of trade secrets, and to avoid the risks of former employees using these trade secrets to future employment, it is our policy to require employees, consultants and independent contractors to assign all rights to intellectual property they develop in connection with their employment with or services for the Company to the Company. We also protect our existing and developing intellectual property expressly through confidentiality provisions in agreements with third parties. There can be no assurance, however, that these agreements will be self-executing or otherwise provide meaningful protection for our trade secrets or other intellectual property or proprietary information, or adequate remedies in the event of unauthorized use or disclosure of such trade secrets or other intellectual property or proprietary information. +We also seek to preserve the integrity and confidentiality of our trade secrets and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in the measures we take to protect and preserve our trade secrets, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. +27 +We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives, which may include objectives within and outside the United States. Despite our efforts to protect our intellectual property rights, and despite the breadth of protection that has issued around our key assets, these rights may not be respected in the future or may be circumvented or challenged (and potentially invalidated) in a legal proceeding in any jurisdiction where we have intellectual property rights. In addition, the laws of various foreign countries where we have received intellectual property protection and where we may eventually distribute our products may not afford the same protections or assurances to the same extent as the laws in the United States. See “Risk Factors—Risks Related to Our Intellectual Property” for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on us. +Government Regulations +Clinical laboratory tests like our diagnostic tests are regulated under CLIA and State law. The FDA regulates medical devices pursuant to the FDCA, including many diagnostic test kits, such as IVDs. However, most LDTs are not currently subject to the FDA’s regulation (although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to such regulation) because the FDA has historically exercised enforcement discretion over LDTs. LDTs are a subset of in vitro diagnostic (IVD) tests that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. FDA’s authority to regulate LDTs has been contested for many years, and there have been several legislative and administrative proposals regarding LDT regulation seeking to end or limit enforcement discretion and to bring LDTs under new or existing FDA regulatory frameworks: +• +On July 9, 2012, Congress passed legislation in the Food and Drug Administration Safety and Innovation Act of 2012 ( FDASIA ) requiring the agency to notify the Committee on Health, Education, Labor, and Pensions and the House Committee on Energy and Commerce of its intent to regulate LDTs. This law, though enacted, had a 5-year sunset provision, meaning that FDA is no longer subject to this notification requirement. +• +In October 2014, the FDA issued two draft guidance documents: Framework for Regulatory Oversight of Laboratory Developed Tests , which provided an overview of how the FDA would regulate LDTs through a risk-based approach, and FDA Notification and Medical Device Reporting for Laboratory Developed Tests , which provided guidance on how the FDA intended to collect information on existing LDTs, including adverse event reports. In the Framework for Regulatory Oversight draft guidance, the FDA asserted that LDT manufacturers would be subject to medical device premarket submission, registration, listing, and adverse event reporting requirements phased in over several years based on which tests posed the highest risk to public health. +• +On November 18, 2016, however, the FDA announced that it would not release the final guidance and would instead continue to work with stakeholders, the new administration, and Congress to determine the right approach. +• +On January 13, 2017, the FDA released a discussion paper on possible approaches to regulate LDTs in which it described a policy wherein previously marketed LDTs would not be expected to comply with most or all FDA oversight requirements, except for adverse event and malfunction reporting. In addition, certain new and significantly modified LDTs would not be expected to comply with pre-market review unless the agency determines certain tests could lead to patient harm. +• +In March 2017, the draft Diagnostic Accuracy and Innovation Act (DAIA) was introduced and outlined a risk-based regulatory approach for in vitro clinical tests ( IVCT), i.e., all IVDs regardless of whether they are commercially distributed diagnostic kits or LDTs. +• +In April 2017, the FDA issued a document describing 20 case studies of LDTs that raised concerns about the safety and efficacy of this category of tests. +• +In August 2018, the FDA responded to the DAIA draft with its own proposal for IVCTs, including PMA, provisional approval, and precertification, in addition to authority to revoke approval, request raw data, and take corrective action against test developers to protect public health. +28 +• +On October 31, 2018, the FDA issued its Safety Communication entitled “The FDA Warns Against the Use of Many Genetic Tests with Unapproved Claims to Predict Patient Response to Specific Medications” alleging that the agency was “aware” of healthcare providers making “inappropriate changes to a patient’s antidepressant medication based on the results from genetic tests.” Following this Safety Alert, the FDA contacted several laboratories that offered tests that made claims regarding drug responses for specific medications. While most laboratories addressed the FDA’s concerns by removing specific medication names from their labeling, the FDA issued an enforcement letter against a laboratory for making such claims without first undergoing the FDA premarket review. +• +In December 2018, a new draft bill which revised the DAIA and incorporated feedback from the FDA was released. The Verifying Accurate, Leading-edge, IVCT Development (VALID) Act creates a risk-based regulatory framework for IVCT regulation. Under the VALID Act framework, premarket review would be required for certain higher risk tests, while lower risk tests would be subject to a precertification pathway. +• +On April 4, 2019, the FDA issued a warning letter to Inova Genomics Laboratory for its pharmacogenomics tests, i.e., tests that predict medication response, among other things. In this letter, the FDA rebutted Inova’s argument that it believed it was operating within the scope of FDA’s LDT exemption and not subject to the FDA’s premarket review or labeling requirements by noting that the FDA has not created a legal “carve-out” or exemption for LDTs and that it ultimately retains discretion to take action when appropriate. +• +On March 5, 2020, identical versions of the VALID Act were introduced in both chambers of Congress. The same day, the House bill was referred to the House Committee on Energy and Commerce. +• +On August 19, 2020, HHS announced a new policy determining that FDA must engage in notice-and-comment rulemaking before requiring premarket review of LDTs. +• +On Nov. 16, 2020, HHS directed FDA to review voluntarily submitted EUAs for LDTs; if FDA’s review time exceeds 14 days, the submission would be referred to the National Institute of Health National Cancer Institute and also to other scientific government agencies, or to outside technical contractors if FDA remains unable to conduct the reviews. +We currently market our GeneStrat, VeriStrat, Nodify XL2 and Nodify CDT tests as LDTs in the United States. As a result, we believe our diagnostic services are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDCA provisions. If the FDA disagrees with the LDT status of any of our tests, the FDA may consider the test to be an unapproved medical device and may subject us to FDA enforcement action, including, without limitation, requiring us to seek clearance, authorization or approval for the laboratory test. If the FDA were to begin enforcement with respect to our LDTs, we could incur substantial costs and delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market requirements. +To date, the FDA has not engaged in notice-and-comment rulemaking or released broad-sweeping guidance, but it could choose to do so in the future and if pre-market review is required, our business could be negatively impacted as a result of commercial delay that may be caused by the new requirements. The cost of conducting clinical trials and otherwise developing data and information to support pre-market applications may be significant. If we are required to submit applications for our currently marketed tests, we may be required to conduct additional studies, which may be time-consuming, costly and could result in our currently-marketed tests being withdrawn from the market. Continued compliance with the FDA’s regulations would increase the cost of conducting our business, and subject us to heightened regulation by the FDA including penalties for failure to comply with these requirements. Failure to comply with applicable regulatory requirements could result in an enforcement action by the FDA, such as fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal sanctions. There are other regulatory and legislative proposals that would increase general FDA oversight of clinical laboratories and LDTs. Until the FDA finalizes its regulatory position regarding LDTs, or the VALID Act or other legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval. The outcome and ultimate impact of such proposals on the business is difficult to predict at this time and we are monitoring developments and anticipate that our products will be able to comply with requirements that may be imposed by the FDA. In the meantime, we maintain our CLIA accreditation, which permits the use of LDTs for diagnostics purposes. +29 +FDA Emergency Use Authorization +Section 564 of the FDCA allows the FDA to authorize the shipment of drugs, biological products, or medical devices that either lack required approval, licensure, or clearance (unapproved products), or are approved but are to be used for unapproved ways to diagnose, treat, or prevent serious diseases or conditions in the event of an emergency declaration by the HHS Secretary. 21 U.S.C. § 360bbb-3(a)(1)-(2). +On February 4, 2020, HHS Secretary Alex M. Azar II declared a public health emergency for COVID-19, under 21 U.S.C. § 360bbb-3(b)(1), justifying the authorization of emergency use of IVDs for detection and/or diagnosis of COVID-19. This determination was published in the Federal Register on February 7, 2020. 85 Fed. Reg. 7316 (Feb. 7, 2020). +While this emergency declaration is effective, the FDA may authorize the use of an unapproved product or an unapproved use of an approved product if it concludes that: +• +an agent referred to in the emergency declaration could cause a serious or life-threatening disease or condition; +• +it is reasonable to believe that the authorized product may be effective in diagnosing, treating, or preventing that disease or condition or a serious or life-threatening disease or condition caused by an approved product or a product marketed under an EUA; +• +the known and potential benefits of the authorized product, when used for that disease or condition, outweigh known and potential risks, taking into consideration the material threat of agents identified in the emergency declaration; +• +there is no adequate, approved, and available alternative to the authorized product for diagnosing, preventing, or treating the relevant disease or condition; +• +any other criteria prescribed by the FDA is satisfied. Id. § 360bbb-3(c). +Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. +The Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. We have completed all required performance verification studies to validate the use of the tests in our laboratories in accordance with the FDA Policy for Coronavirus Disease-2019 Tests During the Public Health Emergency, CAP and New York State Clinical Laboratory Standards of Practice (NYS CLEP) requirements. The FDA Policy for COVID-19 tests is a guidance document that explains the FDA’s current thinking on the topic, is subject to change, and does not establish any legally enforceable responsibilities. As stated in the FDA’s Policy for COVID-19, the FDA does not expect a separate notification or EUA request from laboratories that are performing testing using EUA-authorized test kits purchased from commercial manufacturers or their distributors. According to the FDA Policy for COVID-19 tests, a laboratory may make certain modifications to an EUA-authorized test if the modified test is validated using a bridging study without submitting an EUA amendment or formal notification. A laboratory may modify an EUA authorized test for use of a new specimen through a bridging study when the new specimen type has been previously authorized for another test of the same technology without submitting an EUA amendment or formal notification. +Federal and State Laboratory Licensing Requirements +The Biodesix Boulder, Colorado clinical laboratory is a College of American Pathology ( CAP)-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, Biodesix’s Quality Management System (QMS) holds an ISO 13485:2016 certificate. The Biodesix Boulder, Colorado clinical laboratory has received approval from The New York State Department of Health (NYSDOH), New York State Clinical Laboratory Evaluation Program (NYS CLEP) in Soluble Tumor Markers and Molecular, Cellular Tumor Markers as well as holding state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +30 +CLIA regulations establish standards for proficiency testing; facility administration; general laboratory systems; pre-analytic, analytic systems, post- analytic systems; personnel qualifications and responsibilities; quality control, quality assessment; and specific provisions for laboratories performing moderate to high complexity tests. Our Boulder, Colorado clinical laboratory is inspected biennially as part of its ongoing certification under CLIA certificate of accreditation by CAP. The Boulder, Colorado clinical laboratory most recently passed its CAP inspection in February 2019. +Under CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of or assessment of health. CLIA requires that a laboratory hold a certificate applicable to the type of laboratory examinations it performs and that it complies with, among other things, standards covering operations, personnel, facilities administration, quality systems and proficiency testing, which are intended to ensure, among other things, that clinical laboratory testing services are accurate, reliable and timely. +The Biodesix De Soto, Kansas clinical laboratory is a COLA-accredited clinical laboratory regulated by CMS pursuant to CLIA. COLA Inc. (COLA) was founded in 1988 as a private alternative to help laboratories stay in compliance with CLIA. In 1993, the Health Care Financing Administration (now CMS) granted COLA deeming authority under CLIA, and in 1997 The Joint Commission also recognized COLA Inc.’s laboratory accreditation program. The De Soto, Kansas clinical laboratory is inspected biennially by COLA. The De Soto, Kansas clinical laboratory most recently passed inspection in August 2019. The De Soto, Kansas clinical laboratory also holds state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +The International Organization for Standardization ( ISO) is an independent, non-governmental international organization that defines world-class specifications for products, services and systems, to ensure quality, safety and efficiency. ISO 13485:2016 is a harmonized, international regulatory benchmark for quality management systems that addresses most or all of the QMS requirements in markets including the United States, European Union, Australia, Japan and Canada. The ISO 13485:2016 certificate confirms that an organization operates a QMS that conforms to the standards established by ISO. The FDA has proposed a rule to harmonize and modernize its QSR, which would supplant the existing requirements with ISO 13485:2016 although this rule has been delayed several times spring 2018. In February 2021, we passed an ISO 13485:2016 inspection. +To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Laboratories such as ours, which are performing high complexity testing, are required to meet more stringent CLIA requirements than laboratories performing less complex tests, and therefore our laboratories are also subject to random, unannounced survey and inspection at any time. In addition, a laboratory that is certified as “high complexity” under CLIA may develop, manufacture, validate and use proprietary LDTs. CLIA requires analytical validation including accuracy, precision, specificity, sensitivity and establishment of a reference range for any LDT used in clinical testing. The regulatory and compliance standards applicable to the testing we perform may change over time and any such changes could have a material effect on our business. +CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that out-of-state laboratories maintain an in-state laboratory license to perform tests on samples from patients who reside in that state. As a condition of licensure, certain states may require that laboratory personnel meet qualifications, quality control procedures, facility requirements, record maintenance requirements or other state-specific requirements. +Because our Boulder, Colorado clinical laboratory is located in the State of Colorado, we do not need a specific State of Colorado laboratory license, however, we maintain licenses to conduct testing in other states where nonresident laboratories are required to obtain state laboratory licenses. We maintain licenses for our Boulder, Colorado and De Soto, Kansas laboratories with the New York State Dept. of Health (NYSDOH). We also hold licenses in other states in which we operate, including California, Maryland, Pennsylvania and Rhode Island, that require licensing of out-of-state laboratories under certain circumstances. Other states may currently have or adopt similar licensure requirements in the future, which may require us to modify, delay or stop its operations in those states until such requirements are met. +31 +Failure to comply with CLIA certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate or license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions, and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. +CLIA and state laws and regulations, operating together, sometimes limit the ability of laboratories to offer consumer-initiated testing, also known as direct access testing. We do not offer direct access testing and instead require that our tests be ordered by licensed healthcare providers. +Our Boulder, Colorado and De Soto, Kansas laboratories are certified and adhere to the New York State Clinical Laboratory Evaluation Program (NYS CLEP), based on New York State Public Health Law, Article 5 Title 5. New York State Clinical Laboratory Evaluation Program is exempt from CLIA and establishes their own method of laboratory certification and test validation approval. To process New York State patient specimens a laboratory must submit a robust analytical and clinical validation package to demonstrate clinical utility of the test and receive approval prior to offering the test in the state of New York. Our GeneStrat and VeriStrat tests have received New York State Clinical Laboratory Evaluation Program approval. New York State Clinical Laboratory Evaluation Program requires semi- annual inspections to ensure the laboratory meets all general and specialty standards. Biodesix passed New York State Clinical Laboratory Evaluation Program inspection in May 2019 and is currently scheduled for a routine re-inspection in May 2021. +Regulatory framework for medical devices in the United States +Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, which are defined to include, among other things, IVDs. The FDA regulates the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. It is possible that one of our current, or future, tests will be subject to FDA authority and oversight as either an IVD or a CDx pursuant to the FDA’s authority to regulate medical devices under the FDCA. +Medical devices are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +product design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the European Economic +Area (EEA), a medical device must meet the Medical Devices Directive’s (MDD)/In Vitro Medical Devices Directive’s (IVDD) Essential Requirements or, applicable on May 26, 2021, the Medical Devices Regulation’s (MDR) / applicable on May 26, 2022, In Vitro Medical Devices Regulation’s (IVDR) General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or +32 +statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high - risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a clinical evaluation report (CER) the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk- ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia, of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia, that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. However, the CE mark will be accepted in the UK until July 1, 2023. +Device classification +Under the FDCA, medical devices are classified into one of three classes: Class I, Class II or Class III, depending on the degree of risk to patients that is associated with each medical device and the amount of oversight needed to provide reasonable assurances with respect to safety and effectiveness of the medical device. +Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to a set of FDA regulations, referred to as the General Controls for Medical Devices, which require compliance with the applicable portions of the FDA’s QSR, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements. +Class II devices are subject to the General Controls as well as any special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, patient registries, FDA guidance documents and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process, although some Class II devices are exempt from the 510(k) requirements. +Class III devices include devices deemed by the FDA to pose the greatest risk: such as life-supporting or life-sustaining devices, implantable devices, or those deemed novel and not substantially equivalent to a predicate device following the 510(k) process. CDx tests are regularly considered Class III devices. +Premarket submission process +Unless a statutory or regulatory exemption or enforcement discretion policy applies, before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, the manufacturer must obtain the FDA’s: (1) permission for commercial distribution under section 510(k) of the FDCA (510(k) clearance); or (2) approval of a PMA; or (3) de novo classification and authorization. These processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees. +33 +Under the 510(k) clearance process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and therefore a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Premarket notifications typically include bench, analytical, and preclinical data. Clinical data is sometimes required to support substantial equivalence. If a manufacturer obtains a 510(k) clearance for its device and then makes a modification that could significantly affect the device’s safety or effectiveness or constitutes a major change or modification in the intended use of the device, a new clearance, authorization or approval may be required. +By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous, costly, and time-consuming PMA approval process or seek reclassification of the device through the de novo process. +To obtain a PMA, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling, and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use. +Once filed as a PMA, the FDA has 180 days to review the filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. +Prior to approval of a PMA, the FDA may conduct inspections of any clinical trial data and clinical trial sites, as well as inspections of any manufacturing facility and processes. The FDA can delay, limit or deny approval of a PMA application for many reasons, including (1) the device may not be shown safe or effective to the FDA’s satisfaction; (2) the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval; (3) the manufacturing process or facilities may not meet applicable requirements; and (4) changes in FDA approval policies or adoption of new regulations may require additional data. +If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when data is available. The PMA process can be expensive, uncertain and lengthy. A number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing. New PMA applications or PMA supplements are required for any modifications to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, materials or design of a device that has been approved through the PMA process. +34 +As a condition of PMA application approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer - term safety and effectiveness data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. +Alternatively, the FDA also allows the submission of a direct de novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of FDASIA, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. +The 510(k), de-novo or PMA processes can be expensive, lengthy and unpredictable. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device. +Companion Diagnostics and the Premarket Process +We believe that one of our future product candidates may include a companion diagnostic or complementary diagnostic (collectively CDx). CDx’s can identify patients who are most likely to benefit from a particular therapeutic product; identify patients likely to be at increased risk for serious side effects as a result of treatment with a particular therapeutic product; or monitor response to treatment with a particular therapeutic product for the purpose of adjusting treatment to achieve improved safety or effectiveness. The use of the CDx will be stipulated in the labeling of both the CDx and the therapeutic product. The FDA may require an application for the CDx separate from the drug approval process, and this could potentially delay the approval of any new drug application or the CDx, or complicate the review process. CDx’s are generally regulated as Class III medical devices by the FDA and are therefore most often subject to the PMA approval process. +The FDA issued guidance in July 2016 for the co-development of CDx tests with a therapeutic product and issued another draft guidance in December 2018 specific to oncology CDx tests. The FDA finalized this draft guidance in April 2020 in “Developing and Labeling In vitro Companion Diagnostic Devices for a Specific Group of Oncology Therapeutic Products.” The guidance is meant to guide the development of CDx products, which are defined as IVDs that provide information that is essential for the safe and effective use of the therapeutic product. A CDx is often developed and approved or cleared contemporaneously with the therapeutic, and the use of the CDx is stipulated in the labeling of both the CDx and the corresponding therapeutic product. While it supports contemporaneous marketing authorizations, if there are any deficiencies in the submissions, the FDA may place a PMA review of a CDx on hold or request additional testing, which could potentially delay the approval of the corresponding new drug application or the marketing authorization of the CDx, or otherwise complicate the review process. Some oncology CDx tests can be developed in a way that results in labeling for a specific group of oncology therapeutic products, rather than a single therapeutic product. +35 +Post-Market FDA Regulation +Even if regulatory clearance, authorization or approval of a device is granted, the FDA may impose limitations on the uses and indications for which the device may be labeled and promoted, and the device remains subject to significant regulatory requirements. Medical devices may be marketed only for the uses and indications for which they are cleared, authorized or approved. After a device, including a device exempt from FDA premarket review, is placed on the market, numerous post-market regulatory requirements apply, and the FDA has broad authority to enforce these requirements. Medical device manufacturers are subject to unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of any suppliers. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions such as: warning letters, fines, injunctions, consent decrees and civil penalties; unanticipated expenditures, including requirements to repair, replace, and/or refund the cost of the devices, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; the FDA’s refusal of our requests for 510(k) clearance, de novo classification, or PMA of new products, new intended uses or modifications to existing products; the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries; and withdrawing 510(k) clearance or PMAs that have already been granted and criminal prosecution. In the event that a supplier fails to maintain compliance with the FDA’s or our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. +Federal and State Fraud and Abuse Laws +We are subject to federal fraud and abuse laws such as the federal Anti-Kickback Statute (AKS), the federal prohibition against physician self- referral (Stark Law), the Eliminating Kickbacks in Recovery Act (EKRA), and the federal False Claims Act (FCA). We are also subject to similar state and foreign fraud and abuse laws. +The AKS prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing or ordering, any item or service that may be reimbursable, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. There are a number of statutory exceptions and regulatory safe harbors to the AKS that provide protection from AKS liability to arrangements that fully satisfy the applicable requirements. +EKRA prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program. The term “health care benefit program” is broadly defined such that EKRA extends to referrals reimbursed by both governmental and commercial third-party payers. EKRA includes a number of statutory exceptions that provide protection from EKRA liability if the applicable requirements are met. +The Stark Law generally prohibits, among other things, clinical laboratories and other so-called “designated health services” entities from billing Medicare for any services when the physician ordering the service, or any member of such physician’s immediate family, has a financial relationship, such as a direct or indirect investment interest in or compensation arrangement with the billing entity, unless the arrangement meets an exception to the prohibition. The Stark Law also prohibits physicians from making such referrals to a designated health services entity. There are also similar state laws that apply where Medicaid and/or commercial payers are billed. +The FCA imposes civil penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment to the government that are false or fraudulent, or knowingly making, using or causing to be made or used a false record or statement material to such a false or fraudulent claim, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. This statute also permits a private individual acting as a “qui tam” whistleblower to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $11,665 to $23,331 per false claim or statement for penalties assessed after June 19, 2020, with respect to violations occurring after November 2, 2015. +36 +Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payer knows or should know is likely to influence the beneficiary to order or receive a reimbursable item or service from a particular provider, practitioner, or supplier, and contracting with an individual or entity that the person knows or should know is excluded from participation in a federal health care program. In addition, federal criminal statutes created by HIPAA prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services. +In addition to these federal laws, there are often similar state anti-kickback and false claims laws that typically apply to arrangements involving reimbursement by a state-funded Medicaid or other health care program. Often, these laws closely follow the language of their federal law counterparts, although they do not always have the same exceptions or safe harbors. In some states, these anti-kickback laws apply with respect to all payers, including commercial payers. +A number of states have enacted laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and other healthcare providers, and, in some states, marketing expenditures. In addition, some state statutes impose outright bans on certain manufacturer gifts to physicians or other health care professionals. Some of these laws, referred to as “aggregate spend” or “gift” laws, carry substantial fines if they are violated. +Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs and extensive annual trainings for all of our employees and contractors. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from participation in government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Anti-Corruption +The FCPA and similar international bribery laws make it unlawful for entities to make payments to foreign government officials to assist in obtaining and maintaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any offer, payment, promise to pay, or authorizing the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to do or omit to do an act in violation of his or her duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business, to any person. In addition to the anti-bribery provisions of the FCPA, the statute also contains accounting requirements designed to operate in tandem with the anti-bribery provisions. Covered companies are required to make and keep books and records that accurately and fairly reflect the transactions of the company and devise and maintain an adequate system of internal accounting controls. With our international operations through our third-party partnerships, we could incur significant fines and penalties, as well as criminal liability, if we fail to comply with either the anti-bribery or accounting requirements of the FCPA, or similar international bribery laws. Even an unsuccessful challenge of our compliance with these laws could cause us to incur adverse publicity and significant legal and related costs. +37 +Privacy and Data Protection Laws +Numerous federal and state laws and regulations, including HIPAA, as amended by the HITECH, govern the collection, dissemination, security, use and confidentiality of protected health information (PHI) and personal information. In the course of performing our business we obtain personal information, including PHI. Laws and regulations relating to privacy, data protection, and consumer protection are evolving and subject to potentially differing interpretations. Under HIPAA and HITECH, the HHS, issues regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of PHI, used or disclosed by covered entities (CEs) and their authorized business associates (BAs). Because we are a health care provider that electronically transmits health care information, we are at times either a CE or a BA, as defined by HIPAA. Our subcontractors that create, receive, maintain, transmit or otherwise process PHI on our behalf are HIPAA BAs and must also comply with HIPAA, as applicable. +HIPAA and HITECH include the privacy and security rules, breach notification requirements and electronic transaction standards. The privacy rule governs the use and disclosure of PHI by CEs and BAs. The privacy rule generally prohibits the use or disclosure of PHI except as permitted under the rule. The rule also sets forth individual patient rights, such as the right to access or amend certain records containing such individual’s PHI, or to request restrictions on the use or disclosure of such individual’s PHI. The security rule requires CEs and BAs to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI (also referred to as ePHI) by implementing administrative, physical and technical safeguards. Under HITECH’s breach notification rule, a CE must notify individuals, the Secretary of HHS, and in some circumstances, the media of certain breaches of unsecured PHI or ePHI. +Penalties for failure to comply with a requirement of HIPAA and HITECH vary depending on the number and nature of the violations and any history of prior violations, but can be significant and include civil monetary or criminal penalties. HIPAA is enforced by the Department of Health and Human Services, Office for Civil Rights, and HIPAA also authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in the misuse or breach resulting in improper access to PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA CEs, such as us, and their BAs for compliance with the HIPAA privacy and security standards. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator. +In addition, we may be subject to state privacy, cybersecurity, and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information Act, which, in addition to HIPAA and HITECH, sets forth standards with which all California health care providers must abide. State laws may be more stringent, broader in scope or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other, which may complicate compliance efforts. For instance, the CCPA became effective on January 1, 2020. The CCPA, among other things, gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA has been amended from time to time, and it remains unclear what, if any, further modifications will be made to this legislation or how it will be interpreted. Although there are certain exemptions for PHI and clinical trial data, the CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future and the CCPA may increase our compliance costs and potential liability. Additionally, a California ballot initiative, the California Privacy Rights Act (CPRA) was adopted by California voters. The CPRA will impose additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It would also create a new California data protection agency specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. Similar laws have been proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that could continue to make compliance challenging and costly. +38 +Additionally, the Federal Trade Commission (FTC) and state attorneys general enforce consumer protection laws that prohibit unfair and deceptive acts and practices, including Section 5 of the FTC Act, which creates standards for the collection, use, dissemination and security of health-related and other personal information. Claims of unfair or deceptive trade practices regarding privacy and security can lead to significant liabilities and consequences, including regulatory investigations, penalties, fines and orders as well as civil claims, which could impact our data practices and operations or cause reputational damage. +We may also be subject to laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may add additional compliance burden and complexity. For example, in the EEA, the collection and use of personal data is governed by the GDPR. In the United Kingdom, the GDPR will be adopted in substantially the same form. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze, store, transfer and otherwise process personal data. European and United Kingdom data protection authorities may interpret the GDPR and national laws differently and impose additional requirements, which adds to the complexity of processing personal data in or from the EEA or United Kingdom. Guidance on implementation and compliance practices are often updated or otherwise revised. GDPR applies extra-territorially under certain circumstances and imposes stringent requirements on controllers and processors of personal data, including, for example, requirements to ensure a legal bases to process personal information, provide robust disclosures to individuals, facilitate data subject rights, provide data security breach notifications within 72 hours after discovering a breach in certain circumstances, limit retention of personal information and apply enhanced protections to health data and other categories of sensitive personal information. The GDPR also has requirements around international transfers of personal data. Requirements around transfers to the United States and other jurisdictions have increased since a July 2020 decision by the Court of Justice of the European Union invalidated the Privacy Shield as a basis to transfer personal data from Europe to the United States, and added requirements for reliance on Standard Contractual Clauses. Regulatory guidance on requirements for international transfers, and other GDPR compliance matters, continues to evolve. Failure to comply with the requirements of the GDPR may result in fines of up to €20 million or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. To comply with the GDPR and other applicable international data protection laws and regulations, we may be required to put in place additional mechanisms ensuring compliance, which may result in other substantial expenditures. +Cybersecurity +Our business relies on secure and continuous processing of information and the availability of our IT networks and IT resources, as well as critical IT vendors that support our technology, research and other data processing operations. While we take steps to protect our systems and data, security incidents, data breaches, computer malware and computer hacking attacks have become more prevalent across industries, including the life sciences sector, and may occur on our systems or those of our third-party service providers. Unauthorized persons may in the future be able to exploit weaknesses in the security systems of our (or our third-party service providers) IT networks and gain access to PHI and other personal information, or sensitive trade secrets or other proprietary information. Any wrongful use or disclosure of PHI, other personal information, trade secrets or other proprietary information by us or our third-party service providers could subject us to regulatory fines or penalties, third-party claims or otherwise could adversely affect our business and results of operations. Although HIPAA and the regulations promulgated thereunder do not provide for a private right of action, failures to adequately protect PHI or our IT systems could be viewed as violations of the HIPAA security rule or violations of other applicable information security laws, regulations, contractual obligations or industry standards, and could further result in costly data breach notification obligations that negatively impact our reputation. +Moreover, data security incidents or data breaches, as well as attacks on our IT systems, could result in operational disruptions or data loss or corruption that could adversely impact our business and operations, result in substantial investment of resources to investigate, recover and remediate and subject us to heightened regulatory scrutiny. +39 +International Regulations +Many countries in which we may offer any of our diagnostic tests in the future have anti-kickback regulations prohibiting providers from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable under any national health care program. In situations involving physicians employed by state-funded institutions or national health care agencies, violation of the local anti-kickback law may also constitute a violation of the FCPA. +The FCPA prohibits any United States individual, business entity or employee of a United States business entity to offer or provide, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether or not such conduct violates local laws. In addition, it is illegal for a company that reports to the SEC to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls. We will also be required to maintain accurate information and control over sales and distributors’ activities that may fall within the purview of the FCPA, its books and records provisions and its anti-bribery provisions. +The standard of intent and knowledge in anti-bribery cases is minimal. Intent and knowledge are usually inferred from that fact that bribery took place. The accounting provisions do not require intent. Violations of the FCPA’s anti-bribery provisions for corporations and other business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Other countries, including the United Kingdom and other OECD Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United Kingdom Anti-Bribery Act. +When marketing our diagnostic tests outside of the United States, we may be subject to foreign regulatory requirements governing human clinical testing, prohibitions on the import of tissue necessary for us to perform our diagnostic tests or restrictions on the export of tissue imposed by countries outside of the United States or the import of tissue into the United States, and marketing approval. These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required. +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the European Economic Area (EEA), a medical device must meet MDDs/ IVDD Essential Requirements or, applicable on May 26, 2021, the MDR applicable on May 26, 2022, IVDR General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a CER the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk- ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia , of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia , that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +40 +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. However, the CE mark will be accepted in the UK until July 1, 2023. +Healthcare Reform +In March 2010, the Patient Protection and Affordable Care Act (ACA) was enacted in the United States. The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private insurers. For example, the ACA requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices. The medical device tax was permanently repealed at the end of 2019. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters, and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict. +While the Biden administration has recently signaled its intent to pursue policies strengthening the ACA, the Trump administration and Congress sought to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. The Trump administration issued three executive orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. For example, on December 20, 2019, President Trump signed appropriations legislation for fiscal year 2020 that repealed certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high-cost employer-sponsored insurance plans, for tax years beginning after December 31, 2019; the annual fee imposed on certain health insurance providers based on market share, for calendar years beginning December 31, 2020; and the medical device excise tax on non-exempt medical devices, for sales after December 31, 2019. While Congress has not passed comprehensive legislation that would repeal all or part of the ACA, two bills affecting the implementation of certain taxes under the ACA have been signed into law. The Tax Cuts and Jobs Act of 2017 (TCJA) among other things, included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment, or penalty, imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” In December 2018, a federal district court in Texas ruled that the ACA’s individual mandate, without the penalty that was repealed effective January 1, 2019, was unconstitutional and could not be severed from the ACA. As a result, the court ruled the remaining provisions of the ACA were also invalid. The Fifth Circuit Court of Appeals affirmed the district court’s ruling that the individual mandate was unconstitutional, but it remanded the case back to the district court for further analysis of whether the mandate could be severed from the ACA; that is, whether the entire ACA was therefore also unconstitutional. The United States Supreme Court granted certiorari on March 2, 2020 and heard oral argument on November 10, 2020; the case is expected to be decided in 2021. +Other legislative changes have been proposed and adopted in the United States since the ACA was enacted to reduce healthcare expenditures. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions of Medicare payments to providers of up to 2% per fiscal year that started in 2013 and, due to subsequent statutory amendments, will remain in effect through 2030 unless additional Congressional action is taken. In 2020, the CARES Act temporarily suspended the 2% cut in Medicare payments from May 1, 2020 through December 31, 2020, and it extended the sequestrian reductions through FY 2030 to offset the cost of such temporary suspension. The Consolidated Appropriations Act, 2021 further extended the temporary suspension through March 31, 2021. The American Taxpayer Relief Act of 2012 made other changes, including reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. If federal spending is further reduced, anticipated budgetary shortfalls may also impact the ability of relevant agencies, such as the FDA or the National Institutes of Health to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve R&D, manufacturing, and marketing activities, which may delay our ability to develop, market and sell any products we may develop. Additionally, the Biden administration has already indicated a shift in direction from Trump administration policies by issuing orders and other documents rolling back regulations and Executive Orders from the Trump administration, and as noted, indicating that it will pursue policies strengthening the ACA. The recent change in presidential administration could materially impact our business in ways that are difficult to predict. +41 +In December 2020, in its enactment of the Consolidated Appropriations Act, Congress enacted the No Surprises Act. This law, which takes effect January 1, 2022, bars an out-of-network provi ders from billing patient s in excess of the in-network cost sharing for services furnished with respect to a visit at certain in-network health care facilities. The law establishes an independent dispute resolution process between the provider and the payer to determine the appropriate payment rate to the provider. As written, the No Surprises Act may apply to laboratory tests furnished by an independent laboratory with respect to a hospital visit . The law establishes a notice and consent exception that generally does not apply to laboratory tests, although it allows HHS to apply this exception to certain advanced tests. Additional information on the applicability of the No Surprises Act, any applicability of the notice and consent exception to advanced tests, and the rules governing the independent dispute resolution process may be determined in rulemaking and subregulatory guidance from HHS, the Department of Labor, and the Department of the Treasury in 2021. +Coverage and Reimbursement +Reimbursement for laboratory tests in the United States is determined by various payers, including private third-party payers, managed care organizations, and state and federal health care programs, such as Medicare and Medicaid. In Medicare, coverage of an item or service depends on whether it is “reasonable and necessary” under the section 1862(a)(1)(A) of the Social Security Act (SSA). For single-source laboratory tests, this determination is typically made by the Medicare Administrative Contractor (MAC) with jurisdiction over the laboratory where the test is performed. Our Boulder, Colorado laboratory is currently under the jurisdiction of Novitas Solutions, Inc. Our De Soto, Kansas laboratory is under the jurisdiction of Wisconsin Physicians Service Insurance Corporation , which participates in the MolDX program (administered by another MAC, Palmetto GBA) to set coverage policy for molecular diagnostic tests. +Medicare pays for clinical diagnostic laboratory tests (CDLTs), on the Clinical Laboratory Fee Schedule (CLFS). Section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA), added section 1834A to the SSA, which established the current CLFS rate setting processes and coding provisions for CDLTs, and created a new subcategory of CDLTs called Advanced Diagnostic Laboratory Tests (ADLTs), with separate reporting and payment requirements. +Under section 1834A and its implementing regulations, clinical laboratories that receive the majority of their Medicare revenues from payments made under the CLFS and the Physician Fee Schedule report on a triennial basis (or annually for ADLTs), private payer rates and volumes for their tests with specific billing codes based on final payments made during a set data collection period. The payment rate for a test for the ensuing three-year period (or one year for ADLTs) is set at the weighted median of the rates reported under the specific billing code for that test. Newly established codes for CDLTs are priced until the next private payer rate reporting cycle either based on the payment rate of a comparable code on the CLFS (as determined by CMS) or at the median of rates submitted by the individual MACs based on statutory and regulatory factors. New ADLTs are initially priced at “actual list charge” for a nine-month period, after which they are priced based on private payer rates, with a recoupment provision if actual list charge is more than 130% of the weighted median of private payer rates reported. +The various payers in the United States also determine their own billing rules. In December 2020, Medicare revised its billing rules for clinical laboratory tests to require cancer-related protein-based Multianalyte Assays with Algorithmic Analyses to be billed directly to Medicare by the performing laboratory in most cases when performed on a specimen collected from a hospital outpatient. Molecular pathology tests and most ADLTs are also generally required to be billed directly to Medicare by the laboratory under these circumstances. +Environmental, Health and Safety Regulations +We are subject to various federal, state, local, and foreign environmental, health and safety laws and regulations and permitting and licensing requirements. Such laws include those governing laboratory practices, the generation, storage, use, manufacture, handling, transportation, treatment, remediation, release and disposal of, and exposure to, hazardous materials and wastes and worker health and safety. Our operations involve the generation, use, storage and disposal of hazardous materials, and the risk of injury, contamination or non-compliance with environmental, health and safety laws and regulations or permitting or licensing requirements cannot be eliminated. In particular, the introduction of our Bio-Rad SARS-CoV-2 ddPCR and Platelia SARS-CoV-2 Total Ab tests requires that we maintain compliance with applicable and evolving federal and state laws and regulations relating to COVID-19, including the generation, use, storage, and disposal of testing materials and agents. Compliance with environmental laws and regulations has not had a material effect on our capital expenditures, earning or competitive position. +42 +Corporate Information +We were incorporated in Delaware in 2005 as Elston Technologies, Inc. Our principal executive offices are located at 2970 Wilderness Place, Suite 100, Boulder, Colorado 80301, and our telephone number is (303) 417-0500. On June 20, 2006, we changed our name to Biodesix, Inc. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of our initial public offering. +Additionally, we are a “smaller reporting company ” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +For certain risks related to our status as an emerging growth company, see “Risk Factors—Risks Related to our Common Stock—We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.” +Human Capital Resources +Our culture is underpinned by our cultural beliefs including an unwavering commitment to inclusion and diversity. We are committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent offering opportunities for our team members to grow and develop in their careers, supported by strong compensation, benefits and health and wellness programs. We regularly engage our team members in monthly all-hands meetings to align and focus on the current state of affairs of our business, our partnerships, new products, clinical trials, and other pertinent information about our business. We engage our team members in programs such as peer recognition, recruitment and our newly introduced Diversity, Equity and Inclusion Council that focus on recognizing outstanding individual contributions to company performance, cultural fit of new team members and acknowledging the diversity or our team to ensure our team members feel valued and can do their best work. We have a national annual community service initiative, “Biodesix Gives Back” that allows each team member to invest ten hours of paid community service to organizations of their choosing. +43 +As of December 31, 2020, we had approximately 200 full-time and part-time employees with more than 95% located in the United States. Of our 200 full-time and part-time team members, the majority of our team member base is located in proximity to our corporate office and testing facilities located in Boulder, Colorado and our laboratory in De Soto, Kansas . +Diversity, Equity and Inclusion +We believe that a diverse employee population, including across background, gender, ethnicity, sexual orientation and lived experiences, is critical to our success. Our employees are encouraged to leverage their personal strengths and experiences to continually innovate and contribute to the development of new ideas and process improvements that drive better experiences for our partners. +Employee Engagement +Our company culture emphasizes the satisfaction and well-being of our team members and a diverse, engaged workforce. We solicit the opinion and views of our team members through surveys and peer focus groups. We have an established and valued Peer Recognition Culture. Teammates recognize other teammates publicly for their support and contributions fostering engagement and retention. We are reviewing feedback we received on our current cultural beliefs to determine if any modifications are needed. Additionally, the Company celebrates our top sales performers through the President’s Club and other top company performers as nominated by fellow team members through our four (4) Performance Excellence Awards that recognize creativity and innovation, an entrepreneurial spirit, a strategic impact on the success of the Company and lastly, embodying the Biodesix cultural beliefs and goes “above and beyond” daily. +Training and Development +We invest in our team members career growth and provide team members with a wide range of development opportunities, including face-to-face, virtual, and self-directed learning, mentoring, coaching, and external development. +Health, Safety and Wellness +The physical health, financial stability, life balance and mental health of each of our team members is vital to our success. We sponsor several cancer awareness activities in our local communities to bring engagement and awareness of health, safety and wellness to positively impact lives. We provide an Employee Assistance Program through our professional employer organization (PEO) to enhance physical, financial, and mental well-being for all our team members. Since the onset of the COVID-19 pandemic, we have successfully transitioned a significant portion of our workforce to a remote working environment and implemented several safety and social distancing measures in our sites to protect the health and safety of our team members. We also have provided extraordinary safety protocols and standards for all of “essential” team members who work in our Laboratories and our field sales organization including regularly scheduled serial testing for COVID-19. We also have an active “Friends and Family” COVID-19 testing program for our team members, their families and close friends. +Pay Equity +The main objective of our compensation program is to provide a compensation package that will attract, retain, motivate, and reward superior team members who operate in a highly competitive and technologically challenging environment. We emphasize overall Company performance and provide equity incentives for all team members to align their financial interests with the interests of shareholders. In addition, we offer an employee stock purchase plan to all employees in which participants are eligible to purchase shares at a discount to market. We think like customers and act like owners. +Biodesix seeks fairness in total compensation. We benchmark with external comparisons, internal comparisons and look at the relationship between team member roles within the organization. We also review our compensation practices, both in terms of our overall workforce and individual team members, to ensure our pay is fair and equitable. We have no pay disparities based on gender, race, or ethnicity. +44 +Available Information +We file with, or furnish to, the SEC reports including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available free of charge on our corporate website (www.biodesix.com) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov. The foregoing website addresses are provided as inactive textual references only. The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this Annual Report on Form 10-K. +Item 1A. Risk Factors +Risk Factors Summary +The following is a summary of the principal risks that could adversely affect our business, operations and financial results. This summary does not address all of the risk that we face and should be read in conjunction with the entire Risk Factors section below beginning at “Risks Related to Our Business and Industry” within this Item 1A. Risk Factors. +• +We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we achieve profitability, we may not be able to sustain it. +• +The commercial success of our current and future diagnostic tests and services depends upon attaining significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies. +• +We may encounter difficulties in managing our growth, which could disrupt our operations. +• +If we fail to retain sales and marketing personnel and, as we grow, fail to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests in a cost-effective manner, we may not be able to generate revenue growth. +• +If we cannot maintain our current relationships, or enter into new relationships, with biopharmaceutical companies, our revenue prospects could be reduced. +• +Our commercial success and revenue growth are highly dependent on the demand for, and increased adoption of, our diagnostic tests, including our COVID-19 testing program, which are subject to a number of risks and uncertainty. +• +We need to ensure strong product performance and reliability to maintain and grow our business. +• +We depend upon third-party suppliers, including contract manufacturers and single source suppliers, making us vulnerable to supply problems and price fluctuations. +• +Natural or man-made disasters, pandemics, outbreaks, or other similar events, including a sustained outbreak or second wave of the novel strain of coronavirus disease, COVID-19, could significantly disrupt our business, and negatively impact our business, financial condition and results of operations. +• +Our industry is highly competitive and subject to rapid change, which could make our diagnostic tests and services obsolete. If we are unable to continue to innovate and expand and enhance our diagnostic tests and service offerings, we could lose customers or market share. +• +Any failure to offer high-quality support for our diagnostic tests and services may adversely affect our relationships with providers and negatively impact our reputation among patients and providers, which may adversely affect our business, financial condition and results of operations. +• +We may face additional costs, loss of revenue, significant liabilities, harm to our brand, decreased use of our products or services and business disruption if there are disruptions in our information technology systems, including any security or data privacy breaches or other unauthorized or improper access. +45 +Risk Factors +Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, and results of operations and cash flows. All of the risks described below should be carefully considered together with the other information contained and incorporated by reference in this report. +Risks Related to our Business and Industry +We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we achieve profitability, we may not be able to sustain it. +We have incurred losses since our inception, and expect to continue to incur losses for the foreseeable future. We have reported net losses of $31.4 million and $30.7 million the years ended December 31, 2020 and 2019, respectively. As a result of these losses, as of December 31, 2020, we had an accumulated deficit of approximately $258.8 million. Our cash and cash equivalents were $62.1 million as of December 31, 2020 and we expect our cash and cash equivalents will enable us to fund our operating expenses for at least the next twelve months. We have based this estimate on assumptions that in the future may prove to be wrong, and we could use our capital resources sooner than we currently expect. +We expect that our sales and marketing, research and development, regulatory and other expenses will continue to increase as we expand our marketing efforts for our diagnostic tests and services, expand existing relationships with our customers, obtain regulatory clearances or approvals or certifications for future enhancements to our existing diagnostic tests and services and conduct further clinical trials. In addition, we expect our general and administrative expenses to increase due to the additional costs associated with scaling our business operations and testing capacity, particularly with respect to our COVID-19 testing capacity, as well as being a public company, including due to legal, accounting, insurance, exchange listing and compliance, investor relations and other expenses. As a result, we expect to continue to incur operating losses and may never achieve profitability. We will need to generate significant additional revenue in order to achieve and sustain profitability. Even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. If we do not achieve or sustain profitability, it will be more difficult for us to finance our business and accomplish our strategic objectives, either of which would have a material adverse effect on our business, financial condition and results of operations. +The commercial success of our current and future diagnostic tests and services and our revenue growth depends upon attaining significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies. +Our commercial success depends, in part, on the acceptance of our diagnostic tests and services as being safe and relatively simple for medical personnel to learn and use, clinically flexible, operationally versatile and, with respect to providers and payers, cost effective. We cannot predict how quickly, if at all, payers, providers, clinics and patients will accept future diagnostic tests and services or, if accepted, how frequently they will be used. These constituents must believe that our diagnostic tests offer benefits over other available alternatives. +The degree of market acceptance of our current and future diagnostic tests and services depends on a number of factors, including: +• +whether there is adequate utilization of our tests by clinicians, biopharmaceutical companies and other target groups based on the potential and perceived advantages of our diagnostic tests over those of our competitors; +• +the convenience and ease of use of our diagnostic tests relative to those currently on the market; +• +the effectiveness of our sales and marketing efforts; +• +our ability to provide incremental data that show the clinical benefits and cost effectiveness, and operational benefits, of our diagnostic tests; +• +the coverage and reimbursement acceptance of our products and services; +• +pricing pressure, including from group purchasing organizations (GPOs), seeking to obtain discounts on our diagnostic tests based on the collective bargaining power of the GPO members; +46 +• +negative publicity regarding our or our competitors’ diagnostic tests resulting from defects or errors; +• +the accuracy of our tests relative to those of our competitors; +• +product labeling or product insert requirements by the FDA or other regulatory authorities or conformity assessment bodies; and +• +limitations or warnings contained in the labeling cleared or approved by the FDA or other regulatory authorities or conformity assessment bodies. +Additionally, even if our diagnostic tests achieve widespread market acceptance, they may not maintain that market acceptance over time if competing diagnostic tests or technologies, which are more cost effective or are received more favorably, are introduced. Failure to achieve or maintain market acceptance and/or market share would limit our ability to generate revenue and would have a material adverse effect on our business, financial condition and results of operations. +There is no assurance that our COVID-19 and antibody testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. If the pandemic were to dissipate, whether due to a significant decrease in new infections, due to the availability of vaccines, or otherwise, the need for a COVID-19 test could decrease significantly and this could have an adverse effect on our results of operation and profitability. +We may encounter difficulties in managing our growth, which could disrupt our operations. +As of December 31, 2020, we had approximately 200 full and part-time employees. Over the next several years, we expect to increase significantly the number of our employees and the scope of our operations, particularly in the areas of sales, marketing and reimbursement, product development, regulatory affairs and other functional areas, including finance, accounting, quality and legal. Additionally, we expect to expand our testing capacity as we commercialize additional diagnostic tests. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational quality and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources, we may not be able to manage the expansion of our operations or recruit and train additional qualified personnel in an effective manner. Any inability to manage growth could delay the execution of our business plans or disrupt our operations and have a material and adverse effect on our prospects. +Since our inception, we have experienced multiple cycles of growth and anticipate further growth in our business operations. This future growth could create strain on our organizational, administrative and operational infrastructure, including laboratory operations, quality control, customer service and sales organization management. We expect to continue to increase headcount and to hire more specialized personnel in the future as we grow our business. We will need to continue to hire, train and manage additional qualified scientists, laboratory personnel, client and account services personnel, and sales and marketing staff and improve and maintain our technology to properly manage our growth. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees or if we are not successful in retaining our existing employees, our business may be harmed. +We may not be able to maintain the quality or expected turnaround times of our diagnostic tests and services, or satisfy customer demand as it grows. We may not be able to expand our COVID-19 testing capacity rapidly enough to meet the current and anticipated demand. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures. The time and resources required to implement these new systems and procedures is uncertain, and failure to complete this in a timely and efficient manner could materially adversely affect our operations. +47 +If we fail to retain sales and marketing personnel and, as we grow, fail to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests in a cost-effective manner, we may not be able to generate revenue growth. +We have limited experience marketing and selling our diagnostic tests. We currently rely on our direct sales force to sell our diagnostic tests in the United States, and any failure to maintain and grow our direct sales force will negatively affect our business, financial condition and results of operations. The members of our direct sales force are highly trained and possess substantial technical expertise, which we believe is critical in increasing adoption of our diagnostic tests. The members of our United States sales force are at-will employees. The loss of these personnel to competitors, or otherwise, will negatively affect our business, financial condition and results of operations. If we are unable to retain our direct sales force personnel or replace them with individuals of equivalent technical expertise and qualifications, or if we are unable to successfully instill such technical expertise in replacement personnel, it may negatively affect our business, financial condition and results of operations. +In order to generate future growth, we plan to continue to expand and leverage our sales and marketing infrastructure. Identifying and recruiting qualified sales and marketing personnel and training them on how to promote our diagnostic tests, on applicable federal and state laws and regulations and on our internal policies and procedures requires significant time, expense and attention. It often takes several months or more before a sales representative is fully trained and productive. Our sales force may subject us to higher fixed costs than those of companies with competing techniques or diagnostic tests that utilize independent third parties, which could place us at a competitive disadvantage. It will negatively affect our business, financial condition and results of operations if our efforts to expand and train our sales force do not generate a corresponding increase in revenue, and our higher fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand for our diagnostic tests. Any failure to hire, develop and retain talented sales personnel, to achieve desired productivity levels in a reasonable period of time, or timely reduce fixed costs, could negatively affect our business, financial condition and results of operations. Our ability to increase our customer base and achieve broader market acceptance of our diagnostic tests will depend to a significant extent on our ability to expand our marketing efforts. We plan to dedicate significant resources to our marketing programs. It will negatively affect our business, financial condition and results of operations if our marketing efforts and expenditures do not generate a corresponding increase in revenue. In addition, we believe that developing and maintaining broad awareness of our diagnostic tests in a cost-effective manner is critical to achieving broad acceptance of our diagnostic tests. Promotion activities may not generate patient or physician awareness or increase revenue, and even if they do, any increase in revenue may not offset the costs and expenses we incur in building our brand. If we fail to successfully promote, maintain and protect our brand, we may fail to attract or retain the physician acceptance necessary to realize a sufficient return on our brand building efforts, or to achieve the level of brand awareness that is critical for broad use of our diagnostic tests, which in turn could have a material adverse effect on our business, financial condition and results of operations. +If we cannot maintain our current relationships, or enter into new relationships, with biopharmaceutical companies, our revenue prospects could be reduced. +We collaborate with biopharmaceutical companies to analyze patient samples for multiple applications primarily to support clinical trials, including patient identification, companion or complementary diagnostics and retrospective testing. For fiscal years 2020 and 2019, revenue from our top biopharmaceutical customer accounted for 3% and 21% of our total revenue, respectively. The revenue attributable to our biopharmaceutical customers may also fluctuate in the future, which could have a material adverse effect on our financial condition and results of operations. In addition, the termination of these relationships could result in a temporary or permanent loss of revenue. +Our future success depends in part on our ability to maintain these relationships and to establish new relationships. Many factors have the potential to impact such collaborations, including the type of biomarker support required and our ability to deliver it and our biopharmaceutical customers’ satisfaction with our tests or services and other factors that may be beyond our control. Furthermore, our biopharmaceutical customers may decide to decrease or discontinue their use of our tests due to changes in research and product development plans, failures in their clinical trials, financial constraints, or utilization of internal testing resources or tests performed by other parties, or other circumstances outside of our control. In addition to reducing our revenue, the loss of one or more of these relationships may reduce our exposure to research and clinical trials that facilitate the collection and incorporation of new information into our biobank and proprietary AI platform. +48 +We engage in conversations with biopharmaceutical companies regarding potential commercial opportunities on an ongoing basis. There is no assurance that any of these conversations will result in a commercial agreement, or if an agreement is reached, that the resulting relationship will be successful or that clinical or research studies conducted as part of the engagement will produce successful outcomes. Speculation in the industry about our existing or potential relationships with biopharmaceutical companies can also be a catalyst for adverse speculation about us, our tests and our technology, which can adversely affect our reputation and our business. +Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide. +Our quarterly and annual revenue and operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. Our quarterly and annual operating results may fluctuate as a result of a variety of factors, many of which are outside our control and, as a result, may not fully reflect the underlying performance of our business. These fluctuations may occur due to a variety of factors, including, but not limited to: +• +the level of demand for our diagnostic tests, which may vary significantly; +• +the timing and cost of manufacturing our diagnostic tests, which may vary depending on the quantity of production and the terms of our agreements with third-party suppliers and manufacturers; +• +expenditures that we may incur to acquire, develop, or commercialize additional tests and technologies; +• +unanticipated pricing pressures; +• +the rate at which we grow our sales force and the speed at which newly hired salespeople become effective, and the cost and level of investment therein; +• +the degree of competition in our industry and any change in the competitive landscape of our industry, including consolidation among our competitors or future partners; +• +coverage and reimbursement policies with respect to lung cancer treatment equipment, and potential future diagnostic tests that compete with our diagnostic tests; +• +the timing and success or failure of clinical trials for our diagnostic tests or any enhancements to such tests we develop or competing diagnostic tests; +• +positive or negative coverage, or public perception, of our diagnostic tests or those of our competitors or broader industry trends; +• +the impact, if any, of the spread of COVID-19 and any newly discovered variants, and the resulting effects on the number of patients treated or the demand for our non-COVID-19 tests; +• +the timing and cost of, and level of investment in, research, development, licenses, regulatory approval, conformity certification, commercialization activities, acquisitions and other strategic transactions, or other significant events relating to our diagnostic tests, which may change from time to time; +• +the timing and cost of obtaining regulatory approvals, conformity certifications or clearances for planned or future improvements or enhancements to our diagnostic tests; +• +changes in regulatory requirements or in the status of regulatory approvals or applications or conformity certifications; +• +pricing, discounts, and incentives for our diagnostic tests; +• +future accounting pronouncements or changes in our accounting policies; and +• +general market conditions. +In addition, we can provide no assurances that the demand for our COVID-19 and antibody testing program will be sustained, and even if it is, the period of time for which it would be sustained. As vaccines for COVID-19 become more available and widespread in the future, we expect the demand for our COVID-19 diagnostic and antibody tests will decrease. As a result, the increase in revenue due to any increase in demand for our COVID-19 and antibody testing program is not indicative of results expected for any future period. +49 +The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual financial results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Further, our historical results are not necessarily indicative of results expected for any future period, and quarterly results are not necessarily indicative of the results to be expected for the full year or any other period, and accordingly should not be relied upon as indicative of future performance. +This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any guidance we may provide, or if the guidance we provide is below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any publicly stated guidance we may provide, and could in turn negatively impact our business, financial condition and results of operations. +We need to ensure strong product performance and reliability to maintain and grow our business . +We need to maintain and continuously improve the performance and reliability of our diagnostic tests, including our Biodesix WorkSafe testing program, the Nodify XL2 and Nodify CDT tests, and the GeneStrat and VeriStrat tests, to achieve our profitability objectives. Poor product performance and reliability could lead to customer dissatisfaction, adversely affect our reputation and revenues, and increase our service and distribution costs and working capital requirements. Our diagnostic tests may contain errors or defects, and while we have made efforts to test them extensively, we cannot assure that our current diagnostic tests, or those developed in the future, will not have performance problems. Performance issues with our diagnostic tests will increase our costs in the near-term and accordingly adversely affect our business, financial condition and results of operations. +We depend upon third-party suppliers, including contract manufacturers and single source suppliers, making us vulnerable to supply problems and price fluctuations. +We rely on third-party suppliers, including in some instances single source suppliers, to provide us with certain components of our diagnostic tests. The number of suppliers feeding into the production of our diagnostic tests is in excess of 65 worldwide. We consider a select few of these suppliers, located in the United States, Europe and China, as critical single source providers of components. Bio-Rad Laboratories, as described below, is the sole source supplier for our GeneStrat tests and COVID-19 diagnostic and antibody testing program. Oncimmune is also the sole source supplier for our Nodify CDT tests. While we have initiated the second source qualification process for the majority of these critical components, we may not be successful in securing second sourcing for all of them at all or on a timely basis. +In addition, we may purchase supplies through purchase orders and may not have long-term supply agreements with, or guaranteed commitments from, many of our suppliers, including single source suppliers. Additionally, at present, we rely on contract manufacturers for the production of our supplies for our diagnostic test. Many of our suppliers and contract manufacturers are not obligated to perform services or supply diagnostic testing materials for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. We depend on our suppliers and contract manufacturers to provide us and our customers with materials in a timely manner that meet our and their quality, quantity and cost requirements. These suppliers and contract manufacturers may encounter problems during manufacturing for a variety of reasons, any of which could delay or impede their ability to meet our demand. These suppliers and contract manufacturers may cease producing the components we purchase from them or otherwise decide to cease doing business with us. Further, we maintain limited volumes of inventory from most of our suppliers and contract manufacturers. If we inaccurately forecast demand for finished goods, we may be unable to meet customer demand which could harm our competitive position and reputation. In addition, if we fail to effectively manage our relationships with our suppliers and contract manufacturers, we may be required to change suppliers or contract manufacturers. While we believe replacement suppliers exist for all materials, components and services necessary to manufacture our diagnostic tests, establishing additional or replacement suppliers for any of these materials, components or services, if required, could be time-consuming and expensive, may result in interruptions in our operations and product delivery, may affect the performance of our diagnostic tests or could require that we modify their processes. Even if we are able to find replacement suppliers, we will be required to verify that the new supplier maintains facilities, procedures and operations that comply with our quality expectations and applicable regulatory requirements. Any of these events could require that we obtain a new regulatory authority approval before we implement the change, which we may not obtain on a timely basis or at all. +50 +If our third-party suppliers fail to deliver the required commercial quantities of materials on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality on a timely basis, the continued commercialization of our diagnostic tests, the supply of our diagnostic tests to customers and the development of any future diagnostic tests will be delayed, limited or prevented, which could have material adverse effect on our business, financial condition and results of operations. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test. Under the terms of this arrangement, we were granted non-exclusive rights to utilize the intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. We agreed to purchase all of the necessary supplies and reagents for such testing exclusively from Bio-Rad. As further consideration for the non-exclusive license, we agreed to pay a royalty of two and one half percent (2.5%) on net service fees (such fees are defined in the Non-Exclusive License Agreement with Bio-Rad) collected from contracted third parties who receive ddPCR services from us. In addition, we have separately been granted permission by Bio-Rad to use the Bio-Rad SARS-CoV-2 ddPCR test and Platelia SARS-CoV-2 Total Ab test for commercial diagnostic services. For more information regarding this license and supply agreement and the permission granted to us by Bio-Rad with respect to such tests, please see “Business—Material Agreements—Agreements with Bio-Rad.” +This relationship may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. We cannot be certain that, following the realization of this relationship, we will achieve the revenue or specific net income that justifies our entry into it. Any termination of this relationship, or delays in entering into new strategic partnership agreements with Bio-Rad, could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +We may not be able to sufficiently reduce costs in the performance, manufacturing and production of our diagnostic tests to achieve sustainable gross margins. +We partner with contract manufacturers in the development and production of supplies for our diagnostic tests. While we are undertaking a number of initiatives designed to reduce the cost of performing our diagnostic tests, including reducing the costs of supplies, there is no guarantee that we will be able to achieve planned cost reductions from our various cost savings initiatives. There may also be unforeseen occurrences that increase our costs, such as increased prices of the components of our diagnostic tests, changes to labor costs or less favorable terms with third-party suppliers or contract manufacturing partners. If we are unable to reduce our costs, or if cost reductions are less significant or less timely than projected, we will not be able to achieve sustainable gross margins, which would adversely affect our ability to invest in and grow our business and adversely impact our business, financial condition and results of operations. +A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide, including the outbreak of the novel strain of coronavirus disease, COVID-19, and its variants could adversely affect our business. +If a pandemic, epidemic or outbreak of an infectious disease occurs in the United States or worldwide, our business may be adversely affected. COVID-19 has spread throughout the United States and to most countries globally. Numerous U.S. state and local jurisdictions have imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. In March 2020, the Governor of Colorado, where our headquarters are located, issued “stay at home” orders limiting non-essential activities, travel and business operations. Such orders or restrictions have resulted in reduced operations at our headquarters, work stoppages, slowdowns and delays, travel restrictions and cancellation of events. Other disruptions or potential disruptions include the inability of our suppliers to manufacture components and parts and to deliver these to us on a timely basis, or at all; disruptions in our production schedule and ability to assemble diagnostic tests; inventory shortages or obsolescence; delays in actions of regulatory bodies; diversion of or limitations on employee resources that would otherwise be focused on the operations of our business; delays in growing or reductions in our sales organization, including through delays in hiring, lay-offs, furloughs or other losses of sales representatives; business adjustments or disruptions of certain third parties, including suppliers, medical institutions and clinical investigators with whom we conduct business; and additional government requirements or other incremental mitigation efforts that may further impact our or our suppliers’ capacity to manufacture our diagnostic tests. +51 +The COVID-19 pandemic also has negatively affect ed our non-COVID-19 testing-related revenue and our clinical studies. For example, cancer patients may have more limited access to hospitals, healthcare providers and medical resources as they take steps to control the spread of COVID-19. Our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized. As a result of the COVID-19 pandemic, beginning in the latter half of March 2020, we have been receiving fewer samples for non-COVID-19 testing on a daily average basis from our clinical and biopharmaceutical customers than before the outbreak of the COVID-19 pandemic. Further, our clinical studies, such as our ongoing INSIGHT study and our recently launched ALTITUDE study, as well as our arrangements with our biopharmaceutical customers, are expected to take longer to complete than what we expected before the outbreak of the COVID-19 pandemic. +The COVID-19 pandemic has also created an opportunity for our diagnostic tests and we have commercialized two diagnostic tests to test for the presence of COVID-19 and antibodies. We are expecting to increase our testing capacity for our COVID-19 diagnostic and antibody testing program in the near term to meet the rising demand for rapid and accurate testing. We expect that the revenue we generate from this expansion will comprise a significant portion of our revenue for the first quarter of 2021. However, there is no assurance that our COVID-19 diagnostic and antibody testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or be accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. If the pandemic were to dissipate, whether due to a significant decrease in new infections, due to the availability of vaccines, or otherwise, the need for a COVID-19 test could decrease significantly and this could have an adverse effect on our results of operations and profitability. As a result, the increase in revenue due to any increase in demand for these diagnostic tests may not be indicative of our future revenue. +The extent to which the COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity and spread of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. Furthermore, there is no assurance that our diagnostic tests will continue to be effective against the virus in the future. +While the potential economic impact brought by, and the duration of, any pandemic, epidemic or outbreak of an infectious disease, including COVID-19, may be difficult to assess or predict, the widespread COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets and a reduction in our ability to access capital, which could adversely affect our liquidity. In addition, a recession or market correction resulting from the spread of an infectious disease, including COVID-19, could materially affect our business. Such economic recession could have a material adverse effect on our long-term business. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section. +Natural or man-made disasters and other similar events, including the COVID-19 pandemic, may significantly disrupt our business, and negatively impact our business, financial condition and results of operations. +A significant portion of our employee base, operating facilities and infrastructure are centralized in Boulder, Colorado and we operate a laboratory facility in De Soto, Kansas. Any of our facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, wildfires, floods, nuclear disasters, riots, acts of terrorism or other criminal activities, infectious disease outbreaks or pandemic events, including the COVID-19 pandemic, power outages and other infrastructure failures, which may render it difficult or impossible for us to operate our business for some period of time. Our facilities would likely be costly to repair or replace, and any such efforts would likely require substantial time. Any disruptions in our operations could adversely affect our business, financial condition and results of operations and harm our reputation. Moreover, although we have disaster recovery plans, they may prove inadequate. We may not carry sufficient business insurance to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on our business, financial condition and results of operations. In addition, the facilities of our suppliers and manufacturers may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or otherwise materially and adversely affect our business. +52 +Any failure to offer high-quality support for our diagnostic tests and services may adversely affect our relationships with providers and negatively impact our reputation among patients and providers, which may adversely affect our business, financial condition and results of operations. +In implementing and using our diagnostic tests and services, providers depend on our support to resolve issues in a timely manner. We may be unable to respond quickly enough to accommodate short-term increases in demand for customer support. Increased customer demand for support could increase costs and adversely affect our business, financial condition and results of operations. Our sales are highly dependent on our reputation and on positive recommendations from our existing patients, care partners, providers and clinics. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could adversely affect our reputation, our ability to sell our diagnostic tests and services, and in turn our business, financial condition and results of operations. +The sizes of the markets for our diagnostic tests and services and any future diagnostic tests and services may be smaller than we estimate and may decline. +Our estimates of the annual total addressable market for our diagnostic tests and services are based on a number of internal and third-party estimates and assumptions, including, without limitation, the assumed prices at which we can sell our diagnostic tests and services in the market. While we believe our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be correct and the conditions supporting our assumptions or estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. +As a result, our estimates of the annual total addressable market for our diagnostic tests and services in different market segments may prove to be incorrect. If the actual number of patients who would benefit from our diagnostic tests, the price at which we can sell them or the annual total addressable market for them is smaller than we have estimated, it may impair our sales growth and negatively affect our business, financial condition and results of operations. +Our industry is subject to rapid change, which could make our solutions and the diagnostic tests we develop and services we offer, obsolete. If we are unable to continue to innovate and improve our diagnostic tests and services we offer, we could lose customers or market share. +Our industry is characterized by rapid changes, including technological and scientific breakthroughs, frequent new product introductions and enhancements and evolving industry standards, all of which could make our current diagnostic tests and others we are developing obsolete. Our future success will depend on our ability to keep pace with the evolving needs of our customers on a timely and cost-effective basis and to pursue new market opportunities that develop as a result of scientific and technological advances. In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. There have also been advances in methods used to analyze very large amounts of molecular information. We must continuously enhance our offerings and develop new and improved diagnostic tests to keep pace with evolving standards of care. If we do not leverage or scale our sample and data biobank to discover new diagnostic tests or applications or update our diagnostic tests to reflect new scientific knowledge, including about lung cancer biology, information about new cancer therapies or relevant clinical trials, our diagnostic tests could become obsolete and sales of our current diagnostic tests and any new tests we develop could decline or fail to grow as expected. This failure to make continuous improvements to our diagnostic tests to keep ahead of those of our competitors could result in the loss of customers or market share that would adversely affect our business, financial condition and results of operations. +We may face additional costs, loss of revenue, significant liabilities, harm to our brand, decreased use of our products or services and business disruption if there are any security or data privacy breaches or other unauthorized or improper access. +In connection with various facets of our business, we collect and use a variety of personal data, such as names, mailing addresses, email addresses, mobile phone numbers, location information, prescription information and other medical information. Any failure to prevent or mitigate security breaches or improper access to, use, disclosure or other misappropriation of our data or consumers’ personal data could result in significant liability under state (e.g., state breach notification and privacy laws such as the California Consumer Privacy Act (CCPA) federal (e.g., the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Health Information Technology for Economic and Clinical Health Act (HITECH Act) and laws in other jurisdictions (e.g., the EU General Data Protection Regulation (GDPR). Such an incident may also cause a material loss of revenue from the potential adverse impact to our reputation and brand, affect our ability to retain or attract new users of our diagnostic tests and services and potentially disrupt our business. +53 +Unauthorized disclosure of sensitive or confidential patient or employee data, including personally identifiable information, whether through a breach of computer systems, systems failure, employee negligence, fraud or misappropriation, or otherwise, or unauthorized access to or through our information systems and networks, whether by our employees or third parties, could result in negative publicity, legal liability and damage to our reputation. Unauthorized disclosure of personally identifiable information could also expose us to sanctions for violations of data privacy laws and regulations around the world. To the extent that any disruption or security breach resulted in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed. For example, the loss of or damage to clinical trial data, such as from completed or ongoing clinical trials, for any of our product candidates would likely result in delays in our marketing approval efforts and significantly increased costs in an effort to recover or reproduce the data. +As we become more dependent on information technologies to conduct our operations, cyber incidents, including deliberate attacks and attempts to gain unauthorized access to computer systems and networks, may increase in frequency and sophistication. These threats pose a risk to the security of our systems and networks, the confidentiality and the availability and integrity of our data and these risks apply both to us, and to third parties on whose systems we rely for the conduct of our business. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we and our partners may be unable to anticipate these techniques or to implement adequate preventative measures. We have in the past experienced, and may in the future, experience security incidents. While no security incidents in the past have had a material adverse effect on our business, financial condition and results of operations, we cannot predict the impact of any such future events. Further, we do not have any control over the operations of the facilities or technology of our cloud and service providers, including any third-party vendors that collect, process and store personal data on our behalf. Our systems, servers and platforms and those of our service providers may be vulnerable to computer viruses or physical or electronic break-ins that our or their security measures may not detect. Individuals able to circumvent such security measures may misappropriate our confidential or proprietary information, disrupt our operations, damage our computers or otherwise impair our reputation and business. We may need to expend significant resources and make significant capital investments to protect against security breaches or to mitigate the impact of any such breaches. In addition, to the extent that our cloud and other service providers, experience security breaches that result in the unauthorized or improper use of confidential data, employee data or personal data, we may not be indemnified for any losses resulting from such breaches. There can be no assurance that we or our third-party providers will be successful in preventing cyber-attacks or successfully mitigating their effects. If we are unable to prevent or mitigate the impact of such security breaches, our ability to attract and retain new customers, patients and other partners could be harmed as they may be reluctant to entrust their data to us, and we could be exposed to litigation and governmental investigations, which could lead to a potential disruption to our business or other adverse consequences. +We have significant payer concentration, with a limited number of customers accounting for a substantial portion of our revenues. +For year ended December 31, 2020, Medicare reimbursed to us 18% of our diagnostic test revenue and two healthcare providers accounted for 47% of our total revenue. For the year ended December 31, 2019, Medicare reimbursed to us 60% of our diagnostic test revenue and one biopharmaceutical customer accounted for 21% of our total revenue and 71% of our service revenue. There are risks whenever a large percentage of total revenues are concentrated with a limited number of payers and customers. It is not possible for us to predict the level of demand for our diagnostic tests and services that will be generated by any of these customers in the future. In addition, revenues from these larger customers may fluctuate from time to time based on these customers’ business needs, the timing of which may be affected by market conditions or other factors outside of our control. These payers and customers could also potentially pressure us to reduce the prices we charge for our diagnostic tests and services, which could have an adverse effect on our margins and financial position and could negatively affect our revenues and results of operations. If any of our largest payers terminates its relationship with us or our tests are no longer reimbursable by such payer, such termination could negatively affect our revenues and results of operations. +54 +Our results of operations will be materially harmed if we are unable to accurately forecast customer demand for, and utilization of, our diagnostic tests and manage our inventory. +To ensure adequate inventory supply, we must forecast inventory needs and manufacture our diagnostic tests based on our estimates of future demand for our diagnostic tests. Our ability to accurately forecast demand for them could be negatively affected by many factors, including our failure to accurately manage our expansion strategy, product introductions by competitors, an increase or decrease in customer demand for our diagnostic tests or for those of our competitors, our failure to accurately forecast customer acceptance of new diagnostic tests, unanticipated changes in general market conditions or regulatory matters and weakening of economic conditions or consumer confidence in future economic conditions. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs, which would cause our gross margin to be adversely affected and could impair the strength of our brand. Conversely, if we underestimate customer demand for our diagnostic tests, our supply chain, manufacturing partners and/or internal manufacturing team may not be able to deliver components and diagnostic tests to meet our requirements, and this could result in damage to our reputation, sales growth and customer relationships. In addition, if we experience a significant increase in demand, such as we are currently experiencing with respect to our COVID-19 and antibody testing program, additional supplies of raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, or suppliers may not be able to allocate sufficient capacity in order to meet our increased requirements, which will adversely affect our business, financial condition and results of operations. +If we experience significant disruptions in our information technology systems, our business may be adversely affected. +We depend on our information technology systems for the efficient functioning of our business, including the performance, distribution and maintenance of our diagnostic tests and services, as well as for accounting, data storage, compliance, purchasing and inventory management. We do not have redundant information technology in all aspects of our systems at this time. Our information technology systems may be subject to computer viruses, ransomware or other malware, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, damage or interruption from fires or other natural disasters, hardware failures, telecommunication failures and user errors, among other malfunctions. We could be subject to an unintentional event that involves a third party gaining unauthorized access to our systems, which could disrupt our operations, corrupt our data or result in release of our confidential information. Technological interruptions would disrupt our operations, including our ability to timely ship and track diagnostic test orders and results, project inventory requirements, manage our supply chain and otherwise adequately service our customers or disrupt our customers’ ability to use our diagnostic tests. In the event we experience significant disruptions, we may be unable to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our business, financial condition and results of operations. +Currently, we carry business interruption coverage to mitigate certain potential losses but this insurance is limited in amount, and we cannot be certain that such potential losses will not exceed our policy limits. The successful assertion of one or more large claims against us that exceed or are not covered by our insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations. We are increasingly dependent on complex information technology to manage our infrastructure. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance our existing systems. Failure to maintain or protect our information systems and data integrity effectively could have a material adverse effect on our business, financial condition and results of operations. +55 +If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit or halt the marketing and sale of our diagnostic tests and services. The expense and potential unavailability of insurance coverage for liabilities resulting from issues with our diagnostic tests and services could harm us and negatively impact sales. +We face an inherent risk of product liability as a result of the marketing and sale of our diagnostic tests and services. For example, we may be sued if our diagnostic tests or services cause or are perceived to cause injury or are found to be otherwise unsuitable during manufacturing, marketing or sale. Any such product liability claim may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. In addition, we may be subject to claims against us even if the apparent injury is due to the actions of others or the pre-existing health of the patient. For example, medical personnel, care partners and patients collect samples for our diagnostic tests. If these medical personnel, care partners or patients are not properly trained, are negligent or use our diagnostic tests incorrectly, the capabilities of such tests may be diminished or the patient may suffer critical injury. We may also be subject to claims that are caused by the activities of our suppliers, such as those who provide us with components and sub-assemblies for our diagnostic tests. +If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or halt the marketing and sale of our diagnostic tests and services. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in: +• +decreased demand for our diagnostic tests and services; +• +harm to our reputation; +• +initiation of investigations by regulators; +• +costs to defend the related litigation; +• +a diversion of management’s time and our resources; +• +substantial monetary awards to trial participants or patients; +• +product recalls, withdrawals, or labeling, marketing, or promotional restrictions; +• +loss of revenue; +• +adverse impact on the market price of our common stock; and +• +exhaustion of any available insurance and our capital resources. +We believe we have adequate product liability insurance, but it may not prove to be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain or obtain insurance at a reasonable cost or in an amount adequate to satisfy any liability that may arise. Our insurance policy contains various exclusions, and we may be subject to a product liability claim for which we have no coverage. The potential inability to obtain sufficient product liability insurance at an acceptable cost to protect against product liability claims could prevent or inhibit the marketing and sale of our diagnostic tests and services. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts, which would have a material adverse effect on our business, financial condition and results of operations. In addition, any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, harm our reputation in the industry, significantly increase our expenses and reduce product sales. +56 +We face competition from many sources, including larger companies, and we may be unable to compete successfully. +There are a number of lung cancer diagnostic solutions companies in the United States, Europe and Asia. Notable competitors in the United States include Veracyte, Inc., Guardant Health, Inc., and Foundation Medicine, Inc. These competitors all provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories and other medical facilities. Many of these organizations are significantly larger with greater financial and personnel resources than us, and enjoy significantly greater market share and have greater resources than we do. As a consequence, they may be able to spend more on product development, marketing, sales and other product initiatives than we can. Some of our competitors have: +• +substantially greater name recognition; +• +broader, deeper, or longer-term relations with healthcare professionals, customers, and third-party payers; +• +more established distribution networks; +• +additional lines of diagnostic tests and the ability to offer rebates or bundle them to offer greater discounts or other incentives to gain a competitive advantage; +• +greater experience in conducting research and development, manufacturing, clinical trials, marketing and obtaining regulatory clearance or approval or certification for diagnostic tests; and +• +greater financial and human resources for product development, sales and marketing and patent litigation. +Our continued success depends on our ability to: +• +further penetrate the lung disease diagnostic solutions market and increase utilization of our diagnostic tests; +• +maintain and widen our technology lead over competitors by continuing to innovate and deliver new product enhancements on a continuous basis; and +• +cost-effectively manufacture our diagnostic tests and their component parts as well as drive down the cost of service. +In addition, competitors with greater financial resources than ours could acquire other companies to gain enhanced name recognition and market share, as well as new technologies or diagnostic tests that could effectively compete with our existing diagnostic tests, which may cause our revenue to decline and would harm our business. +Our competitors also compete with us in recruiting and retaining qualified scientific, management and commercial personnel, as well as in acquiring technologies complementary to, or necessary for, development of our diagnostic tests. Because of the complex and technical nature of diagnostic testing and the dynamic market in which we compete, any failure to attract and retain a sufficient number of qualified employees could materially harm our ability to develop and commercialize our diagnostic tests, which would have a material adverse effect on our business, financial condition and results of operations. +As we attain greater commercial success, our competitors are likely to develop diagnostic tests that offer features and functionality similar to our diagnostic tests that are currently on the market. Improvements in existing competitive diagnostic tests or the introduction of new competitive diagnostic tests may make it more difficult for us to compete for sales, particularly if those competitive diagnostic tests demonstrate better reliability, convenience or effectiveness or are offered at lower prices. +Performance issues, service interruptions or price increases by our shipping carriers and warehousing providers could adversely affect our business and harm our reputation and ability to provide our services on a timely basis. +Expedited, reliable shipping and delivery services and secure warehousing are essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point transport of our diagnostic tests to our customers and for tracking of these shipments, and from time to time require warehousing for our diagnostic tests, sample collection kits and supplies. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any systems, it would be costly to replace such systems in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our diagnostic tests and increased cost and expense to our business. In addition, any significant increase in shipping or warehousing rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters, civil unrest and disturbances or other service interruptions affecting delivery or warehousing services we use would adversely affect our ability to process orders for our diagnostic tests on a timely basis. +57 +We rely on commercial courier delivery services to transport samples to our laboratory facility in a timely and cost-efficient manner and if these delivery services are disrupted, our business will be harmed. Our business depends on our ability to quickly and reliably deliver test results to our customers. Blood samples are typically received within days from the United States and outside the United States for analysis at our Boulder, Colorado and De Soto, Kansas facilities. Disruptions in delivery service, whether due to labor disruptions, bad weather, natural disaster, civil unrest or disturbances, terrorist acts or threats or for other reasons could adversely affect specimen integrity and our ability to process samples in a timely manner and to service our customers, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected. +Cost-containment efforts of our customers, purchasing groups and governmental purchasing organizations could have a material adverse effect on our sales and profitability. +In an effort to reduce costs, many hospitals in the United States have become members of GPOs and Integrated Delivery Networks (IDNs). GPOs and IDNs negotiate pricing arrangements with medical device companies and distributors on behalf of their members, which may include hospitals and other providers. GPOs and IDNs typically award contracts on a category-by-category basis through a competitive bidding process. Bids are generally solicited from multiple providers with the intention of driving down pricing or reducing the number of vendors. Due to the highly competitive nature of the GPO and IDN contracting processes, we may not be able to obtain new, or maintain existing, contract positions with major GPOs and IDNs. Furthermore, the increasing leverage of organized buying groups may reduce market prices for our diagnostic tests, thereby reducing our revenue and margins. +While having a contract with a GPO or IDN for a given product category can facilitate sales to members of that GPO or IDN, such contract positions can offer no assurance that any level of sales will be achieved, as sales are typically made pursuant to individual purchase orders. Even when a provider is the sole contracted supplier of a GPO or IDN for a certain product category, members of the GPO or IDN are generally free to purchase from other suppliers. Furthermore, GPO and IDN contracts typically are terminable without cause by the GPO or IDN upon 60 to 90 days’ notice. Accordingly, the members of such groups may choose to purchase alternative diagnostic tests due to the price or quality offered by other companies, which could result in a decline in our revenue. +Pricing and reimbursement of medical devices is not harmonized at European level, but is the exclusive competence of the EU Member States. In Europe, pricing and reimbursement decisions are generally made by regional or centralized bodies based on an assessment of the efficacy and clinical effectiveness of the devices or broad device types or procedures. There is a general trend for EU Member States to adopt cost containment measures to control public spend on medical devices. Due to the competitive nature of product offers and prices, we may not be able to obtain new, or maintain existing, contract positions with the EU Member States. +Litigation and other legal proceedings may adversely affect our business. +From time to time we may become involved in legal proceedings relating to patent and other intellectual property matters, product liability claims, employee claims, tort or contract claims, federal regulatory investigations, securities class action and other legal proceedings or investigations, which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. Litigation is inherently unpredictable and can result in excessive or unanticipated verdicts and/or injunctive relief that affect how we operate our business. We could incur judgments or enter into settlements of claims for monetary damages or for agreements to change the way we operate our business, or both. There may be an increase in the scope of these matters or there may be additional lawsuits, claims, proceedings or investigations in the future, which could have a material adverse effect on our business, financial condition and results of operations. Adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our diagnostic tests and services, even if the regulatory or legal action is unfounded or not material to our operations. +We maintain product and professional liability insurance, but this insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims. Any product liability or professional liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. +58 +General economic and financial market conditions may exacerbate our business risks. +Global macroeconomic conditions and the world’s financial markets remain susceptible to significant stresses, resulting in reductions in available credit and government spending, economic downturn or stagnation, foreign currency fluctuations and volatility in the valuations of securities generally. As a result of uncertainties with respect to financial institutions and the global credit markets and other macroeconomic challenges currently or potentially affecting the economy of the United States and other parts of the world, customers and distributors may experience serious cash flow problems and other financial difficulties, decreasing demand for our products. Our customers and distributors may respond to such economic pressures by reducing or deferring their capital spending or reducing staff. +In addition, events in the United States or foreign markets, such as the United Kingdom’s exit from the European Union, the worldwide effects from the spread of COVID-19 and political and social unrest in various countries around the world, can impact the global economy and capital markets. Additionally, if our customers and distributors are not successful in generating sufficient revenue or are precluded from securing financing, their businesses will suffer, which may materially and adversely affect our business, financial condition and results of operations. +We may not realize the benefits or costs of our Co-Development and Collaboration Agreement with AVEO Oncology. +In 2014, we entered into a Co-Development and Collaboration Agreement with AVEO Oncology (formerly known as AVEO Pharmaceuticals, Inc.) (AVEO) whereby the two parties agreed to various terms and conditions necessary for the co-development of AVEO’s compound ficlatuzumab (the Collaboration Agreement). +We were granted a limited legal interest in ficlatuzumab and may not have the right to control the development and exploitation of ficlatuzumab. As consideration for the grant, we agreed to cover the first $15.0 million of ficlatuzumab’s clinical development costs, with both parties then sharing all costs equally after the cap was reached. +In October of 2016, the Collaboration Agreement was amended to eliminate the requirement that we cover all of the initial costs. Under the amended terms, we agreed to allow AVEO to recapture its cost that it otherwise would not have been responsible for said recapture to occur out of any royalties or revenues eventually derived from the Collaboration Agreement. As part of the Collaboration Agreement, unless we or AVEO exercise our right to opt-out of co-development, we equally share in any income received from licensing rights to ficlatuzumab to any third parties. In September 2020, we exercised our opt-out right for the payment of half of the development and regulatory costs for ficlatuzumab. This opt-out was effective as of December 2, 2020 with remaining obligations estimated to be $0.3 million. Following the effective date, we will be entitled to a 10% royalty of net sales of ficlatuzumab and 25% of license income generated from the licensing of ficlatuzumab. Ficlatuzumab is currently being evaluated in squamous cell carcinoma of the head and neck (SCCHN), metastatic pancreatic ductal cancer (PDAC), and acute myeloid leukemia (AML). For more information regarding this Collaboration Agreement, please see “Business —Drug Co-Development.” +Our relationship with AVEO may require us to incur non-recurring and other charges, increase our near and long-term expenditures, or disrupt our management and business. We cannot be certain that, following the realization of this relationship, we will achieve the revenue or specific net income that justifies our entry into it. Any termination of this relationship, or delays in entering into new strategic partnership agreements with AVEO, could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +We are exposed to significant future payments and other obligations associated with our acquisitions of Integrated Diagnostics and Oncimmune, U.S.A., and may not realize the advantages we expect from these acquisitions. +We purchased select assets and liabilities from Integrated Diagnostics, Inc. and IND Funding, LLC (collectively, the Seller) which included the Clinical Laboratory Improvement Amendments (CLIA) lab in Seattle, Washington, and all rights to the Nodify XL2 test and intellectual property rights related to that test. The purchase was made for total consideration of $27.6 million, consisting of $8.0 million (10,649,604 shares) of our Series G Preferred Stock and contingent consideration with an initial fair market value of $19.6 million. +59 +The acquisition of Integrated Diagnostics included a contingent consideration arrangement that requires additional consideration to be paid by us to the Seller based on the milestone of the attainment of a three consecutive month gross margin target of $2 million within a seven-year period. If the gross margin target is met, the Company is required to issue 2,520,108 shares of common stock. For the 6 months following the achievement of the milestone, the Seller has the option to require us to redeem the common shares for $37 million in cash over 8 equal installments due each calendar quarter. If the Seller elects not to exercise this option, we have 12 months to repurchase the common stock in two equal quarterly cash installments totaling $37 million. As of December 31 , 2020, we have not made any payments in connection with the contingent consideration . +In addition, on October 31, 2019 we completed an acquisition of United Kingdom-based Oncimmune, Ltd.’s (Oncimmune) United States operations including its CLIA lab in De Soto, Kansas and its incidental pulmonary nodule (IPN) malignancy test, then marketed in the United States as the EarlyCDT®-Lung. We renamed the test and relaunched the test on February 28, 2020 as the Nodify CDT test and the De Soto, Kansas lab will be the sole United States provider of the Nodify CDT test. +As part of the acquisition, we and Oncimmune entered into several agreements to govern the relationship between the parties and to allow us to provide the Nodify CDT test. The overarching umbrella Purchase and Commercialization Agreement (PCA) defines the general relationship between the parties. Included under the PCA was (a) an APA whereby we acquired all of the United States assets associated with the De Soto, Kansas clinical laboratory, as well as the trademarks and patent application associated with the test; (b) an intellectual property license granting us the rights necessary under Oncimmune’s background intellectual property rights to perform the Nodify CDT test; (c) a supply agreement for supplying us with the necessary materials and reagents needed to run the Nodify CDT test; and (d) a development agreement where Oncimmune agrees to assist us in further developing the Nodify CDT test. We were also granted an option through December 31, 2020 to acquire the rights to expand the field of use of the Nodify CDT test to include lung cancer screening, which we elected to not exercise. +As consideration for the rights granted to us, we agreed to payments of $1.2 million and further agreed to an option fee for the screening option of $9.0 million due within 30 days of exercising the option. As of December 31, 2020, we have paid $1.2 million of the agreed upon payments. We also agreed to a revenue share payment of 8% of recognized revenue for non-screening tests up to an annual minimum volume and 5% thereafter, with an escalating minimum through the first four years of sales. An insignificant amount of royalty payments was paid for the year ended December 31, 2020. In September 2020, we notified Oncimmune that we would not exercise this option for expansion of the field of use. +Our acquisitions may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. We cannot be certain that, following the realization of these acquisitions, we will achieve the revenue or specific net income that justifies our entry into them. This could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +We are highly dependent on our senior management team and key personnel, and our business could be harmed if we are unable to attract and retain personnel necessary for our success. +We are highly dependent on our senior management and other key personnel. Our success will depend on our ability to retain senior management and to attract and retain qualified personnel in the future, including sales and marketing professionals, scientists, clinical specialists, and other highly skilled personnel and to integrate current and additional personnel in all departments. The loss of members of our senior management, sales and marketing professionals, scientists, clinical and regulatory specialists could result in delays in product development and harm our business. If we are not successful in attracting and retaining highly qualified personnel, it would have a material adverse effect on our business, financial condition and results of operations. +60 +Our research and development programs and laboratory operations depend on our ability to attract and retain highly skilled scientists and technicians. +We may not be able to attract or retain qualified scientists and technicians in the future due to the competition for qualified personnel among life science businesses, particularly near our headquarters in Boulder, Colorado and our laboratory facility in De Soto, Kansas. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. We may have difficulties locating, recruiting, or retaining qualified salespeople. Recruiting and retention difficulties can limit our ability to support our research and development and sales programs. To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have issued and may continue to issue equity awards that vest over time. The value to employees of equity awards that vest over time may be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Our employment arrangements with our employees provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We also do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. +Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture and our business may be harmed. +We believe that our culture has been and will continue to be a critical contributor to our success. We expect to continue to hire aggressively as we expand, and we believe our corporate culture has been crucial in our success and our ability to attract highly skilled personnel. If we do not continue to develop our corporate culture or maintain and preserve our core values as we grow and evolve, we may be unable to foster the innovation, curiosity, creativity, focus on execution, teamwork and the facilitation of critical knowledge transfer and knowledge sharing we believe we need to support our growth. Moreover, liquidity available to our employee securityholders could lead to disparities of wealth among our employees, which could adversely impact relations among employees and our culture in general. Our anticipated headcount growth and our transition from a private company to a public company may result in a change to our corporate culture, which could harm our business. +Our ability to utilize our net operating loss carryforwards and research and development credit may be limited. +In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code) a corporation that undergoes an ownership change, generally defined as a greater than 50% change by value in its equity ownership by certain shareholders over a three-year period, is subject to limitations on its ability to utilize its pre-change net operating losses (NOLs) and its research and development credit carryforwards to offset future taxable income. The applicable rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning, directly or indirectly, 5% or more of the stock of a company, as well as changes in ownership arising from new issuances of stock by the company. We believe that our NOLs are currently not subject to limitation under these rules. However, if we undergo an ownership change now or in the future, our ability to utilize NOLs and research and development credit carryforwards could be limited by Sections 382 and 383 of the Code. Future changes in stock ownership may be beyond our control. In addition, our ability to deduct net interest expense may be limited if we have insufficient taxable income for the year during which the interest is incurred, and any carryovers of such disallowed interest would be subject to the limitation rules similar to those applicable to NOLs and other attributes. For these reasons, in the event we experience a change of control, we may not be able to utilize a material portion of the NOLs, research and development credit carryforwards or disallowed interest expense carryovers, even if we attain profitability. +The terms of our secured credit agreement require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business. +In February 2018, we entered into an agreement with Innovatus Life Sciences Lending Fund to refinance long-term debt carried over from earlier loan agreements (the 2018 Notes). The initial amount borrowed under the 2018 Notes was $23 million and the maturity date is February 2023. We are required to make quarterly interest payments that began in June 2018 and outstanding principal is due in 24 equal installments commencing in March 2021. The agreement has been amended multiple times to adjust terms to account for our acquisitions and growth. Further, we granted the lender a security interest in all of our assets through a pledge and security agreement, patent security agreement and trademark security agreement, each between us and the lender. +61 +The loan may be prepaid by us at any time, subject to a prepayment penalty of up to 3% of the principal amount, depending on the date of prepayment. Upon payment of the 2018 Notes at maturity or prepayment on any earlier date, unless waived, a 2% back-end facility fee will apply to the amounts paid or prepaid. The 2% fee is being recorded as additional interest expense over the term of the 2018 Notes. +The 2018 Notes contain customary affirmative and negative covenants for a loan, requires us to comply with a minimum daily liquidity covenant, and has a rolling monthly revenue requirement. Failure to comply with the covenants and loan requirements may result in early amortization of the loan in a 24- or 36-month payment schedule. +The 2018 Notes also contain certain covenants that prevent us from making acquisitions, incurring additional indebtedness, or making or terminating any agreement valued above a certain dollar threshold without the prior written consent of the lender. These covenants may restrict our ability to pursue new business opportunities and access additional capital. +In the event of a default, including, among other things, our failure to make any payment when due or our failure to comply with any covenant under the 2018 Notes, the lender could elect to declare all amounts outstanding to be immediately due and payable, and could proceed against the collateral granted to them to secure such indebtedness, including all of our intellectual property, which could have a material adverse effect on our business, financial condition, and results of operations. +We will need to raise additional capital to fund our existing operations, develop our platform, commercialize new diagnostic tests or expand our operations. +We will need to raise additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, including to: +• +increase our sales and marketing efforts to drive market adoption of and address competitive developments; +• +fund development and marketing efforts of our diagnostic tests or any other future diagnostic tests; +• +expand our technologies into other types of cancer management and lung disease detection diagnostic tests; +• +acquire, license, or invest in technologies; +• +acquire or invest in complementary businesses or assets; and +• +finance capital expenditures and general and administrative expenses. +Our present and future funding requirements will depend on many factors, including: +• +our ability to achieve revenue growth; +• +our rate of progress in establishing payer coverage and reimbursement arrangements with domestic and international commercial third-party payers and government payers; +• +the cost of expanding our laboratory operations and offerings, including our sales and marketing efforts; +• +our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of and reimbursement for our diagnostic tests; +• +our rate of progress in, and cost of research and development activities associated with, diagnostic tests in research and early development; +• +the effect of competing technological and market developments; +• +costs related to international expansion; and +• +the potential cost of and delays in product development as a result of any regulatory oversight applicable to our diagnostic tests. +62 +The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, our stockholders could experience dilution. Any preferred equity securities issued also could provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our platform technologies or diagnostic tests, pay a portion of our royalties, or grant licenses on terms that are not favorable to us. +We may acquire other businesses, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our results of operations. +As part of our business strategy, we may in the future make additional acquisitions or investments in complementary companies, diagnostic tests or technologies that we believe fit within our business model and can address the needs of our customers and potential customers. In the future, we may not be able to acquire and integrate other companies, diagnostic tests or technologies in a successful manner. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. In addition, the pursuit of potential acquisitions may divert the attention of management and cause us to incur additional expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, including increases in revenue, and any acquisitions we complete could be viewed negatively by our customers, investors and industry analysts. +Future acquisitions may reduce our cash available for operations and other uses and could result in amortization expense related to identifiable assets acquired. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our common stock. The sale or issuance of equity to finance any such acquisitions would result in dilution to our stockholders. The incurrence of indebtedness to finance any such acquisition would result in fixed obligations and could also include covenants or other restrictions that could impede our ability to manage our operations. In addition, our future results of operations may be adversely affected by the dilutive effect of an acquisition, performance earn-outs or contingent bonuses associated with an acquisition. Furthermore, acquisitions may require large, onetime charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based compensation expenses and the recording and subsequent amortization of amounts related to certain purchased intangible assets, any of which items could negatively affect our future results of operations. We may also incur goodwill impairment charges in the future if we do not realize the expected value of any such acquisitions. +Also, the anticipated benefit of any strategic alliance, joint venture or acquisition may not materialize, or such strategic alliance, joint venture or acquisition may be prohibited. For example, our 2018 Notes restrict our ability to pursue certain mergers, acquisitions, amalgamations or consolidations that we may believe to be in our best interest. Additionally, future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results. +Risks Related to our Governmental Regulation +The insurance coverage and reimbursement status of newly approved diagnostic tests, particularly in a new category of diagnostics and therapeutics, is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for current or future diagnostic tests could limit our ability, and that of our collaborators, to fully commercialize our diagnostic tests and decrease our ability to generate revenue. +The availability and extent of reimbursement by governmental and private payers is essential for most patients to be able to afford the clinical diagnostic tests and cellular therapeutics that we and our collaborators currently or in the future plan to develop and sell. In addition, because our clinical diagnostics and diagnostic tests represent new approaches to the research, diagnosis, detection and treatment of diseases, we cannot accurately estimate how our diagnostic tests, and those jointly created with our collaborators, would be priced, whether reimbursement could be obtained or any potential revenue generated. Sales of our diagnostic tests will depend substantially, both domestically and internationally, on the extent to which the costs of our diagnostic tests are paid by health +63 +maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payers. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize some of our diagnostic tests or services. Even if coverage is provided, the available reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize an adequate return on our investment in any of our diagnostic tests or services. Changes in the reimbursement landscape may occur, which are outside of our control, and may impact the commercial viability of our diagnostic tests. +There is significant uncertainty related to the insurance coverage and reimbursement of newly launched, cleared, authorized or approved diagnostic tests. In the United States, many significant decisions about reimbursement for new diagnostics and medicines are typically made by the Centers for Medicare and Medicaid Services (CMS), an agency within the Department of Health and Human Services (HHS). CMS decides whether and to what extent a new diagnostic or medicine will be covered and reimbursed under Medicare, although it frequently delegates this authority to local Medicare Administrative Contractors (MACs). Private payers tend to follow Medicare to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for novel diagnostic tests such as ours. Additionally, reimbursement authorities or bodies in Europe may be more conservative than CMS. For example, a number of cancer drugs have been approved for reimbursement in the United States and have not been approved for reimbursement, or have been approved under restricted conditions, in certain European countries. +Outside the United States, the reimbursement process and timelines vary significantly. In Europe, pricing and reimbursement of medical devices is the exclusive competence of the EU Member States. However, the European Commission is facilitating a voluntary corporation between the EU Member States on health technology assessments (HTA) which consists of a network of the EU Member States’ national authorities and bodies responsible for HTA and a joint action to support cooperation at scientific and technical level between the HTA bodies. We cannot be sure that such prices and reimbursement decisions will be acceptable to us or our collaborators. If the regulatory authorities in these foreign jurisdictions set prices or make reimbursement criteria that are not commercially attractive for us or our collaborators, our revenues and the potential profitability of our products in those countries would be negatively affected. An increasing number of countries are taking initiatives to control the healthcare budget by focusing cost-cutting efforts on medicinal products, and to a lesser extent, medical devices, provided under their state-run healthcare systems. These price control efforts have impacted all regions of the world, but have been most prominent in the EU. Additionally, some countries require approval of the sale price of a product before it can be marketed or mandatory discounts or profit caps may be applied. Further, after the sale price is approved, it remains subject to review during the product lifecycle. In many countries, the pricing review period begins after marketing or product licensing approval is granted or the CE mark is obtained. As a result, we or our collaborators might obtain marketing approval for a product or service in a particular country, but then may experience delays in the reimbursement approval or be subject to price regulations that would delay the commercial launch of our product or service, possibly for lengthy time periods, which could negatively impact the revenues we are able to generate from the sale of that product or service in that particular country. +Moreover, increasing efforts by governmental and third-party payers, in the United States and abroad, to cap or reduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for newly cleared, authorized, certified or approved devices and medicines and, as a result, they may not cover or provide adequate payment for our clinical diagnostics to be sold by us or our collaborators. For example, in May 2018 the United States government released a “blueprint,” or plan, to reduce the cost of drugs. This blueprint contains certain measures that HHS has been working to implement, although it is possible that HHS’s regulatory priorities may change under the new Biden administration. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, which are, in some cases, designed to encourage importation from other countries and bulk purchasing. +We expect to experience pricing pressures on our clinical diagnostics sold by us and our collaborators due to the trend toward value-based pricing and coverage, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs, surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new diagnostic tests. +64 +Measures to reduce healthcare costs may hurt our business. +The majority of our customers are healthcare providers who depend upon reimbursement by government and commercial insurance payers for lung cancer diagnostic solutions services. With a majority of United States patients with lung cancer covered by Medicare, the Medicare reimbursement rate is an important factor in a customer’s decision to use our diagnostic tests and limits the prices we may charge for them. Commercial insurance payers may also exert downward pressure on payment rates for lung cancer treatment services. A reduction in reimbursement rates for lung cancer treatments may adversely affect our customers’ businesses and cause them to enact cost reduction measures that may include reducing the scope of their programs, thereby potentially reducing demand for our diagnostic tests. +Healthcare reform measures could hinder or prevent the commercial success of our diagnostic tests. +In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system in ways that may harm our future revenues and profitability and the demand for our diagnostic tests. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. Current and future legislative proposals to further reform healthcare or reduce healthcare costs may limit coverage of or lower reimbursement for the procedures associated with the use of our diagnostic tests. The effect of any healthcare reform initiative implemented in the future could impact our revenue from the sale of our diagnostic tests. For example, the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the ACA), contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. +There have been judicial challenges to certain aspects of the ACA, as well as efforts by the Trump administration and Congress to repeal, replace or alter the implementation of certain aspects of the ACA. For example, as part of the Tax Cuts and Jobs Act of 2017 (TCJA), Congress eliminated the tax penalty, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance. The Further Consolidated Appropriations Act of 2020, Pub. L. No. 116-94, signed into law December 20, 2019, fully repealed the ACA’s “Cadillac Tax” on certain high-cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share (repeal effective in 2021), and the medical device excise tax on non-exempt medical devices. On December 14, 2018, a Texas District Court Judge invalidated the ACA in its entirety because he concluded that the individual mandate, which was repealed by Congress as noted above, is unconstitutional and cannot be severed from the remainder of the ACA. The Fifth Circuit Court of Appeals affirmed the district court’s ruling that the individual mandate was unconstitutional, but it remanded the case back to the district court for further analysis of whether the mandate could be severed from the ACA; that is, whether the entire ACA was therefore also invalid. The Supreme Court of the United States granted certiorari on March 2, 2020 and heard oral argument on November 10, 2020; the case is expected to be decided by mid-2021. It is unclear how this decision, subsequent appeals, and other efforts to challenge, repeal, or replace, or alter the implementation of the ACA will affect our business, financial condition and results of operations. +In addition, other legislative changes have been proposed and adopted since the ACA was enacted. For example, the Budget Control Act of 2011, among other things, included reductions to CMS payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030 unless additional Congressional action is taken, with the exception of a temporary suspension of the 2% cut in Medicare payments from May 1, 2020 through March 31, 2021. Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced CMS payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover Medicare overpayments to providers from three to five years. +The Biden administration and Congress may continue to pursue significant changes to the current healthcare laws, and the Biden administration has indicated its intent to strengthen the ACA and focus on reducing the cost of healthcare. We face uncertainties that might result from modifications or repeal of any of the provisions of the ACA, including as a result of current and future executive orders and legislative actions. The impact of those changes on us and potential effect on the medical device industry as a whole is currently unknown. Any changes to the ACA are likely to have an impact on our results of operations, and may negatively affect our business, financial condition and results of operations. We cannot predict what other healthcare programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the United States on our business, financial condition and results of operations. +65 +The continuing efforts of the government, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce costs of healthcare may harm: +• +our ability to set a price that we believe is fair for our diagnostic tests; +• +our ability to generate revenue and achieve or maintain profitability; and +• +the availability of capital. +The ACA substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacts our industry. Future changes in healthcare policy could increase our costs and subject us to additional regulatory requirements that may interrupt commercialization of our current and future solutions. Future changes in healthcare policy could also decrease our revenue and impact sales of and reimbursement for our current and future diagnostic tests. +We must comply with anti-corruption, anti-bribery, anti-money laundering and similar laws. +We are subject to the Foreign Corrupt Practices Act of 1977 (FCPA), which generally prohibits companies in the United States from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business and requires companies to maintain accurate books and records and internal controls. We are also subject to requirements under the United States Treasury Department’s Office of Foreign Assets Control, United States domestic bribery laws and other anti-corruption, anti-bribery and anti-money laundering laws. While we have policies and procedures in place designed to promote compliance with such laws, our employees or other agents may nonetheless engage in prohibited conduct under these laws for which we or our executives might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have an adverse effect on our business, financial condition and results of operations. +Furthermore, international customers may currently order our diagnostic tests, either directly from us or through a potential joint venture, and we are subject to the FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non-United States government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent distributors to sell our diagnostic tests internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents and we could be held responsible for their actions. Other United States companies in the medical device and biopharmaceutical field have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including laws promulgated by OECD countries in which we operate, such as Israel. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees and could result in a material adverse effect on our business, prospects, financial condition and results of operations. We could also suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures. +We must comply with healthcare fraud and abuse laws. +Various federal and state laws, as well as the laws of foreign countries, prohibit payments to induce the referral, purchase, order or use of healthcare products or services and require medical device companies to limit prevent, and/or monitor, and report certain payments to third-party payers, health care professionals, and other individuals. These healthcare fraud and abuse, anti-kickback, public reporting and aggregate spend laws affect our sales, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with lung cancer treatment providers, hospitals, physicians or other potential purchasers or users, including patients, of medical devices and services. They also impose additional administrative and compliance burdens on us. In particular, these laws influence, among other things, how we structure our sales offerings, including discount practices, customer support, education and training programs and physician consulting and other service arrangements. These laws prohibit certain marketing initiatives that are commonplace in other industries. If we were to offer or pay inappropriate inducements for the purchase, order or use of our diagnostic tests or our services, or our arrangements are perceived as inappropriate inducements, we could be subject to claims under various healthcare fraud and abuse laws. +66 +Restrictions under applicable United States federal and state healthcare laws and regulations include the following: +• +the federal Anti-Kickback Statute, a criminal law, prohibits, among other things, persons and entities from knowingly and willfully offering, paying, soliciting or receiving any remuneration, directly or indirectly, in cash or in kind, to induce or reward purchasing, leasing, ordering, or arranging for, referring, or recommending the purchase, lease, order of any good or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid; +• +the Eliminating Kickbacks in Recovery Act, which prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program; +• +the Beneficiary Inducement Statute, which prohibits any person, organization, or entity from giving anything of value to a federal health care program beneficiary that is likely to induce or influence the beneficiary’s choice of provider, practitioner, or supplier for covered services; +• +the federal civil False Claims Act, which may be enforced through civil whistleblower or qui tam actions and is often used to enforce the federal Anti-Kickback Statute and other healthcare laws and regulations, imposes civil penalties and potential exclusion from federal healthcare programs, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or for making a false record or statement material to an obligation to pay the federal government or for knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the federal government; +• +federal criminal statutes created by HIPAA impose criminal liability for, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program, including private insurance plans, or, in any matter involving a healthcare benefit program, for knowingly and willfully making materially false, fictitious, or fraudulent statements in connection with the delivery of or payment for health care benefits; and +• +analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers, including private insurers. +Other federal and state laws, as well as the laws of foreign countries, generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payments to government or commercial payers that are false or fraudulent, or for items or services that were not provided as claimed. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of product candidates and medical devices from government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations. Moreover, any investigation into our practices could cause adverse publicity and require a costly and time-consuming response. If any physicians or other healthcare providers or entities with whom we expect to do business are found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Manufacturers can also be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by providing inaccurate billing or coding information to customers, by providing improper financial inducements, or through certain other activities. We attempt to ensure that any billing and coding information we provide for our diagnostic tests emphasizes the need for physicians and other providers to make independent judgments, use accurate and appropriate billing and coding that complies with all applicable payer policies, and document the medical need for their patients as appropriate. Nevertheless, the government may not regard any billing errors that may be made by our customers as inadvertent and may examine our role in providing information to our customers, physicians and patients concerning the benefits and potential coverage of more frequent therapy. +67 +FDA regulation of our industry generally or our tests specifically could be disruptive to our business. +Our operations are subject to extensive federal, state, local and foreign laws and regulations, including FDA laws and regulations, all of which are subject to change. These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. We believe that we are in material compliance with all statutory and regulatory requirements applicable to us, but there is a risk that one or more government agencies could take a contrary position, or that a private party could file suit under the qui tam provisions of the federal False Claims Act or a similar state law. Such occurrences, regardless of their outcome, could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations, and other private third-party payers. +The FDA has recently increased its attention to marketing of pharmacogenetic tests. For example, in late 2018, the FDA issued a safety communication regarding genetic laboratory tests with claims to predict a patient’s response to specific medications that have not been reviewed by the FDA and may not be supported by clinical evidence. Among other tests, the FDA notice cited genetic tests that claim results can be used to help physicians identify which antidepressant medication would have increased effectiveness or side effects compared to other antidepressant medications. As explained by the FDA in its update to this safety communication, the FDA sent notices to several firms marketing such pharmacogenetic tests where the FDA believes the relationship between genetic variations and the medication’s effects has not been established, including a warning letter sent to a laboratory, in part, for failing to obtain premarket review of its test. HHS recently issued an announcement stating that the FDA cannot require premarket review of any LDT without engaging in formal notice-and-comment rulemaking, as opposed to through guidance documents, compliance manuals, website statements, or other informal issuances. +The HHS announcement was made on the Department’s website and we can provide no assurances that the HHS statement will not be rescinded or revised or that it would preclude the FDA from renewing its attention on diagnostic tests, including those that we provide. If this were to happen, it may impact our marketing practices relating to the relevant tests, which in turn may have an adverse impact on our business, financial condition and results of operations. +The SARS-CoV-2 tests we perform are currently the subject of EUAs, which permit the use of unapproved medical products or unapproved uses of medical products to be used in an emergency to diagnose, treat, or prevent serious or life-threatening diseases or conditions when there are no adequate, approved, and available alternatives, as provided under section 564 for the Federal Food, Drug, and Cosmetic Act (FDCA). EUAs are temporary authorizations that are revoked at the end of the public health emergency, when there is an adequate, approved, or available alternative, or when there are performance or safety concerns. These EUAs also set out conditions for laboratories who are authorized to perform the particular test. The HHS statement mentioned above did not affect EUAs for COVID-19 laboratory-developed tests that were already in effect at the time the statement was released. The HHS statement did not affect EUAs issued for commercially developed COVID-19 IVD tests, which apply to test developers and authorized laboratories. +The EUA for Bio-Rad’s SARS-CoV-2 Droplet Digital PCR™ test provides several conditions for authorized laboratories, including that the test result reports will include Fact Sheets that are authorized as part of the EUA, deviations from the authorized procedures, including specimen types, are not permitted, notification of public health authorities of intent to run the test prior to initiating testing, collection and reporting of performance data to the FDA, including false positives, false negatives, and significant deviations from the established performance characteristics, and appropriate training and protective equipment for laboratory staff. This EUA also states that authorized laboratories must maintain records associated with the EUA and be made available to the FDA for inspection upon request. Printed materials, advertising, and promotion related to use of the test must be consistent with the authorized labeling and Fact Sheets, as well as other terms set forth in the EUA and any applicable requirements under the FDCA and its implementing regulations, and conspicuously bear the following statements: +• +This test has not been FDA cleared or approved; +• +This test has been authorized by the FDA under an EUA for use by authorized laboratories; +• +This test has been authorized only for the detection of nucleic acid from SARS- CoV-2, not for any other viruses or pathogens; and +68 +• +This test is only authorized for the duration of the declaration that circumstances exist justifying the authorization of emergency use of in vitro diagnostics for detection and/or diagnosis of COVID-19 under Section 564(b)(1) of the Act, 21 U.S.C. § 360bbb-3(b)(1), unless the authorization is terminated or revoked sooner. +Other statements that appear in advertising and promotional materials must not represent or suggest that this test is safe or effective for the detection of SARS-CoV-2. +The EUA for Bio-Rad’s serological test for the antibodies associated with SARS-CoV-2, also sets out several conditions for authorized laboratories that mirror the conditions for the PCR test described above, except that the printed materials, advertising, and promotion of the test must conspicuously bear the following statements: +• +This test has not been FDA cleared or approved; +• +This test has been authorized by the FDA under an EUA for use by authorized laboratories; +• +This test has been authorized only for the detection of total antibodies, including IgM/IgG/IgA, against SARS-CoV-2, not for any other viruses or pathogens; and +• +This test is only authorized for the duration of the declaration that circumstances exist justifying the authorization of emergency use of in vitro diagnostics for detection and/or diagnosis of COVID-19 under Section 564(b)(1) of the Act, 21 U.S.C. § 360bbb-3(b)(1), unless the authorization is terminated or revoked sooner. +Failure to comply with federal, state and foreign laboratory licensing requirements and the applicable requirements of the FDA or any other regulatory authority, could cause us to lose the ability to perform our tests, experience disruptions to our business, or become subject to administrative or judicial sanctions. +The diagnostic testing industry is subject to extensive laws and regulations, many of which have not been interpreted by the courts, including the application of the FDA’s EUA authority. As noted above, the EUAs for the COVID-19 tests that are part of our Biodesix WorkSafe testing program set out certain conditions for authorized laboratories using the tests, which have not received premarket clearance, approval, or a de novo from the FDA. If we fail to meet these conditions, the FDA may take enforcement action, such as issuing a warning letter, seeking an injunction, seizure, fines, or criminal penalties. Pursuant to the August 19, 2020 statement by HHS, the FDA cannot require any LDT to undergo premarket approval until it has engaged in notice-and-comment rulemaking. Laboratory tests that have already received an EUA to detect the COVID-19 virus were “unaffected” by the announcement. Tests without FDA clearance, approval, or authorization would not be considered covered countermeasures under the Public Readiness and Emergency Preparedness Act (PREP Act). The HHS statement also did not affect EUAs issued for commercially developed COVID-19 IVD tests, which apply to test developers and authorized laboratories. +We are also subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA requires virtually all laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification is also a prerequisite to be eligible to bill state and federal health care programs, as well as many private third-party payers, for laboratory testing services. As a condition of CLIA certification, each of our laboratories is subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by CMS, a CMS agent (typically a state agency), or, if the laboratory holds a CLIA certificate of accreditation, a CMS-approved accreditation organization. +Sanctions for failure to comply with CLIA requirements, including proficiency testing violations, may include suspension, revocation, or limitation of a laboratory’s CLIA certificate, which is necessary to conduct our business, as well as the imposition of significant fines or criminal penalties. +Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing licensure, or our failure to renew a CLIA certificate, a state or foreign license, or accreditation, could have a material adverse effect on our business. If the CLIA certificate of any one of our laboratories is revoked, CMS could seek revocation of the CLIA certificates of our other laboratories based on their common ownership or operation, even though they are separately certified. +69 +In addition, we are subject to state laws and regulations governing laboratory licensure. Some states have enacted state licensure laws that are more stringent than CLIA. Although we have obtained licenses from states where we believe we are required to be licensed, we may become aware of other states that require out-of-state laboratories to obtain licensure in order to accept specimens from the state, and it is possible that other states currently have such requirements or will have such requirements in the future. +We may also be subject to regulation in foreign jurisdictions as we seek to expand international utilization of our tests or such jurisdictions adopt new licensure requirements, which may require review of our tests in order to offer them or may have other limitations that may limit our ability to make our tests available outside of the United States. Complying with licensure requirements in new jurisdictions may be expensive, time-consuming and subject us to significant and unanticipated delays. Changes in state or foreign licensure laws that affect our ability to offer and provide diagnostic services across state or foreign country lines could materially and adversely affect our business. In addition, state and foreign requirements for laboratory certification may be costly or difficult to meet and could affect our ability to receive specimens from certain states or foreign countries. +Failure to comply with applicable clinical laboratory licensure requirements may result in a range of enforcement actions, including suspension, limitation or revocation of our CLIA certificate and/or state licenses, imposition of a directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing clinical laboratory licensure or our failure to renew our CLIA certificate, a state or foreign license or accreditation, could have a material adverse effect on our business, financial condition and results of operations. Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so. +Our Boulder, Colorado and De Soto, Kansas laboratories are College of American Pathologists (CAP)-accredited (Boulder) or COLA-accredited (De Soto) clinical laboratories regulated by CMS pursuant to CLIA. We also have a current CLIA certificate for each facility. To maintain these certificates, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our laboratory from time to time. Furthermore, our diagnostic tests are categorized as Laboratory Developed Tests (LDTs) and are not currently subject to FDA regulation, although certain components provided by third parties and used to create and/or administer the test may be. LDTs are a subset of in vitro diagnostics (IVDs) that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. The FDA’s authority to regulate LDTs has been frequently contested, and HHS recently issued a public statement purporting to rescind the FDA’s policies regarding the premarket review of LDTs. According to the HHS statement, the FDA will not require premarket review of LDTs unless it engages in notice-and-comment rulemaking. There is no guarantee, however, that the HHS statement will not be revised or rescinded, that legislation reforming the federal government’s regulation of LDTs will not be passed, or that LDTs will otherwise continue to be able to operate without first receiving FDA premarket review. Failure to adhere to any new FDA regulation would result in fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal penalties. +Changes in the way that the FDA regulates tests performed by laboratories like ours could result in delay or additional expense in offering our tests and tests that we may develop in the future. +Historically, the FDA has exercised enforcement discretion with respect to most LDTs and has not required laboratories that furnish LDTs to comply with the agency’s requirements for medical devices (e.g., establishment registration, device listing, quality systems regulations, premarket clearance or premarket approval, and post-market controls). In recent years, however, the FDA publicly announced its intention to regulate certain LDTs and issued two draft guidance documents that set forth a proposed phased-in risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. However, these guidance documents were withdrawn at the end of the Obama administration and replaced by an informal discussion paper reflecting some of the feedback that the FDA had received on LDT regulation. The FDA acknowledged that the discussion paper in January 2017 does not represent the formal position of the FDA and is not enforceable. Nevertheless, the FDA wanted to share its synthesis of the feedback that it had received in the hope that it might advance public discussion on future LDT oversight. HHS has since issued a statement purporting to rescind FDA’s policies regarding the premarket review of LDTs, stating that FDA must engage in notice and comment rulemaking (as opposed to through guidance documents, compliance manuals, website statements, or other informal issuances) prior to requiring premarket review of LDTs. HHS issued this statement on its website and it may be subject to change. Also, it is possible that Congress will pass legislation to reform the federal government’s regulation of LDTs or that FDA will engage in notice-and-comment rulemaking to require premarket review of LDTs, which could result in delay or additional expense in offering our tests and tests that we may develop in the future. +70 +Our current line of diagnostic tests is covered under CLIA and CMS, although our COVID testing program and select partnerships we may enter may cause us to be subject to additional FDA requirements. +The laws and regulations governing the marketing of diagnostic products are evolving, extremely complex and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, including in vitro diagnostics and, therefore, potentially our clinical laboratory tests. +Pursuant to the FDCA and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion, and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. Although the FDA has asserted that it has authority to regulate the development and use of LDTs, such as our and many other laboratories’ tests, as medical devices, it has generally exercised enforcement discretion and is not otherwise regulating most tests developed and performed within a single high complexity CLIA-certified laboratory. On August 19, 2020, HHS issued a statement purporting to rescind the FDA’s policies regarding the premarket review of LDTs, absent notice-and-comment rulemaking. the FDA’s policies to date have been articulated through guidance documents, compliance manuals, website statements, and other informal issuances. The FDA could, at any time, engage in notice-and-comment rulemaking, or Congress could take action to amend the law to change the current regulatory framework for in vitro diagnostics and LDTs. Further, the HHS statement was issued on its website and may be subject to change, particularly given the reasoning that additional flexibility is needed due to the COVID-19 pandemic. +We believe that our tests, as utilized in our clinical laboratory, are and would be considered LDTs and that as a result, the FDA does not require that we obtain regulatory clearances or approvals for our LDTs or their components pursuant to the FDA’s current policies and guidance. Although we believe that our tests and test components are either exempt from FDA medical device regulations or are subject to an enforcement discretion policy, it is possible that the FDA would not agree with our determinations or that the FDA will change its regulations and policies such that our products become regulated as medical devices. +In contrast with our LDTs, the FDA has regulatory jurisdiction over the two FDA EUA-authorized COVID-19 tests that were developed by Bio-Rad, which we offer as part of our Biodesix WorkSafe testing programs. +Our operations, therefore, are or may become subject to extensive regulation by the FDA in the United States. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +test design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage, and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales, and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export. +The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated with them, are subject to general controls. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval. +71 +Before a new medical device or service, or a new intended use for an existing product or service, can be marketed in the United States, a company must first submit and receive either 510(k) clearance, de-novo authorization, or premarket approval (PMA) from the FDA, unless an exemption applies. Most Class I devices and some Class II devices are exempt from these requirements. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is substantially equivalent to a legally-marketed predicate device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (preamendments device), a device that was originally on the United States market pursuant to an approved PMA and later down-classified, or a 510(k)-exempt device. To be substantially equivalent, the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. +In the process of obtaining PMA approval, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. +The FDA also allows the submission of a direct de-novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA), a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. +The 510(k), de-novo or PMA process can be expensive, lengthy and unpredictable. The FDA can delay, limit, or deny clearance or approval of a device for many reasons, including: +• +our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or conformity assessment body that the diagnostic tests are safe or effective for their proposed intended uses; +• +the disagreement of the FDA with the design or implementation of our clinical trials or the interpretation of data from clinical trials; +• +serious and unexpected adverse device effects experienced by participants in our clinical trials; +• +the data from our clinical trials may be insufficient to support clearance or approval, where required; +• +our inability to demonstrate that the clinical and other benefits of the device outweigh the risks; +• +the manufacturing process or facilities we use may not meet applicable requirements; and +• +the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance or approval. +The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by any such agency, which may include any of the following sanctions: +• +adverse publicity, warning letters, untitled letters, it has come to our attention letters, fines, injunctions, consent decrees and civil penalties; +• +repair, replacement, refunds, recall or seizure of our diagnostic tests; +• +operating restrictions, partial suspension, or total shutdown of production; +• +denial of our requests for regulatory clearance or premarket approval of new diagnostic tests or services, new intended uses, or modifications to existing diagnostic tests or services; +72 +• +withdrawal of regulatory clearance or premarket approvals that have already been granted; or +• +criminal prosecution. +As discussed above, we believe that our current line of diagnostic tests and their components are LDTs, subject to state licensing requirements and federal regulation by CMS under CLIA, although our COVID-19 testing program and select partnerships we may enter may cause us to be subject to additional FDA regulations discussed above. +While we believe that we are currently in material compliance with applicable laws and regulations, it is possible that the FDA, or other regulatory agencies, would not agree with our determinations. If our products became become subject to 510(k) or other similar FDA regulations, we would need to comply with the applicable regulations or face significant civil and criminal penalties. In addition, IVDs and CDx tests are widely considered to be Class III devices, and it is possible that in the future, we may develop tests that fall into this category. CDx tests in particular may require further administrative procedures in the PMA process. Exposure to these additional regulatory requirements would also affect our business, financial condition and results of operations. +Our future success depends on our ability to develop, receive regulatory clearance or approval or certification for, and introduce new diagnostic tests or enhancements to existing diagnostic tests that will be accepted by the market in a timely manner. There is no guarantee that the FDA will grant 510(k) clearance or PMA approval of our future diagnostic tests and failure to obtain necessary clearances or approvals for our future diagnostic tests would adversely affect our ability to grow our business. +It is important to our business that we build a pipeline of diagnostic test offerings that address limitations of current lung disease diagnostic tests. As such, our success will depend in part on our ability to develop and introduce new diagnostic tests. However, we may not be able to successfully develop and obtain regulatory clearance or approval or certification for enhancements to our existing diagnostic tests, or new diagnostic tests for any number of reasons, including due to the cost associated with certain regulatory approval requirements, or these diagnostic tests may not be accepted by physicians or users. +The success of any new diagnostic test or enhancement to an existing diagnostic test will depend on a number of factors, including our ability to, among others: +• +identify and anticipate physician and patient needs properly; +• +develop and introduce new diagnostic tests or enhancements to our existing diagnostic tests in a timely manner; +• +avoid infringing upon, misappropriating, or violating the intellectual property rights of third parties; +• +demonstrate, if required, the safety and efficacy of new diagnostic tests with data from clinical studies; +• +obtain the necessary regulatory clearances or approvals or certifications for new diagnostic tests or enhancements to existing diagnostic tests; +• +comply fully with FDA and foreign regulations on marketing of new diagnostic tests or modified diagnostic tests; and +• +provide adequate training to potential users of our diagnostic tests. +If we do not develop new diagnostic tests or enhancements to our existing diagnostic tests in time to meet market demand or if there is insufficient demand for these diagnostic tests or enhancements, or if our competitors introduce new diagnostic tests with functionalities that are superior to ours, our results of operations will suffer. +Some of our future diagnostic tests may require FDA clearance of a 510(k) submission. Other diagnostic tests may require the approval of a PMA. In addition, some of our future diagnostic tests may require clinical trials to support regulatory approval and we may not successfully complete these clinical trials. The FDA may not approve or clear these diagnostic tests for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or premarket approval of new diagnostic tests. Failure to receive clearance or approval for our new diagnostic tests would have an adverse effect on our ability to expand our business. +73 +Modifications to our marketed tests may require new 510(k) clearances or PMA approvals, or may require us to cease marketing or recall the modified tests until clearances or approvals are obtained. +Modifications to our diagnostic tests may require new regulatory approvals or clearances, including 510(k) clearances or premarket approvals, or require us to recall or cease marketing the modified systems until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We have made modifications to our diagnostic tests in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our diagnostic tests as modified, which could require us to redesign our diagnostic tests and harm our operating results. In these circumstances, we may be subject to significant enforcement actions. +If a manufacturer determines that a modification to an FDA-cleared device could significantly affect its safety or efficacy, or would constitute a major change in its intended use, then the manufacturer must file for a new 510(k) clearance or possibly a premarket approval application. Where we determine that modifications to our diagnostic tests require a new 510(k) clearance or premarket approval application, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. Obtaining clearances and approvals can be a time-consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced diagnostic tests in a timely manner, which in turn would harm our future growth. +If we or our suppliers fail to comply with ongoing FDA or other domestic and foreign regulatory authority or conformity assessment body requirements, or if we experience unanticipated problems with our diagnostic tests, they could be subject to restrictions or withdrawal from the market. +Any medical device that we manufacture, including those for which we obtain regulatory clearance or approval or certification, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such diagnostic test, will be subject to continued regulatory review, oversight, and periodic inspections by the FDA and other domestic and foreign regulatory bodies or conformity assessment bodies. In particular, we and our suppliers may be required to comply with FDA’s Quality System Regulations (QSR codified at 21 C.F.R. § 820) for medical devices and International Standards Organization (ISO) regulations for the manufacture of our diagnostic tests and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any diagnostic test for which we obtain clearance or approval. Regulatory bodies, such as the FDA, and conformity assessment bodies enforce the QSR and other regulations through periodic inspections and audits. The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies or conformity assessment bodies, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, one or more of the following enforcement actions: +• +untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; +• +unanticipated expenditures to address or defend such actions; +• +customer notifications for repair, replacement, or refunds; +• +recall, detention, or seizure of our diagnostic tests; +• +operating restrictions or partial suspension or total shutdown of production; +• +refusing or delaying our requests for 510(k) clearance or premarket approval of new diagnostic tests or modified versions of current diagnostic tests; +• +operating restrictions; +• +withdrawing 510(k) clearances on PMA approvals that have already been granted; +• +revocation of EUAs that have been authorized previously; +• +refusal to grant export approval for our diagnostic tests; and +• +criminal prosecution. +74 +If any of these actions were to occur it would harm our reputation and cause our diagnostic test sales and profitability to suffer and may prevent us from generating revenue. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements which could result in our failure to produce our diagnostic tests on a timely basis and in the required quantities, if at all. +In addition, we are required to conduct surveillance to monitor the safety or effectiveness of our diagnostic tests, and we must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our diagnostic tests. Later discovery of previously unknown problems with our diagnostic tests, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such diagnostic tests or manufacturing processes, withdrawal of the diagnostic tests from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties which would adversely affect our business, operating results and prospects. +Our diagnostic tests and services may in the future be subject to product recalls that could harm our reputation, business and financial results. +Medical devices can experience performance problems in the field that require review and possible corrective action. The occurrence of component failures, manufacturing errors, software errors, design defects or labeling inadequacies affecting a medical device could lead to a government-mandated or voluntary recall by the device manufacturer, in particular when such deficiencies may endanger health. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our diagnostic tests and services in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. Product recalls may divert management attention and financial resources, expose us to product liability or other claims, harm our reputation with customers and adversely impact our business, financial condition and results of operations. Other jurisdictions have similar recall requirements. +Legislative or regulatory reforms may make it more difficult and costly for us to obtain regulatory clearance or approval or certification of any future diagnostic tests and to manufacture, market and distribute our diagnostic tests after clearance or approval is obtained. +From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. For example, the Verifying Accurate, Leading-edge IVCT Development (VALID) Act recently introduced in Congress would codify into law the term “in vitro clinical test” in order to create a new medical product category separate from medical devices that would include products currently regulated as in vitro diagnostics as well as LDTs. +In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our diagnostic tests. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of planned or future diagnostic tests. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. +Any change in the laws or regulations that govern the clearance and approval processes relating to our current, planned and future diagnostic tests could make it more difficult and costly to obtain clearance or approval for new diagnostic tests or to produce, market and distribute existing diagnostic tests. Significant delays in receiving clearance or approval or the failure to receive clearance or approval for any new diagnostic tests would have an adverse effect on our ability to expand our business. +75 +Clinical trials may be necessary to support future product submissions to FDA. These clinical trials are expensive and will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new diagnostic tests and will adversely affect our business, operating results and prospects. +Initiating and completing clinical trials necessary to support any future PMA applications, and additional safety and efficacy data beyond that typically required for a 510(k) clearance, for our possible future product candidates, will be time consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical trials may not have favorable results in later clinical trials. +Conducting successful clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our diagnostic tests or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. +Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required and we may not adequately develop such protocols to support clearance and approval. Further, the FDA may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our diagnostic tests or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, the FDA may not consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects. +If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval or certification for or commercialize our diagnostic tests and services. +We may not have the ability to independently conduct our pre-clinical and clinical trials for our future diagnostic tests and services and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct such trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our diagnostic tests and services on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control. +Our use, disclosure, and other processing of personally identifiable information, including health information, is subject to HIPAA and other federal, state, and foreign privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our business, operating results and prospects. +We maintain and process, and our third-party vendors, collaborators, contractors and consultants maintain and process on our behalf, a large quantity of sensitive information, including confidential business, personal and patient health information in connection with our clinical studies and our employees, and are subject to data privacy and protection laws and regulations that apply to the collection, transmission, storage and use of personally identifying information, which among other things, impose certain requirements relating to the privacy, security and +76 +transmission of personal information. Failure by us or our third-party vendors, collaborators, contractors and consultants to comply with any of these laws and regulations could result in notification obligations or enforcement actions against us, which could result in fines, imprisonment of company officials and public censure, claims for damages by affected individuals, damage to our reputation and loss of goodwill, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects. These laws, rules and regulations evolve frequently and their scope may continually change, through new legislation, amendments to existing legislation and changes in enforcement, and may be inconsistent from one jurisdiction to another. The interpretation and application of consumer, health-related and data protection laws, especially with respect to genetic samples and data, in the United States, the European Union (EU) and elsewhere, are often uncertain, contradictory and in flux. As a result, implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. +In the United States, numerous federal and state laws and regulations, including federal health information privacy laws, state data breach notification laws, state health information privacy laws and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), that govern the collection, use, disclosure and protection of health-related and other personal information could apply to our operations or the operations of our collaborators. +Domestic laws in this area are complex and developing rapidly. Many state legislatures have adopted legislation relating to privacy, data security and data breaches. Laws in all 50 states require businesses to provide notice to customers whose personally identifiable information has been disclosed as a result of a data breach. The laws are not consistent, and compliance in the event of a widespread data breach is costly. States are also frequently amending existing laws, requiring attention to frequently changing regulatory requirements. For example, California recently enacted the CCPA, which became effective on January 1, 2020. The CCPA, among other things, requires new disclosures to California consumers and affords such consumers new abilities to access and delete their personal information, opt-out of certain sales of personal information and receive detailed information about how their personal information is used. The CCPA provides for fines of up to $7,500 per violation, as well as a private right of action for data breaches that is expected to increase the frequency of data breach litigation. While the CCPA has already been amended multiple times, it is unclear how this legislation will be further modified or how it will be interpreted. Interpretations of the CCPA may continue to evolve with regulatory guidance and the CCPA continue to be amended, including through a ballot initiative, the California Privacy Rights Act (the CPRA). That passed in November 2020. The CPRA will impose additional data protection obligations on companies doing business in California, including additional consumer rights, including regarding certain uses of sensitive data. It also creates a new California data protection agency specifically tasked to enforce the law, which may likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. The effects of this legislation potentially are far-reaching, however, and may require us to modify our data processing practices and policies and incur substantial compliance-related costs and expenses. The CCPA and other changes in state and federal laws or regulations relating to privacy, data protection and information security, particularly any new or modified laws or regulations that require enhanced protection of certain types of data or new obligations with regard to data retention, transfer or disclosure, could increase the cost of providing our offerings, require significant changes to our operations or even prevent us from providing certain offerings in jurisdictions in which we currently operate and in which we may operate in the future. +Because of the breadth of these data protection laws and the narrowness of their exceptions and safe harbors, it is possible that our business or data protection policies could be subject to challenge under one or more of such laws. The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of heightened regulatory focus on data privacy and security issues. Although we endeavor to comply with our published policies and documentation and ensure their compliance with current laws, rules and regulations, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policy and other documentation that provide promises and assurances about privacy and security can subject us to potential state and federal action in the United States if they are found to be deceptive, unfair, or misrepresentative of our actual practices. Any failure by us or other parties with whom we do business to comply with this documentation or with federal, state, local or international regulations could result in proceedings against us by governmental entities, private parties or others. In many jurisdictions, enforcement actions and consequences for noncompliance are rising. +77 +If our operations are found to be in violation of any of the data protection laws described above or any other laws that apply to us, we may be subject to penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from participation in government healthcare programs, injunctions, private qui tam actions brought by individual whistleblowers in the name of the government, class action litigation and the curtailment or restructuring of our operations, as well as additional reporting obligations and oversight if we become subject to a corrective action plan or other agreement to resolve allegations of non-compliance with these laws, any of which could adversely affect our ability to operate our business and our results of operations. +In addition, numerous state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability, integrity, and other processing of PHI and PII. These laws and regulations include HIPAA. HIPAA establishes a set of national privacy and security standards for the protection of protected health information (as defined in HIPAA, PHI) by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services. We are a covered entity under HIPAA when we are conducting our clinical trials. We are a covered entity with regard to our observational studies and clinical trials, and also a business associate under HIPAA for certain other business activities, and we execute business associate agreements with our clients. +HIPAA requires covered entities and business associates, such as us, to develop and maintain policies with respect to the protection of, use and disclosure of electronic PHI, including the adoption of administrative, physical and technical safeguards to protect such information, and certain notification requirements in the event of a data breach. +HIPAA imposes mandatory penalties for certain violations. Penalties for violations of HIPAA and its implementing regulations start at $119 per violation and are subject to a cap of $1,785,651 for violations of the same standard in a single calendar year. However, a single breach incident can result in violations of multiple standards. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. +In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities and business associates. With regard to business associates, those audits assess the business associate’s compliance with the HIPAA Privacy and Security Standards. Such audits are conducted randomly and after an entity experiences a breach affecting more than 500 individuals’ data. Undergoing an audit can be costly, can result in fines or onerous obligations, and can damage a business associate’s reputation. +In addition to HIPAA, numerous other federal, state, and foreign laws and regulations protect the confidentiality, privacy, availability, integrity and security of PHI and other types of PII. Some of these laws and regulations may be preempted by HIPAA with respect to PHI, or may exclude PHI from their scope but impose obligations with regard to PII that is not PHI, and in some cases, can impose additional obligations with regard to PHI. These laws and regulations are often uncertain, contradictory, and subject to changing or differing interpretations, and we expect new laws, rules and regulations regarding privacy, data protection, and information security to be proposed and enacted in the future. HHS is also proposing amendments to the HIPPA Privacy Rule to modernize certain data sharing provisions and enhance patient access to their information. This complex, dynamic legal landscape regarding privacy, data protection, and information security creates significant compliance issues for us and our clients and potentially exposes us to additional expense, adverse publicity and liability. While we have implemented data privacy and security measures in an effort to comply with applicable laws and regulations relating to privacy and data protection, some PHI and other PII or confidential information is transmitted to us by third parties, who may not implement adequate security and privacy measures, but it is possible that laws, rules and regulations relating to privacy, data protection, or information security may be interpreted and applied in a manner that is inconsistent with our practices or those of third parties who transmit PHI and other PII or confidential information to us. If we or these third parties are found to have violated such laws, rules or regulations, it could result in government-imposed fines, orders requiring that we or these third parties change our or their practices, or criminal charges, which could adversely affect our business. +78 +Complying with these various laws and regulations could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business. +We may eventually operate in a number of countries outside of the United States whose laws, including data privacy laws, may in some cases be more stringent than the requirements in the United States. For example, EU and UK data privacy laws have specific requirements relating to cross-border transfers of personal data to certain jurisdictions, including to the United States, have strict requirements relating to personal data collection, use or sharing, and have more stringent requirements relating to organizations’ privacy programs and provide stronger individual rights. Moreover, we may also be subject to evolving international privacy and data security regulations which could result in greater compliance costs and in turn lead to penalties, where such compliance programs are not implemented correctly. +Certain of our processing activities are subject to the EU General Data Protection Regulation and the UK General Data Protection Regulation (collectively, the “GDPR”) – including, those involving pseudonymised / key-coded data - as the GDPR applies extra-territorially. The GDPR imposes strict requirements on controllers and processors processing personal data, including, for example, requirements to: (i) identify a legal basis for the processing of personal data, (ii) provide robust disclosures to individuals, (iii) respond to requests from individuals to exercise their data subject rights, (iv) provide personal data breach notifications within 72 hours after discovering the breach, (v) limit the collection and retention of personal data, (vi) impose specific contractual obligations on processors engaged to process personal data on the instructions of the controller, and (vii) apply enhanced protections to health data and other special categories of personal data. +The EU GDPR also provides that EU Member States may make their own further laws and regulations limiting the processing of personal data, including genetic, biometric or health data, which could limit our ability to use and share such personal data and cause our costs to increase and harm our financial condition. +Failure to comply with the requirements of the GDPR may result in fines of up to €20 million (£17.5 million in the case of the UK GDPR) or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. GDPR compliance may require us to put in place additional mechanisms, which may result in compliance costs and other substantial expenditures. This may be onerous and adversely affect our business, financial condition, results of operations and the profitability of our platform of diagnostic tests. Failure to comply with the GDPR and other countries’ privacy or data security-related laws, rules or regulations could result in material penalties imposed by regulators, affect our compliance with contracts entered into with our collaborators and other third-party payers, and have an adverse effect on our business and financial condition. Currently, the GDPR is only applicable to us as a processor, but as we continue to expand into the European market, the GDPR will have direct applicability to us as a controller. +The GDPR also prohibits the transfer of personal data from the EEA/UK to a country outside of the EEA/UK (e.g., the United States) unless made to a country deemed to have adequate data privacy laws by the European Commission (or UK Government in case of the UK GDPR) or a data transfer mechanism has been put in place. Until recently, one such data transfer mechanism was the EU-US Privacy Shield. However, in July 2020 the Court of Justice of the European Union (CJEU) declared the Privacy Shield to be invalid. The CJEU upheld the validity of standard contractual clauses (SCCs) as a legal mechanism to transfer personal data but companies relying on SCCs will need to carry out a transfer privacy impact assessment, which among other things, assesses laws governing access to personal data in the recipient country and considers whether supplementary measures that provide privacy protections additional to those provided under SCCs will need to be implemented to ensure an essentially equivalent level of data protection to that afforded in the EEA. In turn, the findings of the CJEU will have significant implications for cross-border data flows and may lead to increased transaction, compliance, and technological costs to support international data transfers. +Organizations operating in Canada and covered by the Personal Information Protection and Electronic Documents Act (PIPEDA), or equivalent Canadian provincial laws, must obtain an individual’s consent when they collect, use or disclose that individual’s personal information. Individuals have the right to access and challenge the accuracy of their personal information held by an organization, and personal information may only be used for the purposes for which it was collected. If an organization intends to use personal information for another purpose, it must again obtain that individual’s consent. +79 +We regularly monitor, defend against and respond to attacks to our networks and other information security incidents. Despite our information security efforts, our facilities, systems, and data, as well as those of our third-party service providers, may be vulnerable to privacy and information security incidents such as data breaches, viruses or other malicious code, coordinated attacks, data loss, phishing attacks, ransomware, denial of service attacks, or other security or IT incidents caused by threat actors, technological vulnerabilities or human error. If we, or any of our vendors that support our IT or have access to our data, including any third - party vendors that collect, process and store personal data on our behalf, fail to comply with laws requiring the protection of personal information, or fail to safeguard and defend personal information or other critical data assets or IT systems, we may be subject to regulatory enforcement and fines as well as private civil actions. We may be required to expend significant resources in the response, containment, mitigation of cybersecurity incidents as well as in defense against claims that our information security was unreasonable or otherwise violated applicable laws or contractual obligations. +Our employees, collaborators, independent contractors and consultants may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements. +We are exposed to the risk that our employees, collaborators, independent contractors and consultants may engage in fraudulent or other illegal activity with respect to our business. Misconduct by these employees could include intentional, reckless and/or negligent conduct or unauthorized activity that violates: +• +FDA regulations, including those laws requiring the reporting of true, complete, and accurate information to the FDA authorities; +• +federal and state healthcare fraud and abuse laws and regulations; or +• +laws that require the true, complete and accurate reporting of financial information or data. +In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Misconduct by these parties could also involve individually identifiable information, including, without limitation, the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. Any incidents or any other conduct that leads to an employee, contractor, or other agent, or our company, receiving an FDA debarment or exclusion by the HHS Office of Inspector General (OIG) could result in penalties, a loss of business from third parties, and severe reputational harm. +We have adopted a Code of Business Conduct and Ethics and compliance policies to govern and deter such behaviors, but it is not always possible to identify and deter misconduct by our employees and other agents, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, treble damages, monetary fines, disgorgement, imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and curtailment of our operations. +Clinical development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results. +Our ongoing research and development and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. We are currently conducting pre-and post-market clinical studies of some of our tests. In the future we may conduct clinical trials to support approval of new diagnostic tests and services, or new indications. Clinical studies may need to be conducted in compliance with FDA regulations or the FDA may take enforcement action. The data collected from these clinical studies may ultimately be used to support marketing authorization for these diagnostic tests and services. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims or that the FDA or foreign authorities and conformity assessment bodies will agree with our conclusions +80 +regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our tests are safe and effective for the proposed indicated uses, which could cause us to abandon development of our tests and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, may impact our ability to commercialize our tests and generate revenues. +Many of the factors that may cause or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval or certification. The commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial. +We may find it necessary to engage contract research organizations to perform data collection and analysis and other aspects of our clinical trials, which might increase the cost and complexity of our trials. We may also depend on clinical investigators, medical institutions, and contract research organizations to perform the trials, and would control only certain aspects of their activities. Nevertheless, we would be responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on these third parties would not relieve us of our regulatory responsibilities. We and our third-party contractors are required to comply with good clinical practices (GCPs) which are regulations and guidelines enforced by the FDA, and comparable regulations enforced by foreign regulatory authorities for products in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any third-party contractor fails to comply with applicable GCPs, the clinical data generated in clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities or conformity assessment bodies may require us to perform additional clinical trials before clearing or approving our marketing applications. A failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory clearance or approval or certification process. In addition, if these parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality, completeness or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical trials may have to be extended, delayed or terminated. +Many of these factors could be beyond our control. We may not be able to undertake additional trials, repeat trials or enter into new arrangements with third parties without undue delays or considerable expenditures. If there are delays in testing or clearances or approvals as a result of the failure to perform by third parties, our research and development costs would increase and we may not be able to obtain regulatory clearance or approval or certification for our tests. In addition, we may not be able to establish or maintain relationships with these parties on favorable terms, if at all. Each of these outcomes would harm our ability to market our tests, or to achieve sustained profitability. +The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects. +We cannot be certain that the results of our future clinical trials will support our future product claims or that the FDA or comparable foreign regulatory authorities or conformity assessment bodies will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the future product’s profile. +81 +Our billing, collections and claims processing activities are complex and time-consuming, and any delay in transmitting and collecting claims or failure to comply with applicable billing requirements, could have an adverse effect on our future revenue. +Billing for our tests is complex, time-consuming and expensive. Depending on the billing arrangement and applicable law, we bill various payers, such as government payers, insurance companies and patients, all of which may have different billing requirements. We may face increased risk in our collection efforts, including long collection cycles and the risk that we may never collect at all, either of which could adversely affect our business, financial condition and results of operations. Several factors make the billing process complex, including: +• +differences between the list price for our tests and the reimbursement rates of payers; +• +compliance with complex federal and state regulations related to billing government healthcare programs, including Medicare and Medicaid, to the extent our tests are covered by such programs; +• +differences in coverage among payers and the effect of patient co-payments or co-insurance; +• +differences in information and billing requirements among payers; +• +changes to codes and coding instructions governing our tests; +• +incorrect or missing billing information; and +• +the resources required to manage the billing and claims appeals process. +These billing complexities and the related uncertainty in obtaining payment for our tests could negatively affect our revenue and cash flow, our ability to achieve profitability and the consistency and comparability of our results of operations. In addition, if claims for our tests are not submitted to payers on a timely basis, or if we fail to comply with applicable billing requirements, it could have an adverse effect on our revenue and our business. +Third-party payers require us to identify the test for which we are seeking reimbursement using a Current Procedural Terminology (CPT) code. The CPT code set is maintained by the American Medical Association (AMA). In cases where there is not a specific CPT code to describe a test, such as with Nodify CDT and GeneStrat, the test may be billed under an unlisted molecular pathology procedure code or through the use of a combination of single gene CPT codes, depending on the payer. The Protecting Access to Medicare Act of 2014 (PAMA) authorized the adoption of new, temporary billing codes and unique test identifiers for FDA-cleared or approved tests as well as advanced diagnostic laboratory tests. The AMA has created a new section of CPT codes, Proprietary Laboratory Analyses codes to facilitate implementation of this section of PAMA. In addition, CMS may assign unique level II Healthcare Common Procedure Coding System codes to tests that are not already described by a unique CPT code. VeriStrat and Nodify XL2 both have test specific CPT codes, but GeneStrat and Nodify CDT do not at this time. +In the instance where a code used does not describe a specific test, the insurance claim must be examined to determine what test was provided, whether the test was appropriate and medically necessary, and whether payment should be rendered, which may require a letter of medical necessity from the ordering physician. This process can result in a delay in processing the claim, a lower reimbursement amount or denial of the claim. As a result, obtaining approvals from third-party payers to cover our tests and establishing adequate reimbursement levels is an unpredictable, challenging, time-consuming and costly process and we may never be successful. +We and our third-party manufacturers and suppliers must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do, or interrupt our, business. +Our research and development activities and our third-party manufacturers’ and suppliers’ activities involve the generation, use, storage and disposal of hazardous materials. We work with materials, including chemicals, biological agents and compounds and samples that could be hazardous to human health and safety or the environment. Our operations also produce hazardous and biological waste products. Accordingly, we and our third-party manufacturers and suppliers are subject to federal, state, local and foreign environmental, health and safety laws and regulations, and permitting and licensing requirements, including those governing the generation, use, manufacture, storage, handling, transportation, release and disposal of, and exposure to, these materials, and worker health and safety. +82 +We cannot eliminate the risk of contamination or injury resulting from such hazardous materials. We also cannot guarantee that the procedures utilized by our third-party manufacturers for handling and disposing of hazardous materials and wastes comply with all applicable environmental, health and safety laws and regulations. As a result, we may be held liable for any resulting damages, costs or liabilities, including cleanup costs and liabilities, which could be significant, or our commercialization, research and development efforts and business operations may be restricted or interrupted. +Environmental, health and safety laws and regulations are complex, change frequently and have tended to become more stringent. Compliance with such laws and regulations is expensive, and current or future environmental, health and safety laws and regulations may restrict our operations. If we do not comply with applicable environmental health and safety laws and regulations, and permitting and licensing requirements, we may be subject to fines, penalties, a suspension of our business or other sanctions. +Risks Related to our Intellectual Property +Our success may be impaired if we are unable to obtain, maintain and protect our intellectual property rights. +Our commercial success will depend in part on our ability to obtain and maintain patent and other intellectual property protection in the United States and other countries with respect to our diagnostic tests, products and services and technology. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, to protect our proprietary technology and prevent others from duplicating our suite of diagnostic tests and products. However, these means may afford only limited protection and may not: +• +prevent our competitors from duplicating our diagnostic tests and products, including our COVID-19 testing program and Nodify XL2, Nodify CDT, GeneStrat and VeriStrat tests; +• +prevent our competitors from gaining access to our proprietary information and technology, including the Diagnostic Cortex platform, tech platforms such as the DeepMALDI analysis and intellectual property covering technologies that allow us to develop “test algorithms”; or +• +allow us to gain or maintain a competitive advantage. +Any of our patents, including those we may license, may be challenged, invalidated, rendered unenforceable or circumvented. Consequently, we do not know whether any of our diagnostic tests, products and services will be protectable or remain protected by valid and enforceable patents. We may not prevail if our patents are challenged by competitors or other third parties. The United States federal courts or equivalent national courts or patent offices elsewhere may invalidate our patents, find them unenforceable, or narrow their scope. Furthermore, competitors may be able to design around our patents by developing similar or alternative technologies or products in a non-infringing manner, or obtain patent protection for more effective technologies, designs or methods, including for treating lung cancer. If these developments were to occur, our diagnostic tests and products may become less competitive and sales may decline. +We have filed numerous patent applications seeking protection of diagnostic tests and other inventions originating from our research and development. Our patent applications may not result in issued patents, and any patents that are issued may not provide meaningful protection against competitors or competitive technologies. Further, the examination process may require us to narrow the claims for our pending patent applications, which may limit the scope of patent protection that may be obtained if these applications issue. The scope of a patent may also be reinterpreted and significantly reduced after issuance. Even if patent applications we license or own currently or in the future issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with the protection or competitive advantages we are seeking. +Moreover, some of our owned and in-licensed patents and patent applications are, and may in the future be, co-owned with third parties. If we are unable to obtain or maintain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products and technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects. +83 +The patent position of biotechnology companies generally is highly uncertain, involves complex legal and factual questions, and has been the subject of much litigation in recent years. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the determination of patent rights with respect to pharmaceutical compounds and technologies commonly involves complex legal and factual questions, which has in recent years been the subject of much litigation. Various courts, including the United States Supreme Court have rendered decisions that affect the scope of patentability of certain inventions or discoveries relating to biotechnology. These decisions state, among other things, that a patent claim that recites an abstract idea, natural phenomenon, or law of nature (for example, the relationship between particular genetic variants and cancer) are not themselves patentable. Precisely what constitutes a law of nature or abstract idea is uncertain, and it is possible that certain aspects of our technology could be considered unpatentable under applicable law. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. Depending on decisions by the United States Congress, the federal courts and the United States Patent and Trademark Office (USPTO), the laws and regulations governing patents could change in unpredictable ways that would weaken our and our licensors’ ability to obtain new patents or to enforce our existing owned or in-licensed patents and patents that we might obtain or in-license in the future. Additionally, our pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. The scope of patent protection outside of the United States is also uncertain. Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain, and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property rights or narrow the scope of our owned and licensed patents. +If we are unable to obtain and maintain patent protection for our technology, or if the scope of the patent protection obtained is not sufficient, our competitors could develop and commercialize diagnostic tests, products and services similar or superior to ours, and our competitive position may be adversely affected. It is also possible that we will fail to identify patentable aspects of inventions made in the course of our development and commercialization activities before it is too late to obtain patent protection on them. Therefore, we may miss potential opportunities to strengthen our patent position. In addition, the patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. +Additionally, while software and other of our proprietary works may be protected under copyright law, we have chosen not to register any copyrights in these works, and instead, primarily rely on protecting our software as a trade secret. In order to bring a copyright infringement lawsuit in the United States, the copyright must be registered. Accordingly, the remedies and damages available to us for unauthorized use of our copyrights may be limited. +If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed. +In addition to seeking patent protection for the patents underlying our diagnostic tests, products and services, we also rely upon unpatented trade secrets, know-how and continuing technological innovation to develop and maintain a competitive position. Trade secrets and know-how can be difficult to protect. We seek to protect such proprietary information, in part, through confidentiality agreements with our employees, collaborators, contractors, advisors, consultants and other third parties and invention assignment agreements with our employees. We also have agreements with some of our consultants that require them to assign to us any inventions created as a result of their working with us. The confidentiality agreements are designed to protect our proprietary information and, in the case of agreements or clauses containing invention assignment, to grant us ownership of technologies that are developed through a relationship with employees or third parties. +84 +We cannot guarantee that we have entered into such agreements with each party that has or may have had access to our trade secrets or proprietary information. Additionally, despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to, or independently developed by, a competitor or other third party, our competitive position would be materially and adversely harmed. Furthermore, we expect these trade secrets, know-how and proprietary information to over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology and the movement of personnel from academic to industry scientific positions. Consequently, we may be unable to prevent our proprietary technology from being exploited in the United States and abroad, which could affect our ability to expand in domestic and international markets or require costly efforts to protect our technology. +We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known, or be independently discovered by, competitors. To the extent that our employees, consultants, contractors or collaborators use intellectual property rights owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions, which could have a material adverse effect on our business, financial condition and results of operations. +We may be subject to claims that we or our employees have misappropriated the intellectual property rights of a third party, including trade secrets or know-how, or are in breach of non-competition or non-solicitation agreements with our competitors, and third parties may claim an ownership interest in intellectual property we regard as our own. +Many of our employees and consultants were previously employed at or engaged by universities or other medical device, diagnostic, biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees, consultants and contractors, may have executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees, consultants and independent contractors do not use the intellectual property rights, proprietary information, know-how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, used, infringed, misappropriated or otherwise violated the intellectual property rights or disclosed the alleged trade secrets or other proprietary information, of these former employers, competitors or other third parties, or to claims that we have improperly used or obtained such trade secrets. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Any litigation or the threat of litigation may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize potential diagnostic tests, products and services, which could harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management and other employees. +Additionally, we may be subject to claims from third parties challenging our ownership interest in intellectual property rights we regard as our own, based on claims that our employees or consultants have breached an obligation to assign inventions to another employer, to a former employer, or to another person or entity. Litigation may be necessary to defend against any other claims, and it may be necessary or we may desire to enter into a license to settle any such claim; however, there can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our diagnostic tests or products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. +85 +An inability to incorporate technologies or features that are important or essential to our diagnostic tests or products could have a material adverse effect on our business, financial condition and results of operations, and may prevent us from selling our rights to our COVID-19 testing program, either of the Nodify XL2 and Nodify CDT tests, or the VeriStrat and GeneStrat tests. +In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property rights to execute agreements assigning such intellectual property rights to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property rights that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property rights. Such claims could have a material adverse effect on our business, financial condition, results of operations, and prospects. +Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future diagnostic tests, products and services. +Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. In 2011, the Leahy-Smith America Invents Act (Leahy-Smith Act) was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and also may affect patent litigation. These also include provisions that switched the United States from a first-to-invent system to a first-inventor-to-file system, allow third-party submission of prior art to the USPTO during patent prosecution and set forth additional procedures to attack the validity of a patent by the USPTO administered post grant proceedings, including post-grant review, inter partes review and derivation proceedings. Under a first-inventor-to-file system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor was the first to invent the claimed invention. The USPTO recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective in 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition and results of operations. +In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the United States Supreme Court and the United States Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Recent United States Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents, once obtained. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by United States and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future. +If our trademarks and tradenames are not adequately protected, then we may not be able to build name recognition in our markets and our business may be adversely affected. +Our trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be violating or infringing on other marks. We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these trademarks or trade names, which we need to build name recognition among potential partners and customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement or dilution claims brought by owners of other trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. +86 +We have not yet registered certain of our trademarks in all of our potential markets, although we have registered several connected to our diagnostic tests, products and services in the United States. If we apply to register these and trademarks in the United States and other countries, our applications may not be allowed for registration in a timely fashion or at all, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademark applications and registrations, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would. +Our efforts to enforce or protect our rights related to trademarks, trade secrets, domain names or other intellectual property rights may be ineffective, could result in substantial costs and diversion of resources and could adversely affect our business, financial condition and results of operations. +We may become involved in lawsuits to protect or enforce our patents, the patents of our licensors or other intellectual property rights, which could be expensive, time consuming and unsuccessful. +Competitors or other third parties may infringe, misappropriate or otherwise violate our patents, the patents of our licensors or other intellectual property rights, or we may be required to defend against claims of infringement, misappropriation or other violations. In addition, our patents also may become involved in inventorship, priority or validity disputes. To counter or defend against such claims can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke those parties to assert counterclaims against us alleging that we infringe their patents or other intellectual property. In any such proceeding, a court or other administrative body may decide that a patent or other intellectual property right owned by us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover such technology. Grounds for a validity challenge could include an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, written description, non-enablement or failure to claim patent-eligible subject matter. Grounds for an unenforceability assertion could include an allegation that someone connected with prosecution of the patent withheld information material to patentability from the USPTO, or made a misleading statement, during prosecution. Third parties also may raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include reexamination, post-grant review, inter partes review, interference proceedings, derivation proceedings and equivalent proceedings in foreign jurisdictions, including opposition proceedings. Such proceedings could result in the revocation or cancellation of or amendment to our patents in such a way that they no longer cover our diagnostic tests, products and services or prevent third parties from competing with our diagnostic tests, products and services. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which the patent examiner and we or our licensing partners were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we could lose at least part, and perhaps all, of the patent protection on our diagnostic tests, products and services. An adverse result in any litigation or other proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. +Moreover, some of our owned and in-licensed patents and patent applications are, and may in the future be, co-owned with third parties. If we are unable to obtain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing diagnostic tests, products, services or technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations. +87 +Even if resolved in our favor, litigation or other proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our management and other personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on our common stock price. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations. +Third parties may initiate legal proceedings alleging that we are infringing, misappropriating, or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business. +The intellectual property landscape in the field of precision oncology is in flux, and it may remain uncertain for the coming years. There may be significant intellectual property related litigation and proceedings relating to our owned and in-licensed, and other third party, intellectual property and proprietary rights in the future. As we move into new markets and applications for our diagnostic tests, products or services, incumbent participants in such markets may assert their patents and other intellectual property rights against us as a means of slowing our entry into such markets or as a means to extract substantial license and royalty payments from us. Our competitors and others may now and, in the future, have significantly larger and more mature patent portfolios than we currently have. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product or service revenue and against whom our own patents may provide little or no deterrence or protection. Therefore, our commercial success depends in part on our non-infringement of the patents or other intellectual property rights of third parties. +However, we may in the future be subject to claims that we, or other parties we have agreed to indemnify, infringe, misappropriate or otherwise violate patents or other intellectual property rights owned or controlled by third parties. Because patent applications are published sometime after filing, and because applications can take several years to issue, there may be additional currently pending third-party patent applications that are unknown to us, which may later result in issued patents. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. We may not have sufficient resources to bring these actions to a successful conclusion. +There is a substantial amount of litigation and other patent challenges, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology industry, including patent infringement lawsuits, interferences, oppositions and inter partes review proceedings before the USPTO, and corresponding foreign patent offices. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, including our competitors, exist in the fields in which we are developing diagnostic tests and in which we may develop future diagnostic tests, products and services. As the precision oncology industry expands and more patents are issued, the risk increases that our diagnostic tests may be subject to claims of infringement of the patent rights of third parties. Numerous significant intellectual property issues have been litigated, are being litigated and will likely continue to be litigated, between existing and new participants in our existing and targeted markets, and competitors have and may assert that our diagnostic tests or services infringe their intellectual property rights as part of a business strategy to impede our successful entry into or growth in those markets. +We could incur substantial costs and divert the attention of our management and technical personnel in defending against any of these claims. Parties making claims against us may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. +88 +Because of the inevitable uncertainty in intellectual property litigation, we could lose a patent infringement or other action asserted against us regardless of our perception of the merits of the case. There is no assurance that a court would find in our favor on questions of infringement, validity, enforceability, or priority. A court of competent jurisdiction could hold that these third - party patents are valid, enforceable, and infringed, which could materially and adversely affect our ability to commercialize any product candidates we may develop and any other product candidates or technologies covered by the asserted third -party patents. In order to successfully challenge the validity of any such United States patent in federal court, we would need to overcome a presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such United States patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such United States patent. +Parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell diagnostic tests, products or services, and could result in the award of substantial damages against us, including treble damages, attorney’s fees, costs, and expenses if we are found to have willfully infringed. In the event of a successful claim of infringement against us, we may be required to pay damages and ongoing royalties, which could be significant, and obtain one or more licenses from third parties, or be prohibited from selling certain diagnostic tests, products or services. We may not be able to obtain these licenses on acceptable or commercially reasonable terms, if at all, or these licenses may be non-exclusive, which could result in our competitors gaining access to the same intellectual property. In addition, we could encounter delays in diagnostic test introductions while we attempt to develop alternative diagnostic tests, products or services to avoid infringing third-party patents or intellectual property rights. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing diagnostic tests, products or services, and the prohibition of sale of any of our diagnostic tests, products or services could materially affect our business and our ability to gain market acceptance for our diagnostic tests, products and services. +Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. +In addition, our agreements with some of our customers, suppliers or other entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims, including the types of claims described above. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results or financial condition. +We may be subject to claims challenging the priority or inventorship of our patents and other intellectual property rights. +We or our licensors may be subject to claims that former employees, collaborators or other third parties have an interest in our owned or in-licensed patents, trade secrets or other intellectual property rights as an inventor or co-inventor. For example, we or our licensors may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or our or our licensors’ ownership of our owned or in-licensed patents, trade secrets or other intellectual property rights. If we or our licensors fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property rights that are important to our product candidates. +If we or our licensors are unsuccessful in any interference proceeding or other priority or inventorship dispute, we may be required to obtain and maintain licenses from third parties, including parties involved in any such interference proceedings or other priority or inventorship disputes. Such licenses may not be available on commercially reasonable terms or at all, or may be non-exclusive. If we are unable to obtain and maintain such licenses, we may need to cease the development, manufacture, and commercialization of one or more of our diagnostic tests, products or services. The loss of exclusivity or the narrowing of our owned and licensed patent +89 +claims could limit our ability to stop others from using or commercializing similar or identical technology and products. Any of the foregoing could result in a material adverse effect on our business, financial condition, results of operations, or prospects. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. +Obtaining and maintaining our patent protection depends on compliance with various required procedures, document submissions, fee payments and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. +Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States at several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees due to non-United States patent agencies. We are also dependent on our licensors to take the necessary action to comply with these requirements with respect to our licensed intellectual property rights. The USPTO and various non-US governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors may be able to enter the market without infringing our patents and this circumstance would have a material adverse effect on our business. +Issued patents covering our diagnostic tests and any other or future diagnostic tests, products or services could be found invalid or unenforceable if challenged. +The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability and some of our patents or patent applications, including licensed patents, may be challenged, in courts or patent offices in the United States and abroad, in opposition, derivation, reexamination, inter partes review, post-grant review or interference. Additionally, if we and our licensing partners initiate or become involved in legal proceedings against a third party to enforce a patent covering one of our diagnostic tests, products, services or technologies, the defendant could counterclaim that the patent covering our diagnostic tests, products or services is invalid or unenforceable. In patent litigation in the United States, counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including patent eligible subject matter, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement during prosecution. In addition, the United States now awards patent priority to the first party to file a patent application, and others may submit patent claims covering our inventions prior to us. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our diagnostic tests or any diagnostic tests, products and services that we may develop. +A successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights, which could have a material adverse impact on our business. Furthermore, if the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the outcome, it could dissuade companies from collaborating with us to license, develop or commercialize current or future diagnostic tests, products or services. +We may not be aware of all third-party intellectual property rights potentially relating to our current or future diagnostic tests, products or services. +90 +Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until approximately 18 months after filing or, in some cases, not until such patent applications issue as patents. We, or our current or future license partners or collaborators, might not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings, derivation proceedings or other post-grant proceedings declared by the USPTO. The outcome of such proceedings is uncertain, and other patent applications may have priority over our patent applications. Such proceedings could also result in substantial costs to us and divert our management’s attention and resources. +We rely on licenses from third parties in relation to certain diagnostic tests, products and services and if we lose these licenses then we may be subjected to future litigation. +We are a party to license agreements that grant us rights to use certain intellectual property rights, including patents and patent applications, typically in certain specified fields of use, in connection with our diagnostic tests, products and services. Some of those licensed rights could provide us with freedom to operate for aspects of our diagnostic tests, products and services. We may need to obtain additional licenses from others to advance our research, development and commercialization activities. +The in-licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to in-license or acquire third-party intellectual property rights that we may consider attractive or necessary. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. +Furthermore, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. In addition, we expect that competition for the in-licensing or acquisition of third-party intellectual property rights for product candidates that are attractive to us may increase in the future, which may mean fewer suitable opportunities for us as well as higher acquisition or licensing costs. We may be unable to in-license or acquire the third-party intellectual property rights for product candidates on terms that would allow us to make an appropriate return on our investment. If we are unable to successfully obtain rights to suitable product candidates, our business, financial condition, results of operations and prospects for growth could suffer. +Our existing license agreements impose, and we expect that our future license agreements will impose, various diligence, royalty payment, milestone payment, insurance and other obligations on us. If we fail to comply with these obligations or other obligations in our license agreements, our licensors may have the right to terminate these agreements, in which event we may not be able to develop and market any product or use any technology that is covered by these agreements. If our license agreements terminate, or we experience a reduction or elimination of licensed rights under these agreements, we may have to negotiate new or reinstated licenses with less favorable terms or we may not have sufficient intellectual property rights to operate our business. The occurrence of such events could materially harm our business. +Our success may depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for our licensed intellectual property rights. Our licensors may not successfully prosecute the patent applications we license. Even if patents issue in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents or may pursue such litigation less aggressively than we would. Without protection for the intellectual property rights we license, other companies might be able to offer substantially identical diagnostic tests for sale, which could adversely affect our competitive business position and harm our business prospects. +Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations and prospects. +91 +Moreover, disputes may also arise between us and our current or future licensors regarding intellectual property rights subject to a license agreement, including those relating to: +• +the scope of rights granted under the license agreement and other interpretation-related issues; +• +whether, and the extent to which, our diagnostic tests, products, services, technology, and processes infringe on intellectual property rights of the licensor that is not subject to the licensing agreement; +• +whether our licensor or its licensor had the right to grant the license agreement; +• +whether third parties are entitled to compensation or equitable relief, such as an injunction, for our use of the intellectual property rights without their authorization; +• +our involvement in the prosecution of licensed patents and our licensors’ overall patent enforcement strategy; +• +the amounts of royalties, milestones, or other payments due under the license agreement; +• +our right to sublicense patent and other rights to third parties under collaborative development relationships; +• +our diligence obligations under the license agreement and what activities satisfy those diligence obligations; +• +the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property rights by our licensors and us and our collaborators; and +• +the priority of invention of patented technology. +If we do not prevail in such disputes, we may lose any or all of our rights under such license agreements. +In addition, the agreements under which we currently license intellectual property rights or technology from third parties are complex and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property rights or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Moreover, if disputes over intellectual property rights that we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, or are insufficient to provide us the necessary rights to use the intellectual property rights, we may be unable to successfully develop and commercialize any affected diagnostic tests, products or services, which could have a material adverse effect on our business, financial conditions, results of operations and prospects. +Absent the license agreements, we may infringe patents subject to those agreements, and if the license agreements are terminated, we may be subject to litigation by the licensor. Litigation could result in substantial costs to us and distract our management. If we do not prevail, we may be required to pay damages, including treble damages, attorneys’ fees, costs and expenses and royalties or be enjoined from selling our diagnostic tests, products or services, which could adversely affect our ability to offer diagnostic tests, products or services, our ability to continue operations and our financial condition. +Some intellectual property that we in-license may have been developed through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements and a preference for companies based in the United States. Compliance with such regulations may limit our exclusive rights, and limit our ability to contract with manufacturers that are not based in the United States. +Certain of the intellectual property that we license may have been developed through the use of United States government funding and therefore may be subject to certain federal regulations. As a result, the United States government may have certain rights to intellectual property embodied in our diagnostic tests, products and services pursuant to the Bayh-Dole Act of 1980 (Bayh-Dole Act). These United States government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the United States government has +92 +the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). To date, none of our commercialized products are subject to march-in rights. The United States government also has the right to take title to these inventions if we, or the applicable licensor, fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us or the applicable licensor to expend substantial resources. In addition, the United States government requires that any products of the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for United States manufacturers may limit our ability to contract with product manufacturers outside of the United States for products covered by such intellectual property. To the extent any of our current or future owned or licensed intellectual property is generated through the use of United States government funding, the provisions of the Bayh-Dole Act may similarly apply. Any failure by us to comply with federal regulations regarding intellectual property rights that were developed through the use of United States government funding could have a material adverse effect on our business, financial condition, results of operations, and prospects. +Patent terms may be inadequate to protect our competitive position on our diagnostic tests, products and services for an adequate amount of time. +Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest United States non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. +Even if patents covering our diagnostic tests, products and services are obtained, once the patent life has expired, we may be open to competition from competitive diagnostic tests, products and services. Given the amount of time required for the development, testing and regulatory review of potential new diagnostic tests, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing diagnostic tests, products or services similar or identical to ours. +We may not be able to protect our intellectual property rights throughout the world. +Third parties may attempt to commercialize competitive diagnostic tests, products or services in foreign countries where we do not have any patents or patent applications and/or where legal recourse may be limited. This may have a significant commercial impact on our foreign business operations. +Filing, prosecuting and defending patents on our diagnostic tests, products and services in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing diagnostic tests or products made using our inventions in and into the United States or other jurisdictions. Competitors may use our diagnostic tests, products, services and technologies in jurisdictions where we have not obtained patent protection to develop their own diagnostic tests and, further, may export otherwise infringing diagnostic tests or products to territories where we have patent protection but enforcement is not as strong as that in the United States. These diagnostic tests and products may compete with our diagnostic tests, products or services and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. +93 +Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing diagnostic tests, products and services in violation of our intellectual property rights generally. Proceedings to enforce our intellectual property rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license. +Many countries, including India, China, and certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our current or future licensors are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition and results of operations may be adversely affected. +Intellectual property rights do not necessarily address all potential threats. +The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example: +• +others may be able to make diagnostic tests or products that are similar to our Nodify XL2, Nodify CDT, GeneStrat or VeriStrat tests or the COVID-19 tests that we use in our COVID-19 testing program or utilize similar technology that is not covered by the claims of our patents or that incorporates certain technology in our Nodify XL2, Nodify CDT, GeneStrat or VeriStrat tests or such COVID-19 tests that is in the public domain; +• +we, or our current or future licensors or collaborators, might not have been the first to make the inventions covered by the applicable issued patent or pending patent application that we own or license now or may own or license in the future; +• +we, or our current or future licensors or collaborators, might not have been the first to file patent applications covering certain of our or their inventions; +• +others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights; +• +it is possible that our current or future pending patent applications will not lead to issued patents; +• +issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties; +• +our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive diagnostic tests, products and services for sale in our major commercial markets; +• +we may not develop additional proprietary technologies that are patentable; +• +the patents of others may harm our business; and +• +we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property rights. +Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. +94 +General Risk Factors +There has been no prior public market for our common stock and an active trading market may not develop. +We completed our initial public offering in October 2020. Prior to that time, there had not been a public market for our common stock. An active trading market may not develop or may not be sustained. The lack of an active trading market may impair the value of your shares and your ability to sell your shares at the time you wish to sell them. An inactive trading market may also impair our ability to both raise capital by selling shares of common stock and acquire other complementary diagnostic tests, technologies or businesses by using our shares of common stock as consideration. +If we fail to satisfy the continued listing standards of the Nasdaq Global Market, we could be de-listed, which would negatively impact the price of our common stock. +We expect that the price of our common stock will fluctuate substantially and you may not be able to sell your shares at or above the price you paid for them. +The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including: +• +volume and customer mix for our COVID-19, Nodify XL2, Nodify CDT, GeneStrat and VeriStrat testing; +• +the introduction of new diagnostic tests or enhancements to such tests by us or others in our industry; +• +disputes or other developments with respect to our or others’ intellectual property rights; +• +our ability to develop, obtain regulatory clearance or approval or certification for, and market new and enhanced diagnostic tests on a timely basis; +• +product liability claims or other litigation; +• +quarterly variations in our results of operations or those of others in our industry; +• +media exposure of our diagnostic tests or of those of others in our industry; +• +changes in governmental regulations or in the status of our regulatory approvals or applications; +• +changes in earnings estimates or recommendations by securities analysts; and +• +general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors. +In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may significantly affect the market price of our common stock, regardless of our actual operating performance, and you may not realize any return on your investment in us and may lose some or all of your investment. +In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert management’s attention and resources from our business. +Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline. +If a trading market for our common stock develops, the trading market will be influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a newly public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with us, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. +95 +We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors. +We are an “emerging growth company,” as defined in the JOBS Act. We may take advantage of certain exemptions and relief from various public reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act). We will be exempt from any rules that could be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements; we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved. +Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of our initial public offering. +We are also a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our common shares held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common shares held by nonaffiliates exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +Investors may find our common stock less attractive to the extent we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline or become more volatile. +If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. +The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. It is possible that interpretation, industry practice and guidance may evolve over time. If our assumptions change or if actual circumstances differ from our assumptions, our operating results may be adversely affected and could fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. +96 +A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well. +Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell their shares, could result in a decrease in the market price of our common stock. +We have 26,561,504 outstanding shares of common stock based on the number of shares outstanding as of December 31, 2020. This includes the 4,000,000 shares that we sold in our initial public offering in October 2020, which may be resold in the public market immediately without restriction, unless purchased by our affiliates. Of the remaining shares, 22,561,504 shares are currently restricted as a result of securities laws or Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in 180-day lock-up agreements but will be able to be sold after the offering. Moreover, holders of an aggregate of 20,090,745 shares of our common stock that were issued upon conversion of our convertible preferred stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market, subject to volume limitations applicable to affiliates lock-up agreements. +Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders. +Our officers, directors and principal stockholders each holding more than 5% of our common stock collectively control approximately 60.7% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to control the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change of control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of our other stockholders. +We expect to incur significant additional costs as a result of being a public company, which may adversely affect our business, financial condition and results of operations. +As a result of our initial public offering completed in October 2020, we expect to incur costs associated with corporate governance requirements that are applicable to us as a public company, including rules and regulations of the SEC, under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Securities Exchange Act of 1934, as amended (the Exchange Act), as well as the rules of Nasdaq. These rules and regulations are expected to significantly increase our accounting, legal and financial compliance costs and make some activities more time-consuming. We also expect these rules and regulations to make it more expensive for us to maintain directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers. Accordingly, increases in costs incurred as a result of becoming a publicly traded company may adversely affect our business, financial condition and results of operations. +If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock. +As a result of becoming a public company, we will be required, under Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ended December 31, 2021. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis. +97 +We are further enhancing internal controls, processes and related documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. The effectiveness of our controls and procedures may be limited by a variety of factors, including: +• +faulty human judgment and simple errors, omissions, or mistakes; +• +fraudulent action of an individual or collusion of two or more people; +• +inappropriate management override of procedures; and +• +the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial control. +When we cease to be an “emerging growth company” under the federal securities laws, our auditors will be required to express an opinion on the effectiveness of our internal controls. If we are unable to confirm that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline. +Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud. +We are subject to the periodic reporting requirements of the Exchange Act. We have designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected. +Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management. +Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. +Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. +98 +Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees. +Our amended and restated certificate of incorporation specifies that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders. Notwithstanding the foregoing, the exclusive forum provision will not apply to any claim to enforce any liability or duty created by the Exchange Act or the Securities Act and for which the federal courts have exclusive jurisdiction. We believe this exclusive forum provision benefits us by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in such action. +Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us. +Our amended and restated articles of incorporation provide that we will indemnify our directors and officers to the fullest extent permitted by Section 145 of the Delaware General Corporate Law. +In addition, as permitted by the Delaware General Corporate Law, our amended and restated articles of incorporation and our indemnification agreements that we have entered into with our directors and officers provide that: +• +we will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by applicable law. Such law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful; +• +we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law; +• +we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification; +• +the rights conferred in our amended and restated articles of incorporation are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and +• +we may not retroactively amend our amended and restated articles of incorporation provisions to reduce our indemnification obligations to directors, officers, employees and agents. +99 +1B. Unresolved Staff Comments. +None. +Item 2. Properties. +Our headquarters is located in Boulder, Colorado, where we office and laboratory space, under a lease that expires in January 2023. We also lease laboratory space located in De Soto, Kansas, under a lease that expires in October 2023. A portion of our employees are located outside of Colorado and Kansas, and others work from home. We believe our existing facilities meet our current needs. We will need additional office space in the future as we continue to build our development, commercial and support teams. We believe we can find suitable additional space in the future on commercially reasonable terms. +Location +Use +Square Feet +Expiration +Boulder, Colorado +Office and laboratory +29,722 +January 14, 2023 +De Soto, Kansas +Laboratory +9,066 +October 31, 2023 +Item 3. Legal Proceedings. +From time to time we may become involved in legal proceedings or investigations which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition, or cash flows. +Item 4. Mine Safety Disclosures. +None. +100 +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +Our common stock is traded on The NASDAQ Global Market under the symbol "BDSX." The high and low closing prices for our common stock on The NASDAQ Global Market for the period from October 28, 2020 (the date our common stock began trading following our initial public offering) to December 31, 2020 were $20.16 and $10.89, respectively. +Holders of our Common Stock +As of March 12, 2021, there were approximately 172 holders of our common stock. +Dividend Policy +We have never declared or paid dividends on our common stock and do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used for the operation and growth of our business. Any future determination to declare dividends will be subject to the discretion of our Board of Directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects, and any other factors deemed relevant by our Board of Directors. In addition, the terms of our credit agreement restrict our ability to pay dividends on our common stock, and we may also enter into credit agreements or other borrowing arrangements in the future that will further restrict our ability to declare or pay dividends on our common stock. +Use of Proceeds +On October 28, 2020 we completed an initial public offering of our common stock. In connection with our initial public offering, we issued and sold 4,000,000 shares of common stock at a price to the public of $18.00 per share. As a result of the initial public offering, we received approximately $63.8 million in net proceeds, after deducting underwriting discounts and commissions of $5.0 million and offering expenses of approximately $3.2 million paid by us. The offering was completed in October 2020. +We registered the shares under the Securities Act on a Registration Statement on Form S-1 (Registration No. 333-249260 ), which was filed on October 29, 2020 and declared effective on October 27, 2020. From the date of the initial closing of the initial public offering through December 31, 2020, we have used a portion of the net proceeds from the sale of these securities to fund our operations, to make capital expenditures, for working capital and for other general corporate purposes. +Recent Sales of Unregistered Securities +From January 1, 2019 through December 31, 2020, we granted stock options under our 2016 and 2006 Stock Plans to purchase 1.7 million shares of our common stock at exercise prices ranging from $0.77 to $6.83 per share, and issued an aggregate of 0.4 million shares of common stock pursuant to the exercise of stock options with aggregate proceeds of approximately $1.4 million. These issuances were undertaken in reliance upon an exemption from registration under Rule 701 of the Securities Act of 1933. +Item 6. Selected Financial Data. +None. +101 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +The following discussion of our financial condition and results of operations should be read together with our audited financial statements and related notes and other financial information included elsewhere in this Annual Report on Form 10-K and our audited financial statements and notes thereto and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our final prospectus dated October 29, 2020 that forms a part of our Registration Statement on Form S-1 (File No. 333-249260), as filed with the Securities and Exchange Commission (SEC) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”), on October 29, 2020 (Prospectus). +In addition to historical financial information, this discussion and other parts of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part II, Item 1A below. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ from those anticipated. +These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. +The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), is provided to supplement the financial statements and the related notes in Part II - Item 8 of this Annual Report on Form10-K. We intend for this discussion to provide you with information that will assist you in understanding our financial statements, the changes in key items in those financial statements from year to year and the primary factors that accounted for those changes. Data for the years ended December 31, 2020 and 2019 has been derived from our audited financial statements included in this Annual Report on Form 10-K. +Overview +We are a leading data-driven diagnostic solutions company leveraging state of the art technologies with our proprietary AI platform to discover, develop, and commercialize solutions for clinical unmet needs, with a primary focus in lung disease. By combining a technology agnostic approach with a holistic view of the patient’s disease state, we believe our solutions provide physicians with greater insights to help personalize their patient’s care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe helps improve overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic Cortex, to discover innovative diagnostic tests for clinical use. The Diagnostic Cortex is an extensively validated deep learning platform optimized for the discovery of diagnostic tests, which we believe overcomes standard machine learning challenges faced in life sciences research. Our data-driven and technology agnostic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +102 +We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage with our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape to identify additional clinical unmet needs where a diagnostic test could help improve patient care. Additionally, we incorporate clinical and molecular profiling data from our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or academic partnerships, to continue to advance our platform. We have over 140,000 samples and data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development initiatives. +We have commercialized six diagnostic tests which are currently available for use by physicians. Our Nodify XL2 and Nodify CDT tests, marketed as part of our Nodify Lung Nodule Risk Assessment testing strategy, assess the risk of lung cancer to help identify the most appropriate treatment pathway. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our GeneStrat and VeriStrat tests, marketed as part of our Biodesix Lung Reflex testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to establish the patient’s prognosis and help guide treatment decisions. The GeneStrat tumor profiling test and the VeriStrat immune profiling test have a three-day average turnaround time, providing physicians with timely results to facilitate treatment decisions. In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe testing program. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two FDA EUA authorized tests, a part of our customizable program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. HHS Secretary Azar declared a public health emergency for COVID-19 in February 2020 which justified the authorization of emergency use of diagnostic tests for the detection and/or diagnosis of COVID-19. The Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. The Bio-Rad SARS-CoV- 2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under Clinical Laboratory Improvement Amendments (CLIA) to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. Using the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test, we operate and have commercialized the Biodesix WorkSafe testing program. +Prior to using the Bio-Rad tests as part of our testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Post-launch development support for these tests have included improvements in on-boarding new personnel, logistics of sample collection, sample receipt and data reporting, all required to support our testing program. Additional releases of the laboratory data management software are ongoing and planned for the foreseeable future. +These tests are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems to assist in their back-to-work or back-to-school strategies. Recently we announced multiple partnerships for COVID-19 testing, and have entered into an agreement with the State of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State. Additionally, we recently announced that we will oversee and manage onsite testing and validating testing for the Big Ten Conference athletic competitions. +103 +In addition to the six diagnostic tests currently on the market, we perform over 30 assays for research use as part of our laboratory services that have been used by over 50 biopharmaceutical customers and academic partners. All of our diagnostic testing is performed at one of our two certified, high - complexity clinical laboratories in Boulder, Colorado and De Soto, Kansas. +Since our inception, we have performed over 285,000 tests and continue to generate a large and growing body of clinical evidence consisting of over 275 clinical and scientific peer-reviewed publications and presentations. Through ongoing study of each of our tests, we continue to grow our depth of understanding of disease biology and the broad utility of each of our tests. We believe we are poised for rapid growth by leveraging our scientific development and laboratory operations expertise along with our commercial infrastructure which includes sales, marketing, reimbursement, and regulatory affairs. +In the United States, we market our tests to clinical customers through our targeted sales organization, which includes sales representatives that are engaged in sales efforts and promotional activities primarily to pulmonologists, oncologists, cancer centers and nodule clinics. We market our tests and services to biopharmaceutical customers globally through our targeted business development team, which promotes the broad utility of our tests and testing capabilities throughout drug development and commercialization which is of value to pharmaceutical companies and their drug-development process. +We have funded our operations to date principally from net proceeds from an initial public offering of our common stock, the sale of convertible preferred stock, revenue from diagnostic testing and services, and the incurrence of indebtedness. We had cash and cash equivalents of $62.1 million and $5.3 million as of December 31, 2020 and 2019, respectively. +Factors Affecting Our Performance +We believe there are several important factors that have impacted our operating performance and results of operations, including: +• +Testing volume and customer mix. Our revenues and costs are affected by the volume of testing and mix of customers from period to period. We evaluate both the volume of our commercial tests, or the number of tests that we perform for patients on behalf of clinicians, as well as tests for biopharmaceutical companies. Our performance depends on our ability to retain and broaden adoption with existing customers, as well as attract new customers. We believe that the test volume we receive from clinicians and biopharmaceutical companies are indicators of growth in each of these customer verticals. Customer mix for our tests has the potential to significantly impact our results of operations, as the average selling price for biopharmaceutical sample testing is currently significantly greater than our average selling price for clinical tests since we are not a contracted provider for, or our tests are not covered by all clinical patients’ insurance. We evaluate our average selling price for tests that are covered by Medicare, Medicare Advantage and commercial payers to understand the trends in reimbursement and apply those trends to our revenue recognition policies. O ur operating revenues and costs significantly increased during 2020 due to the expected increase in demand for COVID-19 testing. +• +Reimbursement for clinical diagnostic testing. Our revenue depends on achieving broad coverage and reimbursement for our tests from third-party payers, including both commercial and government payers. Payment from third-party payers differs depending on whether we have entered into a contract with the payers as a “participating provider” or do not have a contract and are considered a “non-participating provider.” Payers will often reimburse non-participating providers, if at all, at a lower rate than participating providers. +Historically, we have experienced situations where commercial payers proactively reduced the amounts they were willing to reimburse for our tests, and in other situations, commercial payers have determined that the amounts they previously paid were too high and have sought to recover those perceived excess payments by deducting such amounts from payments otherwise being made. When we contract to serve as a participating provider, reimbursements are made pursuant to a negotiated fee schedule and are limited to only covered indications. Becoming a participating provider generally results in higher reimbursement for covered indications and lack of reimbursement for non-covered indications. As a result, the impact of becoming a participating provider with a specific payer will vary. If we are not able to obtain or maintain coverage and adequate reimbursement from third-party payers, we may not be able to effectively increase our testing volume and revenue as expected. Additionally, retrospective reimbursement adjustments can negatively impact our revenue and cause our financial results to fluctuate. +104 +• +Investment in clinical studies and product innovation to support growth. A significant aspect of our business is our investment in research and development, including the development of new products and our investments in clinical utility studies. We have invested heavily in clinical studies for our on market and pipeline products. Our studies focus primarily on the clinical utility of our tests including the ongoing INSIGHT study which seeks to enroll up to 5,000 patients to continue our clinical understanding of the predictive and prognostic value of the VeriStrat test. Our recently launched ALTITUDE study seeks to further demonstrate the efficacy of the Nodify XL2 and Nodify CDT test. A secondary focus of our studies is understanding the economic impact of our tests in guiding treatment choices and the potential impact of our tests in reducing overall healthcare costs. +Our clinical research has resulted in over 80 peer-reviewed publications for our tests. In addition to clinical studies, we are collaborating with investigators from multiple academic cancer centers. We believe these studies are critical to gaining physician adoption and driving favorable coverage decisions by payers and expect our investments in research and development to increase. Further we also expect to increase our research and development expenses to fund further innovation and develop new clinically relevant tests. +• +Ability to attract new biopharmaceutical customers and maintain and expand relationships with existing customers . Our business development team promotes the broad utility of our products for biopharmaceutical companies in the United States and internationally. Our revenue, business opportunities and growth depend in part on our ability to attract new biopharmaceutical customers and to maintain and expand relationships with existing biopharmaceutical customers. We expect to increase our sales and marketing expenses in furtherance of this as we continue to develop these relationships, we expect to support a growing number of investigations and clinical trials. If our relationships expand, we believe we may have opportunities to offer our platform for companion diagnostic development, novel target discovery and validation efforts, and to grow into other commercial opportunities. For example, we believe our multi-omic data including genomic and proteomic data, in combination with clinical outcomes or claims data, has revenue-generating potential, including for novel target identification and companion diagnostic discovery and development. +• +Motivating and expanding our field sales force and customer support team . Our field sales force is the primary point of contact in the clinical setting. These representatives of the company must cover expansive geographic regions which limits their time for interaction and education of our products in the clinical setting. As a result of the successful capital raise associated with our initial public offering, we plan to invest heavily in the field sales force to increase the total number of sales representatives and thereby reduce the geographic footprint each representative must cover. This investment will allow the larger sales force to maximize their education and selling efforts and achieve greater returns. Additionally, we plan to invest in the Boulder-based marketing and customer support teams to continue to provide the field team with the resources to be successful in the field. Furthermore, as we increase testing volume for our COVID-19 testing program, we plan to hire additional project support members to assist us in managing testing capacity. +While each of these areas present significant opportunities for us, they also pose significant risks and challenges that we must address. See Part II, Item 1A. “Risk Factors” for more information. +COVID-19 Pandemic +The COVID-19 pandemic has disrupted, and we expect will continue to disrupt, our lung diagnostic testing operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States of Colorado and Kansas’ public health orders and the guidance from the Centers for Disease Control and Prevention. Employees who can perform their duties remotely are asked to work from home and those on site are asked to follow our social distance guidelines. Our sales, marketing and business development efforts have also been constrained by our operational response to the COVID-19 pandemic due to travel restrictions. We expect to continue to adjust our operational norms to help slow the spread of COVID-19 in the coming months, including complying with government directives and guidelines as they are modified and supplemented. +105 +The COVID-19 pandemic negatively affect ed , and we expect will continue to negatively affect, our lung diagnostic testing-related revenue and our clinical studies. For example, cancer patients may have more limited access to hospitals, healthcare providers and medical resources as they take steps to control the spread of COVID- 19. Our b iopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized. As a result of the COVID-19 pandemic, beginning in the latter half of March 2020, we have received fewer samples for non-COVID-19 testing on a daily average basis from our clinical and biopharmaceutical customers than before the outbreak of the COVID-19 pandemic. Further, our clinical studies, such as our ongoing INSIGHT study and our recently launched ALTITUDE study, as well as our arrangements with our b iopharmaceutical customers, are expected to take longer to complete than what we expected before the outbreak of the COVID-19 pandemic. +Conversely, we are also experiencing a substantial increase in revenues related to an increase in the demand for our Biodesix WorkSafe testing program, our COVID-19 testing program. We expect that our costs to expand capacity for COVID-19 testing will increase for the first quarter of 2021 and we expect that the revenue that we generate from this expansion will comprise a significant portion of our revenue for these periods. However, there is no assurance that our COVID-19 testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. If the pandemic were to dissipate, whether due to a significant decrease in new infections, due to acquiring herd immunity based on previous natural infection, and the availability and rapid distribution of vaccines, the evolution of variant strains that impact diagnostic test performance, or otherwise, the need for a COVID-19 test could decrease significantly and this could have an adverse effect on our results of operations and profitability. As a result, the increase in revenue due to any increase in demand for these diagnostic tests may not be indicative of our future revenue. See Part II., Item 1A. “Risk Factors” for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations. +2020 Financial and Operational Highlights +Our fiscal year corresponds to a calendar year. The Company generated record revenue in fiscal 2020 of $45.6 million, representing an increase of 86%, of which $27.0 million was associated with the three-month period ended December 31, 2020. +The following were significant developments affecting our business, capital structure and liquidity during the year ended December 31, 2020: +• +In October 2020 we completed our initial public offering, in which we sold 4.0 million shares of common stock for an offering price of $18.00 per common share. The successful offering enabled the Company to raise approximately $63.8 million in net proceeds, after deducting offering costs, underwriting discounts and commissions, providing significant cash resources to fund the Company’s growth strategy and working capital and general corporate purposes; +• +As of December 31, 2020, we held cash and cash equivalents of $62.1 million, an increase of $56.8 million as compared to December 31, 2019. Our December 31, 2020 cash and cash equivalent balance includes a reduction for a prepayment of approximately $7 million for three years of premiums for the Company’s directors and officer (D&O) liability insurance coverage; +• +Initiated biomarker study to affirm Nodify XL2® test’s importance in clinical decision making (ALTITUDE). The first-in-class biomarker study is aligned with the recommendations from the official 2018 American Thoracic Society (ATS) policy statement of the early detection of lung cancer. Dr. Gerard A. Silvestri of Medical University of South Carolina named Principal Investigator; +• +Announced results of study showing the Company’s proprietary blood collection device (BCD) collects, separates, and transports blood at ambient temperature to simplify specimen collection and transport while maintaining accuracy of diagnostic test results; +• +Partnered with major public and private institutions, including the BIG 10 athletic conference, Purdue University, Colorado State University and the State of Colorado to support COVID-19 testing. +106 +Components of Operating Results +Revenues +We derive our revenue from two primary sources: (i) providing diagnostic testing in the clinical setting (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, clinical trial testing, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics (Services). +Diagnostic Tests +Diagnostic test revenue is generated from delivery of results from our diagnostic tests. In the United States, we performed tests as both an in- network and out-of-network service provider depending on the test performed and the contracted status of the insurer. We provide diagnostic tests in two primary categories (i) lung diagnostics testing and (ii) COVID-19 testing. +We consider diagnostic testing to be completed upon the delivery of test results to our customer, either the prescribing physician or third-party to which we contracted for services to be performed, which is considered the performance obligation. The fees for such services are billed either to a third party such as Medicare, medical facilities, commercial insurance payers, or to the patient. We determine the transaction price related to our contracts by considering the nature of the payer, the historical amount of time until payment by a payer and historical price concessions granted to groups of customers. +Services +Services revenue is generated from the delivery of our on-market tests, pipeline tests, custom diagnostic testing, and other scientific services for a purpose as defined by any individual customer. At times we collaborate with large biopharmaceutical companies in an attempt to discover biomarkers that would be helpful in their drug development or marketing. The performance obligations and related revenue for these sales is defined by a written agreement between us and our customer. These services are generally completed upon the delivery of testing results, or other contractually defined milestone(s), to the customer, which is considered the performance obligation. Customers for these services are typically large pharmaceutical companies where collectability is reasonably assured and therefore revenue is accrued upon completion of the performance obligations. Revenue derived from services is often unpredictable and can cause dramatic swings in our overall net revenue line from quarter to quarter. +Operating Expenses +Direct costs and expenses +Cost of diagnostic testing generally consists of cost of materials, direct labor, including bonus, employee benefits, equipment and infrastructure expenses associated with acquiring and processing test samples, including sample accessioning, test performance, quality control analyses, charges to collect and transport samples; curation of test results for physicians; and in some cases, license or royalty fees due to third parties. Costs associated with performing our tests are recorded as the tests are processed regardless of whether revenue was recognized with respect to the tests. Infrastructure expenses include depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs. Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents. While we do not believe the technologies underlying these licenses are necessary to permit us to provide our tests, we do believe these technologies are potentially valuable and of possible strategic importance to us or our competitors. Under these license agreements, we are obligated to pay aggregate royalties ranging from 1% to 8% of sales in which the patents or know-how are used in the product or service sold, sometimes subject to minimum annual royalties or fees in certain agreements. +We expect the aggregate cost of diagnostic testing to increase in line with the increase in the number of tests we perform, but the cost per test to decrease modestly over time due to the efficiencies we may gain as test volume increases, and from automation and other cost reductions. +107 +Cost of services includes costs incurred for the performance o f development services requested by our customers. Cost s of d evelopment services will vary depending on the nature, timing and scope of customer projects. +Research and development +Research and development expenses consist of costs incurred to develop technology and include salaries and benefits, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services, clinical studies, other outside costs and costs to develop our technology capabilities. Research and development expenses account for a significant portion of our operating expenses and consist primarily of external and internal costs incurred in connection with the discovery and development of our product candidates. +External expenses include: (i) payments to third parties in connection with the clinical development of our product candidates, including contract research organizations and consultants; (ii) the cost of manufacturing products for use in our preclinical studies and clinical trials, including payments to contract manufacturing organizations (CMOs) and consultants; (iii) scientific development services, consulting research fees and for sponsored research arrangements with third parties; (iv) laboratory supplies; and (v) allocated facilities, depreciation and other expenses, which include direct or allocated expenses for IT, rent and maintenance of facilities. External expenses are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers or our estimate of the level of service that has been performed at each reporting date. We track external costs by the stage of program, clinical or preclinical. +Internal expenses include employee-related costs, including salaries and related benefits for employees engaged in research and development functions. We do not track internal costs by product candidate because these costs are deployed across multiple programs and, as such, are not separately classified. +Research and development costs are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or services are rendered. Costs to develop our technology capabilities are recorded as research and development. +We expect our research and development expenses to increase as we continue to innovate and develop additional products and expand our data management resources. As our services revenue grows, an increasing portion of research and development dollars are expected to be allocated to cost of goods for biopharma service contracts. This expense, though expected to increase in dollars, is expected to decrease as a percentage of revenue in the long term, though it may fluctuate as a percentage of our revenues from period to period due to the timing and extent of these expenses. +Sales, marketing, general and administrative +Our sales and marketing expenses are expensed as incurred and include costs associated with our sales organization, including our direct sales force and sales management, client services, marketing and reimbursement, as well as business development personnel who are focused on our biopharmaceutical customers. These expenses consist primarily of salaries, commissions, bonuses, employee benefits, and travel, as well as marketing and educational activities and allocated overhead expenses. We expect our sales and marketing expenses to increase in dollars as we expand our sales force, increase our presence within the United States, and increase our marketing activities to drive further awareness and adoption of our tests and our future products. These expenses, though expected to increase in dollars, are expected to decrease as a percentage of revenue in the long term, though they may fluctuate as a percentage of our revenues from period to period due to the timing and extent of these expenses. +Our general and administrative expenses include costs for our executive, accounting, finance, legal and human resources functions. These expenses consist principally of salaries, bonuses, employee benefits, and travel, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. We expect that our general and administrative expenses will continue to increase in dollars, primarily due to increased headcount and costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, maintaining compliance with exchange listing and requirements of the SEC, director and officer insurance premiums and investor relations. These expenses, though expected to increase in dollars, are expected to decrease as a percentage of revenue in the long term, though they may fluctuate as a percentage from period to period due to the timing and extent of these expenses. +108 +Change in Fair Value of Contingent Consideration +In connection with the purchase transaction of Integrated Diagnostics, Inc. (Indi), we recorded contingent consideration pertaining to the amounts potentially payable to Indi shareholder pursuant to the terms of the asset purchase agreement. The fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value are recognized as operating expenses within the statement of operations. The estimated fair value of the contingent consideration is based upon significant assumptions including probability of successful achievement of a product gross margin target, the estimated timing in which the gross margin target is achieved, and discount rates. The estimated fair value could materially differ from actual values or fair values determined using different assumptions. +Interest Expense and Interest Income +Interest expense consists of cash and non-cash interest from our term loan, payroll protection program loan, and convertible debt. Our convertible debt, along with the related accrued interest, was automatically converted to 1,848,280 shares of our common stock upon completion of our initial public offering in October 2020. Principal payments for our term loan are scheduled to begin in March 2021. Interest income consists of income earned on our cash and cash equivalents. Our interest income has increased primarily as a result of investment of the net proceeds from our recent offering. +Results of Operations +The following table sets forth the significant components of our results of operations for the periods presented (in thousands, except percentages): +Year Ended December, +Change +2020 +2019 +$ +% +Revenues +$ +45,557 +$ +24,552 +$ +21,005 +86 +% +Operating expenses +Direct costs and expenses +21,998 +6,074 +15,924 +262 +Research and development +10,818 +10,468 +350 +3 +Sales, marketing, general and administrative +34,857 +30,637 +4,220 +14 +Change in fair value of contingent consideration +818 +4,114 +(3,296 +) +(80 +) +Total operating expenses +68,491 +51,293 +17,198 +34 +% +Loss from operations +(22,934 +) +(26,741 +) +3,807 +14 +% +Other income (expense) +Interest income +18 +55 +(37 +) +(67 +%) +Interest expense +(7,604 +) +(3,008 +) +(4,596 +) +153 +Change in fair value of warrant liability +(1,252 +) +(104 +) +(1,148 +) +1,104 +Change in fair value of put option liability +— +(2,000 +) +2,000 +(100 +) +Other income, net +422 +1,072 +(650 +) +(61 +) +Total other expense +(8,416 +) +(3,985 +) +(4,431 +) +111 +% +Net loss +$ +(31,350 +) +$ +(30,726 +) +$ +(624 +) +(2 +%) +Revenues +We generate revenue from our diagnostic tests and services that we provide. Our revenues for the periods indicated were as follows (in thousands, except percentages): +Year Ended December, +Change +2020 +2019 +$ +% +Diagnostic revenue +$ +40,919 +$ +17,315 +$ +23,604 +136 +% +Services revenue +4,638 +7,237 +(2,599 +) +(36 +)% +Total revenue +$ +45,557 +$ +24,552 +$ +21,005 +86 +% +109 +Total revenue was $45.6 million for the year ended December 31, 2020 as compared to $24.6 million for the year ended December 31, 2019, an increase of $21.0 million, or 86%. +Diagnostic test revenue increased to $40.9 million for the year ended December 31, 2020, as compared to $17.3 million for year ended December 31, 2019, an increase of $23.6 million or 136%. This increase was primarily attributable to the deployment of COVID-19 testing which generated $28.3 million of revenue and was partially offset by a decline in our lung diagnostic test volumes, which declined by $4.7 million or 27% as health care practitioners, including pulmonologists, were increasingly diverted to pandemic-related care. In addition, the Company sales efforts continued to be impacted by the reduction in travel and other COVID-19 pandemic related restrictions. +Services revenue decreased to $4.6 million for the year ended December 31, 2020 compared to $7.2 million for the prior year ended December 31, 2019, a decrease of $2.6 million or 36%, due primarily to a reduction in business development activities which was negatively impacted by the COVID-19 pandemic similar to the reduction we experienced in our lung diagnostic testing revenue. +Direct Costs and Expenses +Direct costs and expenses related to revenue were $22.0 million for the year ended December 31, 2020 compared to $6.1 million for the prior year ended December 31, 2019, an increase of $16.0 million or 262%. The increase in direct costs and expenses were primarily driven by costs associated with the delivery of our COVID-19 tests as well as the release of our Nodify CDT test, offset in part by decreases costs related to our remaining lung diagnostic test costs. +Research and Development +Research and development expenses were relatively consistent year over year with $10.8 million for the year ended December 31, 2020 as compared to $10.5 million for the prior year ended December 31, 2019, an increase of $0.3 million, or 3%. The overall increase in cost was attributable to an increase in internal costs primarily associated with variable compensation tied to fiscal 2020 performance measures slightly offset by a decrease in external costs. +The following table summarizes our external and internal costs for the years ended December 31, 2020 and 2019 (in thousands, except percentages): +Year Ended December, +Change +2020 +2019 +$ +% +External expenses: +Clinical trials and associated costs +$ +2,487 +$ +2,141 +$ +346 +16 +% +Other external costs +2,823 +3,784 +(961 +) +(25 +)% +Total external costs +5,310 +5,925 +(615 +) +(10 +)% +Internal expenses +5,508 +4,543 +965 +21 +% +Total research and development expenses +$ +10,818 +$ +10,468 +$ +350 +3 +% +Sales, Marketing, General and Administrative +Sales, marketing, general and administrative expenses were $34.9 million for the year ended December 31, 2020 compared to $30.6 million for the prior year ended December 31, 2019, an increase of $4.2 million, or 14%, as a result of variable compensation tied to fiscal 2020 performance measures, including the Company’s bonus to equity program for senior executives offset by reductions in employee related costs associated with COVID-19 pandemic restrictions. +Change in Fair Value of Contingent Consideration +Change in fair value of contingent consideration was $0.8 million for the year ended December 31, 2020 compared to $4.1 million for the year ended December 31, 2019, a net decrease of $3.3 million or 80%. The amounts recorded for change in fair value reflect the passage of time, as well as estimates regarding the period in which targets that trigger the payment of contingent consideration will be achieved and subsequently paid. +110 +Interest Expense +Interest expense was $7.6 million for the year ended December 31, 2020 compared to $3.0 million for the year ended December 31, 2019, an increase of $4.6 million, or 153%. This increase was due to the addition of interest expense related to convertible notes issued to certain shareholders from August 2019 through March 2020, including the non-cash interest expense of $4.4 million associated with the full amortization of debt discount resulting from the conversion discounts included in the convertible note terms, interest on our existing term loan, and interest on our payroll protection plan loan. Cash and non-cash interest expense for the twelve-month period ended December 31, 2020 was $1.8 million and $5.8 million, respectively. +Change in Fair Value of Warrant Liability +During the twelve-month period ended December 31, 2020, we recognized a charge for the change in estimated fair value of our warrant liability related to warrants issued in connection with our Series G preferred stock of $1.3 million, compared to a charge of $0.1 million during fiscal year 2019, a change of $1.2 million. Effective with the closing of our initial public offering in October 2020, the warrants to purchase Series G preferred stock were automatically converted to warrants to acquire common stock and the carrying value of the warrants of $1.6 million were reclassified to additional paid-in capital. +Change in Fair Value of Put Option Liability +During 2019, we issued $13.0 million in convertible debt with terms that provided conversion rate discounts to the note holders in certain situations, including upon the completion of an initial public offering. The conversion discounts created a put option liability that was accounted for separately from the convertible debt instrument and reflected as a liability in our balance sheet. Subsequent to the initial measurement of the put option liability, changes in the estimated fair value will be reflected as other income or expense in the statement of operations. During 2019, we recorded a $2 million increase in the fair value of the put option liability as other expense due to the increase in the conversion discount rate provided to note holders resulting from an amendment to terms of the convertible debt issued in August and September 2019. There were no changes to the fair value of the put option liability that was recorded during 2020. +Other Income and Expense, net +Other income, net, during fiscal 2020 and fiscal 2019 was income of $0.4 million and $1.1 million, respectively, a decrease of $0.7 million or 61%. The decrease was due primarily to proceeds from a non-recurring legal settlement received in fiscal 2019. +Liquidity and Capital Resources +We are an emerging growth company and, as such, have yet to generate positive cash flow from operations. We have funded our operating activities primarily through financing activities, such as debt and equity offerings. In October 2020, we completed an initial public offering, resulting in net proceeds of approximately $63.8 million after deducting offering costs, underwriting discounts and commissions. As of December 31, 2020 we held cash and cash equivalents of $62.1 million. We believe that our existing cash, cash equivalents, and cash generated from sales of our products and services will be sufficient to meet our anticipated needs for at least the next 12 months from the date of our most recent audited financial statements, including amounts due under our PPP loan. The Company currently intends to repay the PPP loan in accordance with the underlying terms and conditions. +We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term while we make investments to support our anticipated growth. We may raise additional capital through the issuance of additional equity financing, debt financings or other sources. If this financing is not available to us at adequate levels, we may need to reevaluate our operating plans. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. +111 +Cash Flows +The following summarizes our cash flows for the periods indicated (in thousands): +Year Ended December 31, +2020 +2019 +Net cash flows (used in) provided by: +Operating activities +$ +(21,366 +) +$ +(21,726 +) +Investing activities +(2,927 +) +(1,872 +) +Financing activities +81,131 +22,972 +Net increase in cash and cash equivalents and restricted cash +$ +56,838 +$ +(626 +) +2020 compared to 2019 +Our cash flows resulted in a net increase in cash of $56.8 million during the year ended December 31, 2020. The net cash used in operating activities decreased by approximately $0.4 million, primarily due to a year-over-year increase in non-cash charges of: (i) $4.1 million associated with the increased amortization of convertible notes debt discount resulting from our initial public offering; (ii) $3.5 million associated with the increased share-based compensation expense from achieving performance thresholds for our 2020 bonus to equity program; (iii) $1.1 million associated with an increase in the expense recorded as a change in estimated fair value of warrant liability partially offset by; (iv) a $3.3 million reduction in the year-over-year change in the estimated fair value of contingent consideration; and (v) a $3.2 million net reduction in operating assets and liabilities +Net cash used in investing activities during the year ended December 31, 2020 totaled $2.9 million, an increase of $1.1 million compared to the same period in 2019. The increase in net cash used in investing activities was primarily due to an increase of $0.8 million in the purchases of research equipment and patent costs, and payments made for Oncimmune assets acquired of $0.3 million. +Net cash provided by financing activities during the year ended December 31, 2020 totaled $81.1 million, an increase of $58.2 million compared to the same period in 2019. The net cash provided by financing activities for the year ended December 31, 2020 primarily resulted from $72.0 million gross proceeds from our initial public offering, $13.0 million in proceeds from the issuance of convertible notes payable, $1.3 million proceeds from stock option exercises, and $3.1 from proceeds from our paycheck protection program note payable, offset in part by equity issuance costs associated with our initial public offering of $8.2 million. The net cash provided by financing activities for the year ended December 31, 2019 primarily resulted from $10.0 million in proceeds from the issuance of our Series H Preferred Stock and $13.0 million in proceeds from the issuance of convertible notes payable. +Contractual Obligations and Commitments +The following table summarizes our non-cancelable contractual obligations and commitments as of December 31, 2020 (in thousands): +Payments due by period (1) +Total +Less than +1 year +1 to 3 +years +4 to 5 +years +More than +5 years +Operating lease obligations (2) +$ +1,539 +$ +703 +$ +836 +$ +— +$ +— +Borrowings and interest (3) +31,517 +13,921 +17,596 +— +— +$ +33,056 +$ +14,624 +$ +18,432 +$ +— +$ +— +(1) +Royalty payments that we may owe are not included as the timing of such payments is uncertain. +(2) +We are obligated under non-cancellable operating leases for all of our facilities. Lease terms for our facilities range from less than one to three years and generally require us to pay real estate taxes, certain insurance and operating costs. +(3) +Includes a 2% back-end term loan facility fee of $0.5 million due at maturity. The term loan is also subject to a 3% prepayment penalty which is not included above. In addition, includes principal and accrued interest payable under the Company’s payroll protection plan loan. +112 +In connection with the purchase transaction of Integrated Diagnostics, Inc., we recorded contingent consideration pertaining to the amounts potentially payable to Integrated Diagnostics’ shareholder pursuant to the terms of the asset purchase agreement. The estimated fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value are recognized as operating expenses within the statement of operations. The estimated fair value of the contingent consideration is based upon significant assumptions including probability of successful achievement of the Milestone, the estimated timing in which the Milestone is achieved, and discount rates. The estimated fair value could materially differ from actual values or fair values determined using different assumptions. At December 31, 2020, the amount that would be due in cash at the option of the seller at the time the Milestone is met would be approximately $37 million. +Off-Balance Sheet Arrangements +None. +Critical Accounting Policies and Significant Judgments and Estimates +In accordance with accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Certain of these estimates significantly influence the portrayal of our financial condition and results of operations and require us to make difficult, subjective or complex judgments. Our critical accounting policies primarily relate to our fair value estimates, and are described in greater detail in Note 1 to our financial statements in Part 8 of this Annual Report on Form 10-K. +Revenue Recognition +We recognize revenue when our customers obtain control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for our goods or services. To determine revenue recognition for our arrangements with our customers, we perform a five-step process, which includes: (i) identifying the contract(s) with a customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations in the contract; and (v) recognizing revenue when (or as) we satisfy our performance obligations. +Diagnostic service revenues are recognized upon completion of our performance obligation to the deliver test results to our customer, either the prescribing physician or third-party to which we contracted for services to be performed. Testing services revenues are recognized upon completion of our performance obligation to deliver testing results for assay development and testing services. +Change in Fair Value of Contingent Consideration +In connection with the purchase transaction with Integrated Diagnostics, Inc. (Indi), we recorded contingent consideration pertaining to the amounts potentially payable to Indi’s shareholder pursuant to the terms of the asset purchase agreement. The fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value are recognized as operating expenses within the statements of operations. +The estimated fair value of the contingent consideration is based upon significant assumptions including probabilities of successful achievement of product gross margin targets, the estimated timing in which achievement of the product gross margin target is expected, and discount rates. The estimated fair value could materially differ from actual values or fair values determined using different assumptions. +Share-based Compensation and Grant Date Fair Value +Share-based compensation related to stock options granted to our employees, directors and non-employees is measured at the grant date based on the fair value of the award. For our service-based awards, the fair value of each award is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. Compensation expense for share-based awards with performance conditions is recognized based upon the probability the performance conditions will be met as defined in the grant. Restricted stock unit option awards are measured at their grant date fair value using the closing price of our common stock on the date of grant and recognized to expense on a straight-line basis over the vesting period of each award. We estimate forfeitures and adjust these estimates to actual forfeitures as they occur. +113 +We use the Black-Scholes option-pricing model to estimate the fair value of our share-based option awards , which requires assumptions to be made related to expected term of an award, expected volatility, the risk-free rate and expected dividend yield. Following the completion of our initial public offering , our Board of Directors has determined the fair value of our common stock is based on our closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded . +Prior to our initial public offering in October 2020, the fair value of our common stock was determined by our Board of Directors in accordance with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation Practice Aid (Practice Aid). In doing so, our Board of Directors determined the best estimate of fair value of our common stock, exercising reasonable judgment and considering numerous objective and subjective factors, by first determining the enterprise value of our business, and then allocating the value among the various classes of our equity securities to derive a per share value of our common stock. +Recently Issued Accounting Pronouncements +In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-2, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and corresponding lease liability on the balance sheet for substantially all leases. The ASU is effective for us for beginning January 1, 2022. We expect to recognize right-of-use assets and lease obligations in our balance sheets upon adoption using the modified retrospective method as permitted by ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. We do not currently expect adoption of this standard will have a significant effect on our results of operations or cash flows. +In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments . This ASU requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for us beginning January 1, 2022 with early adoption permitted. We have not yet begun evaluating the potential effect of this standard on our financial statements. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) until December 31, 2025 (the year ended December 31st following the fifth anniversary of our initial public offering. +Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which: (i) the market value of our common shares held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common shares held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. +114 +Item 7A. Quantitative and Qualitative Disclosures About Market Risk. +We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. +Interest Rate Risk +We are exposed to market risk for changes in interest rates related primarily to our cash and cash equivalents, marketable securities and our indebtedness. We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. We continually monitor our positions with, and the credit quality of, the financial institutions with which we invest. +Periodically throughout the year, we have maintained balances in various operating accounts in excess of federally insured limits. Included in cash and cash equivalents are funds held in a bank savings account of $58.8 million and $4.7 million at December 31, 2020 and 2019, respectively. As of December 31, 2020, a hypothetical 100 basis point increase in interest rates would not have a material impact on our investment portfolio, financial position or results of operations. +Item 8. Financial Statements and Supplementary Data. +The financial statements and supplementary data are as set forth in the index to the financial statements on page F-1. +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. +None. +Item 9A. Controls and Procedures. +Evaluation of Disclosure Controls and Procedures +We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. +Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. +This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. +Item 9B. Other Information. +None. +115 +PART III +Item 10. Directors, Executive Officers and Corporate Governance. +The information required by this item with respect to directors is incorporated by reference from the information under the caption "Election of Directors" contained in our Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2020 Annual Meeting of Stockholders to be held on May 26, 2021. Certain information required by this item concerning executive officers is set forth in Part I of this Report under the caption "Executive Officers of the Registrant" and is incorporated herein by reference. +Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16(a) of the Exchange Act. This disclosure is contained in the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated herein by reference. +We have adopted a Code of Business Conduct and Ethics that applies to all of our officers and employees, including our President and Chief Executive Officer, our Chief Financial Officer and other employees who perform financial or accounting functions. The Code of Business Conduct and Ethics sets forth the basic principles that guide the business conduct of our employees. Stockholders may request a free copy of our Code of Business Conduct and Ethics by contacting Biodesix, Inc., Attention: Chief Financial Officer, 2970 Wilderness Place, Suite 100, Boulder, Colorado 80301. +To date, there have been no waivers under our Code of Business Conduct and Ethics. We intend to disclose future amendments to certain provisions of our Code of Business Conduct and Ethics or waivers of such Codes granted to executive officers and directors on our website at http://www.biodesix.com within four business days following the date of such amendment or waiver. +Our Board of Directors has appointed an Audit Committee, comprised of Ms. Jean Franchi, as Chairwoman, Mr. Hany Massarany and Dr. Matthew Strobeck. The Board of Directors has determined that Ms. Franchi qualifies as an Audit Committee Financial Expert under the definition outlined by the Securities and Exchange Commission. In addition, each of the members of the Audit Committee qualifies as an "independent director" under the current rules of The NASDAQ Stock Market and Securities and Exchange Commission rules and regulations. +Item 11. Executive Compensation. +The information required by this item is incorporated by reference from the information under the captions "Election of Directors—Director Compensation" and "Executive Compensation" contained in the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +The information required by this item is incorporated by reference from the information under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Executive Compensation—Equity Compensation Plan Information" contained in the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this item is incorporated by reference from the information under the caption "Election of Directors—Certain Relationships and Related Transactions" and "—Director Independence" contained in the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders and is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services. +The information required by this item is incorporated by reference from the information under the caption "Ratification of the Appointment of Independent Registered Public Accounting Firm—Principal Accountant Fees and Services" contained in the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders and is incorporated herein by reference. +116 +PART IV +Item 15. Exhibits, Financial Statement Schedules. +(a) +Documents filed as a part of the report. +1. +Financial Statements +Reference is made to the Index to Financial Statements of Biodesix, Inc. included in Item 8 of Part II hereof +2. +Financial Statement Schedules +All schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto. +3 . +See Item 15(b) below. Each management contract or compensating plan or arrangement required to be filed has been identified. +(b) +Exhibits. +Item 16. Form 10-K Summary +Not applicable. +117 +Exhibit Index +Exhibit +Number +Description +1.1** +Form of Underwriting Agreement (incorporated by reference to Exhibit 1.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 21, 2020). +3.1** +Amended and Restated Certificate of Incorporation of Biodesix, Inc., dated October 30, 2020 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on October 12, 2020). +3.2** +Amended and Restated Bylaws of Biodesix, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on October 12, 2020). +4.1** +Specimen stock certificate evidencing shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 21, 2020). +4.2** +Eleventh Amended and Restated Investor Rights Agreement, by and among Biodesix, Inc. and the investors listed on Exhibit A thereto, dated October 10, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +4.3** +Warrant held by Innovatus Life Sciences Lending Fund I, LP, to Purchase Series G Preferred Stock, dated February 23, 3018 (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +4.4** +Secured Promissory Note held by Innovatus Life Sciences Lending Fund I, LP, in Biodesix, Inc., dated February 23, 2018 (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +4.5* +Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934. +10.1+** +Biodesix, Inc. Amended and Restated 2006 Employee, Director and Consultant Stock Plan, as amended to date (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.1+** +Form of Stock Option Grant Notice under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.2+** +Form of Option Agreement under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.3+** +Form of Notice of Exercise under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.3 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.3+** +Biodesix, Inc. 2016 Equity Incentive Plan, as amended to date (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.4.1+** +Form of Stock Option Grant Notice under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.4.2+** +Form of Option Agreement under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +118 +10.4.3+** +Form of Notice of Exercise under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.3 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.5+** +Biodesix, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 26, 2020). +10.5.1+* +Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the 2020 Equity Incentive Plan. +10.6+** +Biodesix, Inc. 2020 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 26, 2020). +10.7.1+** +Biodesix, Inc., First Amended Bonus-to-Options Program, adopted by the Board of Directors on October 15, 2010 (incorporated by reference to Exhibit 10.5.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.7.2+** +Biodesix, Inc., Second Amended Bonus-to-Options Program, adopted by the Board of Directors on June 21, 2011 (incorporated by reference to Exhibit 10.5.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.7.3+** +Biodesix, Inc., Third Amended Bonus-to-Options Program, adopted by the Board of Directors on December 31, 2015 (incorporated by reference to Exhibit 10.5.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.8.1+** +Form of Stock Option Grant Notice under the Biodesix, Inc. Bonus-To-Options Program (incorporated by reference to Exhibit 10.6.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.8.2+** +Form of Option Agreement under the Biodesix, Inc. Bonus-To-Options Program (incorporated by reference to Exhibit 10.6.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.9+** +Form of Indemnification Agreement, by and between Biodesix, Inc. and each of its directors and executive officers (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 14, 2020). +10.10.1†+** +Executive Employment Letter, by and between Biodesix, Inc. and Scott Hutton, dated February 16, 2018 (incorporated by reference to Exhibit 10.9.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.10.2†+** +Executive Employment Letter, by and between Biodesix, Inc. and Scott Hutton, dated February 23, 2020 (incorporated by reference to Exhibit 10.9.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.11.1†+** +Employment Letter, by and between Biodesix, Inc. and Robin Harper Cowie, dated March 11, 2011 (incorporated by reference to Exhibit 10.10.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.11.2†+** +Executive Employment Letter, by and between Biodesix, Inc. and Robin Harper Cowie, dated February 23, 2020 (incorporated by reference to Exhibit 10.10.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.12+** +Consulting Agreement, by and between David Brunel and Biodesix, Inc., dated September 19, 2020 (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.13†** +Office Lease between Aero-Tech Investments, LLC and Biodesix, Inc., dated October 5, 2011 (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +119 +10.14†** +Lease Assignment of De Soto Facility, dated November 1, 2019 (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.15.1†** +Loan and Security Agreement, by and among Innovatus Life Sciences Lending Fund I, LP, the Lenders listed therein, and Biodesix, Inc., dated February 23, 2018 (incorporated by reference to Exhibit 10.13.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.15.2†** +Limited Consent Agreement and Second Amendment to Loan and Security Agreement, by and among Innovatus Life Sciences Lending Fund I, LP, the Lenders listed therein, and Biodesix, Inc., dated June 30, 2018, as amended to date (incorporated by reference to Exhibit 10.14.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.16** +Patent Assignment between Biodesix, Inc., and Integrated Diagnostics, Inc., dated June 30, 2018 (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.17†** +IP Assignment Agreement between Oncimmune Limited, and Biodesix, Inc., dated October 31, 2019 (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.18†** +IP License Agreement between Oncimmune Limited, and Biodesix, Inc., dated October 31, 2019 (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.19†** +Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated August 1, 2019 (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.20†** +Supply Agreement between Biodesix, Inc., and Oncimmune, dated October 31, 2019 (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.21†** +Supply Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated August 1, 2019 (incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.22†** +Co-Development and Collaboration Agreement between AVEO Pharmaceuticals, Inc., and Biodesix, Inc., dated April 9, 2014, as amended October 14, 2016 (incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.23†** +Contingent Value Rights Agreement between Biodesix, Inc. and Holders on Schedule A mentioned within, dated February 22, 2016 (incorporated by reference to Exhibit 10.22 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.24†** +Asset Purchase Agreement among Biodesix, Inc., Integrated Diagnostics, Inc., and the stockholders of Integrated Diagnostics, Inc., listed therein, dated June 30, 2018 (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.25†** +Asset Purchase Agreement between Oncimmune Limited and Biodesix, Inc., dated June 27, 2019, as amended to date (incorporated by reference to Exhibit 10.24 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +120 +10.26† ** +COVID-19 Testing Laboratory Services Agreement by and between Biodesix, Inc., and Centura Health Corporation, dated April 3, 2020 (incorporated by reference to Exhibit 10.25 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.27†** +First Amendment to COVID-19 Testing Laboratory Services Agreement by and between Biodesix, Inc. and Centura Health Corporation, dated April 23, 2020 (incorporated by reference to Exhibit 10.26 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.28†** +Second Amendment to COVID-19 Testing Laboratory Services Agreement by and between Biodesix, Inc. and Centura Health Corporation, dated May 27, 2020 (incorporated by reference to Exhibit 10.27 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.29†** +Third Amendment to COVID-19 Testing Laboratory Services Agreement by and between Biodesix, Inc. and Centura Health Corporation, dated August 7, 2020 (incorporated by reference to Exhibit 10.28 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.30†** +Contract Agreement between Biodesix, Inc. and the Colorado Department of Public Health and Environment, dated September 11, 2020 (incorporated by reference to Exhibit 10.29 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.31†** +Material Transfer Agreement by and between Biodesix, Inc. and Bio-Rad Laboratories, Inc., dated March 23, 2020 (incorporated by reference to Exhibit 10.30 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.32†** +First Amendment to Material Transfer Agreement by and between Biodesix, Inc. and Bio-Rad Laboratories, Inc. dated April 3, 2020 (incorporated by reference to Exhibit 10.31 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.33†** +Material Transfer Agreement by and between Biodesix, Inc. and Bio-Rad Laboratories, Inc., dated April 17, 2020 (incorporated by reference to Exhibit 10.32 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.34†** +Price Agreement by and between Biodesix, Inc. and Bio-Rad Laboratories, Inc., dated May 12, 2020 (incorporated by reference to Exhibit 10.33 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.35** +Letter from Bio-Rad Laboratories, Inc. dated August 7, 2020 (incorporated by reference to Exhibit 10.33 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 21, 2020). +10.36** +Letter from Bio-Rad Laboratories, Inc. dated August 14, 2020 (incorporated by reference to Exhibit 10.34 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 21, 2020). +23.1 +Consent of independent registered public accounting firm. +24.1 +Power of Attorney (included on the signature page of this Form 10-K). +121 +31.1* +Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2* +Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS* +Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. +101.SCH* +Inline XBRL Taxonomy Extension Schema Document +101.CAL* +Inline XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF* +Inline XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +Inline XBRL Taxonomy Extension Label Linkbase Document +101.PRE* +Inline XBRL Taxonomy Extension Presentation Linkbase Document +104 +Cover Page Interactive Data File (embedded within the Inline XBRL document) +† +Portions of this exhibit have been omitted as the Registrant has determined that the omitted information (i) is not material and (ii) would likely cause competitive harm to the Registrant if publicly disclosed. ++ +Indicates management contract or compensatory plan. +* Filed herewith. +** Previously filed. +122 +SIGNATURES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized . +Biodesix, Inc. +Date: March 16, 2021 +By: +/s/ ROBIN HARPER COWIE +Robin Harper Cowie +Chief Financial Officer, Secretary and Treasurer +POWER OF ATTORNEY +Each person whose signature appears below constitutes and appoints Scott Hutton and Robin Harper Cowie, and each of them, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution,for him or her and in his or her name, place and stead, in any and all capacities, to file with the Securities and Exchange Commission this Form 10-K and any and all amendments and exhibits thereto, and all documents in connection therewith, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and purposes as he or she might or could do in person, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his or her substitutes may lawfully do or cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. +Name +Title +Date +/s/ SCOTT HUTTON +President, Chief Executive Officer (Principal Executive Officer +March 16, 2021 +Scott Hutton +/s/ ROBIN HARPER COWIE +Chief Financial Officer, Secretary and Treasurer +March 16, 2021 +Robin Harper Cowie +/s/ JOHN PATIENCE +Chairman and Director +March 16, 2021 +John Patience +/s/ JEAN FRANCHI +Director +March 16, 2021 +Jean Franchi +/s/ HANY MASSARANY +Director +March 16, 2021 +Hany Massarany +/s/ JACK SCHULER +Director +March 16, 2021 +Jack Schuler +/s/ MATTHEW STROBECK +Director +March 16, 2021 +Matthew Strobeck, Ph.D. +/s/ CHARLES WATTS +Director +March 16, 2021 +Charles Watts M.D. +123 +Item 8. Financial Statements and Supplementary Data +BIODESIX, Inc. +INDEX TO FINANCIAL STATEMENTS +Report of Independent Registered Public Accounting Firm +F-2 +Balance Sheets as of December 31, 2020 and 2019 +F-3 +Statements of Operations for the Years ended December 31, 2020 and 2019 +F-4 +Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years ended December 31, 2020 and 2019 +F-5 +Statements of Cash Flows for the Years ended December 31, 2020 and 2019 +F-6 +Notes to Financial Statements +F-8 +F-1 +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Stockholders of +Biodesix, Inc.: +Opinion on the Financial Statements +We have audited the accompanying balance sheets of Biodesix, Inc. (the Company) as of December 31, 2020 and 2019, the related statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the two‑year period ended December 31, 2020, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two‑year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 2016 +Denver, Colorado +March 16, 2021 +F-2 +BIODESIX, INC. +Balance Sheets +(in thousands, except share data) +As of December 31, +2020 +2019 +Assets +Current assets +Cash and cash equivalents +$ +62,126 +$ +5,286 +Accounts receivable, net +15,304 +5,292 +Other current assets +8,710 +2,122 +Total current assets +86,140 +12,700 +Non‑current assets +Property and equipment, net +3,178 +2,120 +Intangible assets, net +13,260 +15,092 +Other long-term assets +3,461 +90 +Goodwill +15,031 +15,031 +Total non‑current assets +34,930 +32,333 +Total assets +$ +121,070 +$ +45,033 +Liabilities, Convertible Preferred Stock and Stockholders' Equity (Deficit) +Current liabilities +Accounts payable +$ +8,964 +$ +1,717 +Accrued liabilities +7,789 +4,180 +Deferred revenue +3,532 +1,283 +Current portion of notes payable +11,840 +12,159 +Put option liability +— +3,261 +Total current liabilities +32,125 +22,600 +Non‑current liabilities +Warrant liability +— +329 +Long‑term notes payable +15,926 +23,812 +Contingent consideration +29,932 +29,114 +Other long-term liabilities +1,921 +358 +Total non‑current liabilities +47,779 +53,613 +Total liabilities +79,904 +76,213 +Commitments and contingencies +Convertible preferred stock +Convertible preferred stock, $ 0.001 par value, 0 (2020) and 174,237,067 +(2019) authorized; 0 (2020) and 118,766,273 (2019) issued and outstanding; liquidation preference of $ 202,582 (2019) +— +193,959 +Stockholders' equity (deficit) +Preferred stock, $ 0.001 par value, 5,000,000 (2020) and 0 (2019) authorized; 0 (2020 and 2019) issued and outstanding +— +— +Common stock, $ 0.001 par value, 200,000,000 (2020) and 190,000,000 (2019) authorized; 26,561,504 (2020) and 254,918 (2019) issued and outstanding +27 +1 +Additional paid‑in capital +299,953 +2,324 +Accumulated deficit +( 258,814 +) +( 227,464 +) +Total stockholders' equity (deficit) +41,166 +( 225,139 +) +Total liabilities, convertible preferred stock and stockholders' equity (deficit) +$ +121,070 +$ +45,033 +The accompanying Notes are an integral part of these financial statements. +F-3 +BIODESIX, INC. +Statements of Operations +(in thousands, except per share data) +Year Ended December 31, +2020 +2019 +Revenues +$ +45,557 +$ +24,552 +Operating expenses: +Direct costs and expenses +21,998 +6,074 +Research and development +10,818 +10,468 +Sales, marketing, general and administrative +34,857 +30,637 +Change in fair value of contingent consideration +818 +4,114 +Total operating expenses +68,491 +51,293 +Loss from operations +( 22,934 +) +( 26,741 +) +Other income (expense): +Interest income +18 +55 +Interest expense +( 7,604 +) +( 3,008 +) +Change in fair value of warrant liability +( 1,252 +) +( 104 +) +Change in fair value of put option liability +— +( 2,000 +) +Other income, net +422 +1,072 +Total other expense +( 8,416 +) +( 3,985 +) +Net loss +$ +( 31,350 +) +$ +( 30,726 +) +Net loss per share, basic and diluted +$ +( 6.48 +) +$ +( 126.97 +) +Weighted-average shares outstanding, basic and diluted +4,838 +242 +The accompanying Notes are an integral part of these financial statements. +F-4 +BIODESIX, INC. +Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) +(in thousands) +Convertible Preferred Stock +Common Stock +Additional +Paid‑In +Accumulated +Total +Stockholders' +Shares +Amount +Shares +Amount +Capital +Deficit +Deficit +Balance ‑ January 1, 2019 +110,071 +$ +183,962 +215 +$ +1 +$ +2,107 +$ +( 196,738 +) +$ +( 194,630 +) +Common stock issued upon exercise of stock options +— +— +40 +— +47 +— +47 +Issuance of Series H convertible preferred stock, in February and March 2019 at $ 1.15 per share, net of issuance costs of $ 3 +8,695 +9,997 +— +— +— +— +— +Stock‑based compensation expense +— +— +— +— +170 +— +170 +Net loss and comprehensive loss +— +— +— +— +— +( 30,726 +) +( 30,726 +) +Balance ‑ December 31, 2019 +118,766 +193,959 +255 +1 +2,324 +( 227,464 +) +( 225,139 +) +Common stock issued upon exercise of stock options +— +— +368 +— +1,340 +— +1,340 +Stock‑based compensation expense +— +— +— +— +3,709 +— +3,709 +Issuance of common stock in initial public offering, net of discounts and commission of $ 5,040 and direct offering costs of $ 3,203 +— +— +4,000 +4 +63,753 +— +63,757 +Conversion of preferred stock into common stock upon initial public offering +( 118,766 +) +( 193,959 +) +20,091 +20 +193,939 +— +193,959 +Conversion of convertible debt into common stock upon initial public offering +— +— +1,848 +2 +26,614 +— +26,616 +Reclassification of preferred stock warrant liability and put option into additional paid-in capital upon initial public offering +— +— +— +— +8,274 +— +8,274 +Net loss and comprehensive loss +— +— +— +— +— +( 31,350 +) +( 31,350 +) +Balance ‑ December 31, 2020 +— +$ +— +26,562 +$ +27 +$ +299,953 +$ +( 258,814 +) +$ +41,166 +The accompanying Notes are an integral part of these financial statements. +F-5 +BIODESIX, INC. +Statements of Cash Flows +(in thousands) +Year Ended December 31, +2020 +2019 +Cash flows from operating activities +Net loss +$ +( 31,350 +) +$ +( 30,726 +) +Adjustments to reconcile net loss to net cash, cash equivalents, and +restricted cash used in operating activities +Depreciation and amortization +2,903 +2,793 +Amortization of convertible notes debt discount +4,389 +262 +Stock‑based compensation expense +3,709 +170 +Change in fair value of warrant liability +1,252 +104 +Change in contingent consideration +818 +4,114 +Change in fair value of put option +— +2,000 +Accrued interest on notes payable and convertible notes payable +1,226 +799 +Amortization of debt issuance costs +144 +144 +Provision for doubtful accounts +296 +246 +Loss on disposals of assets +48 +13 +Changes in operating assets and liabilities, net of assets acquired and +liabilities assumed in acquisitions: +Accounts receivable +( 10,308 +) +( 3,646 +) +Other current assets +( 6,588 +) +1 +Other long-term assets and liabilities +( 1,808 +) +16 +Accounts payable and other accrued liabilities +11,654 +1,193 +Deferred revenue +2,249 +791 +Net cash and cash equivalents and restricted cash used in operating activities +( 21,366 +) +( 21,726 +) +Cash flows from investing activities +Purchase of property and equipment +( 1,945 +) +( 1,310 +) +Patent costs and intangible asset acquisition, net +( 232 +) +( 106 +) +Payments to acquire Oncimmune assets +( 750 +) +( 456 +) +Net cash and cash equivalents and restricted cash used in investing activities +( 2,927 +) +( 1,872 +) +Cash flows from financing activities +Proceeds from initial public offering +72,000 +— +Proceeds from exercise of common stock options +1,340 +47 +Proceeds from issuance of series H preferred stock +— +10,000 +Proceeds from issuances of convertible notes payable +12,955 +13,044 +Proceeds from paycheck protection program note payable +3,085 +— +Equity financing costs +( 8,243 +) +( 3 +) +Other +( 6 +) +( 116 +) +Net cash and cash equivalents and restricted cash provided by financing activities +81,131 +22,972 +Net increase (decrease) in cash and cash equivalents and restricted cash +56,838 +( 626 +) +Cash, cash equivalents, and restricted cash ‑ beginning of period +5,468 +6,094 +Cash, cash equivalents, and restricted cash ‑ end of period +$ +62,306 +$ +5,468 +The accompanying Notes are an integral part of these financial statements. +F-6 +BIODESIX, INC. +Statements of Cash Flows +(in thousands) +(Continued from the previous page) +Supplemental cash flow information : +Year Ended December 31, +2020 +2019 +Conversion of preferred stock into common stock +$ +193,959 +$ +— +Conversion of convertible notes and accrued interest into common stock +26,616 +— +Reclassification of put option liability to additional paid-in capital +6,650 +— +Value of put option recorded at issuance of convertible debt payable +3,389 +1,261 +Cash paid for interest +1,844 +1,800 +Reclassification of warrant liability to additional paid-in capital +1,624 +— +Accrued business combination payments +— +750 +Cash paid for income taxes +— +— +The accompanying Notes are an integral part of these financial statements. +F-7 +BIODESIX, INC. +Notes to Financial Statements +Note 1 – Organization and Description of Business +Biodesix, Inc. (the “Company”, “Biodesix”, “we” and “our”), formerly Elston Technologies, Inc., was incorporated in Delaware in 2005. The Company’s headquarters are in Colorado, with laboratories in Colorado and Kansas. The Company conducts all of its operations within a single legal entity. Biodesix is a data-driven diagnostic solutions company leveraging state of the art technologies with its proprietary artificial intelligence platform to discover, develop, and commercialize solutions for clinical unmet needs, with a primary focus in lung disease. In addition to diagnostic tests, the Company provides biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. +The Company performs its blood-based diagnostic tests for lung cancer in its laboratory facilities, which are located in Boulder, Colorado and De Soto, Kansas. In May 2020, the Federal Drug Administration (FDA) authorized performance of Bio-Rad SARS-CoV-2 Droplet Digital™ polymerase chain reaction (ddPCR) test to detect Coronavirus Disease 2019 (COVID-19) infection. In April 2020, the FDA authorized our Platelia SARS-CoV-2 Total Ab test to detect COVID-19 antibodies. Medical products that are granted an Emergency Use Authorization (EUA) are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety. +Blood-Based Lung Tests +The Company offers four blood-based lung cancer tests across the lung cancer continuum of care: +• +Nodify XL2® and Nodify CDT™ tests, marketed as part of our Nodify Lung ™ Nodule Risk Assessment testing strategy, assess the risk of lung cancer to help identify the most appropriate treatment pathway. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules . +• +GeneStrat® and VeriStrat® tests, marketed as part of our Biodesix Lung Reflex ® testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to establish the patient’s prognosis and help guide treatment decisions. The GeneStrat tumor profiling test and the VeriStrat immune profiling test have a three-day average turnaround time, providing physicians with timely results to facilitate treatment decisions. +COVID-19 Tests +Using the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab tests, we operate and have commercialized the Biodesix WorkSafe testing program. The Company offers two SARS-CoV-2 tests: +• +Bio-Rad SARS-CoV-2 ddPCR test, which is authorized by the FDA to be performed by Clinical Laboratory Institute Amendments (CLIA) authorized laboratories that perform high complexity tests. The ddPCR test is designed to detect the presence of infection by the SARS-CoV-2 virus. +• +Platelia SARS-CoV-2 Total Ab test, which is an antibody test, authorized by the FDA, intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. +These tests are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems to assist in their back-to-work or back-to-school strategies, a crucial element of restarting economic activity. +In developing the Company's products, the Company has built or gained access to unique biorepositories, proprietary technology, and bioinformatics that it believes are important to the development of new targeted therapies, determining clinical trial eligibility and guiding treatment selection. +F-8 +All of the Company’s testing services are made available through its clinical laboratories. +Reverse Stock Split +O n October 19, 2020, the Company obtained approval of an amended and restated certificate of incorporation effecting a 0.1684664 -for-1 reverse stock split of its issued and outstanding common stock as converted. All common shares, stock options, and per share information presented in these financial statements and notes thereto have been adjusted, where applicable, to reflect the reverse stock split on a retroactive basis for all periods presented. +Approval of Amended and Restated Certificate of Incorporation +In October 2020, the Company’s Board of Directors and stockholders approved an amended and restated certificate of incorporation, which authorized 200,000,000 shares of common stock, par value $ 0.001 per share, and 5,000,000 shares of preferred stock, par value $ 0.001 per share. The amended and restated certificate of incorporation became effective on October 30, 2020. +Initial Public Offering +On October 27, 2020, the Company completed its initial public offering, in which it issued and sold 4,000,000 shares of its common stock at a public offering price of $ 18.00 per share. The Company received net proceeds of $ 63.8 million after deducting underwriting discounts and commissions and offering expenses payable by the Company. In addition, in connection with the initial public offering, all shares of the Company’s then-outstanding convertible preferred stock and convertible notes payable were automatically converted into 21,939,025 shares of common stock, and all then outstanding warrants to purchase the Company’s Series G convertible preferred stock were automatically converted into warrants to purchase 103,326 shares of the Company’s common stock. +Note 2 – Summary of Significant Accounting Policies +Basis of Presentation +The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The 2019 balance sheet has been updated to reflect an increase in goodwill and a reduction in accumulated deficit of $ 3.4 million related to the correction of an immaterial error recorded as part of the acquisition of Integrated Diagnostics, Inc. in 2018. The Company determined that the reduction in the preexisting valuation allowance resulting from the acquisition should have been reflected as an income benefit within the tax provision rather than as a reduction in goodwill. The correction of the immaterial error had no impact on our 2020 or 2019 results of operations. +Certain prior period amounts have been reclassified to conform to the current period presentation. +Segment Reporting +The chief operating decision maker for the Company is the Chief Executive Officer, who reviews financial information for purposes of allocating resources and assessing financial performance. The Company has a single operating segment focused on providing diagnostic testing services to customers. Substantially all of the Company’s revenue and all long-lived assets were derived or located in the United States for the years ended December 31, 2020 and 2019. +Use of Estimates +The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates include: revenue recognition; the useful lives of property and equipment; the recoverability of long-lived assets; the estimation of the fair value of intangible assets; the valuation of contingent consideration related to a business combination; stock options; income tax uncertainties, including a valuation allowance for deferred tax assets; and contingencies. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recognized revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions. +F-9 +Revenue Recognition +The Company generates revenues from (i) diagnostic tests and (ii) assay development and testing services (services revenue). +Diagnostic test revenues consist of blood-based lung tests and COVID-19 tests, which are recognized in the amount expected to be received in exchange for diagnostic tests when the diagnostic tests are delivered. The Company determines the transaction price related to its blood-based lung diagnostic test contracts using a portfolio approach by considering the nature of the payer and historical price concessions granted to groups of customers. The transaction price associated with COVID-19 testing arrangements are determined on the basis of the individual contract with each customer. +Services revenue consists of various types of tests or other scientific services for a purpose as defined by any individual customer, which are often larger biopharmaceutical companies, as defined by a written agreement between the Company and the customer. These services are generally completed upon the delivery of testing results, or achievement of contractual milestone(s) as defined in the customer agreements. Revenue for these services is recognized upon delivery of the completed test results, or upon completion of the contractual milestone(s). +The Company recognizes revenues related to blood-based lung diagnostic billings based on estimates of the amounts ultimately expected to be collected from customers on a portfolio approach as discussed above. In determining the amount to accrue for a delivered test, the Company considers factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. Variable consideration, if any, is estimated based on an analysis of historical experience and adjusted as better estimates become available. These estimates require significant judgment by management. +The Company also provides services to patients with whom the Company does not have contracts as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC 606). The Company recognizes revenue for these patients when contracts as defined in ASC 606 are established at the amount of consideration to which it expects to be entitled, or when the Company receives substantially all of the consideration subsequent to satisfaction and delivery of the performance obligations. +See Note 13 — Revenue for additional information. +Deferred Revenue +Deferred revenue consists of payments received for research, development, and testing services fees received prior to the completion of performance of these tests and services. As of December 31, 2020, deferred revenue also includes $ 2.8 million in a Medicare advance payment on testing services which can either be paid back or earned back starting 1 year from receipt. +Direct Costs and Expenses +The components of our cost of diagnostic tests and testing services consist of cost of materials, direct labor, including bonus, benefit and stock-based compensation, depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs associated with acquiring and processing test samples, including sample accessioning, test performance, quality control analyses, charges to collect and transport samples; curation of test results for physicians; and in some cases, license or royalty fees due to third parties. +Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents. Costs associated with performing tests are expensed as the test is processed regardless of whether and when revenue is recognized with respect to that test. +F-10 +Research and Development Expenses +Research and development expenses include external and internal costs incurred to develop our technology, collect clinical samples, and conduct clinical studies to develop and support our products. External costs consist primarily of payments to clinical trial sites, sample acquisition costs and laboratory supplies purchased in connection with the Company’s discovery and preclinical activities, process development and clinical development activities. Internal costs consist primarily of salaries and benefits, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs . +The Company estimates and accrues its expenses resulting from its obligations under contracts with vendors and consultants in connection with conducting research and development activities. The financial terms of these contracts vary from contract to contract and may result in payments that do not match the periods over which materials or services are provided under such contracts. The Company’s estimates depend on the timeliness and accuracy of the data provided by consultants and vendors regarding the status of each activity. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information received. Research and development costs are expensed as incurred. +Sales, Marketing, General and Administrative Expenses +Selling expenses consist primarily of costs associated with our sales organization, including our direct sales force and sales management, client services, marketing, and reimbursement, as well as business development personnel who are focused on our biopharmaceutical customers. These expenses consist primarily of salaries, commissions, bonuses, employee benefits, travel, and stock-based compensation, as well as marketing and educational activities and allocated overhead expenses. +Sales, marketing, general and administrative expenses also include costs for our marketing and sales organizations, and other functions including finance, legal, human resources, and information technology. +These expenses consist principally of salaries, bonuses, employee benefits, travel, and stock-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. +Concentrations of Credit Risk and Other Uncertainties +Substantially all of the Company’s cash and cash equivalents are deposited with one major financial institution in the United States. The Company continually monitors its positions with, and the credit quality of, the financial institution with which it holds cash. Periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. +Several of the components of the Company's sample collection kit and test reagents, and certain test systems and related test kits are obtained from single-source suppliers. If these single-source suppliers fail to satisfy the Company's requirements on a timely basis, it could suffer delays in being able to deliver its diagnostic solutions, a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results. +The Company’s customers in excess of 10% of total revenue, and their related revenue as a percentage of total revenue were as follows: +Year Ended +December 31, +2020 +The Big Ten Conference +30 +% +Centura Healthcare +17 +% +Percent of total revenue +47 +% +F-11 +One customer, Covance, exceeded 10% of total revenue during 2019, representing 21 % of total revenue. In addition to the above table, we collect reimbursement on behalf of customers covered by Medicare, which accounted for 17 % and 36 % of the Company’s total revenue for the years ended December 31, 2020 and 2019, respectively. The Company is subject to credit risk from its accounts receivable related to services provided to its customers. The Company does not perform evaluations of customers' financial condition and does not require collateral. The Company’s third-party payors and other customers in excess of 10% of accounts receivable, and their related accounts receivable as a percentage of total accounts receivable were as follows: +As of December 31, +2020 +2019 +The Big Ten Conference +35 +% +— +% +Centura Healthcare +24 +% +— +% +Medicare +6 +% +18 +% +Covance Central Laboratory Services +2 +% +43 +% +Janssen Research and Development, LLC +5 +% +12 +% +Pfizer, Inc +4 +% +10 +% +Percent of total accounts receivable +76 +% +83 +% +Cash and Cash Equivalents +Cash equivalents consist of short-term, highly-liquid instruments with an original maturity of three months or less from the date of purchase. +Restricted Cash +Restricted cash consists of deposits related to the Company’s corporate credit card and a letter of credit related to an operating lease agreement. As of December 31, 2020 and 2019, the Company had $ 0.2 million restricted cash, respectively, which was included in ‘Other current assets’ in the accompanying balance sheets. +Accounts Receivable and Allowance for Doubtful Accounts +Accounts receivable are stated at the amount management expects to collect from customers based on their outstanding invoices. Management reviews accounts receivable quarterly to determine if any receivable will potentially be uncollectible and to estimate the amount of allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value based on historical experience, customer creditworthiness, facts, and circumstances specific to outstanding balances, and payment terms. The Company’s allowance for doubtful accounts was $ 0.2 million as of December 31, 2020 and 2019. +Inventory +Inventory consists primarily of material supplies, which are consumed in the performance of testing services and charged to cost of sales. Inventory is stated at cost and reported within ‘Other current assets’ in the balance sheet and were $ 3.2 million and $ 0.8 million as of December 31, 2020 and 2019, respectively. +Property and Equipment +Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and five years . Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the statements of operations and comprehensive loss in the period realized. +F-12 +Long-lived assets to be held and used are evaluated for impairment when events or circumstances indicate the carrying value of a long-lived asset or asset group is less than the undiscounted cash flows from the use and eventual disposition over its remaining useful life. The Company assesses recoverability by comparing the sum or projected undiscounted cash flows from the use and eventual disposition of the asset or asset group to it carrying value, and records an impairment loss if the carrying value is greater than the undiscounted future cash flows. There were no impairments for the years ended December 31, 2020 or 2019. +Intangible Assets +Intangible assets primarily consist of intangible assets acquired as part of business combinations, external costs associated with patent applications that are expected to be successful, and trademark costs. Finite-lived intangibles are stated at cost, net of accumulated amortization. The Company amortizes finite-lived intangible assets using the straight-line method over their estimated useful lives of 9 to 10 years, based on management's estimate of the period over which their economic benefits will be realized, product life and patent life. Trademarks are considered indefinite lived and are not amortized. +Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate a reduction to fair value below their carrying amounts. There were no impairments for the years ended December 31, 2020 or 2019. +Goodwill +Goodwill represents the excess of purchase price over amounts allocated to acquired assets and liabilities assumed in business combinations. The carrying value of goodwill is evaluated for impairment at least annually or more frequently when events or circumstances occur indicate a potential for impairment. The annual impairment test is performed on the last day of our fourth quarter. Prior to performing a quantitative evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of the reporting unit exceeds its carrying value. In the event the Company determines that it is more likely than not the carrying value of our single reporting unit is higher than its estimated fair value, quantitative testing is performed comparing recorded values to estimated fair values. If impairment is present, the impairment loss is measured as the excess of the recorded goodwill over its implied fair value. There were no impairments for the years ended December 31, 2020 or 2019. +Fair Value of Financial Instruments +U.S. GAAP for fair value establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). We utilize a combination of market and income approaches to value our financial instruments. Our financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. Fair value measurements are categorized within the fair value hierarchy based upon the lowest level of the most significant inputs used to determine fair value. The three levels of the hierarchy and the related inputs are as follows: +Level +Inputs +1 +Unadjusted quoted prices in active markets for identical assets and liabilities. +2 +Unadjusted quoted prices in active markets for similar assets and liabilities; +Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or +Inputs other than quoted prices that are observable for the asset or liability. +3 +Unobservable inputs for the asset or liability. +The carrying amounts of certain financial instruments including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. +See Note 5 — Fair Value for further discussion related to estimated fair value measurements. +F-13 +Contingent Consideration +In connection with the purchase transaction with Integrated Diagnostics, Inc. (Indi), the Company recorded contingent consideration for amounts potentially payable to Indi’s shareholder pursuant to the terms of the asset purchase agreement. The fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value are recognized as operating expenses within the statements of operations. The estimated fair value of the contingent consideration is based upon significant assumptions including the probability of successful achievement of product gross margin targets included in the acquisition agreement, the estimated timing of achievement of the product gross margin targets, and discount rates. The estimated fair value could materially differ from actual values or fair values determined using different assumptions. +Warrant Liability +Prior to the completion of the Company’s initial public offering in October 2020, certain warrants issued to purchase convertible preferred stock were classified as liabilities with changes in the estimated fair value of these liabilities recognized in our results of operations. Upon completion of the Company’s initial public offering in October 2020, the warrants were automatically converted to warrants to purchase common stock. Accordingly, the warrants were remeasured to an estimate of fair value and recognized in our results of operations and then reclassified to additional paid-in capital. +Put Option Liability +During 2020 and 2019, the Company issued convertible debt with terms that provided for a conversion rate to the convertible debtholders that was more favorable than the price that other investors would pay for common stock in certain situations, including the completion of an initial public offering. As a result, the convertible debt is a financial instrument that was bifurcated into two instruments, a debt obligation and a put option liability, which represented the estimated fair value of the favorable conversion rate. The estimated fair value of the put option liability was separated from the convertible debt at inception and reported as a liability and debt discount, and amortized to interest expense. As a result of our initial public offering, the convertible debt was automatically converted to common stock and the put option liability was remeasured to an estimate of fair value and recognized in our results of operations and then reclassified to additional paid-in capital. +Share‑Based Compensation +Stock Options +The Company grants service condition and performance condition stock options. Stock options are granted with exercise prices equal to the fair market value of our common stock on the date of grant. The grant date fair value of each employee stock option is estimated on the date of grant using the Black-Scholes option-pricing model, which requires the use of assumptions, including the expected term of the option, expected volatility of our stock price, expected dividend yield, and the risk-free interest rate, among others. These assumptions involve inherent uncertainties including market conditions and employee behavior that are generally outside of the Company’s control. Service condition stock options are expensed based on the grant date fair value of the awards using the straight-line method over the requisite service period, adjusted for forfeitures as they occur. Performance-condition stock options vest based on achievement of multiple weighted performance goals, certification of performance achievement by the Compensation Committee of the Board of Directors, and continued service. For performance-condition stock options, compensation expense is updated for our expected performance level against performance goals at the end of each reporting period, which involves judgment as to achievement of certain performance metrics. +Prior to our initial public offering in October 2020, the fair value of our common stock was determined by the Board of Directors in accordance with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation Practice Aid (Practice Aid). In doing so, the Board of Directors determined the best estimate of fair value of our common stock, exercising reasonable judgment and considering numerous objective and subjective factors , by first determining the enterprise value of our business, and then allocating the value among the various classes of our equity securities to derive a per share value of our common stock. Subsequent to the Company’s initial public offering, the fair value of the Company’s common stock is determined based on its traded market price. +F-14 +Restricted Stock Units (RSUs) +The Company grants service-condition RSUs. As a result of our initial public offering, the grant date fair values of these RSUs are based on the closing market price of our common stock on the grant date. The service-condition RSUs vest based on continued service with compensation expense, net of forfeitures, recognized on a straight-line basis over the requisite service period. +See Note 14 — Share-Based Compensation for additional information related to share-based compensation. +Net Loss per Common Share +Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the period, if dilutive, using the treasury stock method. Potentially dilutive securities consisting of options to purchase common stock, warrants to purchase common stock, restricted stock units and shares subject to purchase under our employee stock purchase plan were excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive for all periods presented. +Until the Company’s initial public offering in October 2020, basic and diluted net loss attributable to common stockholders per share was calculated using the two-class method. The net loss was attributable entirely to common stockholders because the participating securities did not have a contractual obligation to share in the Company’s losses. As the Company has reported a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share for all periods presented. +Note 3 – Recent Accounting Pronouncements +Recently Issued Accounting Standards Not Yet Adopted +In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-2, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The ASU is effective for the Company for interim and annual periods beginning January 1, 2022. The Company expects to recognize right-of-use assets and lease obligations in its balance sheet upon adoption using the modified retrospective method as permitted by ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. The Company does not currently expect adoption of this standard will have a significant effect on its statements of operations or cash flows. +In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for the Company beginning January 1, 2022 with early adoption permitted. The Company has not yet begun evaluating the potential effect of this standard on its financial statements. +Note 4 – Business Combinations +Oncimmune Limited +On October 31, 2019, the Company purchased select assets and liabilities from Oncimmune Limited (Oncimmune) for total consideration of $ 1.2 million payable in quarterly installments commencing 30 days following the closing of the transaction. Concurrent with the Oncimmune purchase, the Company acquired an exclusive option to license rights within the United States to an additional indication for their product for $ 9.0 million. In September 2020, we notified Oncimmune that we would not exercise this option for the expansion of the field of use. As of December 31, 2020, the Company had paid the full $ 1.2 million consideration. +The acquisition was accounted for as business combination and resulted in the recognition of goodwill of $ 0.8 million representing expected synergies, including expected increases in future revenues as a result of expansion of the acquired technology into additional markets, and lower expected operating expenses. The Company finalized its purchase price allocation of the transaction as of December 31, 2019. +F-15 +The following table summarizes the aggregate consideration paid by the Company and the allocation of the purchase price to assets acquired and liabilities assumed (in thousands): +Cash +$ +1,206 +Total fair value of consideration transferred +$ +1,206 +Deposit +$ +6 +Inventory +14 +Property and equipment +241 +Purchase option +121 +Goodwill +827 +Accrued liabilities +( 3 +) +$ +1,206 +Integrated Diagnostics, Inc. +On June 30, 2018, the Company purchased select assets and liabilities from Integrated Diagnostics, Inc. (Indi) for total consideration of $ 27.6 million, consisting of $ 8.0 million in the Company’s Series G Preferred Stock and contingent consideration with an initial estimated fair value of $ 19.6 million. The acquisition was accounted for as a business combination and resulted in goodwill of $ 14.2 million representing expected synergies, including increases in future revenues as a result of expansion of the acquired technology into additional markets, and lower operating expenses. +The contingent consideration arrangement requires additional consideration to be paid by the Company to Indi upon attainment of a three-consecutive month gross margin target of $ 2.0 million within the seven-year period after the acquisition date. If the gross margin target is met, the Company is required to issue 2,520,108 shares of common stock. For the six months following the achievement of the gross margin target, Indi has the option to require the Company to redeem these common shares for $ 37.0 million in cash over eight equal quarterly installments. If Indi elects to not exercise its option, the Company has 12 months to repurchase the common stock in two equal and consecutive quarterly cash installments totaling $ 37.0 million. +Note 5 - Fair Value +Recurring Fair Value Measurements +Our borrowing instruments are recorded at their carrying values in the balance sheets, which may differ from their respective fair values. The fair values of outstanding borrowings, which are classified as Level 2, approximate their carrying values at December 31, 2020 and 2019, based on interest rates currently available for similar borrowings and were: +As of December 31, +2020 +2019 +Carrying Value +Fair Value +Carrying Value +Fair Value +Borrowings +$ +27,766 +$ +27,766 +$ +35,971 +$ +35,971 +F-16 +The financial liabilities that are measured and recorded at estimated fair value on a recurring basis consist of our contingent consideration associated with our acquisition of Indi, and prior to the completion of our initial public offering in October 2020, the warrant liability and put option liability granted to certain holders of our convertible preferred stock and debt instruments, which were accounted for as liabilities and remeasured through our statements of operations. The table below presents the reported fair values of these liabilities, all of which are classified as Level 3 in the fair value hierarchy, as of the dates indicated (in thousands): +As of December 31, +Description +2020 +2019 +Contingent consideration +$ +29,932 +$ +29,114 +Put option liability +— +3,261 +Warrant liability +— +372 +Contingent value rights +— +60 +The following table presents the changes in these financial liabilities for the year ended December 31, 2020 (in thousands): +Level 3 Rollforward +Contingent +Consideration +Put +Option +Liability +Warrant +Liability +Contingent +Value Rights +Beginning balances +$ +29,114 +$ +3,261 +$ +372 +$ +60 +Additions +— +3,389 +— +— +Changes in fair value +818 +— +1,252 +( 60 +) +Reclassified to additional paid-in capital +— +( 6,650 +) +( 1,624 +) +— +Ending balances +$ +29,932 +$ +— +$ +— +$ +— +Contingent Consideration +In connection with the acquisition of Indi, the Company recorded contingent consideration for amounts contingently payable to Indi's selling shareholders pursuant to the Asset Purchase Agreement (See Note 4 – Business Combinations ). The significant unobservable inputs used in the measurement of fair value include the probability of successful achievement of the specified product gross margin targets, the period in which the targets are expected to be achieved, and discount rates which ranged from 12.2 % to 13.5 %. Significant increases or decreases in any of these inputs would result in a significantly higher or lower fair value measurement. +Contingent consideration is recorded in the balance sheets as long-term liabilities. The net change to contingent consideration during the years ended December 31, 2020 and 2019 was an increase of $ 0.8 million and $ 4.1 million, respectively, and are recorded as operating expenses in the statements of operations. +Put Option Liability +The put option liability was valued based on the calculated returns as a result of the various discounts included in the Company’s convertible notes payable and the related probability assessments of the various settlement scenarios. During 2020, the Company recognized an addition to the put option liability of $ 3.4 million in connection with a favorable conversion rate granted to holders of issued convertible debt. The put option liability was settled upon the closing of the Company’s initial public offering in October 2020 and reclassified to additional paid-in capital. +Warrant Liability +In connection with entering into the 2018 Notes, the Company issued to the lender a warrant to purchase 613,333 shares of Series G convertible preferred stock, at an exercise price of $ 0.75 per share, subject to adjustment upon specified dilutive issuances. The warrant was immediately exercisable upon issuance and expires on February 23, 2028 . The estimated fair value of the warrant on the issuance date of $ 0.3 million was recorded as a debt discount and as a preferred stock warrant liability. Through the effective date of the Company’s initial public offering, the Series G warrants were remeasured to an estimate of fair value using a Black Scholes pricing model. As a result of the Company’s initial public offering, the preferred stock warrants were automatically converted to warrants to purchase 103,326 shares of common stock with a weighted average exercise price of $ 4.46 and were also transferred to additional paid-in capital. During 2020, the Company recorded an increase in the value of the warrant liability of $ 1.3 million. +F-17 +Contingent Value Rights +In addition to the shares of Series F Preferred Stock that were issued in January 2016, investors who purchased more than their pro‑rata amount in the financing described above received a calculated number of contingent value rights (CVRs). In connection with the Series F financing, the Company issued 3,999 CVRs originally valued at $ 0.5 million. One CVR represents 0.00375 % of the Company’s interest in the drug ficlatuzumab. The initial estimated value of the CVRs were recorded as a liability and as a reduction to the Series F proceeds. Upon receipt by the Company or a milestone, royalty, or any other type of payment from the Company’s ownership rights in the drug, the Company was required to make a cash payment to the CVR holders equal to 15 % of net proceeds, as defined. In September 2020, the Company exercised its opt-out right with AVEO Oncology (AVEO) for the payment of 50 % of development and regulatory costs for ficlatuzumab. As a result, the CVRs were settled effective December 2, 2020. See Note 17 – Commitments and Contingencies for a discussion of the Co-Development Agreement with AVEO. +Non-Financial Assets and Liabilities +Our non-financial assets, which primarily consist of property and equipment, goodwill, and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. There were no changes to the valuation methods during the periods presented. +Note 6 – Property and Equipment +Property and equipment consist of the following (in thousands): +As of December 31, +2020 +2019 +Lab equipment +$ +5,730 +$ +4,221 +Leasehold improvements +1,845 +1,894 +Computer equipment +871 +869 +Furniture and fixtures +424 +427 +Software +651 +503 +Construction in process +381 +592 +9,902 +8,506 +Less accumulated depreciation +( 6,724 +) +( 6,386 +) +Total property and equipment, net +$ +3,178 +$ +2,120 +Depreciation expense related to property and equipment, reported in ‘Direct costs and expenses’ and ‘Sales, marketing, general and administrative’ was: +Year ended December 31, +2020 +2019 +Direct costs and expenses +$ +361 +$ +183 +Sales, marketing, general and administrative +478 +636 +Total +$ +839 +$ +819 +Disposals of Property and Equipment +Gains on disposal of property and equipment were not significant for the years ended December 31, 2020 and 2019, and are included in ‘Sales, marketing, general and administrative’ in the statements of operations. +F-18 +Note 7 – Goodwill and Intangible Assets +Goodwill +Changes in goodwill for the years ended December 31, 2020 and 2019 were (in thousands): +Balance at January 1, 2019 +$ +14,204 +Attributable to acquisition of Oncimmune, Ltd. +827 +Balance at December 31 2019 +$ +15,031 +Balance at December 31, 2020 +$ +15,031 +Intangible Assets, Net +Intangible assets consist of the following (in thousands): +December 31, 2020 +December 31, 2019 +Cost +Accumulated +Amortization +Net Carrying Value +Cost +Accumulated +Amortization +Net Carrying Value +Intangible assets subject to amortization +Patents +$ +1,474 +$ +( 494 +) +$ +980 +$ +1,245 +$ +( 411 +) +$ +834 +Purchased technology +16,900 +( 4,694 +) +12,206 +16,900 +( 2,817 +) +14,083 +Purchase option +— +— +— +121 +( 17 +) +104 +Intangible assets not subject to amortization +Trademarks +74 +— +74 +71 +— +71 +Total +$ +18,448 +$ +( 5,188 +) +$ +13,260 +$ +18,337 +$ +( 3,245 +) +$ +15,092 +Amortization expense related to definite-lived intangible assets was (in thousands): +Year ended December 31, +2020 +2019 +Direct costs and expenses +$ +13 +$ +15 +Sales, marketing, general and administrative +2,051 +1,959 +Total +$ +2,064 +$ +1,974 +Future estimated amortization expense of intangible assets is (in thousands): +As of +December 31, +2020 +2021 +$ +1,946 +2022 +1,940 +2023 +1,936 +2024 +1,928 +2025 +1,924 +Thereafter +3,512 +Total +$ +13,186 +There have been no impairments of intangible assets for the twelve-month periods ended December 31, 2020 and December 31, 2019. +F-19 +Note 8 – Accrued Liabilities +Amounts reported in ‘Accrued liabilities’ in the balance sheets were (in thousands): +December 31, +2020 +2019 +Compensation related accruals +$ +3,975 +$ +1,165 +Accrued clinical trial expense +715 +620 +Other expenses +3,099 +2,352 +Warrant liability, current +- +43 +Total accrued liabilities +$ +7,789 +$ +4,180 +Note 9 – Debt +Notes Payable +Long-term notes payable were as follows (in thousands): +As of December 31, +2020 +2019 +2018 Notes +$ +24,972 +$ +24,270 +Payroll protection plan +3,107 +— +Convertible notes payable +— +13,159 +Unamortized debt discount and debt issuance costs +( 313 +) +( 1,458 +) +27,766 +35,971 +Less: current maturities +11,840 +12,159 +Long-term notes payable +$ +15,926 +$ +23,812 +In February 2018, the Company issued long-term debt of $ 23.0 million to Innovatus Life Sciences Lending Fund (Innovatus or Lender) (the 2018 Notes). Innovatus is also a holder of the Company’s common stock. +At the time of issuance, the Company paid a facility fee of $ 0.2 million and issued a warrant to Innovatus, with an initial estimated fair value of $ 0.3 million, for the purchase of 613,333 shares of Series G preferred stock. The facility fee and the estimated warrant fair value were recorded as debt discount and is amortized to interest expense over the term of the 2018 Notes. The 2018 Notes bear annual interest at 10 %, of which 7.5 % is payable in cash, with the remaining 2.5 % added to principal through December 31, 2020. Total interest added to principal was $ 1.7 million and $ 1.1 million as of December 31, 2020 and 2019, respectively. Commencing March 2021 and continuing through the maturity date February 2023, the outstanding principal is repayable in 24 equal monthly installments. +The loan may be prepaid by the Company at any time, subject to a prepayment penalty of up to 3 % of the principal amount, depending on the date of prepayment. Upon payment of the 2018 Notes at maturity or prepayment on any earlier date, unless waived, a 2 % back-end facility fee will apply to the amounts paid or prepaid. The 2 % fee is recognized as additional interest expense over the loan term. The 2018 Notes are senior to all of the Company’s other indebtedness including any contingent consideration payable to Indi. +The 2018 Notes contain customary affirmative covenants, and contain negative covenants limiting the ability of the Company to, among other things, incur future debt, transfer assets except for the ordinary course of business, make acquisitions, make certain restricted payments, or to sell assets, subject to certain exceptions. In addition, the 2018 Notes require the Company to comply with a minimum daily liquidity covenant and a rolling monthly revenue requirement. Failure to comply with the covenants and loan requirements may result in early amortization of the loan in a 24- or 36-month payment schedule. As of December 31, 2020, the Company was in compliance with all terms and covenants. +The Company granted the Lender a security interest in all of the Company’s assets through a pledge and security agreement, patent security agreement and trademark security agreement, each between the Company and the Lender. +F-20 +Paycheck Protection Program Note Payable +In April 2020, the Company entered into a loan pursuant to the Paycheck Protection Program under the CARES Act, as administered by the U.S. Small Business Administration (the SBA). The loan, in the principal amount of $ 3.1 million (the PPP Loan), was disbursed by JPMorgan Chase Bank (JPM) pursuant to a Paycheck Protection Program Promissory Note and Agreement (the Note and Agreement). +The PPP Loan matures on the two-year anniversary of the funding date, April 2022, and bears interest at a fixed rate of 1.00 % per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (as discussed below), will commence in September 2021. The Company did not provide any collateral or guarantees in connection with the PPP Loan, nor did the Company pay any facility charge to obtain the PPP Loan. The Note and Agreement provides for customary events of default, including those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the principal of the PPP Loan at any time without incurring any prepayment charges. +All or a portion of the PPP Loan may be forgiven by the SBA and JPM upon application by the Company. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and covered utilities during the eight-week period beginning on the approval date of the PPP Loan. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee earning more than $ 100,000 , prorated annually. Not more than 40 % of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $ 100,000 or less annually are reduced by more than 25 %. The Company currently intends to repay the PPP loan in accordance with the underlying terms and conditions. To the extent we elect to seek forgiveness, the Company cannot assure that the PPP Loan will be forgiven, in whole or in part. If the loan is forgiven in part or in whole, and legal release is received, the Company will reduce the liability by the amount forgiven and record a gain on extinguishment in the statements of operations. +Convertible Notes Payable +March 2020 Notes +In March 2020, the Company issued $ 10.0 million of convertible notes primarily to existing stockholders that were originally scheduled to mature in August 2020 (the March 2020 Notes). In August 2020, the Company and its lenders agreed to extend the maturity date to June 30, 2021 . The March 2020 Notes were issued in two tranches of $ 5.0 million , with the first in March 2020 and the second in June 2020. Interest on the March 2020 Notes was 3 % per annum, payable in full upon maturity through conversion to Series H Preferred Stock at 80 % of the original issuance price of $ 1.15 per share. Under the terms of the March 2020 Notes, on or before the maturity date and if the March 2020 Notes are unpaid, the outstanding principal and unpaid accrued interest under the March 2020 Notes shall be automatically converted into common stock in an initial public offering at a conversion price of 80 % of the per share price of common stock sold in the initial public offering. The discount on the automatic conversion was separated from the March 2020 Notes and reported as a debt discount and put option liability of $ 2.5 million and was amortized over the term of the March 2020 Notes. Following the closing of the initial public offering in October 2020, the March 2020 Notes were automatically converted into 703,503 shares of common stock at a conversion price of $ 14.40 , or 80 % of the initial public offering price per common share. +December 2019 Notes +In December 2019, the Company issued $ 6.0 million of convertible notes primarily to existing preferred shareholders that were originally scheduled to mature in August 2020 (the December 2019 Notes). In August 2020, the Company and its lenders agreed to extend the maturity date to June 30, 2021 . The December 2019 Notes were issued in two tranches of $ 3.0 million , the first in December 2019 and the second in February 2020. Interest on the December 2019 Notes was 3 % per annum and payable in full upon maturity through the conversion to Series H Preferred Stock at 80 % of the original issuance price of $ 1.15 per share. Under the terms of the December 2019 Notes, on or before the maturity date and if the December 2019 Notes are unpaid, the outstanding principal and unpaid accrued interest under the December 2019 Notes shall be automatically converted into common stock in an initial public offering at a conversion price of 80 % of the per share price of common stock sold in the initial public offering. The discount on the automatic conversion was separated from the December 2019 Notes and reported as a debt discount and put option liability of $ 1.5 million and was amortized over the term of the December 2019 Notes. Following the closing of the initial public offering in October 2020, the December 2019 Notes were automatically converted into 426,386 shares of common stock at a conversion price of $ 14.40 , or 80 % of the initial public offering price per common share. +F-21 +August 2019 Notes +In August and September 2019 (the August 2019 Notes), the Company issued $ 10.0 million of convertible notes primarily to existing preferred shareholders that were originally scheduled to mature in August 2020 . In August 2020, the Company and its lenders agreed to extend the maturity date to June 30, 2021 . Interest on the August 2019 Notes was 3 % per annum and payable in full upon maturity through the conversion to Series H Preferred Stock at 95 % of the original issuance price of $ 1.15 per share. Under the terms of the August 2019 Notes, on or before the maturity date and if the August 2019 Notes are unpaid, the outstanding principal and unpaid accrued interest under the August 2019 Notes shall be automatically converted into common stock in an initial public offering at a conversion price of 95 % of the per share price of common stock sold in the initial public offering. In connection with the issuance of the December 2019 Notes, the conversion price on the August 2019 Notes was amended to 80 % . The initial discount on the automatic conversion created an initial put option liability of $ 0.5 million that was separated from the August 2019 Notes. The amendment to the conversion price of the August 2019 Notes in December 2019 resulted in an increase to the put option liability of $ 2.0 million to a total estimated value of $ 2.5 million as of December 31, 2019. The increase in the value of the put option liability was reflected as a change in put option in the 2019 statement of operations. Following the closing of the initial public offering in October 2020, the August 2019 Notes were automatically converted into 718,391 shares of common stock at a conversion price of $ 14.40 , or 80 % of the initial public offering price per common share. +Scheduled principal repayments (maturities) of long-term obligations as of December 31, 2020 were as follows (in thousands): +Year Ending December 31, +As of +December 31, +2020 +2021 +$ +11,840 +2022 +13,919 +2023 +2,320 +2024 +— +2025 +— +Thereafter +— +$ +28,079 +Note 10 – Convertible Preferred Stock +The Company had issued convertible preferred stock from time to time to fund its operations and to make acquisitions. In February and March 2019, the Company issued 8,695,621 shares of Series H Preferred Stock at $ 1.15 per share for total cash proceeds of $ 10.0 million. +The Company’s convertible preferred stock was reported as temporary equity in the Company’s balance sheet because the preferred shareholders held a majority of the Company’s Board of Directors seats and as a result could have caused certain events to occur outside of the Company’s control, with the result the Company could have been obligated to redeem the convertible preferred stock. +Immediately prior to the Company’s initial public offering and as of December 31, 2019, the Company had issued 118,766,273 convertible preferred shares. On October 27, 2020, upon closing of the Company’s initial public offering, each outstanding share of Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Series H Preferred Stock automatically converted into 0.1684664 share of common stock; and each share of Series B-1 Preferred Stock automatically converted into 0.196 shares of common stock. In the aggregate, all Series of preferred stock were converted into 20,090,745 shares of common stock. As a result, as of December 31, 2020 there are no longer any series of convertible preferred stock outstanding. +F-22 +Note 11 – Warrants to Purchase Convertible Preferred Stock +The Company issued warrants to purchase shares of convertible preferred stock in conjunction with the sale of certain of the convertible preferred shares and issuance of debt. The estimated grant date fair value as well as the estimated fair value at each reporting date of the warrants was determined using the Black‑Scholes option pricing model with weighted average assumptions substantially consistent with those disclosed for stock options (see Note 14 – Shared Based Compensation ), other than term, which is the contractual term of the warrant and the use of the exercise price and estimated fair value of the underlying series of convertible preferred stock. At December 31, 2019 and through the closing of the Company’s initial public offering, the preferred warrants were classified as liabilities with estimated fair value remeasured at each reporting date reported within in the accompanying statements of operations. +The following table presents the activity for convertible preferred stock warrants (in thousands, except weighted average exercise price): +Series E +Series G +Warrants +Weighted +Average +Exercise +price +Warrants +Weighted +Average +Exercise +price +Outstanding ‑ December 31, 2019 +925 +$ +5.00 +613 +$ +0.75 +Granted +— +— +— +— +Forfeited/canceled +( 925 +) +( 5.00 +) +— +— +Exercised +— +— +— +— +Reclassification of warrant liability to additional paid-in capital +— +— +( 613 +) +( 0.75 +) +Outstanding ‑ December 31, 2020 +— +$ +— +$ +— +$ +— +Upon closing of the Company’s initial public offering, the then outstanding Series G convertible preferred stock was automatically converted to common stock and the outstanding warrants to purchase Series G convertible preferred stock were automatically converted to warrants to purchase 103,326 shares of common stock at $ 4.46 per share and expire in February 2028 . The warrants were remeasured to an estimate of fair value as of the initial public offering with the change in fair value of $ 1.3 million recognized in our statements of operations. The carrying value of the warrants was reclassified to additional paid-in capital as a result of the initial public offering. +Note 12 – Equity +Common Stock +The Company’s Restated Certificate of Incorporation authorizes the Company to issue up to 200,000,000 shares of common stock with a par value of $ 0.001 per share. The holder of each share of common stock is entitled to one vote per share. The common shareholders are entitled to dividends whenever funds and assets are legally available and when and if declared by the Board of Directors. The Company is currently subject to restrictions on the payment of dividends (see Note 9 - Debt ) and no dividends have been declared as of December 31, 2020. +On October 27, 2020, the Company issued and sold 4,000,000 shares of common stock in a registered initial public offering at a price to the public of $ 18.00 per share. The net proceeds to the Company were approximately $ 63.8 million, after deducting underwriting discounts and commissions of $ 5.0 million and direct offering expenses of approximately $ 3.2 million. +Preferred Stock +The Company’s Restated Certificate of Incorporation authorizes the Company to issue up to 5,000,000 shares of preferred stock with a par value of $ 0.001 per share. As of December 31, 2020, no shares of preferred stock were issued or outstanding. +F-23 +Note 13 - Revenue +The Company’s revenue is generated from (i) diagnostic tests and (ii) assay development and testing services. Diagnostic test revenues consist of blood-based lung tests and COVID-19 tests, which are recognized in the amount expected to be received in exchange for diagnostic tests when the diagnostic tests are delivered. The Company conducts diagnostic tests and delivers the completed test results to the prescribing physician or patient, as applicable. The fees for diagnostic tests are billed either to a third party such as Medicare, medical facilities, commercial insurance payers, or to the patient. The Company determines the transaction price related to its diagnostic test contracts by considering the nature of the payer and historical price concessions granted to groups of customers. For diagnostic test revenue, the Company estimates the transaction price, which is the amount of consideration it expects to be entitled to receive in exchange for providing services based on its historical collection experience, using a portfolio approach. The Company recognizes revenues for diagnostic tests upon delivery of the tests to the physicians requesting the tests or patient, as applicable. +Services revenue consists of on-market tests, pipeline tests, custom diagnostic testing, and other scientific services for a purpose as defined by any individual customer, which is often with large biopharmaceutical companies. The performance obligations and related revenue for these sales is defined by a written agreement between the Company and the customer. These services are generally completed upon the delivery of testing results, or other contractually defined milestone(s), to the customer. Revenue for these services is recognized upon delivery of the completed test results, or upon completion of the contractual milestone(s). +Revenues consisted of the following (in thousands): +Year Ended December 31, +2020 +2019 +Diagnostic tests +$ +40,919 +$ +17,315 +Services +4,638 +7,237 +Total revenue +$ +45,557 +$ +24,552 +The Company’s fiscal 2020 diagnostic test revenue consists of $ 28.3 million in COVID-19 test revenue, which began in late fiscal 2020, and $ 12.6 million in lung diagnostic revenue. +Contract Liabilities +Contract liabilities consist of cash payments from customers received in advance of delivery (advance deposits). As products are shipped and control transfers, the Company recognizes the deferred revenue in ‘Revenues’ in the statements of operations. At January 1 and December 31, 2020, $ 1.3 million and $ 3.5 million, respectively, of advance deposits were reported in ‘Deferred revenue’ in the accompanying balance sheets. Of the $ 1.3 million in deferred revenue recorded at January 1, 2020, $ 0.7 million was recognized in revenues during the year ended December 31, 2020. The deferred revenue of $ 3.5 million at December 31, 2020 is expected to be recognized in revenues during 2021 as test results are delivered. +Note 14 – Share Based Compensation +2016 Equity Incentive Plan and Predecessor 2006 Equity Incentive Plan +In February 2016, the Company adopted the 2016 Equity Incentive Plan (2016 Plan) as a successor to and continuation of the prior 2006 Equity Incentive Plan (2006 Plan). The 2016 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other stock awards to directors, employees, and consultants. Awards granted under the 2016 Plan or the 2006 Plan that expired or otherwise terminated, or were forfeited, cancelled, or repurchased by the Company, became available for future issuance under the 2016 Plan. In addition, shares subject to an award were withheld to satisfy a participant’s tax withholding obligations, or were reacquired by the Company as consideration for the exercise or purchase price of a stock award also became available for future issuance under the 2016 Incentive Plan. +F-24 +2020 Equity Incentive Plan +Effective upon the closing of our initial public offering, the Company’s Board of Directors approved the 2020 Equity Incentive Plan (2020 Plan), which replaced the 2016 Plan. The 2020 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other stock awards. Officers, directors, employees, consultants, agents, and independent contractors who provide services to the Company may receive awards. The terms of all awards are governed by an agreement between the Company and the recipients, as administered and approved by the Compensation Committee of the Board of Directors. +Employee Stock Purchase Plan +Effective with our initial public offering in October 2020, the Company’s Board of Directors and its stockholders approved the Company’s Employee Stock Purchase Plan (ESPP). A total of 338,106 shares of our common stock have been reserved for issuance under the ESPP. The maximum number of shares of our common stock available under the ESPP will automatically increase on the first trading day of each calendar year, commencing January 2021, by an amount equal to the lesser of (i) 1 % of the shares of our common stock issued and outstanding on December 31 of the immediately preceding calendar year, and (ii) an amount determined by our Board of Directors. +Subject to any plan limitations, the ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. The price at which common stock is purchased under the ESPP is equal to 85 % of the fair market value of the Company’s common stock on the first or last day of the offering period, whichever is lower. No employee may participate in an offering period if the employee owns 5% or more of the total combined voting power or value of the Company’s stock. The initial offering period will commence from January 1, 2021 through August 31, 2021. On a going forward basis, the ESPP provides for successive six-month offering periods beginning on September 1st and March 1st of each year. +Shares Reserved Subject to All Plans +The number of shares reserved for issuance under the 2020 Plan is 1,893,395 , plus an annual increase added on the first day of each calendar year, beginning with the calendar year ending December 31, 2022, and continuing until, and including, the calendar year ending December 31, 2030. The annual increase will be equal to the lesser of (i) 4 % of the number of shares of our common stock issued and outstanding as of December 31st of the immediately preceding calendar year and (ii) such lesser amount determined by the Board of Directors. Up to 1,893,395 shares of our common stock that may be issued under the 2020 Plan may be issued in satisfaction of incentive stock option awards. +Under the 2006 Plan, the Company is authorized to grant incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards and restricted stock units up to 831,389 total award shares. No additional awards may be granted under the 2006 Plan. Unallocated shares under the 2006 Plan were added to the shares available for issuance under the 2016 Plan. +Under the 2016 Plan, which is a successor to and continuation of the 2006 Plan, the Company is authorized to grant incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock units and stock appreciation rights up to 1,431,964 total shares, plus any shares subject to stock awards made under the 2006 Plan . +Our Compensation Committee may grant other stock awards that are based on or related to shares of our common stock, such as awards of shares of common stock granted as bonus and not subject to any vesting conditions, deferred stock units, stock purchase rights, and shares of our common stock issued in lieu of our obligations to pay cash under any compensatory plan or arrangement. To date, t he Company has granted service-condition RSUs. +To the extent an equity award granted under the 2020 Plan (other than any substitute award) or granted under any other equity plan maintained by us under which awards are outstanding as of the effective date of the 2020 Plan (the Prior Plans) expires or otherwise terminates without having been exercised or paid in full, or is settled in cash, the shares subject to such award will become available for future grant under the 2020 Plan. In addition, to the extent shares subject to an award are withheld to satisfy a participant’s tax withholding obligation upon the exercise or settlement of such award (other than any substitute award) or to pay the exercise price of a stock option granted under the 2020 Plan or a Prior Plan, such shares will become available for future grant under the 2020 Plan. The total number of shares available for grant under all Plans was 4,647,380 at December 31, 2020. +F-25 +Description of Awards Granted +The Company has granted incentive stock options, non-statutory stock options, performance-based stock options, and restricted stock units. +Incentive stock options, which may only be issued to employees, are granted at an exercise price per share equal to the fair market value per share of the underlying common stock on the grant date, and vest over time as determined by the Compensation Committee, provided that the term of the options may not exceed ten years from the date of grant. Accelerated vesting may occur in the event of an optionee's death, disability, or other events. +Non-statutory stock options may be issued to non-employees and directors, with exercise prices, vesting conditions, option term and other conditions as determined by the Compensation Committee. +Performance-based stock options are typically granted on an annual basis and consist of a performance-based and service-based component. The performance targets and vesting conditions for performance-condition options are based on achievement of recognized revenue targets. Performance-based options vest in three equal annual installments beginning one year after the grant date , pending certification of performance achievement by the Compensation Committee and continued service. The fair value of performance-condition awards is based on the closing market price of the Company’s common stock on the grant date. Compensation expense, net of forfeitures, is updated for the Company’s expected performance level against performance goals at the end of each reporting period. On January 1, 2019, the Company granted 168,466 performance-condition options, with an exercise price of $ 0.77 per share and a term of ten years . During the year ended December 31, 2020, the performance conditions were met and 56,155 options vested. During the year ended December 31, 2019, the performance conditions were not met and 56,155 options were forfeited. As of December 31, 2020, there were 56,156 performance condition options outstanding with a remaining life of approximately eight years . +Restricted stock units and the related terms and conditions are awarded at the discretion of the Compensation Committee. RSU holders have a contractual right to receive a share of common stock when vested. RSUs generally vest over three years . RSU agreements may provide for accelerated vesting in the event of a stock unit holder's death, disability, or retirement or other events. +Bonus-To-Options Program +The Company also has a Bonus-to-Options Program (the “Bonus Option Program”), which is separate from predecessor Plans and was initially adopted by the Board of Directors in 2008, and subsequently amended and restated in 2010, 2011 and 2015. For fiscal year 2021, the Bonus Option Program is subject to the shares reserved under the 2020 Plan. The Bonus Option Program, which is limited to participation of the Chief Executive Officer, direct reports to the Chief Executive Officer and Vice Presidents of the Company, allows participants who so elect to convert all or a portion of their annual cash bonus into fully vested, non-qualified stock options to purchase shares of common stock (Bonus Options). The exercise price for the options under the Bonus Option Program equals the then current price for the shares of the common stock as of the grant date, as disclosed below under “ Fair Value of Common Stock ”. Bonus Options issued must be exercised within a ten-year term. A maximum of 1 % of the fully diluted equity, as of December 31 of the year for which the bonus was awarded, may be issued in any one year to the participants. As of December 31, 2020, there were 173,229 options outstanding under the Bonus Option Program. These options are fully vested and have a weighted average exercise price of $ 11.11 per share and have an intrinsic value of approximately $ 1.6 million as of December 31, 2020 . +During the twelve-month period ended December 31, 2020, the Company accrued $ 3.4 million as stock compensation expense associated with the estimate of options to be delivered to eligible participants under the Bonus Option Program and which were granted in February 2021 by the Compensation Committee of the Board of Directors. In determining the amount of stock compensation to recognize under the Bonus Option Program, the Company estimates the bonus attainment for the year and determines the expected number of options to be delivered to eligible participants. A Black-Scholes option pricing model is used to determine the estimated fair value of the expected number of options to be delivered to eligible participants. The key elements in determining the estimated fair value include assumptions for volatility, the risk free interest rate, expected dividends and strike price, utilizing the measurement date closing stock price until the grants are authorized. +F-26 +Share-Based Compensation Expense +Pre-tax share-based compensation expense reported in the Company’s statements of operations was (in thousands): +Year Ended December 31, +2020 +2019 +Research and development +$ +589 +$ +33 +Sales, marketing, general and administrative +3,120 +137 +Total +$ +3,709 +$ +170 +The unrecognized remaining share-based compensation expense for options and RSUs was approximately $ 0.6 million as of December 31, 2020, and is expected to be amortized to expense over the next 3.7 years. +Stock Options +Stock option activity during the year ended December 31, 2020, excluding the Bonus Option Program described above, was (in thousands, except weighted average exercise price and weighted average contractual life): +Number of +Options +Weighted +Average +Exercise +Price +Weighted +Average +Contractual +Life (Years) +Aggregate +Intrinsic +Value +Outstanding - December 31, 2019 +1,916 +$ +1.72 +7.6 +$ +— +Granted +828 +2.81 +— +— +Forfeited/canceled +( 55 +) +0.60 +— +— +Exercised +( 368 +) +3.65 +— +— +Outstanding ‑ December 31, 2020 +2,321 +$ +1.82 +7.4 +$ +42,580 +Exercisable ‑ December 31, 2020 +1,190 +$ +2.35 +6.3 +$ +21,194 +Fair Value of Common Stock +Prior to the Company’s initial public offering, the fair value of the Company’s common stock underlying the stock options was determined by the Board of Directors with assistance from management and, in part, on input from an independent third-party valuation firm. The Board of Directors determined the fair value of common stock by considering a number of objective and subjective factors, including valuations of comparable companies, sales of convertible preferred stock, operating and financial performance, the lack of liquidity of the Company’s common stock and the general and industry-specific economic outlook. Subsequent to the Company’s initial public offering, the fair value of the Company’s common stock is determined based on its closing market price. +The fair value of each option grant prior was estimated on the grant date using the Black‑Scholes option pricing model with the following weighted average assumptions for the year ended December 31, 2020: +Risk‑free rate +0.34 +% +Expected term (in years) +5.73 +Expected dividend yield +—% +Expected volatility +77 +% +The Company estimated volatility based on the historical volatility of its peer group and average expected life based on the review of historical exercise behavior of option grants with similar vesting periods. +F-27 +Restricted Stock Units and Restricted Stock Unit Activity +Service-condition RSUs were granted to Board members and vest over three years , 40 % over the first two years and the remaining 60 % over the third year from the grant date. During the year ended December 31, 2020, the Company granted 52,736 service-condition RSUs. As of December 31, 2020, there were 79,104 RSUs outstanding, with a weighted average grant date fair value of $ 6.83 per share. +Note 15 – Earnings per Share +Excluded from determination of diluted net loss attributable to common stockholders for the periods presented because inclusion would be anti-dilutive are the instruments below, the terms of which are described in further detail in Note 14 – Share Based Compensation. The potentially dilutive securities as of December 31, 2020 and 2019 primarily represent the shares subject to future issuance under stock options awards, warrants and RSUs and would be subject to the treasury stock method when dilutive. The number of common shares that convertible debt was assumed to convert to was based on the Company’s estimated common stock price as of December 31, 2019, as determined by the Company’s Board of Directors with assistance from a valuation firm. +Year Ended December 31 +2020 +2019 +Numerator +Net loss attributable to common stockholders +$ +( 31,350 +) +$ +( 30,726 +) +Denominator +Weighted-average shares outstanding used +in computing net loss per share, basic and diluted +4,838 +242 +Net loss per share, basic and diluted +$ +( 6.48 +) +$ +( 126.97 +) +The following outstanding common stock equivalents were excluded from diluted net loss attributable to common stockholders for the periods presented because inclusion would be anti-dilutive (in thousands): +Year Ended December 31 +2020 +2019 +Options to purchase common stock +2,495 +2,104 +Convertible preferred stock +— +119,257 +Warrants +103 +1,538 +Restricted stock units +79 +26 +Convertible debt +— +21,131 +Total +2,677 +144,056 +F-28 +Note 16 - Income Taxes +Since inception, the Company has incurred net taxable losses, and accordingly, no current provision for income taxes has been recorded. The effective income tax rate of the provision for income taxes differs from the federal statutory rate as follows: +Years Ended December 31, +2020 +2019 +Federal statutory income tax rate +21 +% +21 +% +State income taxes, net of federal benefit +2 +4 +Research and developments credits +( 1 +) +2 +Permanent items +( 6 +) +( 4 +) +Change in valuation allowance +( 16 +) +( 23 +) +Effective income tax rate +— +% +— +% +The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities are as follows (in thousands): +Years Ended December 31, +2020 +2019 +Deferred Tax Assets: +Net operating loss carryforwards +$ +53,128 +$ +50,360 +Research and development tax credits +2,860 +3,040 +Property and equipment +279 +370 +Stock-based compensation +865 +— +Accruals and reserves +1,406 +286 +Total +58,538 +54,056 +Valuation allowance +( 56,083 +) +( 51,135 +) +Total deferred tax assets after valuation allowance +2,455 +2,921 +Deferred Tax Liabilities: +Intangible assets +( 2,455 +) +( 2,921 +) +Total deferred tax liabilities +( 2,455 +) +( 2,921 +) +Net deferred tax assets and liabilities +$ +— +$ +— +At December 31, 2020, the Company had $ 233.6 million and $ 3.6 million of net operating loss and research and experimentation tax carryforwards, respectively, which are set to expire beginning in 2026 . The Internal Revenue Code contains provisions that may limit the net operating loss carryovers available to be used in any year if certain events occur, including significant changes in ownership interest. +In assessing the realizability of its deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As the Company does not have any historical taxable income, projections of future taxable income over the periods in which the deferred tax assets are deductible, and after consideration of the history of operating losses, the Company does not believe it is more likely than not that it will realize the benefits of net deferred tax assets and, accordingly, has established a valuation allowance equal to 100 % of net deferred tax assets. The valuation allowance increased by $ 4.9 million during 2020 and $ 7.0 million during 2019. +F-29 +During 2020, the Company determined that it now has uncertain tax positions related to its U.S. research and development credits. As of December 31, 2020 and 2019, there was no accrued interest related to uncertain tax positions. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change in the next twelve months . A reconciliation of beginning and ending balances for unrecognized tax benefits is as follows (in thousands): +Year Ended +December 31, +2020 +Balance at January 1 +$ +— +Additions for tax positions related to the current year +106 +Additions for tax positions related to prior years +609 +Reductions for tax positions related to prior years +— +Reductions related to settlements +— +Reductions related to a lapse of statute +— +Balance at December 31 +$ +715 +The Company monitors proposed and issued tax law, regulations, and cases to determine the potential impact of uncertain income tax positions. At December 31, 2020, the Company had not identified any potential subsequent events that would have a material impact on unrecognized income tax benefits within the next twelve months. +All years will remain open for examining by federal and state authorities for three and four years, respectively, from the date of utilization of any net operating loss carryforwards. +Note 17 – Commitments and Contingencies +Leases +The Company leases facilities under non‑cancelable operating leases. Rent expense was $ 1.7 million and $ 2.1 million for the years ended December 31, 2020 and 2019, respectively. +Future minimum lease payments for operating lease obligations are as follows as of December 31, 2020 (in thousands): +Year Ending December 31, +2021 +$ +703 +2022 +724 +2023 +112 +2024 +— +2025 +— +Thereafter +— +$ +1,539 +F-30 +Co‑Development Agreement +In April 2014 and amended in October 2016, the Company entered into a worldwide agreement with AVEO to develop and commercialize AVEO's hepatocyte growth factor inhibitory antibody ficlatuzumab with the Company's proprietary companion diagnostic test, BDX004, a version of the Company’s serum protein test that is commercially available to help physicians guide treatment decisions for patients with advanced non‑small cell lung cancer (NSCLC). Under the terms of the agreement, AVEO will conduct a proof‑of‑concept (POC) clinical study of ficlatuzumab for NSCLC in which BDX004 will be used to select clinical trial subjects (the NSCLC POC Trial). The Company and AVEO will share equally in the costs of the NSCLC POC Trial, and each will be responsible for 50 % of development and regulatory costs associated with all future clinical trials agreed upon by the Company and AVEO. The Company and AVEO continue to conduct POC clinical trials of ficlatuzumab in combination with BDX004 with each responsible for 50 % of development and regulatory costs. +In September 2020, the Company exercised its opt-out right with AVEO for the payment of 50 % of development and regulatory costs for ficlatuzumab effective December 2, 2020. The Company had $ 0.3 million in remaining obligations related to the AVEO agreement as of the opt-out date. Following the effective date, the Company is entitled to a 10 % royalty of net sales of ficlatuzumab and 25 % of license income generated from the licensing of ficlatuzumab from AVEO. +Expenses related to this agreement for the years ended December 31, 2020 and 2019 were approximately $ 0.9 million and $ 0.9 million, respectively. +License Agreement +In August 2019, we entered into a non-exclusive license agreement with Bio-Rad Laboratories, Inc. (Bio-Rad) (the Bio-Rad License). Under the terms of the Bio-Rad License, the Company received a non-exclusive license, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of Droplet Digital PCR™ (ddPCR) in cancer detection testing for third parties in the United States. The Company also agreed to purchase all of the necessary supplies and reagents for such testing exclusively from Bio-Rad, pursuant to a separately executed supply agreement (the Supply Agreement) with Bio-Rad. As further consideration for the non-exclusive license, the Company agreed to pay a royalty of 2.5 % on the net revenue received for the performance of such ddPCR testing collected from third parties. The Bio-Rad License expires in August 2024 . Either party may terminate for the other’s uncured material breach or bankruptcy events. Bio-Rad may terminate the Bio-Rad License if the Company does not purchase licensed products under the Supply Agreement for a consecutive twelve-month period or for any material breach by us of the Supply Agreement. The Company incurred royalty expense of $ 0.1 million and $ 0.1 million for the years ended December 31, 2020 and 2019, respectively, under the Bio-Rad License. +Revenue Share Agreement +As part of the acquisition of Oncimmune, the Company entered into several agreements to govern the relationship between the parties. The Company agreed to a revenue share payment related to an acquired diagnostic test of 8 % of recognized revenue for non-screen tests up to an annual minimum volume and 5 % thereafter, with an escalating minimum through the first four years of sales . Revenue share expenses of $ 0.3 million were recognized for the year ended December 31, 2020. +Note 18 – Defined Contribution 401(k) Plan +The Company sponsors a 401(k) defined contribution plan covering all eligible employees. The Company did no t make any discretionary or employer matching contributions under the plan during the years ended December 31, 2020 or 2019. +F-31 \ No newline at end of file diff --git a/raw/filings/0001439725/2020/0001564590-21-013512/filing_metadata.csv b/raw/filings/0001439725/2020/0001564590-21-013512/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..5a616f7cc8e3324adc15649e8371b6dc6ad3b33e --- /dev/null +++ b/raw/filings/0001439725/2020/0001564590-21-013512/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001439725,BDSX,BIODESIX INC,10-K,2021-03-16,2020-12-31,2021-03-16T19:01:43.000Z,0001564590-21-013512,bdsx-10k_20201231.htm,10-K,14507662,1,1,https://www.sec.gov/Archives/edgar/data/1439725/000156459021013512/bdsx-10k_20201231.htm,https://www.sec.gov/Archives/edgar/data/1439725/000156459021013512/,2020,2020,1 diff --git a/raw/filings/0001439725/2020/0001564590-21-013512/item1.txt b/raw/filings/0001439725/2020/0001564590-21-013512/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..388483f23c8c82faab67dcb3feb68191ab2b4cfb --- /dev/null +++ b/raw/filings/0001439725/2020/0001564590-21-013512/item1.txt @@ -0,0 +1,518 @@ +Item 1. Business. +Our mission is to improve every patient’s lung disease care by empowering physicians with swift, comprehensive and actionable insights. +Our vision is to be a trusted business partner that the world relies on for data-driven diagnostics in lung disease and beyond. +Business Overview +Biodesix, Inc. (“Biodesix”, “we,” “us,” “our” or the “Company”) is a leading data-driven diagnostic solutions company leveraging state of the art technologies with our proprietary artificial intelligence (AI) platform to discover, develop, and commercialize solutions for clinical unmet needs, with a primary focus in lung disease. By combining a technology agnostic approach with a holistic view of the patient’s disease state, we believe our solutions provide physicians with greater insights to help personalize their patient’s care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe improves overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic Cortex®, to discover innovative diagnostic tests for clinical use. Because of this approach, we believe we are unique in the diagnostics market as this approach allows for a broader and more holistic understanding of each patient’s disease state. Our data-driven and technology agnostic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +We operate in a single segment and derive our revenue from two sources: (i) providing diagnostic testing services associated with blood-based lung and Coronavirus Disease 2019 (COVID-19) tests (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics (Services). We derived 90% and 71% of our total revenues for fiscal 2020 and fiscal 2019, respectively, from our diagnostic testing business. +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. Since our inception, we have performed over 285,000 tests and continue to generate a large and growing body of clinical evidence. We have participated in 27 clinical studies, five of which are ongoing, and have published over 275 peer-reviewed publications and presentations. We have over 140,000 samples and data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development (R&D) initiatives. +We have commercialized six diagnostic tests which are currently on market and we perform over 30 assays for research use as part of our laboratory services that have been used by over 50 biopharmaceutical customers and academic partners. +Blood-Based Lung Tests +We have four diagnostic blood-based tests across the lung cancer continuum of care, which generated $12.6 million and $17.3 million in revenue for fiscal 2020 and 2019 , respectively. +• +Nodify XL2® and Nodify CDT™ tests, together marketed as part of our Nodify Lung ™ Nodule Risk Assessment testing strategy, assess the risk of lung cancer to help identify the most appropriate treatment pathway. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +3 +• +GeneStrat ® and VeriStrat ® tests, together marketed as part of our Biodesix Lung Reflex ® testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to establish the patient’s prognosis and help guide treatment decisions. The GeneStrat tumor profiling test and the VeriStrat immune profiling test have a three-day average turnaround time, providing physicians with timely results to facilitate treatment decisions. +COVID-19 Tests +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe™ testing program. We generated $28.3 million in revenue from COVID-19 testing during fiscal 2020. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two United States Food and Drug Administration (FDA) Emergency Use Authorization (EUA)-authorized tests, a part of our customizable WorkSafe™ program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. +In February 2020, the U.S. Department of Health and Human Services Secretary declared a public health emergency for COVID-19 which justified the authorization of emergency use of diagnostic tests for the detection and/or diagnosis of COVID-19. The Bio-Rad SARS-CoV-2 Droplet Digital™ polymerase chain reaction ( ddPCR) test and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. The Bio-Rad SARS- CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under the Clinical Laboratory Improvement Amendments (CLIA) to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. Using the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab tests, we operate and have commercialized the Biodesix WorkSafe testing program. +Prior to using the Bio-Rad tests as part of our WorkSafe testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Post-launch development support for these tests have included improvements in on-boarding new personnel, logistics of sample collection, sample receipt and data reporting, all required to support our testing program. Additional releases of the laboratory data management software are ongoing and planned for the foreseeable future. +These tests are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems to assist in their back-to-work or back-to-school strategies, a crucial element of restarting economic activity. During 2020, we announced multiple partnerships for COVID-19 testing and have entered into an agreement with the State of Colorado to be one of the diagnostic companies to support wide-spread COVID-19 testing for the State. Additionally, we oversee and manage onsite testing and validating testing for the Big Ten Conference athletic competitions. +COVID-19 Pandemic +The COVID-19 pandemic has disrupted, and we expect will continue to disrupt, our non-COVID-19 testing operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States of Colorado and Kansas’ public health orders and the guidance from the Centers for Disease Control and Prevention. Employees who can perform their duties remotely are asked to work from home and those on site are asked to follow our social distance guidelines. Our sales, marketing and business development efforts have also been constrained by our operational response to the COVID-19 pandemic due to travel restrictions. We expect to continue to adjust our operational norms in an effort to help slow the spread of COVID-19 in the coming months, including complying with government directives and guidelines as they are modified and supplemented. +4 +The COVID-19 pandemic also has started to negatively affect, and we expect will continue to negatively affect, our non- COVID-19 testing- related revenue and our clinical studies. For example, cancer patients may have more limited access to hospitals, healthcare providers and medical resources as they take steps to control the spread of COVID-19. Our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized. As a result of the COVID-19 pandemic, beginning in the latter half of March 2020, we have been receiving fewer samples for non-COVID-19 testing on a daily average basis from our clinical and biopharmaceutical customers than before the outbreak of the COVID-19 pandemic. Further, our clinical studies, such as our ongoing INSIGHT study and our recently launched ALTITUDE study, as well as our arrangements with our biopharmaceutical customers, are expected to take longer to complete than what we originally expected before the outbreak of the COVID-19 pandemic. +Conversely, we are also experiencing an increase in revenues related to an increase in the demand for our Biodesix WorkSafe testing program which generated revenue of $28.3 million during fiscal 2020 of which $21.4 million is attributable to the fourth quarter 2020. As a result, our operating costs to expand capacity for COVID-19 testing also increased substantially during 2020 and we expect that trend to continue into the first quarter of 2021. There is no assurance that our COVID-19 testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. If the pandemic were to dissipate, whether due to acquiring herd immunity based on previous natural infection, and the availability and rapid distribution of vaccines, the evolution of variant strains that impact diagnostic test performance, or otherwise, the need for a COVID-19 test could decrease significantly and this could have an adverse effect on our results of operations and profitability. As a result, the increase in revenue due to any increase in demand for these diagnostic tests may not be indicative of our future revenue. See “Risk Factors” for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations. +Full Year Results for 2020 +For the year ended December 31, 2020, compared to the prior year: +• +Total Revenue was $45.6 million, an increase of 86%; +• +Gross Margin was $23.6 million, an increase of 27%; +• +Operating Expenses, Excluding Cost of Revenue, were $46.5 million, an increase of 3%; +• +Net Loss and Comprehensive Loss was $31.4 million, an increase of 2%; +• +Basic and Diluted Net Loss Per Common Share was $6.48; +• +Net Cash Used by Operating Activities was $21.4 million, compared to $21.7 million used; and +• +Cash and Cash Equivalents was $62.1 million at December 31, 2020, an increase of $56.8 million primarily resulting from our successful initial public offering in October 2020. +5 +Our Market Opportunity +Diagnostic Testing Market Size and Opportunity +Despite significant advances over the last decade, lung cancer is still the deadliest type of cancer in both men and women in the United States today. While diagnostic testing has become routinely used at certain points in the lung cancer continuum of care (diagnosis, treatment and monitoring), we believe there is a substantial need for novel, advanced testing to improve on the current standard of care. We estimate that in the United States, the lung cancer continuum of care currently represents over 10 million annual testing opportunities, and is over a $27 billion market annually for testing alone. +Over the last two decades, the use of biomarker testing in clinical trials has increased, with 55% of oncology trials involving the use of biomarker testing in 2018 versus 15% in 2000. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their research and development pipelines and increase chances of drug development success. We estimate that the biopharmaceutical partnering and research opportunities represent over a $2 billion market annually. +Lung Cancer Continuum of Care – Clinical Unmet Needs +Standards of care in lung cancer have evolved rapidly over the past decade, along with our understanding of the disease. With the introduction of numerous treatment options, physicians need an ever-increasing amount of information in order to select the best treatment plan for each individual patient. We believe that the lung cancer continuum of care has a variety of clinical unmet needs ranging from initial diagnosis of lung cancer after discovery of a lung nodule to treatment guidance for early and advanced stage disease, and monitoring for disease progression. +• +Diagnosis : We estimate approximately 1.6 million new incidental lung nodules and potentially 4 million lung nodules from the adoption of screening could be identified annually in the United States. Following initial discovery of a nodule, patients are typically evaluated by a pulmonologist for risk of lung cancer before an invasive procedure is carried out to obtain a tissue sample to confirm diagnosis. This risk assessment is based on clinical factors such as the patient’s smoking history and age, and radiological features such as the size and location of the nodule, obtained from a computed tomography (CT) scan. On initial assessment, we estimate that approximately 80% of patients are identified as low to moderate risk (5-65%) where guideline recommendations for their care plan are unclear, often resulting in either overtreatment of patients with benign nodules or undertreatment in patients with cancer. An estimated 17% of patients with malignant nodules are initially sent to watchful waiting, where a follow-up CT scan is scheduled in three to six months, potentially delaying their diagnosis. Conversely, we estimate that 62% of biopsies and 35% of surgeries performed on lung nodules find benign disease, representing a significant overtreatment that incurs both risk and cost to the patient and their providers. We therefore believe that there is a clear clinical need for blood-based diagnostic testing to help improve the initial risk assessment of pulmonary nodules, helping direct patients to the relevant treatment pathway, and ultimately improving patient outcomes and saving costs to the system. +6 +• +Treatment Guidance – Early Stage : We estimate that there are over 700,000 testing opportunities annually in the United States in early - stage lung cancer to assess a patient’s risk of recurrence following curative-intent surgery, and to detect potential target mutations for therapeutics. Depending on a patient’s risk of recurrence, they may also receive chemotherapy, radiotherapy or chemoradiation post-surgery. The assessment of risk of recurrence is primarily based on the stage of cancer at diagnosis, with stage I patients typically receiving no additional treatment beyond surgery. However, 20 to 40% of patients with stage I disease do still recur within five years following surgery, representing a sub-group of patients who may have benefitted from more intensive treatment protocol. We believe there is a clear clinical need for blood-based diagnostic testing prior to surgery to identify stage I patients who may benefit from a more intensive treatment protocol and we also believe there is the need for identifying stage II and IIIA patients where low risk patients may benefit from a less intensive treatment protocol. There have also been recent advances in the use of targeted therapies in early - stage lung disease. These therapies typically target specific genomic mutations or alterations found in some tumors. We believe there is therefore an emerging need for testing designed specifically for mutation detection in early -stage disease. +• +Treatment Guidance – Advanced Stage: We estimate that there are over 3 million diagnostic testing opportunities annually in the United States to guide advanced stage lung cancer treatment decisions. With nearly 50 FDA-approved systemic treatment regimens listed in national treatment guidelines for non-small cell lung cancer (NSCLC), there is an elevated need for personalized biomarkers to help physicians identify the right patient for the right treatment. Multiple tissue-based diagnostic tests have been approved to identify patients eligible for targeted therapies and immunotherapy; however, about 50% of patients do not have sufficient tissue collected following diagnosis to facilitate testing. To compound the issue, different molecular tests take varying amounts of time (days versus weeks) to report results back to the ordering physician, which often leads to treatment decisions being made on incomplete information. Therefore, we believe there is an imminent need for a blood-based testing solution that measures tumor mutations and the patient’s immune profile, to provide physicians with more comprehensive and timely information to assess the overall prognosis of the patient and personalize treatment. +• +Monitoring : We estimate that there are over 800,000 testing opportunities in the United States for blood-based tumor and immune profiling to monitor for disease recurrence and progression in NSCLC patients. Unfortunately, advanced stage lung cancer is often terminal, so repeat tissue biopsy to assess the evolution of resistance mutations or to detect disease progression is not feasible from either a cost or risk perspective to the patient, which we believe demonstrates an important need for blood-based testing to help routinely monitor these patients. As a patient progresses through therapies, changes in their immune system occur and blood-based immune profiling could help physicians identify these changes prior to subsequent therapy selection. +Current Limitations in Biomarker Discovery and Companion Diagnostics +We estimate the biopharmaceutical biomarker testing and companion diagnostic market opportunity is $2 billion annually . Over the last two decades, the use of biomarker testing in clinical trials has increased, with 55% of oncology trials involving the use of biomarker testing in 2018 versus 15% in 2000. From 2005 to 2015, a study identified that incorporating biomarkers into clinical development programs increased their probability of therapeutic success rate from phase 1 to FDA-approval by 570%, representing an increase from 1.6% without biomarkers to 10.7% with biomarkers. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their product development efforts and increase chances of drug development success. However, we believe as the market continues to advance, inherent limitations of both biomarker discovery and companion diagnostic development have become more apparent. +Biomarker Discovery : There are many limitations with biomarker discovery in biopharmaceutical drug development, including: +• +Biomarkers with clinical utility are difficult to discover and validate in independent datasets. +• +Classical statistical approaches to biomarker discovery are limited. Single-omic tests fail to see the whole biological picture. +7 +• +Tissue biopsies are limited by the amount of a sample that can be collected: longitudinal testing is difficult and the biology is only from the profile of the tumor (host response is not accounted for). +• +Clinical trials are expensive and take a long period of time. It is often difficult to meet enrollment goals for clinical trials with slow diagnostic testing turnaround times. +Companion Diagnostics (CDx): While developing companion diagnostics is critical to precision medicine, the promise of companion diagnostics has not been fully realized and there are multiple limitations that still need resolution. The path to co-develop a successful companion diagnostic with a corresponding drug has several challenges, including: +• +Traditional companion diagnostic agreements may fail to realize the full value of a testing opportunity, leading to difficulty in funding appropriate commercialization. +• +Drug development is a lengthy, complex and costly process. There can be a financial impact to a pharmaceutical company to have a drug selected by a test. +• +Current diagnostic reimbursement policies may not always support the coverage and payment of new companion diagnostics. +• +Regulatory agencies continue to work on defining the co-development process, but the environment is continually changing. +The Diagnostic Cortex - Our Proprietary Artificial Intelligence (AI) Platform +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic Cortex, to discover innovative diagnostic tests for clinical use. We focus on developing technologies that are capable of single and multi-omic research and development. +The Diagnostic Cortex is an extensively validated deep learning platform optimized for the discovery of clinical diagnostic tests, which we believe overcomes standard machine learning challenges faced in life sciences research. Researchers commonly encounter issues with machine learning-based biological discoveries that cannot be repeated or validated when assessed in additional specimen cohorts. This challenge, commonly referred to as overfitting, occurs when the machine identifies a perfect pattern in an initial training dataset but is unable to identify the same pattern in a new dataset. For over 15 years we have focused on developing our platform to overcome this challenge through proprietary computational techniques to ensure each diagnostic test that is discovered can be further developed to perform consistently in the clinical testing environment. +We are able to combine blood-based biological information related to the tumor, immune system, and host-status with clinical and radiomic data through our proprietary AI platform, which enables us to interpret the holistic disease state of each patient or clinical dataset we encounter. +We continuously evolve and improve the Diagnostic Cortex platform. These improvements range from basic code optimization to complex improvements such as the incorporation of novel computational methods for the optimization of multi-omic diagnostic tests. Any AI platform is inherently limited without the highest quality data inputs. Therefore, all of the technologies that we employ have been chosen and developed to provide high-quality data to enable our Diagnostic Cortex platform. We feel that this level of data integrity is crucial for the development of diagnostic tests that require the advanced pattern matching abilities of deep learning algorithms. +We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and learn about biological discoveries that are clinically meaningful. Additionally, we incorporate clinical and molecular profiling data aggregated through our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or academic partnerships, into our platform. We have over 140,000 samples and data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external development initiatives. With our data-driven and technology agnostic approach as data inputs into the Diagnostic Cortex, we are able to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +8 +The following is a diagram outlining our innovative diagnostic test discovery, development and commercialization infrastructure as outlined in the text above. +We employ multiple technologies, as illustrated below, including genomics, proteomics, transcriptomics, and radiomics, generated by different assay techniques, including ddPCR, NGS, LC-MS, ELISA, and our proprietary DeepMALDI mass spectrometry platform for the blood-based molecular analysis of the tumor, immune system, and host-status of each patient and/or clinical dataset. Through our learning loop, we continuously revisit our technology strategy and roadmap to integrate new technologies into our evolving platform, which ultimately support the addition of new service and product revenue offerings. We focus on developing technologies that are capable of single and multi-omic research and development. +Most diagnostic companies focus their strategy on using a single technology to discover biomarkers for a broad range of clinical questions. We believe that no single technology can interrogate the complexity of the human disease state to help solve all clinical questions. For that reason, we employ a technology agnostic approach to solving diagnostic challenges leveraging our proprietary AI platform. Because of this approach, we believe we are unique in the diagnostics market, allowing for a broader and more holistic understanding of each patient’s disease state. +We are experts in many technologies, but we are a true market leader with over 15 years of experience in the field of clinical proteomics. For over 10 years, we have been discovering and developing proteomic-based diagnostic tests and have a deep understanding of how to incorporate technologies that can be applied to blood samples in order to extract important protein-based biological information in the form of diagnostic tests, which can aid clinicians and scientists in understanding the dynamic biology of their system of interest, such as a patient with cancer. +9 +Our suite of technologies that assist us in discovery, development and commercialization of novel diagnostic tests includes: +DeepMALDI Mass Spectrometry +We have developed DeepMALDI, a proprietary high-density matrix-assisted laser desorption/ionization time-of-flight (MALDI-ToF) mass spectrometry (MS) technology, to produce blood-based proteomic data for disease diagnosis, personalized health care, precision medicine for direct treatment options, and disease screening in lung and other disease states. DeepMALDI overcomes the limitations of conventional MALDI and other mass spectrometry methods to produce highly sensitive, stable, and reproducible data by: (1) utilizing optimized signal-to-noise reduction and signal processing algorithms; and (2) novel batch correction methods and spectral alignment methods. The combination of these improvements yields substantially higher quality data content and is thereby much better suited for the discovery of biomarkers with clinical utility. +Our current DeepMALDI methods allow us to achieve finer mass resolution, greater sensitivity, and 20-times faster imaging speeds than other instruments. Additionally, we believe enhancements to our DeepMALDI methods and MALDI-ToF technology evolution will allow us to measure approximately 1,500 proteins, an improvement from the estimated 900 proteins we can measure today. We intend to maintain our leadership role in the discovery of proteomics-based diagnostic tests. We utilize our DeepMALDI and MALDI-ToF technologies in our discovery and development efforts and as part of our collaborations with our biopharmaceutical customers and academic partners. +Liquid Chromatography Mass Spectrometry MS +We use Multiple Reaction Monitoring (MRM) MS with triple quadrupole mass spectrometers and up-front liquid chromatography (LC) sample injection in the Nodify XL2 test. This mass spectrometry method offers highly sensitive, specific, and cost-effective analysis for simultaneous quantitation of hundreds to several thousands of targeted peptides in a single experiment. We have since included the MRM technologies as part of our services for discovery and development with our biopharmaceutical customers and academic partners. +Enzyme-Linked Immunosorbent Assay +ELISA is the most widely used ligand binding assay platform within and outside the pharmaceutical industry. Formats include direct, indirect and sandwich assays and are typically run in manually or semi-automated modes. We use a semi-automated implementation of ELISA in clinical testing for the Nodify CDT test and the Platelia SARS-CoV-2 Total Ab test for COVID-19. The acquisition of Oncimmune USA in 2019 expanded our ability to conduct very high throughput and cost-effective ELISAs in our clinical testing laboratory. We have now included the ELISA technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +Droplet Digital PCR Platform +We use the ddPCR technology for multiplexed, semi-automated nucleic acid detection. This allows high sensitivity, fast turn-around times, flexibility in our laboratory workflows, rapid scaling from low to moderate analyte complexity, and high-volume scalability. ddPCR is an absolute quantitation method based on the partitioning of circulating nucleic acids into up to 20,000 droplets per reaction and is used for the GeneStrat test and Bio-Rad SARS-CoV-2 ddPCR test for COVID-19. We have included the ddPCR technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +Next Generation Sequencing Technology +We use an NGS technology for broad genomic sequencing of clinical specimens. Our strategy with NGS relies on a menu of off-the-shelf and custom research use assays, which we develop and make available as a part of our biopharmaceutical test services. The NGS technology integrates automated systems to yield high sensitivity results with a rapid turnaround time. Since adoption of this technology, we have included the NGS technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +10 +Our Solutions and Products +To help address the current limitations with standard of care in lung cancer diagnosis, treatment, and monitoring, we use combinations of tumor, immune and host profiling, radiological imaging, patient clinical profiling, and our proprietary AI platform to provide a holistic view of each patient’s dynamic disease state. +We have four blood-based diagnostic tests across the lung cancer continuum of care to help address clinical unmet needs by physicians. +• +Diagnosis : We believe there is a clinical need to help physicians reclassify risk of malignancy in patients presenting with suspicious lung nodules. We offer the blood-based Nodify Lung Nodule Risk Assessment testing strategy to aid physicians in stratifying patients into distinct nodule management treatment pathways: diagnostic procedure or imaging surveillance. Nodify Lung consists of two blood-based proteomic tests: the Nodify CDT test helps identify patients with lung nodules that are likely malignant and the Nodify XL2 test conversely helps identify those that are likely benign. +• +Treatment Guidance : We believe there is an imminent need for a blood-based testing solution that measures tumor-specific mutations and the patient’s immune profile to provide physicians with more comprehensive information to assess the overall prognosis of the patient and personalize treatment plans. We offer the blood-based Biodesix Lung Reflex testing strategy, which consists of the GeneStrat tumor profiling test and the VeriStrat immune profiling test for patients diagnosed with NSCLC. With a three-day turnaround time, we are able to quickly provide critical diagnostic information to physicians to facilitate personalized treatment decisions for their patients. +• +Monitoring : We believe longitudinally monitoring advanced NSCLC patients for the dynamic evolution of their tumor and immune profile while on treatment can provide an earlier indication of treatment resistance and/or disease progression. We offer the Biodesix Lung Reflex testing strategy as a blood-based monitoring tool for physicians to track their patients’ disease evolution. +Diagnosis – Nodule Management +We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our blood-based nodule management offering, Nodify Lung Nodule Risk Assessment assists physicians in reclassifying a patient’s risk of lung cancer by incorporating their protein biomarker results with radiographic imaging and clinical characteristics. Nodify Lung consists of the Nodify CDT and Nodify XL2 proteomic tests, which can be ordered separately or together from a single blood draw to help reclassify risk of cancer to aid physicians in stratifying patients into distinct nodule management pathways: intervention or surveillance. +11 +The Nodify CDT test is used to help identify lung nodules that are likely malignant and the Nodify XL2 test helps identify lung nodules that are likely benign. Nodify Lung is available for patients 40 years or older, with nodules between 8 and 30mm, and less than 65% pre-test risk of lung cancer. The testing strategy starts with the Nodify CDT test to determine if a nodule is likely malignant or at a higher risk of lung cancer. The Nodify CDT test helps physicians identify cancer more quickly by prioritizing patients with a higher risk of malignancy for a diagnostic procedure, such as biopsy or surgery. If the nodule is not identified as having a high risk of malignancy by Nodify CDT, then the Nodify XL2 test is performed to help determine if the patient’s nodule is likely benign or has a reduced risk of lung cancer and may be a candidate for CT imaging surveillance. The Nodify Lung testing strategy is represented graphically in the image below starting with the patient’s pre-test risk of malignancy and ending with the guideline-recommended diagnostic procedure for each risk category. +We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. We launched the Nodify Lung combined offering of Nodify CDT and Nodify XL2 in March 2020. However, the Nodify XL2 test has been available to all physicians since September 2019 and has been available to a select group of physicians since October 2018. We acquired the Nodify XL2 test from Integrated Diagnostics in July 2018, and acquired the Nodify CDT from Oncimmune USA in October 2019. +Nodify CDT +Nodify CDT is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely malignant or at a higher risk of being cancerous. Results allow physicians to identify patients who may be better candidates for timely invasive diagnostic procedures such as bronchoscopy, transthoracic needle biopsy, or surgical resection, with the hope of catching cancer earlier. Nodify CDT enhances lung nodule risk assessment to facilitate compliance with clinical treatment guidelines such as those of the American College of Chest Physicians (ACCP). Nodify CDT is intended for use in patients who are 40 years or older, have nodules between 8 and 30mm, and pre-test risk of lung cancer of less than 65%. +The test measures the levels of seven circulating autoantibodies (P53, NY-ESO-1, CAGE, GBU4-5, SOX2, HuD, and MAGE A4) associated with lung cancer, combined by an algorithm to report out three potential results: High Level, Moderate Level, or No Significant Levels of Antibodies Detected (NSLAD). The seven autoantibodies have shown to be elevated for all types of lung cancer, and from the earliest stage of the disease. +Unlike the tumor antigens themselves, the autoantibody levels can be measured accurately through a blood sample, based upon the signal amplification generated by the immune response to cancer. This mechanism of action likely reflects very early events in a tumor’s evolution; as the immune system initiates a response to the cancer, it can also trigger an expansion of self-reactive antibodies that can be measured in circulation. +12 +In addition to the test result of High Level, Moderate Level, or NSLAD, each test report includes the patient’s pre-test risk of malignancy as calculated by the Solitary Pulmonary Nodule Risk Assessment calculator, and their post-test risk of cancer incorporating the result of the test. The Solitary Pulmonary Nodule Risk Assessment calculator was developed by Stephen Swensen, M.D., of the Mayo Clinic and is designed to provide a risk of malignancy for a patient with a newly discovered incidental nodule. The model incorporates six clinical and radiologic factors into the equation: age, nodule size, smoking status, nodule location, spiculation (nodule edge characteristic), and previous history of lung cancer. Incorporating the autoantibody levels with the risk model provides physicians with a more accurate assessment of risk. The test has been studied in 14 peer reviewed published studies and presentations. +Nodify XL2 +Nodify XL2 is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely benign or at a reduced risk of being cancerous. Results allow physicians to identify patients who may be better candidates for routine CT surveillance to monitor for growth or shrinkage of the nodule over time instead of an invasive diagnostic procedure. Nodify XL2 is used for patients who are 40 years or older, have nodules between 8 and 30mm, and have a pre-test risk of lung cancer of less than or equal to 50%. +Nodify XL2 integrates peptides measured by LC-MS with clinical and radiological characteristics that are combined by an algorithm to report out three potential results: Likely Benign, Reduced Risk, or Indeterminate. Specifically, the Nodify XL2 test measures the relative abundance of two peptides (LG3BP and C163A) in circulation in the patient’s blood. The native proteins from which the peptides are derived, have been associated with an inflammatory response to cancer. The clinical factors are patient age and smoking status, and radiological factors are nodule size, location, and edge characteristics. +In addition to the test result of Likely Benign, Reduced Risk, or Indeterminate, each test report includes the patient’s pre-test risk of lung cancer as calculated by the Solitary Pulmonary Nodule Risk Assessment calculator, and their post-Nodify XL2 risk of malignancy incorporating the result of the test. Incorporating the peptide levels with the risk model provides physicians with a revised assessment of risk incorporating the patient’s biology. +In summary, the inclusion of the Nodify Lung testing strategy into clinical practice helps physicians reclassify risk of malignancy of low to moderate risk lung nodules by incorporating the patient’s own biology into the assessment. The Nodify CDT test helps physicians identify patients with a high-risk lung nodule who may benefit from timely intervention, which can ultimately help identify lung cancer earlier. The Nodify XL2 test helps physicians identify patients with a very low risk lung nodule who may benefit from CT surveillance and could avoid unnecessary invasive procedures. +Blood samples for Nodify XL2 and Nodify CDT can be collected in the physician’s office, laboratory, or at home through use of mobile phlebotomy. Mobile phlebotomy options facilitate testing for patients even if they are not seen in person by the physician and instead are seen through telehealth visits. This benefits the patient as scheduling can be conveniently fit to their needs and can keep them away from a physician’s office or hospital for safety concerns, especially with the evolving coronavirus pandemic. Additionally, mobile phlebotomy benefits the physician as the logistics around a blood draw or tissue sampling are out of their hands. We have a national network of contracted Nurses and Phlebotomists to support at-home or mobile blood collection. +Both tests require a single blood sample shipped at ambient temperature to our certified, high-complexity clinical laboratory in De Soto, Kansas. Nodify CDT requires whole blood and Nodify XL2 requires whole blood spotted onto our proprietary Blood Collection Device (BCD). The introduction of the BCD as a qualified specimen collection method for use with the Nodify XL2 test alleviated the need for serum separation processing steps by phlebotomists at blood draw sites such as centrifugation, and cold chain (dry ice) shipments, which has increased the market access to our proteomic-based tests. Results for Nodify CDT alone are typically available within one day. If both tests are ordered for the patient and Nodify CDT returns a result of NSLAD, then both test results are typically available within 4 to 5 days. All results are available through a portal, fax, hard copy, or mobile device. +13 +Treatment Guidance and Monitoring +Profiling the tumor through blood-based testing can help identify mutations in genes that may be driving growth of the tumor and may be targets for therapeutics. However, tumors also suppress intrinsic mechanisms that prevent the patient’s immune system from identifying and eliminating the cancer cells. Profiling the immune system can show if the patient’s immune system may have been subverted and therefore, is less likely to be responsive to immunotherapies. Our blood-based Biodesix Lung Reflex testing strategy consists of the GeneStrat tumor profiling test and the VeriStrat immune profiling test, which can be ordered together or separately for patients with NSCLC. Together, the tests typically have a 3-day turnaround time, providing physicians with timely results to facilitate treatment decisions. +GeneStrat +GeneStrat is a blood-based tumor profiling test that detects the guideline recommended, actionable mutations in lung cancer: EGFR, KRAS, BRAF, EML4-ALK, ROS-1, and RET. Physicians can order one or any combination of the gene tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat test performance and potential clinical utility have been published in 3 peer reviewed studies. +GeneStrat test results are typically available within 72 hours from our receipt of the sample in our Boulder, Colorado clinical laboratory. In a study at Eastern Carolina University, it was observed that blood-based testing was up to three weeks faster than tissue-based testing, with tissue-based testing taking a median of 26 days from sample collection. With GeneStrat testing, results are typically available in time for the patients first oncology visit, allowing the patient to start front-line treatment as quickly as possible. In the same study, it was observed that only 4% of patients had tissue-based molecular test results prior to start of front-line treatment. Meanwhile, after integrating Biodesix Lung Reflex testing at the institution, 72% of patients had molecular test results available. Testing with the GeneStrat test can help physicians identify driver mutations quickly to help speed up time to treatment. +We believe that rapid, blood-based tumor profiling with the GeneStrat test is complementary to both targeted tissue-based testing (including PD-L1) and broad genomic sequencing. Testing with GeneStrat at diagnosis can help quickly identify patients who are eligible for targeted therapies. Additionally, blood-based testing upfront can help save valuable tissue for diagnostic evaluation, PD-L1 testing and broad genomic profiling for rare mutations to enroll in clinical trials. +14 +VeriStrat +VeriStrat is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. Results help inform physicians whether their patient has a more aggressive cancer and can help with treatment planning. VeriStrat profiles the patient’s immune system by measuring eight protein features measured by mass spectrometry and interpreted by a proprietary machine learning-based algorithm to produce either a VeriStrat Good or VeriStrat Poor test result. +The presence of a VeriStrat Poor result indicates the presence of chronic inflammation and a chronic acute phase immune response. A chronic acute phase immune response can trigger the immune system to provide growth factors to the tumor to increase blood flow and tumor growth. The test has been studied in over 85 peer-reviewed and published clinical studies across many different types of therapies such as chemotherapy, targeted therapies, immune therapies, and combinations. The results consistently show the test to be predictive of outcomes, independent of other prognostic factors including PD-L1 expression and performance status. Patients who test as VeriStrat Poor, on average, have an overall survival that is less than half of those who test as VeriStrat Good, independent of treatment type, demonstrating that the test is strongly prognostic. Conversely, patients with a VeriStrat Good test result typically respond better to standard of care treatments than those patients that test as VeriStrat Poor. By using the VeriStrat test for immune profiling, physicians can help identify the patients with an immune status associated with generally poor prognosis who should be treated with alternate therapies or in clinical trials. +GeneStrat requires whole blood and VeriStrat requires a whole blood sample spotted onto our proprietary BCD. Both samples are shipped at ambient temperature and testing is performed in our certified, high-complexity clinical laboratory in Boulder, Colorado. GeneStrat is performed using the ddPCR technology, and the protein features in VeriStrat are measured using matrix-assisted laser desorption/ionization time of flight (MALDI-ToF) mass spectrometry. Results are typically available within 72 hours through a portal, fax, hard copy, or mobile device. +COVID-19 +Biodesix WorkSafe COVID-19 Testing Program +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe testing program. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two diagnostic tests for the SARS-CoV-2 virus that causes COVID-19. The first test is the Bio-Rad SARS-CoV-2 ddPCR test, which is a molecular test intended for detecting active SARS-CoV-2 infection. The test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under CLIA to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The test was FDA EUA authorized on April 29, 2020. +Within a month of initiating our development collaboration with Bio-Rad, we were able to launch two tests for commercial use. We were able to bring these tests to market as fast as possible due to our scientific diagnostic expertise, technologies and existing commercial infrastructure. In addition to our launch agility, we have been able to rapidly scale our laboratory operations for high-volume testing. We remain committed to delivering rapid test results in 24 to 48 hours on average. +Using the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab tests, we operate and have commercialized the Biodesix WorkSafe testing program. +Prior to using the Bio-Rad tests as part of our testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Post-launch development support for these tests have included improvements in on-boarding new personnel, logistics of sample collection, sample receipt and data reporting, all required to support our testing program. Additional releases of the laboratory data management software are ongoing and planned for the foreseeable future. +15 +Our tests are utilized by healthcare providers, including hospitals and nursing homes and are also offered to businesses and educational systems to assist in their back-to-work or back to school strategies. Recently, we announced multiple partnerships for COVID-19 testing, and Colorado Governor Jared Polis announced at a press conference on July 23, 2020 that we will now be supporting wide-spread COVID-19 testing for the State of Colorado. Additionally, we announced a partnership as the official COVID-19 testing partner for the Major League Lacrosse as they competed in their 2020 tournament. We also announced on September 30, 2020 that we will oversee and manage onsite testing and testing validation for the Big Ten Conference athletic competitions. +Bio-Rad SARS-CoV-2 ddPCR test +The Bio-Rad SARS-CoV-2 ddPCR test, also known as a molecular or viral test, is intended for the qualitative detection of nucleic acid from SARS-CoV-2, the virus that causes COVID-19. The test targets detection of the nucleic acid from SARS-CoV-2 (not from any other viruses or pathogens) in respiratory specimens to identify and isolate infected individuals. Recent studies have shown that ddPCR-based testing is more sensitive than qPCR for detecting SARS-CoV-2, specifically in the reduction of false negative results. In one study, the ddPCR test demonstrated 95% accuracy vs. 47% for other “bulk” RT-PCR technologies used in other molecular tests Specimens are shipped at ambient temperature or dry ice depending on the viral transport media (VTM) used, and testing is performed using ddPCR in our certified, high-complexity clinical laboratory in Boulder, Colorado. Results are typically available through fax, hard copy, or encrypted email within 24 to 48 hours on average from receipt of the sample. +Platelia SARS-CoV-2 Total Ab Test +The Platelia SARS-CoV-2 Total Ab test (also known as a serology or antibody test) is intended for use as an aid in identifying individuals who have developed an adaptive immune response to the SARS-CoV-2 virus, indicating recent or prior infection. The test uses whole blood to detect circulating antibodies against the virus. The sensitivity is 98% and specificity is 99% eight days after the onset of symptoms. At this time, it is not known how long antibodies persist following infection and if the presence of antibodies confers protective immunity. The test is intended for the qualitative detection of total anti-SARS-CoV-2 nucleocapsid antibodies (IgG, IgM and IgA) in human serum or plasma specimens. The test requires a 3 mL blood draw, and samples are shipped at ambient temperature. Testing is conducted using semi-automated ELISA technology in our certified, high-complexity clinical laboratory in De Soto, Kansas. Results are typically available within 24 to 48 hours from receipt of the sample through fax, hard copy, or encrypted email. +Biopharmaceutical Diagnostic Discovery, Development and Testing Services Business +We believe our leadership in clinical proteomics and our technology agnostic approach to probe the cancer disease state provides our customers with a clear and distinct advantage over other diagnostic service providers who solely focus on either genomics or proteomics. Similar to our commercial clinical testing business, our biopharmaceutical diagnostic discovery, development and testing services business leverages the Diagnostic Cortex to provide an extensively validated and deep learning approach to discovering new biomarkers, which in turn helps drive the clinical development of therapeutics. We recognize each clinical development program is complex, which is why we offer end-to-end diagnostic solutions, ranging from initial biomarker discovery and feasibility projects to commercialization of companion diagnostics. +To address the increasing complexity of disease biology and new drug mechanisms of action, we employ a technology agnostic approach to uncover insights about the tumor biology and patient’s immune response to cancer for therapeutics in clinical development. With our broad technology and service offering, including the performance of over 30 assays for research use as part of our laboratory services (see diagram below), we are able to provide the depth and breadth of biomarker tools for our partners for multi-omic analyses across their product development efforts. Although we recognize the importance of a multi-omic, technology agnostic approach in translational research, we are experts in discovering and developing proteomic-based diagnostic tests to help interrogate the immune profile and host disease state of patients on particular therapeutics. Traditionally, oncology biomarkers have been discovered from tumor tissue, but with the increased trend in the number of programs featuring immuno-oncology agents in therapeutic development, we believe there is a clinical unmet need for blood-based tumor markers and host/immune biomarkers to complement information obtained from tissue. +16 +We believe we provide benefit to our biopharmaceutical customers as they integrate strategies for increasing the probability of success for pivotal clinical trials. Specifically, our diagnostic testing services may help enable quicker enrollment rates for patients in prospective clinical trials, ranging from phase 1 to phase 3, and could help identify patient populations who may experience the greatest benefit from new therapeutics. Ultimately, our goal is to help biopharmaceutical customers realize greater efficiency in their clinical development programs. Additionally, we have the ability to access and leverage our large sample and data biobank for our partners’ data mining needs, including new test discovery. +While our biopharmaceutical discovery, diagnostic development and testing revenue continues to grow, it is important to note that we benefit greatly from these partnerships in many ways that expand beyond revenue. We are continuously expanding our knowledge and biological understanding of multiple diseases and the rapidly evolving treatment landscape, while our Diagnostic Cortex continues to be powered through these biomarker analyses. Additionally, our sample and data biobank continue to grow and can be further leveraged for internal test development and external partnering. Importantly, we look to supplement our product development efforts with companion diagnostics as they are developed. +To date, we have over 50 biopharmaceutical customers and academic partners who have utilized our diagnostic tests and services. The following are a few case studies of early-stage biomarker discovery and development with our biopharmaceutical customers. +• +AstraZeneca: We provided services to AstraZeneca to retrospectively analyze samples from the FLAURA clinical trial (NCT02296125). The goal of this analysis was to interpret and establish the clinical utility of blood-based longitudinal monitoring of EGFR sensitizing and resistance mutations by ddPCR in advanced NSCLC patients treated with osimertinib. The data demonstrated that these circulating DNA mutations could be tracked in blood to interpret the patient’s prognosis, and could help AstraZeneca to identify disease progression 3 months (median) in advance of standard imaging. +• +Genentech: We partnered with Genentech to discover a novel proteomic classifier for advanced NSCLC patients treated with atezolizumab. The test was discovered on a small clinical cohort (n=77) and was independently validated on blinded samples (n=270) from the POPLAR clinical trial (NCT01903993). The validation revealed that the proteomic test was predictive of progression free survival and overall survival for atezolizumab versus the control arm docetaxel. Additionally, an analysis compared the correlation between our proteomic classifier with standard of care biomarkers (PD-L1 expression status and tumor mutation burden), which revealed there was no significant correlation. This implies that our classifier provides unique and valuable information in the treatment of patients with advanced NSCLC. It is our belief that Genentech could use this strategy to identify patients that could derive a longer progression free survival from atezolizumab. +17 +• +Merck KGaA & Pfizer: We announced the initiation of a clinical phase development program for the anti-PD-L1 checkpoint inhibitor, avelumab with Merck KGaA and Pfizer on February 12, 2020. The new proteomic test was developed through retrospective analysis of the circulating proteome combined with our proprietary AI platform. We have completed initial discovery of the test that identifies likely responders to avelumab and efforts are now focusing on transferring the test into our CLIA lab in Boulder, Colorado for clinical phase test validation. +Our Competitive Advantages +We believe the following are our key competitive advantages: +• +Our proprietary extensively validated deep learning platform, which is tailored to discover diagnostic tests that address clinical unmet needs. Our platform is an extensively validated deep learning platform optimized for discovery of diagnostic tests. By combining our data-driven and technology agnostic approach with deep learning techniques, we believe we have overcome many standard machine learning challenges. This has enabled us to develop commercial tests for clinical unmet needs and collaborate with our biopharmaceutical customers and academic partners. +• +Our data-driven approach to precision medicine combined with our biobank, which enables us to accelerate development of new tests. We have over 140,000 samples and data in our biobank, including tumor profiles and immune profiles, used for both internal and external research and development initiatives. Our biobank, clinical trials, commercial testing and other partnerships provide an ongoing source of new data that further enhances our proprietary AI platform. We are continuously identifying and incorporating new market insights and input from our customers, key opinion leaders, and scientific experts to leverage this data in developing our diagnostic tests. +• +Our leadership in clinical proteomics, demonstrated research, development, and scientific expertise, combined with our intellectual property portfolio. Our leadership in clinical proteomics and our technology agnostic approach, we believe provides us with a distinct advantage over our competitors, who focus on any single technology, such as genomics or proteomics. Our certified, high-complexity laboratories offer significant advantages in development of commercial tests. +• +Our proprietary technologies and processes are protected by a portfolio of approximately 87 issued patents in the United States and internationally, and 22 uniquely registered United States trademarks. We take efforts to protect our proprietary position using a variety of methods, such as a pursuit of United States and foreign patent applications related to our proprietary technology, use of trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities. +• +Our demonstrated success commercializing diagnostic tests in lung disease. With six diagnostic tests launched and three currently in development, our commercial portfolio of blood-based solutions currently addresses clinical unmet needs within diagnosis, treatment and monitoring of lung cancer. Our diagnostic tests provide rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan. We have displayed agility in our R&D and commercial launch efforts and within a month of initiating a development collaboration, launched two diagnostic tests for COVID-19 for commercial use. +• +Our depth and breadth of point of care access to physicians allows us to drive adoption of our diagnostic tests while incorporating real-life feedback to inform new product development. Our commercial team’s primary focus is to articulate the scientific and clinical evidence behind our tests, how they impact clinical care and can ultimately help to improve patient outcomes. Our demonstrated scientific expertise, leadership in clinical proteomics and breadth of data, including peer-reviewed publications, presentations and clinical studies, forms the basis of our relationships with major hospitals and physician networks across the United States. +18 +• +Our commercial infrastructure, which includes our extensive knowledge and experience in sales, marketing, reimbursement and operations, provides us with the ability to launch, scale and drive revenue. We believe our commitment to commercial excellence helps us to leverage insights, operational excellence and proven approaches to deliver revenue growth and enhance the brand of our company and products. We are able to deploy rapid clinical testing turnaround times and develop commercial tests at scale. Scaling of our test capacity to meet volumes is then achieved by adding instrumentation and qualified personnel to our quality systems. +Our Strategy +We strive to provide swift, comprehensive and actionable insights to improve patient outcomes across lung disease and to help answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. To achieve this, we intend to: +• +Drive increased awareness, adoption, and reimbursement coverage of our diagnostic tests by: +• +continuously educating physicians, key opinion leaders, hospital systems, advocacy groups, patients, payers, academic research organizations, and technology assessment and guideline organizations on the clinical data and benefits of our tests; +• +utilizing our pulmonology-focused sales force and commercial reach with targeted awareness campaigns to employ highly targeted sales and marketing tactics in pulmonology clinics specializing in the management of lung nodules and the diagnosis of lung cancer; +• +continuing to invest in the expansion of our sales force and commercial support team; +• +incorporating our testing services into diagnostic pathways and protocols via a top-down strategy that introduces our diagnostic tests to the largest United States health systems; and +• +leveraging our clinical data to gain broad coverage from public and private payers for our tests. +• +Deepen our relationships with current biopharmaceutical customers and establish new customer opportunities by: +• +selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally; +• +leveraging existing projects and relationships to expand sales with our current biopharmaceutical customers; and +• +targeting companies developing novel companion diagnostic strategies and drug development projects best suited to our platform for new test discovery, development and commercialization. +• +Further demonstrate the clinical utility and economic benefits of our diagnostic tests by: +• +investing in commercial clinical testing, research studies and clinical trials to further demonstrate the clinical utility of our tests; +• +providing rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan; and +• +providing timely and actionable clinical information to help improve overall patient outcomes and lower the overall healthcare cost. +• +Introduce new diagnostic tests in lung disease by: +• +engaging with our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and to identify additional clinical unmet needs; +• +entering strategic partnerships with biopharmaceutical companies, academic research organizations, technology providers, and other diagnostic companies; and +19 +• +developing companion diagnostic tests to support the therapeutics’ regulatory approval and adoption process for our biopharmaceutical customers. +• +Enhance our proprietary AI platform and expand our technology portfolio by: +• +continuing to invest in R&D capabilities to foster innovation in test discovery and development; +• +identifying, acquiring technologies and integrating new data types into our proprietary AI platform; and +• +entering strategic partnerships across our commercial product portfolio and product development efforts in order to further our development capabilities, accelerate launch of commercial products, or expand our service offering. +• +Continue to expand and leverage our biobank by: +• +expanding and enhancing the robustness of our samples and the data set, including through our collaborations and partnerships; +• +pursuing commercial opportunities with companies and researchers who are interested in utilizing our biobank for their own discovery and development efforts; and +• +monetizing these commercial opportunities. +Our Diagnostic Tests in Development +With the goal of finding solutions for clinical unmet needs related to diagnosis, treatment and monitoring in lung disease, our diagnostic tests in development include the following: +Early-Stage NSCLC—Risk of Recurrence +Currently, surgical resection of the tumor without systemic or radiation therapy is standard of care for stage I NSCLC patients. However, 20 to 40% of surgically treated patients will suffer a recurrence within 5 years after surgery. From market research with pulmonologists, thoracic surgeons, and medical oncologists, we identified a significant clinical unmet need for a blood-based test to help identify stage I NSCLC patients who are at a higher risk of recurrence and may benefit from neoadjuvant or adjuvant systemic treatment. With this information, we discovered the Risk of Recurrence (ROR) test, which is a pre-surgery blood-based proteomic test, designed with the Diagnostic Cortex to predict whether a stage I NSCLC patient has a higher risk of recurrence post-surgical resection. Knowing this information early and before surgery may support treatment decisions such as neoadjuvant or adjuvant therapy, which have the potential to reduce tumor volume and address micro-metastatic disease as early as possible. Our ROR test validated in an independent sample set, and we are currently working with major academic institutions across the United States to further validate the test. +Late-Stage NSCLC—Immunotherapy Treatment Guidance +In 2015, the first immunotherapy-based treatment regimen was approved by the FDA for use in lung cancer. Currently, there are 9 immune checkpoint inhibitor (ICI) regimens (single agent or combinations) recommended by the NCCN guidelines for treatment of advanced NSCLC patients. For a portion of patients treated, these drugs can result in significant improvement in overall survival compared with platinum-based chemotherapy options. +The combination ICI regimens see some improvement in performance over single agent ICI, but side effect profiles are worse, and costs are higher than for single agent ICI. In addition, recent data have shown that a subset of patients experience more rapid disease progression on ICI compared with chemotherapy. We utilized the Diagnostic Cortex platform to discover our Primary Immune Response (PIR) test. PIR is a blood-based proteomic test designed to profile a patient’s immune response to their cancer and stratify by who is likely to respond to ICI treatment. Our PIR test has been validated in multiple independent sample sets for advanced stage NSCLC patients treated with single agent ICI, and we are currently working with major academic institutions across the United States to further validate the test in a prospective study called BEACON-Lung. +20 +Monitoring – Progression & Resistance +Blood-based monitoring with our ddPCR technology may offer a feasible method to non-invasively evaluate therapeutic mechanism of action, disease progression, and the emergence of resistance mutations in patients treated with targeted therapies. Our internal validation studies have shown the utility of the GeneStrat EGFR ddPCR test in all three of these indications. The test can identify disease progression up to 3 months (median) in advance of standard imaging. Using ddPCR for longitudinal blood-based monitoring of EGFR cell-free DNA mutations is a cost-effective testing method while patients are being treated with targeted therapies. +COVID-19 Viral Infection – Risk of Severe Outcomes +Despite significant medical advances in the prevention and treatment of COVID-19, the virus continues to place health systems under pressure, with COVID-19 hospitalization rates in the United States exceeding 417 hospitalizations per 100,000 population the week ending January 31, 2021. Better understanding of how to identify which patients are at greatest risk of developing severe lung disease, requiring intubation, or dying from COVID-19 would help inform physicians of the risks and benefits of treatments, target higher risk patients for clinical trials, compare outcomes between patients with similar risk, and prioritize resources in a time of shortage. In partnership with an academic institution, we have developed an artificial intelligence (AI)-based algorithm for clinical decision support to help stratify patients hospitalized with COVID-19 who are likely to require intervention, such as treatment with ventilators, admission to intensive care units, or those patients who may develop acute respiratory distress syndrome (ARDS), versus those who will likely not require intervention. Our COVID-19 AI-based algorithm validated in a blinded, independent study, and uses 26 easily obtainable variables from the emergency department at time of initial evaluation to classify patients, including patient characteristics, vital signs, and readily available laboratory test values. We are working with a United States and International COVID-19 consortia consisting of major academic institutions to perform additional large, blinded, independent validation testing of the classifier and we are currently exploring options for making the algorithm widely available to hospitals for future patient use. +Clinical Trials +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. We have participated in 27 clinical studies, 5 of which are ongoing, and have published over 275 peer-reviewed publications and presentations. The following are our ongoing clinical studies for our diagnostic testing solutions. +ORACLE Registry Study (NCT03766958) +The ORACLE registry study was designed to develop real-world clinical utility data for Nodify XL2 and is titled “An Observational Registry Study to Evaluate the Performance of the Nodify XL2 Test”. The study objectives are to show a reduction in invasive procedures on patients with benign nodules compared to a historical control obtained from chart review. The first patient enrolled on October 16, 2018. As of May 1, 2020, 423 patients have been enrolled and are undergoing primary endpoint analysis, with 2-year follow-up estimated to be completed by the first half of 2022. +ALTITUDE Clinical Utility Study (NCT04171492) +The ALTITUDE clinical utility study is designed to evaluate the performance of Nodify Lung (Nodify XL2 and Nodify CDT) in a randomized controlled study (RCT). The study is titled “A Multicenter, Randomized Controlled Trial, Prospectively Evaluating the Clinical Utility of the Nodify XL2 Proteomic Test in Incidentally Discovered Low to Moderate Risk Lung Nodules”. We received central investigational review board (IRB) approval in December 2019 and have an enrollment goal of 2,000 patients. The study objectives are to evaluate how the addition of the Nodify Lung test result impacts the clinical decision making for patients with new, incidentally identified solid lung nodules assessed as low to moderate risk of lung cancer. The trial has an adaptive study design with a blinded standard of care arm and 2:1 randomization for open-label results for Nodify XL2. The study launched in December of 2020. Phase 1 of the study with only Nodify XL2 is expected to enroll 500 patients. Phase 2 of the adaptive study design will include an open-label arm for Nodify CDT, which is aligned with our commercial testing algorithm. +21 +INSIGHT Observational Study (NCT03289780) +The INSIGHT observational study is designed to evaluate the real-world clinical utility and performance of the Biodesix Lung Reflex (GeneStrat and VeriStrat) testing strategy. The title is “Observational Study Assessing the Clinical Effectiveness of VeriStrat and Validating Immunotherapy Tests in Subjects with Non-Small Cell Lung Cancer (INSIGHT)” and the first patient enrolled was on May 11, 2016. To date, we have over 3,500 patients enrolled with a target 5,000 enrollment goal. Final analysis with 3-year follow-up is estimated to be completed by 2024. Results of an interim analysis were presented at ASCO 2020. The study rationale is to guide the adoption of VeriStrat and inform medical decision making, including treatment choice, and enable the validation of additional mass spectrometry-based proteomic tests. The primary study objective is to describe the impact of the VeriStrat test results on treatment decisions, including but not limited to the percentage change in treatment decision, differences in chosen treatments between patients classified as VeriStrat Good and those classified as VeriStrat Poor, and the percentage of patients receiving systemic therapy or supportive therapies only. +BEACON-Lung Clinical Study (Trial in Progress) +In partnership with ALCMI (Addario Lung Cancer Medical Institute), the BEACON-Lung clinical study is intended to evaluate the performance and utility of our proteomic product currently in development, PIR, in advanced stage NSCLC patients who express high PD-L1. The study title is “A Biomarker Analysis in High PD-L1 Expressing NSCLC Patients Treated With An Immune Checkpoint Inhibitor (ICI) With or Without Platinum-Based Chemotherapy.” The study design is an observational, multicenter, open-label study to assess biomarkers (serum, microbiome, radiomics and tissue) as predictive of early progression in 390 treatment-naive patients with advanced stage NSCLC and PD-L1 greater than or equal to 50% treated with two standard of care regimens, triplet therapy (platinum-based chemotherapy plus ICI regimen) and ICI monotherapy (single agent ICI). The objectives are to collect biospecimens and evaluate candidate biomarkers, with a focus on PIR, to detect early progression on ICI monotherapy versus triplet therapy. +DROPLET (Pending IRB Submission) +Droplet is an exploratory direct to patient study to assess the utility a novel gene linkage phenomenon as measured by the Bio-Rad SARS-CoV-2 ddPCR test, on the correlative immune response in individuals previously infected with the COVID-19 virus. The primary objective of this study (titled “ddPCR Linkage, Viral Load and Immune Response in Individuals Infected with COVID-19”) is to evaluate the correlation between linkage, viral load and the immune responses in individuals who have had a natural infection with SARS-CoV-2. Fifty patients will be enrolled and serially tested for viral load and immune responses for up to 12 months. +Commercialization +For our lung cancer and nodule management tests, commercial efforts are focused on the promotion of our testing strategies to healthcare professionals actively involved in the diagnosis and treatment of lung cancer. Primarily focusing on pulmonology, the commercial team, consisting of specialty sales representatives, medical affairs, marketing and customer care representatives, works to educate and inform the entire patient care group consisting of physicians, nurses, office staff, laboratory personnel, and administration as to the appropriate use and value provided by our testing. The team’s goal is to drive test adoption through articulating the scientific and clinical evidence behind our tests, how they impact the clinical care of a patient, and how the tests can ultimately help to improve patient outcomes. +Patients with pulmonary nodules are concentrated in this sub-specialty, where additional resources such as lung cancer screening and nodule management clinics may exist to provide an increased level of care. We are also engaging large hospital systems in a “top-down” approach, with a goal of incorporating our tests into system wide pathways and protocols. +After a physician orders our tests, blood is collected either in the physician office or laboratory, third-party “store front” patient service centers, or it can be collected in the patient’s home or workplace. We have contracted with a network of patient service centers and mobile phlebotomy services to be enable collection of blood samples outside of the physician office, at home or work for patients across the United States. +22 +For our Biodesix WorkSafe COVID-19 testing program, we have a dedicated outreach team that works with the State of Colorado healthcare providers and hospitals, and employers looking to safely return to work across many industries, including food services, oil and gas, biotechnology and pharmaceuticals, sports teams, universities, and many small businesses. We recognize everyone’s COVID-19 situation is unique, which is why we provide end-to-end customized solutions to support testing for our different customers, such as risk assessment tools, physician ordering services, on-site testing, phlebotomy services, shipping logistics, and ongoing client support. +Our business development team is focused on selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally. Our team consists of customer facing business development associates that work with our biopharmaceutical customers to identify projects, draw up statements of work and negotiate service agreements. Alliance managers help to manage the contractual obligations and scope of the project, whereas our operations team assures the project is managed with adequate resources and delivers on time. We take a two-pronged approach generating business in this segment. Primarily, we leverage existing projects and relationships to expand sales in current accounts. We also actively map ongoing drug development projects in biopharmaceutical companies and target programs best suited to our platform for new test development. +Coverage and Reimbursement +The primary source of reimbursement for our tests in the United States is from third-party payers including government payers, such as Medicare, and commercial payers, such as insurance companies. For our COVID-19 testing program, the primary source of reimbursement is through contracts with hospitals, companies providing wellness testing for their employees, or direct pay from patients. We believe that our lung cancer tests can both improve patient outcomes and help guide cost-effective treatment choices for patients with and at-risk of lung cancer. Achieving broad coverage and adequate reimbursement for each of our tests is a key component of our financial success and will continue to be important over time. +Under the Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief, and Economic Security Act (CARES), Congress has imposed a broad requirement that Medicare fee-for-service, Medicare Advantage, Medicaid, and commercial payers generally cover clinical diagnostic laboratory tests administered during the Public Health Emergency for the detection of SARS-CoV-2 or the diagnosis of the virus that causes COVID-19. Where applicable, the FFCRA and CARES require payers to cover COVID-19 tests without cost sharing or medical management techniques like prior authorization. Medicare fee-for-service does not require cost sharing or prior authorization for any clinical diagnostic laboratory tests. +The Department of Health & Human Services (HHS) has indicated in guidance that the coverage requirements of the FFCRA and CARES can apply both to infection and serological testing, but that they are only applicable to testing that is “diagnostic,” which “may include testing of individuals with signs or symptoms compatible with COVID-19, as well as asymptomatic individuals with known or suspected recent exposure to SARS-CoV-2.” Testing that is “not primarily intended for individualized diagnosis or treatment of COVID-19 or another health condition,” including “testing conducted to screen for general workplace health and safety,” is beyond the scope of the statutory coverage requirements. We believe these coverage requirements apply to the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test when performed for diagnostic purposes. In some cases, we submit claims to insurance payers for the Bio-Rad SARS-CoV-2 ddPCR test and/or the Platelia SARS-CoV-2 Total Ab test. In these cases, insurance payers may have a different position on the scope of mandatory coverage of our tests under the FFCRA and CARES. More commonly, we enter into a rrangements with clients under which the client pays us directly for testing. +Compliance with applicable laws and regulations, as well as internal compliance policies and procedures adds complexity to the billing process. The Centers for Medicare & Medicaid Services ( CMS) is responsible for overseeing the establishment of new Healthcare Common Procedure Coding System (HCPCS) codes for billing the Medicare program and other payers. CMS continuously evaluates and implements changes to the Medicare billing, coding, and reimbursement processes. To receive reimbursement from third-party payers, we bill our tests using a variety of HCPCS codes or Current Procedural Terminology (CPT) codes, as defined by the American Medical Association. For some of the tests we conduct, there may not be a specific CPT or HCPCS code, in which case the test may be billed under a miscellaneous code for an unlisted molecular pathology procedure or unlisted multiple analyte test with algorithmic analysis (MAAA) procedure. Because these miscellaneous codes do not describe a specific service, the third-party payer claim may be examined to determine the service provided, whether the service was appropriate and medically necessary and whether payment should be rendered. This process can result in a delay in processing the claim, a lower reimbursement amount, and/or denial of the claim. +23 +Competitors +We primarily face competition from lung cancer diagnostic solutions companies in the United States, Europe and Asia seeking to answer clinical questions in the space, all of whom provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories and other medical facilities. +Diagnosis—Nodule Management +We are not aware of any other company that offers two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. We are aware of efforts by Veracyte, Inc. to develop and validate a test that may be competitive to the Nodify XL2 and/or Nodify CDT tests in the future. Additionally, Veracyte currently markets a test that is used post-bronchoscopy that is not competitive with our pre-bronchoscopy nodule risk assessment tests. +Prognosis, Treatment Guidance and Monitoring—NSCLC +We are unaware of any other diagnostic test available, commercially or in development, that will compete with our VeriStrat immune profiling test. There is substantial interest and activity in tumor profiling through liquid biopsy. Our genomic test offering, GeneStrat, faces competition from academic hospital laboratories, and companies such as Guardant Health and Foundation Medicine. We believe that there are several companies and academic research institutions in the process of developing tests for monitoring patients on or following treatment for recurrence or progression of lung cancer. +COVID-19 Testing +We believe that our competitors include university and state laboratories, national reference laboratories such as Lab Corporation and Quest Diagnostics, in-hospital laboratories, and a number of other diagnostic providers. We are aware that a number of other companies have announced development efforts to develop COVID-19 tests. +Biopharmaceutical Diagnostic Discovery, Development & Testing Services +We are aware of a number of companies who compete with our diagnostic tests and services, including diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. From the perspective of tumor profiling, we believe Guardant Health and Foundation Medicine are our most significant competitors. Conversely, in the immune profiling market, we believe Adaptive Biotechnologies and Personalis are our most significant competitors. +Clinical Laboratory Operations +We perform the VeriStrat, GeneStrat, and COVID-19 ddPCR tests in our Boulder, Colorado clinical laboratory. The laboratory is CAP-accredited, CLIA-certified, New York Department of Health (NYSDOH)— permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified, along with all other states that require licensing: California, Maryland, Pennsylvania, and Rhode Island. All aspects of the testing process from receipt of the test requisition form through to delivery of test results are performed in the Boulder, Colorado facility. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within 3 days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +The Nodify XL2, Nodify CDT, and COVID-19 total antibody tests are performed in our De Soto, Kansas clinical laboratory. This clinical laboratory is CLIA-certified, COLA-accredited, New York Department of Health—permitted and licensed, and licensed by California, Maryland, Pennsylvania, and Rhode Island. Efforts are underway with the NYSDOH to become permitted and licensed to perform Nodify XL2 and Nodify CDT testing for samples from the state of New York. Receipt of requisitions and testing is performed in our De Soto, Kansas clinical laboratory. Delivery of the test results is performed by personnel from our Boulder, Colorado headquarters. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within 5 days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +Personnel in both facilities are responsible for quality assurance oversight, licensing, and regulation compliance and maintenance to ensure data integrity and consistent, validated processes. +24 +Supply Chain +We rely on third-party suppliers, including in some instances single source suppliers, to provide us with certain components of our diagnostic tests. The number of suppliers feeding into the production of our diagnostic tests is in excess of 65 worldwide. We consider a select few of these suppliers, located in the United States, Europe and China, as critical single source providers of components. Bio-Rad, as described below, is the sole source supplier for our GeneStrat test and COVID-19 and antibody testing program. Oncimmune is also the sole source supplier for our Nodify CDT tests but there are known secondary suppliers for these materials. We have initiated the second source qualification process for the majority of these critical components. +In addition, we purchase supplies through purchase orders without long-term supply agreements with, or guaranteed commitments from, many of our suppliers, including single source suppliers. Additionally, at present, we rely on contract manufacturers for the production of our diagnostic tests. We depend on our suppliers and contract manufacturers to provide us and our customers with materials in a timely manner that meet our and their quality, quantity and cost requirements. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test, but these supplies are able to be supplied by known suppliers. A disruption to this supply would negatively impact our ability to perform the GeneStrat and SARS - CoV-2 tests until alternatives could be validated. +While we have initiated the second source qualification process for the majority of these critical components, we may not be successful in securing second sourcing for all of them at all or on a timely basis. A disruption to this supply would negatively impact our ability to perform these tests until an alternative supplier could be validated. +All materials for our VeriStrat test and Nodify XL2 tests have alternative suppliers readily available, and a disruption in any single supplier would not materially impact our ability to deliver the test. +The COVID-19 pandemic has allowed us to pressure-test our supply chain and logistics processes as we purchased additional manufacturing capacity above our normal run rates to ensure that supply to execute on tests for the foreseeable future was available in-stock and in-house. Our suppliers have been able to allocate sufficient capacity to meet this increased demand with reasonable lead times and therefore we believe sufficient capacity exists for all tests for the next 24 months. +Intellectual Property +Our success depends, in part, on our ability to obtain and maintain intellectual property and proprietary protection for our products and other know-how, to operate our business without infringing, misappropriating or otherwise violating the intellectual property and proprietary rights of others, and to defend and enforce our intellectual property and proprietary rights. We take efforts to protect our proprietary position using a variety of methods, which include pursuit of United States and foreign patent applications related to our proprietary technology, inventions and improvements that we determine are important to our business. We also may rely on trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities to develop and maintain our proprietary position. For more information regarding risks relating to intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property.” +We have invested heavily in the protection of our key assets, namely the VeriStrat® and GeneStrat® tests, and we acquired a patent portfolio relating to the Nodify XL2® and Nodify CDT™ tests in our acquisitions of Integrated Diagnostics in June 2018, and of Oncimmune USA in October 2019 from Oncimmune Limited (Oncimmune). We own patents and patent applications as well as trade secrets relating to our products currently in development, collection device for whole blood, business strategy, client lists and business methods. Further, we have expanded our access to key intellectual property through license and co-development agreements, including our Non-Exclusive License Agreement with Bio-Rad (the Bio-Rad License), which allows us to use the Droplet Digital PCR™ technology developed by Bio-Rad and which we employ in our GeneStrat test. +25 +Our patent strategy has focused on creating and acquiring protection for our VeriStrat and Nodify XL2 proteomic tests, while utilizing trade secret and some methods patent protection for our genomic test (the GeneStrat test) and ELISA test (the Nodify CDT test). We have entered into a non-exclusive license agreement with Bio-Rad, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. For more information regarding this license and supply agreement, please see “— Material Agreements—Agreements with Bio-Rad.” Bio-Rad owns patents relating to ddPCR and to which we have a non-exclusive license to utilize for the performance of ddPCR in cancer detection testing for third parties as set forth in the Bio- Rad License Agreement. In addition, we have separately been granted permission by Bio-Rad to use the Bio-Rad SARS-CoV-2 ddPCR test and Platelia SARS-CoV-2 Total Ab test for commercial diagnostic services. For more information regarding the permission granted to us by Bio-Rad with respect to such tests, please see “Business—Material Agreements—Agreements with Bio-Rad.” We are unaware of patents owned by Bio-Rad relating to its COVID- 19 antibody test but acknowledge that Bio-Rad has know-how and trade secrets relating to this test . We have patent protection in the United States and other countries around the world for the primary use of the VeriStrat test for profiling of patients with NSCLC, and various other uses of the VeriStrat test, such as breast cancer, prostate cancer, head and neck cancer have received patent protection. We have also received patent protection relating to our core classifier development program, our Diagnostic Cortex ® technologies and our approaches to using mass shot matrix-assisted laser desorption time of flight (MALDI-T oF ) technology (DeepMALDI ® techniques). Additionally, our first device patent was issued in 2019 for our internally designed blood co llection device. +As of October 21, 2020, our patent portfolio includes approximately 49 issued United States patents, 38 issued foreign patents, which includes 3 European patents that were nationalized in multiple European countries, and 40 pending applications (including 23 foreign patent applications). With regard to our product development efforts, provisional applications have been filed around new developments relating to ARDS and COVID diagnostics, and national stage applications are now in active prosecution to protect our ROR and PIR tests. +The patent portfolio can be broken down into 5 categories: +1) +Issued patents and patent applications relating to the VeriStrat and Nodify tests and uses of these tests; +2) +Issued patents and patent applications relating to methods for developing classifiers using the Diagnostic Cortex and DeepMALDI technologies; +3) +Issued patents and patent applications relating to tests currently in development; +4) +Issued patents and patent applications relating to our novel blood collection device; and +5) +Issued patents and patent applications relating to tests developed for our third-party partners. +The patents relating to the VeriStrat test are scheduled to expire between 2026 and 2032. The patents relating to the Nodify XL2 test are scheduled to expire beginning in 2031 (excluding any patent term extension granted by the USPTO), and the patents relating to the Nodify CDT test are scheduled to expire in 2027. The patent related to the blood collection device is scheduled to expire in 2039. Should our current patent applications in prosecution in the United States issue, the resulting patents would be scheduled to have expiration dates between 2036 and 2040 (excluding any patent term extension(s) granted by the USPTO). +While we do not currently have any pending PCT applications, we often convert provisional patent applications to PCT applications. PCT patent applications are not eligible to become issued patents until, among other things, we file such PCT applications as national stage patent application(s) within 30 months in the countries in which we seek patent protection. If we do not timely file any national stage patent applications, we may lose our priority date with respect to any such PCT patent applications and any patent protection on the inventions disclosed in such PCT patent applications. Provisional patent applications are not eligible to become issued patents but can become the basis of PCT foreign stage and United States non-provisional patent applications, if such applications are filed within 12 months of filing the related provisional patent application. If we do not timely file any non-provisional patent applications, we will lose our priority date and any patent protection on the inventions disclosed in any such provisional patent application. +26 +In addition, the term of individual issued patents depends upon the legal term for patents in the countries in which they are obtained. In most countries in which we have filed, including the United States, the patent term is generally 20 years from the earliest filing date of a non-provisional patent application, assuming the patent has not been terminally disclaimed over a commonly-owned patent or a patent naming a common inventor, or over a patent not commonly owned but that was disqualified as prior art as the result of activities undertaken within the scope of a joint research agreement. The life of a patent, and the protection it affords, is therefore limited and once the patent lives of our issued patents have expired, we may face competition, including from other competing technologies. In the United States, the term of a patent may also be eligible for patent term adjustment for delays within the USPTO. The term of a patent that covers a biological product may also be eligible for patent term extension when FDA approval is granted for a portion of the term effectively lost as a result of the FDA regulatory review period, subject to certain limitations and provided statutory and regulatory requirements are met. Any such patent term extension can be for no more than five years, only one patent per approved product can be extended, the extension cannot extend the total patent term beyond 14 years from approval, and only those claims covering the approved biological product, a method for using it or a method for manufacturing it may be extended. We may not receive an extension if we fail to exercise due diligence during the testing phase or regulatory review process, fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. There can be no assurance that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. +Our ability to maintain and solidify our proprietary and intellectual property position will depend on our success in obtaining effective patent claims and maintaining and enforcing claims that are granted. However, our owned and licensed patents could be invalidated or narrowed or otherwise fail to adequately protect our proprietary and intellectual property position and our pending owned and licensed patent applications, and any patent applications that we may in the future file or license from third parties, may not result in the issuance of patents. +Because branding is as much a part of any intellectual property strategy as patent or trade secret protection we have a number of registered and pending trademarks relating to our company and products. We have received or filed for trademark protection in the United States for our tradename (Biodesix), the names of four of our commercial tests (namely the VeriStrat, GeneStrat, Nodify XL2 and Nodify CDT tests), and a suite of research tests (ImmunoStrat), as well as having trademark protection for our core development and methodological platforms, such as our Diagnostic Cortex and DeepMALDI technologies. In all, as of September 21, 2020, we have 22 uniquely registered United States trademarks 10 of which (including Biodesix, VeriStrat, and GeneStrat) have received foreign issuances as well. We will continue to pursue protection in the United States and abroad for our branded assets and will continue to use branding to protect products currently in development, key Biodesix developments and non-trade secret methodologies. +We also rely on trade secrets, including know how, confidential information, unpatented technologies and other proprietary information, to strengthen or enhance our competitive position, protect and maintain aspects of our business that are not amenable to, or that we do not presently consider appropriate for, patent protection, and prevent competitors from reverse engineering or copying our technologies. We have decided that some technologies, such as our laboratory methodologies (including sample preparation and assay development), and some information (such as client and billing information) are best kept as trade secrets. However, trade secrets and confidential know-how are difficult to protect. To avoid inadvertent and improper disclosure of trade secrets, and to avoid the risks of former employees using these trade secrets to future employment, it is our policy to require employees, consultants and independent contractors to assign all rights to intellectual property they develop in connection with their employment with or services for the Company to the Company. We also protect our existing and developing intellectual property expressly through confidentiality provisions in agreements with third parties. There can be no assurance, however, that these agreements will be self-executing or otherwise provide meaningful protection for our trade secrets or other intellectual property or proprietary information, or adequate remedies in the event of unauthorized use or disclosure of such trade secrets or other intellectual property or proprietary information. +We also seek to preserve the integrity and confidentiality of our trade secrets and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in the measures we take to protect and preserve our trade secrets, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. +27 +We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives, which may include objectives within and outside the United States. Despite our efforts to protect our intellectual property rights, and despite the breadth of protection that has issued around our key assets, these rights may not be respected in the future or may be circumvented or challenged (and potentially invalidated) in a legal proceeding in any jurisdiction where we have intellectual property rights. In addition, the laws of various foreign countries where we have received intellectual property protection and where we may eventually distribute our products may not afford the same protections or assurances to the same extent as the laws in the United States. See “Risk Factors—Risks Related to Our Intellectual Property” for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on us. +Government Regulations +Clinical laboratory tests like our diagnostic tests are regulated under CLIA and State law. The FDA regulates medical devices pursuant to the FDCA, including many diagnostic test kits, such as IVDs. However, most LDTs are not currently subject to the FDA’s regulation (although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to such regulation) because the FDA has historically exercised enforcement discretion over LDTs. LDTs are a subset of in vitro diagnostic (IVD) tests that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. FDA’s authority to regulate LDTs has been contested for many years, and there have been several legislative and administrative proposals regarding LDT regulation seeking to end or limit enforcement discretion and to bring LDTs under new or existing FDA regulatory frameworks: +• +On July 9, 2012, Congress passed legislation in the Food and Drug Administration Safety and Innovation Act of 2012 ( FDASIA ) requiring the agency to notify the Committee on Health, Education, Labor, and Pensions and the House Committee on Energy and Commerce of its intent to regulate LDTs. This law, though enacted, had a 5-year sunset provision, meaning that FDA is no longer subject to this notification requirement. +• +In October 2014, the FDA issued two draft guidance documents: Framework for Regulatory Oversight of Laboratory Developed Tests , which provided an overview of how the FDA would regulate LDTs through a risk-based approach, and FDA Notification and Medical Device Reporting for Laboratory Developed Tests , which provided guidance on how the FDA intended to collect information on existing LDTs, including adverse event reports. In the Framework for Regulatory Oversight draft guidance, the FDA asserted that LDT manufacturers would be subject to medical device premarket submission, registration, listing, and adverse event reporting requirements phased in over several years based on which tests posed the highest risk to public health. +• +On November 18, 2016, however, the FDA announced that it would not release the final guidance and would instead continue to work with stakeholders, the new administration, and Congress to determine the right approach. +• +On January 13, 2017, the FDA released a discussion paper on possible approaches to regulate LDTs in which it described a policy wherein previously marketed LDTs would not be expected to comply with most or all FDA oversight requirements, except for adverse event and malfunction reporting. In addition, certain new and significantly modified LDTs would not be expected to comply with pre-market review unless the agency determines certain tests could lead to patient harm. +• +In March 2017, the draft Diagnostic Accuracy and Innovation Act (DAIA) was introduced and outlined a risk-based regulatory approach for in vitro clinical tests ( IVCT), i.e., all IVDs regardless of whether they are commercially distributed diagnostic kits or LDTs. +• +In April 2017, the FDA issued a document describing 20 case studies of LDTs that raised concerns about the safety and efficacy of this category of tests. +• +In August 2018, the FDA responded to the DAIA draft with its own proposal for IVCTs, including PMA, provisional approval, and precertification, in addition to authority to revoke approval, request raw data, and take corrective action against test developers to protect public health. +28 +• +On October 31, 2018, the FDA issued its Safety Communication entitled “The FDA Warns Against the Use of Many Genetic Tests with Unapproved Claims to Predict Patient Response to Specific Medications” alleging that the agency was “aware” of healthcare providers making “inappropriate changes to a patient’s antidepressant medication based on the results from genetic tests.” Following this Safety Alert, the FDA contacted several laboratories that offered tests that made claims regarding drug responses for specific medications. While most laboratories addressed the FDA’s concerns by removing specific medication names from their labeling, the FDA issued an enforcement letter against a laboratory for making such claims without first undergoing the FDA premarket review. +• +In December 2018, a new draft bill which revised the DAIA and incorporated feedback from the FDA was released. The Verifying Accurate, Leading-edge, IVCT Development (VALID) Act creates a risk-based regulatory framework for IVCT regulation. Under the VALID Act framework, premarket review would be required for certain higher risk tests, while lower risk tests would be subject to a precertification pathway. +• +On April 4, 2019, the FDA issued a warning letter to Inova Genomics Laboratory for its pharmacogenomics tests, i.e., tests that predict medication response, among other things. In this letter, the FDA rebutted Inova’s argument that it believed it was operating within the scope of FDA’s LDT exemption and not subject to the FDA’s premarket review or labeling requirements by noting that the FDA has not created a legal “carve-out” or exemption for LDTs and that it ultimately retains discretion to take action when appropriate. +• +On March 5, 2020, identical versions of the VALID Act were introduced in both chambers of Congress. The same day, the House bill was referred to the House Committee on Energy and Commerce. +• +On August 19, 2020, HHS announced a new policy determining that FDA must engage in notice-and-comment rulemaking before requiring premarket review of LDTs. +• +On Nov. 16, 2020, HHS directed FDA to review voluntarily submitted EUAs for LDTs; if FDA’s review time exceeds 14 days, the submission would be referred to the National Institute of Health National Cancer Institute and also to other scientific government agencies, or to outside technical contractors if FDA remains unable to conduct the reviews. +We currently market our GeneStrat, VeriStrat, Nodify XL2 and Nodify CDT tests as LDTs in the United States. As a result, we believe our diagnostic services are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDCA provisions. If the FDA disagrees with the LDT status of any of our tests, the FDA may consider the test to be an unapproved medical device and may subject us to FDA enforcement action, including, without limitation, requiring us to seek clearance, authorization or approval for the laboratory test. If the FDA were to begin enforcement with respect to our LDTs, we could incur substantial costs and delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market requirements. +To date, the FDA has not engaged in notice-and-comment rulemaking or released broad-sweeping guidance, but it could choose to do so in the future and if pre-market review is required, our business could be negatively impacted as a result of commercial delay that may be caused by the new requirements. The cost of conducting clinical trials and otherwise developing data and information to support pre-market applications may be significant. If we are required to submit applications for our currently marketed tests, we may be required to conduct additional studies, which may be time-consuming, costly and could result in our currently-marketed tests being withdrawn from the market. Continued compliance with the FDA’s regulations would increase the cost of conducting our business, and subject us to heightened regulation by the FDA including penalties for failure to comply with these requirements. Failure to comply with applicable regulatory requirements could result in an enforcement action by the FDA, such as fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal sanctions. There are other regulatory and legislative proposals that would increase general FDA oversight of clinical laboratories and LDTs. Until the FDA finalizes its regulatory position regarding LDTs, or the VALID Act or other legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval. The outcome and ultimate impact of such proposals on the business is difficult to predict at this time and we are monitoring developments and anticipate that our products will be able to comply with requirements that may be imposed by the FDA. In the meantime, we maintain our CLIA accreditation, which permits the use of LDTs for diagnostics purposes. +29 +FDA Emergency Use Authorization +Section 564 of the FDCA allows the FDA to authorize the shipment of drugs, biological products, or medical devices that either lack required approval, licensure, or clearance (unapproved products), or are approved but are to be used for unapproved ways to diagnose, treat, or prevent serious diseases or conditions in the event of an emergency declaration by the HHS Secretary. 21 U.S.C. § 360bbb-3(a)(1)-(2). +On February 4, 2020, HHS Secretary Alex M. Azar II declared a public health emergency for COVID-19, under 21 U.S.C. § 360bbb-3(b)(1), justifying the authorization of emergency use of IVDs for detection and/or diagnosis of COVID-19. This determination was published in the Federal Register on February 7, 2020. 85 Fed. Reg. 7316 (Feb. 7, 2020). +While this emergency declaration is effective, the FDA may authorize the use of an unapproved product or an unapproved use of an approved product if it concludes that: +• +an agent referred to in the emergency declaration could cause a serious or life-threatening disease or condition; +• +it is reasonable to believe that the authorized product may be effective in diagnosing, treating, or preventing that disease or condition or a serious or life-threatening disease or condition caused by an approved product or a product marketed under an EUA; +• +the known and potential benefits of the authorized product, when used for that disease or condition, outweigh known and potential risks, taking into consideration the material threat of agents identified in the emergency declaration; +• +there is no adequate, approved, and available alternative to the authorized product for diagnosing, preventing, or treating the relevant disease or condition; +• +any other criteria prescribed by the FDA is satisfied. Id. § 360bbb-3(c). +Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. +The Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. We have completed all required performance verification studies to validate the use of the tests in our laboratories in accordance with the FDA Policy for Coronavirus Disease-2019 Tests During the Public Health Emergency, CAP and New York State Clinical Laboratory Standards of Practice (NYS CLEP) requirements. The FDA Policy for COVID-19 tests is a guidance document that explains the FDA’s current thinking on the topic, is subject to change, and does not establish any legally enforceable responsibilities. As stated in the FDA’s Policy for COVID-19, the FDA does not expect a separate notification or EUA request from laboratories that are performing testing using EUA-authorized test kits purchased from commercial manufacturers or their distributors. According to the FDA Policy for COVID-19 tests, a laboratory may make certain modifications to an EUA-authorized test if the modified test is validated using a bridging study without submitting an EUA amendment or formal notification. A laboratory may modify an EUA authorized test for use of a new specimen through a bridging study when the new specimen type has been previously authorized for another test of the same technology without submitting an EUA amendment or formal notification. +Federal and State Laboratory Licensing Requirements +The Biodesix Boulder, Colorado clinical laboratory is a College of American Pathology ( CAP)-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, Biodesix’s Quality Management System (QMS) holds an ISO 13485:2016 certificate. The Biodesix Boulder, Colorado clinical laboratory has received approval from The New York State Department of Health (NYSDOH), New York State Clinical Laboratory Evaluation Program (NYS CLEP) in Soluble Tumor Markers and Molecular, Cellular Tumor Markers as well as holding state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +30 +CLIA regulations establish standards for proficiency testing; facility administration; general laboratory systems; pre-analytic, analytic systems, post- analytic systems; personnel qualifications and responsibilities; quality control, quality assessment; and specific provisions for laboratories performing moderate to high complexity tests. Our Boulder, Colorado clinical laboratory is inspected biennially as part of its ongoing certification under CLIA certificate of accreditation by CAP. The Boulder, Colorado clinical laboratory most recently passed its CAP inspection in February 2019. +Under CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of or assessment of health. CLIA requires that a laboratory hold a certificate applicable to the type of laboratory examinations it performs and that it complies with, among other things, standards covering operations, personnel, facilities administration, quality systems and proficiency testing, which are intended to ensure, among other things, that clinical laboratory testing services are accurate, reliable and timely. +The Biodesix De Soto, Kansas clinical laboratory is a COLA-accredited clinical laboratory regulated by CMS pursuant to CLIA. COLA Inc. (COLA) was founded in 1988 as a private alternative to help laboratories stay in compliance with CLIA. In 1993, the Health Care Financing Administration (now CMS) granted COLA deeming authority under CLIA, and in 1997 The Joint Commission also recognized COLA Inc.’s laboratory accreditation program. The De Soto, Kansas clinical laboratory is inspected biennially by COLA. The De Soto, Kansas clinical laboratory most recently passed inspection in August 2019. The De Soto, Kansas clinical laboratory also holds state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +The International Organization for Standardization ( ISO) is an independent, non-governmental international organization that defines world-class specifications for products, services and systems, to ensure quality, safety and efficiency. ISO 13485:2016 is a harmonized, international regulatory benchmark for quality management systems that addresses most or all of the QMS requirements in markets including the United States, European Union, Australia, Japan and Canada. The ISO 13485:2016 certificate confirms that an organization operates a QMS that conforms to the standards established by ISO. The FDA has proposed a rule to harmonize and modernize its QSR, which would supplant the existing requirements with ISO 13485:2016 although this rule has been delayed several times spring 2018. In February 2021, we passed an ISO 13485:2016 inspection. +To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Laboratories such as ours, which are performing high complexity testing, are required to meet more stringent CLIA requirements than laboratories performing less complex tests, and therefore our laboratories are also subject to random, unannounced survey and inspection at any time. In addition, a laboratory that is certified as “high complexity” under CLIA may develop, manufacture, validate and use proprietary LDTs. CLIA requires analytical validation including accuracy, precision, specificity, sensitivity and establishment of a reference range for any LDT used in clinical testing. The regulatory and compliance standards applicable to the testing we perform may change over time and any such changes could have a material effect on our business. +CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that out-of-state laboratories maintain an in-state laboratory license to perform tests on samples from patients who reside in that state. As a condition of licensure, certain states may require that laboratory personnel meet qualifications, quality control procedures, facility requirements, record maintenance requirements or other state-specific requirements. +Because our Boulder, Colorado clinical laboratory is located in the State of Colorado, we do not need a specific State of Colorado laboratory license, however, we maintain licenses to conduct testing in other states where nonresident laboratories are required to obtain state laboratory licenses. We maintain licenses for our Boulder, Colorado and De Soto, Kansas laboratories with the New York State Dept. of Health (NYSDOH). We also hold licenses in other states in which we operate, including California, Maryland, Pennsylvania and Rhode Island, that require licensing of out-of-state laboratories under certain circumstances. Other states may currently have or adopt similar licensure requirements in the future, which may require us to modify, delay or stop its operations in those states until such requirements are met. +31 +Failure to comply with CLIA certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate or license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions, and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. +CLIA and state laws and regulations, operating together, sometimes limit the ability of laboratories to offer consumer-initiated testing, also known as direct access testing. We do not offer direct access testing and instead require that our tests be ordered by licensed healthcare providers. +Our Boulder, Colorado and De Soto, Kansas laboratories are certified and adhere to the New York State Clinical Laboratory Evaluation Program (NYS CLEP), based on New York State Public Health Law, Article 5 Title 5. New York State Clinical Laboratory Evaluation Program is exempt from CLIA and establishes their own method of laboratory certification and test validation approval. To process New York State patient specimens a laboratory must submit a robust analytical and clinical validation package to demonstrate clinical utility of the test and receive approval prior to offering the test in the state of New York. Our GeneStrat and VeriStrat tests have received New York State Clinical Laboratory Evaluation Program approval. New York State Clinical Laboratory Evaluation Program requires semi- annual inspections to ensure the laboratory meets all general and specialty standards. Biodesix passed New York State Clinical Laboratory Evaluation Program inspection in May 2019 and is currently scheduled for a routine re-inspection in May 2021. +Regulatory framework for medical devices in the United States +Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, which are defined to include, among other things, IVDs. The FDA regulates the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. It is possible that one of our current, or future, tests will be subject to FDA authority and oversight as either an IVD or a CDx pursuant to the FDA’s authority to regulate medical devices under the FDCA. +Medical devices are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +product design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the European Economic +Area (EEA), a medical device must meet the Medical Devices Directive’s (MDD)/In Vitro Medical Devices Directive’s (IVDD) Essential Requirements or, applicable on May 26, 2021, the Medical Devices Regulation’s (MDR) / applicable on May 26, 2022, In Vitro Medical Devices Regulation’s (IVDR) General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or +32 +statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high - risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a clinical evaluation report (CER) the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk- ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia, of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia, that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. However, the CE mark will be accepted in the UK until July 1, 2023. +Device classification +Under the FDCA, medical devices are classified into one of three classes: Class I, Class II or Class III, depending on the degree of risk to patients that is associated with each medical device and the amount of oversight needed to provide reasonable assurances with respect to safety and effectiveness of the medical device. +Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to a set of FDA regulations, referred to as the General Controls for Medical Devices, which require compliance with the applicable portions of the FDA’s QSR, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements. +Class II devices are subject to the General Controls as well as any special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, patient registries, FDA guidance documents and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process, although some Class II devices are exempt from the 510(k) requirements. +Class III devices include devices deemed by the FDA to pose the greatest risk: such as life-supporting or life-sustaining devices, implantable devices, or those deemed novel and not substantially equivalent to a predicate device following the 510(k) process. CDx tests are regularly considered Class III devices. +Premarket submission process +Unless a statutory or regulatory exemption or enforcement discretion policy applies, before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, the manufacturer must obtain the FDA’s: (1) permission for commercial distribution under section 510(k) of the FDCA (510(k) clearance); or (2) approval of a PMA; or (3) de novo classification and authorization. These processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees. +33 +Under the 510(k) clearance process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and therefore a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Premarket notifications typically include bench, analytical, and preclinical data. Clinical data is sometimes required to support substantial equivalence. If a manufacturer obtains a 510(k) clearance for its device and then makes a modification that could significantly affect the device’s safety or effectiveness or constitutes a major change or modification in the intended use of the device, a new clearance, authorization or approval may be required. +By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous, costly, and time-consuming PMA approval process or seek reclassification of the device through the de novo process. +To obtain a PMA, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling, and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use. +Once filed as a PMA, the FDA has 180 days to review the filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. +Prior to approval of a PMA, the FDA may conduct inspections of any clinical trial data and clinical trial sites, as well as inspections of any manufacturing facility and processes. The FDA can delay, limit or deny approval of a PMA application for many reasons, including (1) the device may not be shown safe or effective to the FDA’s satisfaction; (2) the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval; (3) the manufacturing process or facilities may not meet applicable requirements; and (4) changes in FDA approval policies or adoption of new regulations may require additional data. +If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when data is available. The PMA process can be expensive, uncertain and lengthy. A number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing. New PMA applications or PMA supplements are required for any modifications to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, materials or design of a device that has been approved through the PMA process. +34 +As a condition of PMA application approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer - term safety and effectiveness data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. +Alternatively, the FDA also allows the submission of a direct de novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of FDASIA, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. +The 510(k), de-novo or PMA processes can be expensive, lengthy and unpredictable. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device. +Companion Diagnostics and the Premarket Process +We believe that one of our future product candidates may include a companion diagnostic or complementary diagnostic (collectively CDx). CDx’s can identify patients who are most likely to benefit from a particular therapeutic product; identify patients likely to be at increased risk for serious side effects as a result of treatment with a particular therapeutic product; or monitor response to treatment with a particular therapeutic product for the purpose of adjusting treatment to achieve improved safety or effectiveness. The use of the CDx will be stipulated in the labeling of both the CDx and the therapeutic product. The FDA may require an application for the CDx separate from the drug approval process, and this could potentially delay the approval of any new drug application or the CDx, or complicate the review process. CDx’s are generally regulated as Class III medical devices by the FDA and are therefore most often subject to the PMA approval process. +The FDA issued guidance in July 2016 for the co-development of CDx tests with a therapeutic product and issued another draft guidance in December 2018 specific to oncology CDx tests. The FDA finalized this draft guidance in April 2020 in “Developing and Labeling In vitro Companion Diagnostic Devices for a Specific Group of Oncology Therapeutic Products.” The guidance is meant to guide the development of CDx products, which are defined as IVDs that provide information that is essential for the safe and effective use of the therapeutic product. A CDx is often developed and approved or cleared contemporaneously with the therapeutic, and the use of the CDx is stipulated in the labeling of both the CDx and the corresponding therapeutic product. While it supports contemporaneous marketing authorizations, if there are any deficiencies in the submissions, the FDA may place a PMA review of a CDx on hold or request additional testing, which could potentially delay the approval of the corresponding new drug application or the marketing authorization of the CDx, or otherwise complicate the review process. Some oncology CDx tests can be developed in a way that results in labeling for a specific group of oncology therapeutic products, rather than a single therapeutic product. +35 +Post-Market FDA Regulation +Even if regulatory clearance, authorization or approval of a device is granted, the FDA may impose limitations on the uses and indications for which the device may be labeled and promoted, and the device remains subject to significant regulatory requirements. Medical devices may be marketed only for the uses and indications for which they are cleared, authorized or approved. After a device, including a device exempt from FDA premarket review, is placed on the market, numerous post-market regulatory requirements apply, and the FDA has broad authority to enforce these requirements. Medical device manufacturers are subject to unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of any suppliers. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions such as: warning letters, fines, injunctions, consent decrees and civil penalties; unanticipated expenditures, including requirements to repair, replace, and/or refund the cost of the devices, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; the FDA’s refusal of our requests for 510(k) clearance, de novo classification, or PMA of new products, new intended uses or modifications to existing products; the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries; and withdrawing 510(k) clearance or PMAs that have already been granted and criminal prosecution. In the event that a supplier fails to maintain compliance with the FDA’s or our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. +Federal and State Fraud and Abuse Laws +We are subject to federal fraud and abuse laws such as the federal Anti-Kickback Statute (AKS), the federal prohibition against physician self- referral (Stark Law), the Eliminating Kickbacks in Recovery Act (EKRA), and the federal False Claims Act (FCA). We are also subject to similar state and foreign fraud and abuse laws. +The AKS prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing or ordering, any item or service that may be reimbursable, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. There are a number of statutory exceptions and regulatory safe harbors to the AKS that provide protection from AKS liability to arrangements that fully satisfy the applicable requirements. +EKRA prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program. The term “health care benefit program” is broadly defined such that EKRA extends to referrals reimbursed by both governmental and commercial third-party payers. EKRA includes a number of statutory exceptions that provide protection from EKRA liability if the applicable requirements are met. +The Stark Law generally prohibits, among other things, clinical laboratories and other so-called “designated health services” entities from billing Medicare for any services when the physician ordering the service, or any member of such physician’s immediate family, has a financial relationship, such as a direct or indirect investment interest in or compensation arrangement with the billing entity, unless the arrangement meets an exception to the prohibition. The Stark Law also prohibits physicians from making such referrals to a designated health services entity. There are also similar state laws that apply where Medicaid and/or commercial payers are billed. +The FCA imposes civil penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment to the government that are false or fraudulent, or knowingly making, using or causing to be made or used a false record or statement material to such a false or fraudulent claim, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. This statute also permits a private individual acting as a “qui tam” whistleblower to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $11,665 to $23,331 per false claim or statement for penalties assessed after June 19, 2020, with respect to violations occurring after November 2, 2015. +36 +Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payer knows or should know is likely to influence the beneficiary to order or receive a reimbursable item or service from a particular provider, practitioner, or supplier, and contracting with an individual or entity that the person knows or should know is excluded from participation in a federal health care program. In addition, federal criminal statutes created by HIPAA prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services. +In addition to these federal laws, there are often similar state anti-kickback and false claims laws that typically apply to arrangements involving reimbursement by a state-funded Medicaid or other health care program. Often, these laws closely follow the language of their federal law counterparts, although they do not always have the same exceptions or safe harbors. In some states, these anti-kickback laws apply with respect to all payers, including commercial payers. +A number of states have enacted laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and other healthcare providers, and, in some states, marketing expenditures. In addition, some state statutes impose outright bans on certain manufacturer gifts to physicians or other health care professionals. Some of these laws, referred to as “aggregate spend” or “gift” laws, carry substantial fines if they are violated. +Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs and extensive annual trainings for all of our employees and contractors. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from participation in government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Anti-Corruption +The FCPA and similar international bribery laws make it unlawful for entities to make payments to foreign government officials to assist in obtaining and maintaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any offer, payment, promise to pay, or authorizing the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to do or omit to do an act in violation of his or her duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business, to any person. In addition to the anti-bribery provisions of the FCPA, the statute also contains accounting requirements designed to operate in tandem with the anti-bribery provisions. Covered companies are required to make and keep books and records that accurately and fairly reflect the transactions of the company and devise and maintain an adequate system of internal accounting controls. With our international operations through our third-party partnerships, we could incur significant fines and penalties, as well as criminal liability, if we fail to comply with either the anti-bribery or accounting requirements of the FCPA, or similar international bribery laws. Even an unsuccessful challenge of our compliance with these laws could cause us to incur adverse publicity and significant legal and related costs. +37 +Privacy and Data Protection Laws +Numerous federal and state laws and regulations, including HIPAA, as amended by the HITECH, govern the collection, dissemination, security, use and confidentiality of protected health information (PHI) and personal information. In the course of performing our business we obtain personal information, including PHI. Laws and regulations relating to privacy, data protection, and consumer protection are evolving and subject to potentially differing interpretations. Under HIPAA and HITECH, the HHS, issues regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of PHI, used or disclosed by covered entities (CEs) and their authorized business associates (BAs). Because we are a health care provider that electronically transmits health care information, we are at times either a CE or a BA, as defined by HIPAA. Our subcontractors that create, receive, maintain, transmit or otherwise process PHI on our behalf are HIPAA BAs and must also comply with HIPAA, as applicable. +HIPAA and HITECH include the privacy and security rules, breach notification requirements and electronic transaction standards. The privacy rule governs the use and disclosure of PHI by CEs and BAs. The privacy rule generally prohibits the use or disclosure of PHI except as permitted under the rule. The rule also sets forth individual patient rights, such as the right to access or amend certain records containing such individual’s PHI, or to request restrictions on the use or disclosure of such individual’s PHI. The security rule requires CEs and BAs to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI (also referred to as ePHI) by implementing administrative, physical and technical safeguards. Under HITECH’s breach notification rule, a CE must notify individuals, the Secretary of HHS, and in some circumstances, the media of certain breaches of unsecured PHI or ePHI. +Penalties for failure to comply with a requirement of HIPAA and HITECH vary depending on the number and nature of the violations and any history of prior violations, but can be significant and include civil monetary or criminal penalties. HIPAA is enforced by the Department of Health and Human Services, Office for Civil Rights, and HIPAA also authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in the misuse or breach resulting in improper access to PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA CEs, such as us, and their BAs for compliance with the HIPAA privacy and security standards. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator. +In addition, we may be subject to state privacy, cybersecurity, and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information Act, which, in addition to HIPAA and HITECH, sets forth standards with which all California health care providers must abide. State laws may be more stringent, broader in scope or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other, which may complicate compliance efforts. For instance, the CCPA became effective on January 1, 2020. The CCPA, among other things, gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA has been amended from time to time, and it remains unclear what, if any, further modifications will be made to this legislation or how it will be interpreted. Although there are certain exemptions for PHI and clinical trial data, the CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future and the CCPA may increase our compliance costs and potential liability. Additionally, a California ballot initiative, the California Privacy Rights Act (CPRA) was adopted by California voters. The CPRA will impose additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It would also create a new California data protection agency specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. Similar laws have been proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that could continue to make compliance challenging and costly. +38 +Additionally, the Federal Trade Commission (FTC) and state attorneys general enforce consumer protection laws that prohibit unfair and deceptive acts and practices, including Section 5 of the FTC Act, which creates standards for the collection, use, dissemination and security of health-related and other personal information. Claims of unfair or deceptive trade practices regarding privacy and security can lead to significant liabilities and consequences, including regulatory investigations, penalties, fines and orders as well as civil claims, which could impact our data practices and operations or cause reputational damage. +We may also be subject to laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may add additional compliance burden and complexity. For example, in the EEA, the collection and use of personal data is governed by the GDPR. In the United Kingdom, the GDPR will be adopted in substantially the same form. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze, store, transfer and otherwise process personal data. European and United Kingdom data protection authorities may interpret the GDPR and national laws differently and impose additional requirements, which adds to the complexity of processing personal data in or from the EEA or United Kingdom. Guidance on implementation and compliance practices are often updated or otherwise revised. GDPR applies extra-territorially under certain circumstances and imposes stringent requirements on controllers and processors of personal data, including, for example, requirements to ensure a legal bases to process personal information, provide robust disclosures to individuals, facilitate data subject rights, provide data security breach notifications within 72 hours after discovering a breach in certain circumstances, limit retention of personal information and apply enhanced protections to health data and other categories of sensitive personal information. The GDPR also has requirements around international transfers of personal data. Requirements around transfers to the United States and other jurisdictions have increased since a July 2020 decision by the Court of Justice of the European Union invalidated the Privacy Shield as a basis to transfer personal data from Europe to the United States, and added requirements for reliance on Standard Contractual Clauses. Regulatory guidance on requirements for international transfers, and other GDPR compliance matters, continues to evolve. Failure to comply with the requirements of the GDPR may result in fines of up to €20 million or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. To comply with the GDPR and other applicable international data protection laws and regulations, we may be required to put in place additional mechanisms ensuring compliance, which may result in other substantial expenditures. +Cybersecurity +Our business relies on secure and continuous processing of information and the availability of our IT networks and IT resources, as well as critical IT vendors that support our technology, research and other data processing operations. While we take steps to protect our systems and data, security incidents, data breaches, computer malware and computer hacking attacks have become more prevalent across industries, including the life sciences sector, and may occur on our systems or those of our third-party service providers. Unauthorized persons may in the future be able to exploit weaknesses in the security systems of our (or our third-party service providers) IT networks and gain access to PHI and other personal information, or sensitive trade secrets or other proprietary information. Any wrongful use or disclosure of PHI, other personal information, trade secrets or other proprietary information by us or our third-party service providers could subject us to regulatory fines or penalties, third-party claims or otherwise could adversely affect our business and results of operations. Although HIPAA and the regulations promulgated thereunder do not provide for a private right of action, failures to adequately protect PHI or our IT systems could be viewed as violations of the HIPAA security rule or violations of other applicable information security laws, regulations, contractual obligations or industry standards, and could further result in costly data breach notification obligations that negatively impact our reputation. +Moreover, data security incidents or data breaches, as well as attacks on our IT systems, could result in operational disruptions or data loss or corruption that could adversely impact our business and operations, result in substantial investment of resources to investigate, recover and remediate and subject us to heightened regulatory scrutiny. +39 +International Regulations +Many countries in which we may offer any of our diagnostic tests in the future have anti-kickback regulations prohibiting providers from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable under any national health care program. In situations involving physicians employed by state-funded institutions or national health care agencies, violation of the local anti-kickback law may also constitute a violation of the FCPA. +The FCPA prohibits any United States individual, business entity or employee of a United States business entity to offer or provide, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether or not such conduct violates local laws. In addition, it is illegal for a company that reports to the SEC to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls. We will also be required to maintain accurate information and control over sales and distributors’ activities that may fall within the purview of the FCPA, its books and records provisions and its anti-bribery provisions. +The standard of intent and knowledge in anti-bribery cases is minimal. Intent and knowledge are usually inferred from that fact that bribery took place. The accounting provisions do not require intent. Violations of the FCPA’s anti-bribery provisions for corporations and other business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Other countries, including the United Kingdom and other OECD Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United Kingdom Anti-Bribery Act. +When marketing our diagnostic tests outside of the United States, we may be subject to foreign regulatory requirements governing human clinical testing, prohibitions on the import of tissue necessary for us to perform our diagnostic tests or restrictions on the export of tissue imposed by countries outside of the United States or the import of tissue into the United States, and marketing approval. These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required. +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the European Economic Area (EEA), a medical device must meet MDDs/ IVDD Essential Requirements or, applicable on May 26, 2021, the MDR applicable on May 26, 2022, IVDR General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a CER the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk- ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia , of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia , that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +40 +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. However, the CE mark will be accepted in the UK until July 1, 2023. +Healthcare Reform +In March 2010, the Patient Protection and Affordable Care Act (ACA) was enacted in the United States. The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private insurers. For example, the ACA requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices. The medical device tax was permanently repealed at the end of 2019. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters, and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict. +While the Biden administration has recently signaled its intent to pursue policies strengthening the ACA, the Trump administration and Congress sought to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. The Trump administration issued three executive orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. For example, on December 20, 2019, President Trump signed appropriations legislation for fiscal year 2020 that repealed certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high-cost employer-sponsored insurance plans, for tax years beginning after December 31, 2019; the annual fee imposed on certain health insurance providers based on market share, for calendar years beginning December 31, 2020; and the medical device excise tax on non-exempt medical devices, for sales after December 31, 2019. While Congress has not passed comprehensive legislation that would repeal all or part of the ACA, two bills affecting the implementation of certain taxes under the ACA have been signed into law. The Tax Cuts and Jobs Act of 2017 (TCJA) among other things, included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment, or penalty, imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” In December 2018, a federal district court in Texas ruled that the ACA’s individual mandate, without the penalty that was repealed effective January 1, 2019, was unconstitutional and could not be severed from the ACA. As a result, the court ruled the remaining provisions of the ACA were also invalid. The Fifth Circuit Court of Appeals affirmed the district court’s ruling that the individual mandate was unconstitutional, but it remanded the case back to the district court for further analysis of whether the mandate could be severed from the ACA; that is, whether the entire ACA was therefore also unconstitutional. The United States Supreme Court granted certiorari on March 2, 2020 and heard oral argument on November 10, 2020; the case is expected to be decided in 2021. +Other legislative changes have been proposed and adopted in the United States since the ACA was enacted to reduce healthcare expenditures. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions of Medicare payments to providers of up to 2% per fiscal year that started in 2013 and, due to subsequent statutory amendments, will remain in effect through 2030 unless additional Congressional action is taken. In 2020, the CARES Act temporarily suspended the 2% cut in Medicare payments from May 1, 2020 through December 31, 2020, and it extended the sequestrian reductions through FY 2030 to offset the cost of such temporary suspension. The Consolidated Appropriations Act, 2021 further extended the temporary suspension through March 31, 2021. The American Taxpayer Relief Act of 2012 made other changes, including reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. If federal spending is further reduced, anticipated budgetary shortfalls may also impact the ability of relevant agencies, such as the FDA or the National Institutes of Health to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve R&D, manufacturing, and marketing activities, which may delay our ability to develop, market and sell any products we may develop. Additionally, the Biden administration has already indicated a shift in direction from Trump administration policies by issuing orders and other documents rolling back regulations and Executive Orders from the Trump administration, and as noted, indicating that it will pursue policies strengthening the ACA. The recent change in presidential administration could materially impact our business in ways that are difficult to predict. +41 +In December 2020, in its enactment of the Consolidated Appropriations Act, Congress enacted the No Surprises Act. This law, which takes effect January 1, 2022, bars an out-of-network provi ders from billing patient s in excess of the in-network cost sharing for services furnished with respect to a visit at certain in-network health care facilities. The law establishes an independent dispute resolution process between the provider and the payer to determine the appropriate payment rate to the provider. As written, the No Surprises Act may apply to laboratory tests furnished by an independent laboratory with respect to a hospital visit . The law establishes a notice and consent exception that generally does not apply to laboratory tests, although it allows HHS to apply this exception to certain advanced tests. Additional information on the applicability of the No Surprises Act, any applicability of the notice and consent exception to advanced tests, and the rules governing the independent dispute resolution process may be determined in rulemaking and subregulatory guidance from HHS, the Department of Labor, and the Department of the Treasury in 2021. +Coverage and Reimbursement +Reimbursement for laboratory tests in the United States is determined by various payers, including private third-party payers, managed care organizations, and state and federal health care programs, such as Medicare and Medicaid. In Medicare, coverage of an item or service depends on whether it is “reasonable and necessary” under the section 1862(a)(1)(A) of the Social Security Act (SSA). For single-source laboratory tests, this determination is typically made by the Medicare Administrative Contractor (MAC) with jurisdiction over the laboratory where the test is performed. Our Boulder, Colorado laboratory is currently under the jurisdiction of Novitas Solutions, Inc. Our De Soto, Kansas laboratory is under the jurisdiction of Wisconsin Physicians Service Insurance Corporation , which participates in the MolDX program (administered by another MAC, Palmetto GBA) to set coverage policy for molecular diagnostic tests. +Medicare pays for clinical diagnostic laboratory tests (CDLTs), on the Clinical Laboratory Fee Schedule (CLFS). Section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA), added section 1834A to the SSA, which established the current CLFS rate setting processes and coding provisions for CDLTs, and created a new subcategory of CDLTs called Advanced Diagnostic Laboratory Tests (ADLTs), with separate reporting and payment requirements. +Under section 1834A and its implementing regulations, clinical laboratories that receive the majority of their Medicare revenues from payments made under the CLFS and the Physician Fee Schedule report on a triennial basis (or annually for ADLTs), private payer rates and volumes for their tests with specific billing codes based on final payments made during a set data collection period. The payment rate for a test for the ensuing three-year period (or one year for ADLTs) is set at the weighted median of the rates reported under the specific billing code for that test. Newly established codes for CDLTs are priced until the next private payer rate reporting cycle either based on the payment rate of a comparable code on the CLFS (as determined by CMS) or at the median of rates submitted by the individual MACs based on statutory and regulatory factors. New ADLTs are initially priced at “actual list charge” for a nine-month period, after which they are priced based on private payer rates, with a recoupment provision if actual list charge is more than 130% of the weighted median of private payer rates reported. +The various payers in the United States also determine their own billing rules. In December 2020, Medicare revised its billing rules for clinical laboratory tests to require cancer-related protein-based Multianalyte Assays with Algorithmic Analyses to be billed directly to Medicare by the performing laboratory in most cases when performed on a specimen collected from a hospital outpatient. Molecular pathology tests and most ADLTs are also generally required to be billed directly to Medicare by the laboratory under these circumstances. +Environmental, Health and Safety Regulations +We are subject to various federal, state, local, and foreign environmental, health and safety laws and regulations and permitting and licensing requirements. Such laws include those governing laboratory practices, the generation, storage, use, manufacture, handling, transportation, treatment, remediation, release and disposal of, and exposure to, hazardous materials and wastes and worker health and safety. Our operations involve the generation, use, storage and disposal of hazardous materials, and the risk of injury, contamination or non-compliance with environmental, health and safety laws and regulations or permitting or licensing requirements cannot be eliminated. In particular, the introduction of our Bio-Rad SARS-CoV-2 ddPCR and Platelia SARS-CoV-2 Total Ab tests requires that we maintain compliance with applicable and evolving federal and state laws and regulations relating to COVID-19, including the generation, use, storage, and disposal of testing materials and agents. Compliance with environmental laws and regulations has not had a material effect on our capital expenditures, earning or competitive position. +42 +Corporate Information +We were incorporated in Delaware in 2005 as Elston Technologies, Inc. Our principal executive offices are located at 2970 Wilderness Place, Suite 100, Boulder, Colorado 80301, and our telephone number is (303) 417-0500. On June 20, 2006, we changed our name to Biodesix, Inc. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of our initial public offering. +Additionally, we are a “smaller reporting company ” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +For certain risks related to our status as an emerging growth company, see “Risk Factors—Risks Related to our Common Stock—We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.” +Human Capital Resources +Our culture is underpinned by our cultural beliefs including an unwavering commitment to inclusion and diversity. We are committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent offering opportunities for our team members to grow and develop in their careers, supported by strong compensation, benefits and health and wellness programs. We regularly engage our team members in monthly all-hands meetings to align and focus on the current state of affairs of our business, our partnerships, new products, clinical trials, and other pertinent information about our business. We engage our team members in programs such as peer recognition, recruitment and our newly introduced Diversity, Equity and Inclusion Council that focus on recognizing outstanding individual contributions to company performance, cultural fit of new team members and acknowledging the diversity or our team to ensure our team members feel valued and can do their best work. We have a national annual community service initiative, “Biodesix Gives Back” that allows each team member to invest ten hours of paid community service to organizations of their choosing. +43 +As of December 31, 2020, we had approximately 200 full-time and part-time employees with more than 95% located in the United States. Of our 200 full-time and part-time team members, the majority of our team member base is located in proximity to our corporate office and testing facilities located in Boulder, Colorado and our laboratory in De Soto, Kansas . +Diversity, Equity and Inclusion +We believe that a diverse employee population, including across background, gender, ethnicity, sexual orientation and lived experiences, is critical to our success. Our employees are encouraged to leverage their personal strengths and experiences to continually innovate and contribute to the development of new ideas and process improvements that drive better experiences for our partners. +Employee Engagement +Our company culture emphasizes the satisfaction and well-being of our team members and a diverse, engaged workforce. We solicit the opinion and views of our team members through surveys and peer focus groups. We have an established and valued Peer Recognition Culture. Teammates recognize other teammates publicly for their support and contributions fostering engagement and retention. We are reviewing feedback we received on our current cultural beliefs to determine if any modifications are needed. Additionally, the Company celebrates our top sales performers through the President’s Club and other top company performers as nominated by fellow team members through our four (4) Performance Excellence Awards that recognize creativity and innovation, an entrepreneurial spirit, a strategic impact on the success of the Company and lastly, embodying the Biodesix cultural beliefs and goes “above and beyond” daily. +Training and Development +We invest in our team members career growth and provide team members with a wide range of development opportunities, including face-to-face, virtual, and self-directed learning, mentoring, coaching, and external development. +Health, Safety and Wellness +The physical health, financial stability, life balance and mental health of each of our team members is vital to our success. We sponsor several cancer awareness activities in our local communities to bring engagement and awareness of health, safety and wellness to positively impact lives. We provide an Employee Assistance Program through our professional employer organization (PEO) to enhance physical, financial, and mental well-being for all our team members. Since the onset of the COVID-19 pandemic, we have successfully transitioned a significant portion of our workforce to a remote working environment and implemented several safety and social distancing measures in our sites to protect the health and safety of our team members. We also have provided extraordinary safety protocols and standards for all of “essential” team members who work in our Laboratories and our field sales organization including regularly scheduled serial testing for COVID-19. We also have an active “Friends and Family” COVID-19 testing program for our team members, their families and close friends. +Pay Equity +The main objective of our compensation program is to provide a compensation package that will attract, retain, motivate, and reward superior team members who operate in a highly competitive and technologically challenging environment. We emphasize overall Company performance and provide equity incentives for all team members to align their financial interests with the interests of shareholders. In addition, we offer an employee stock purchase plan to all employees in which participants are eligible to purchase shares at a discount to market. We think like customers and act like owners. +Biodesix seeks fairness in total compensation. We benchmark with external comparisons, internal comparisons and look at the relationship between team member roles within the organization. We also review our compensation practices, both in terms of our overall workforce and individual team members, to ensure our pay is fair and equitable. We have no pay disparities based on gender, race, or ethnicity. +44 +Available Information +We file with, or furnish to, the SEC reports including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available free of charge on our corporate website (www.biodesix.com) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov. The foregoing website addresses are provided as inactive textual references only. The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this Annual Report on Form 10-K. \ No newline at end of file diff --git a/raw/filings/0001439725/2020/0001564590-21-013512/item13.txt b/raw/filings/0001439725/2020/0001564590-21-013512/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..d95f80d1fd3c467fd503807f77b0a6e7f9da1a3b --- /dev/null +++ b/raw/filings/0001439725/2020/0001564590-21-013512/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this item is incorporated by reference from the information under the caption "Election of Directors—Certain Relationships and Related Transactions" and "—Director Independence" contained in the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001439725/2020/0001564590-21-013512/item9a.txt b/raw/filings/0001439725/2020/0001564590-21-013512/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..16726202a85cc6819af9ccc63ead13d4af3a133c --- /dev/null +++ b/raw/filings/0001439725/2020/0001564590-21-013512/item9a.txt @@ -0,0 +1,5 @@ +Item 9A. Controls and Procedures. +Evaluation of Disclosure Controls and Procedures +We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. +Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. +This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. \ No newline at end of file diff --git a/raw/filings/0001439725/2020/0001564590-21-013512/rp_note.txt b/raw/filings/0001439725/2020/0001564590-21-013512/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001439725/2020/0001564590-21-013512/rpt_disclosure.txt b/raw/filings/0001439725/2020/0001564590-21-013512/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..92edc681cc3cde52da53aeb2e4e9b94ecd92f364 --- /dev/null +++ b/raw/filings/0001439725/2020/0001564590-21-013512/rpt_disclosure.txt @@ -0,0 +1,70 @@ +Certain Relationships and Related-Party Transactions +The following is a summary of the transactions since January 1, 2020 to which we have been a participant in which the amount involved in +the transaction exceeds or will exceed $120,000 and in which any of our directors, director nominees, executive officers, or holders of more than 5% of our capital stock, or any immediate family member of, or person sharing the household with, any +of these individuals, had or will have a direct or indirect material interest, with certain exceptions, other than compensation arrangements, which are under the section of this proxy statement captioned “Executive Compensation.” +At-the-Market Equity Offering +On November 29, 2021, we established an at-the-market +equity offering program (the “ATM Program”) to sell shares of our common stock from time to time through Cowen and Company, LLC as sales agent. On December 30, 2021, we sold 3,756,994 shares under the ATM Program at a public offering +price of $4.35 per share, generating gross proceeds of $16.3 million, before $0.6 million of underwriting discounts and commissions and offering expenses payable by the Company. The net proceeds from the ATM Program were used, among other +things, to fund a $20 million partial repayment of the $30 million term loan with Silicon Valley Bank. +Preferred Stock +Financings +We previously issued convertible preferred stock from time to time to fund our operations and to make acquisitions. +In February and March 2019, we issued 8,695,621 shares of Series H Preferred Stock at $1.15 per share for total cash proceeds of $10.0 million. Immediately prior to our initial public offering, we had issued 118,766,273 convertible preferred +shares. On October 27, 2020, upon closing of our initial public offering, each outstanding share of Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Series H Preferred Stock +automatically converted into 0.1684664 share of common stock; and each share of Series B-1 Preferred Stock automatically converted into 0.196 shares of common stock. In the aggregate, all series of preferred +stock were converted into 20,090,745 shares of common stock. As a result, as of December 31, 2020 and through the date of this filing there are no longer any series of convertible preferred stock outstanding. +Convertible Debt Financings +In March 2020, we issued $10.0 million in convertible debt (the “March 2020 Notes”) that was scheduled to mature in August +2020. In August 2020, the maturity date of this debt was extended to June 30, 2021. The March 2020 Notes were issued in two tranches of $5 million, with the first tranche being funded in March 2020 and the second tranche in June 2020. The +holders of the March 2020 Notes included a number of our directors and their affiliates. +In December 2019, we issued $6.0 million in +convertible debt (the “December 2019 Notes”), that were scheduled to mature in August 2020. In August 2020, the maturity date of this debt was extended to June 30, 2021. The December 2019 Notes were issued in two tranches of +$3.0 million, with the first tranche funded in December 2019. The second tranche was funded in February 2020. The holders of the December 2019 Notes included a number of our directors and their affiliates. +In August and September 2019 we issued $10.0 million in convertible debt (the “August 2019 Notes”) that was scheduled to mature +in August 2020. In August 2020, the maturity date of this debt was extended to June 30, 2021. The holders of the August 2019 Notes included a number of our directors and their affiliates. +2022 Proxy Statement +19 +Table of Contents +Our convertible debt, along with the related accrued interest, was automatically converted +to 1,848,280 shares of our common stock upon the completion of our initial public offering in October 2020. +Investor Rights +Agreement +In October 2018, we entered into an amended and restated investor rights agreement (“IRA”) with certain +holders of our preferred stock and common stock, including certain holders of 5% of our capital stock, and including certain members of, and affiliates of, our directors and certain of our executive officers. The IRA provides the holders of our +preferred stock with certain registration rights. After the closing of our initial public offering, the holders of 20,090,745 shares of common stock issuable from conversion of outstanding preferred stock, became entitled to rights with respect to +the registration of their shares of common stock under the Securities Act under this agreement. +Contingent Value Rights +Agreement +In February 2016, we entered into a contingent value rights agreement (“CVR Agreement”) with certain +holders of our preferred and common stock, including several members of our board of directors. Pursuant to the CVR Agreement, the holders would be eligible to receive in the aggregate up to 15% of any future income and proceeds that we would +receive, subject to a number of conditions and offsets, with respect to ficlatuzumab rights under our co-development and collaboration agreement with AVEO Pharmaceuticals, Inc. +Stock Options +The Biodesix, Inc. 2006 Employee, Director and Consultant Stock Plan, as amended and restated in 2008, 2011 and 2013 (the “2006 Incentive +Plan”) was replaced in 2016 by the 2016 Equity Incentive Plan (the “2016 Incentive Plan”). The 2006 Incentive Plan governed outstanding awards granted prior to the adoption of the 2016 Incentive Plan. In connection with our initial +public offering in October 2020, our board of directors and our stockholders approved the 2020 equity incentive plan (the “2020 Incentive Plan”). The 2020 Incentive Plan replaced the 2016 Incentive Plan. As of December 31, 2021, options to +purchase an aggregate of 1,350,157 shares of common stock were outstanding under our 2020 Incentive Plan. As of December 31, 2021, options to purchase an aggregate of 1,900,451 shares of common stock were outstanding, in the aggregate, under our +2006 Incentive Plan and our 2016 Incentive Plan. +Participation in Initial Public Offering +Messrs. Patience and Schuler and Dr. Strobeck, members of our board of directors, purchased 391,110 shares of common stock from the +underwriters in our initial public offering at the initial public offering price per share of $18.00. +Participation in Initial +Public Offering Directed Share Program +Messrs. Hutton and Massarany and Dr. Watts, members of our board of directors, +purchased 15,000 shares of common stock through our Directed Share Program in our initial public offering at the initial public offering price per share of $18.00. +Indemnification of Directors and Executive Officers +We have entered into indemnification agreements with each of our directors and executive officers in connection with our initial public +offering. The indemnification agreements and our bylaws will require us to indemnify our directors against certain liabilities, costs and expenses to the fullest extent not prohibited by DGCL, and have purchased directors’ and officers’ +liability insurance. Subject to very limited exceptions, our bylaws will also require us to advance expenses incurred by our directors and officers. +2022 Proxy Statement +20 +Table of Contents +Policies and Procedures for Related-Party Transactions +Our audit committee has the primary responsibility for the review, approval and oversight of any “related-party transaction,” which +is any transaction, arrangement or relationship (or series of similar transactions, arrangements or relationships) in which we are, were or will be a participant and the amount involved exceeds $120,000, and in which the related person has, had or +will have a direct or indirect material interest. We adopted a written related-party transaction policy effective October 2020. Under our related-party transaction policy, our management is required to submit any related-party transaction not +previously approved or ratified by our audit committee to our audit committee. In approving or rejecting the proposed transactions, our audit committee takes into account all of the relevant facts and circumstances available. All of the transactions +described in this section, except for certain equity award grants, occurred prior to the adoption of this policy. +2022 Proxy Statement +21 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001439725/2021/0000950170-22-003495/filing.txt b/raw/filings/0001439725/2021/0000950170-22-003495/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..8cc3190da82de27d0942378efb195a09933c4074 --- /dev/null +++ b/raw/filings/0001439725/2021/0000950170-22-003495/filing.txt @@ -0,0 +1,3842 @@ +10-K +--12-31 FY One false http://fasb.org/us-gaap/2021-01-31#OperatingLeaseLiability http://fasb.org/us-gaap/2021-01-31#OtherAssetsNoncurrent 0001439725 Three years seven years 0001439725 bdsx:NotesPayable2018NotesMember 2018-02-28 0001439725 us-gaap:SeriesFPreferredStockMember bdsx:AVEOOncologyMember 2020-09-01 2020-09-30 0001439725 bdsx:LabcorpDdFormerlyCovanceMember srt:MinimumMember us-gaap:CustomerConcentrationRiskMember 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COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2021 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO +Commission File Number 001-39659 +Biodesix, Inc. +(Exact name of Registrant as specified in its Charter) +Delaware +20-3986492 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer +Identification No.) +2970 Wilderness Place , Suite 100 +Boulder , CO +80301 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: ( 303 ) 417-0500 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading +Symbol(s) +Name of each exchange on which registered +Common Stock, par value $0.001 per share +BDSX +The NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☒ No ☐ +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☐ +Accelerated filer +☐ +Non-accelerated filer +☒ +Smaller reporting company +☒ +Emerging growth company +☒ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +As of June 30, 2021, the aggregate market value of common stock held by non-affiliates of the Registrant was $ 196.5 million, based on the closing price of the common stock as reported on the Nasdaq Global Select Market for that date. +The number of shares of Registrant’s Common Stock outstanding as of March 9, 2022 was 31,307,853 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for its 2022 Annual Meeting of Shareholders are to be incorporated by reference into Part III, as specifically set forth in Part III.) +Table of Contents +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +39 +Item 1B. +Unresolved Staff Comments +84 +Item 2. +Properties +84 +Item 3. +Legal Proceedings +84 +Item 4. +Mine Safety Disclosures +84 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +85 +Item 6. +[Reserved] +85 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +86 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +98 +Item 8. +Financial Statements and Supplementary Data +98 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +99 +Item 9A. +Controls and Procedures +99 +Item 9B. +Other Information +99 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +100 +Item 11. +Executive Compensation +100 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +100 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +100 +Item 14. +Principal Accountant Fees and Services +100 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +101 +Item 16 +Form 10-K Summary +101 +i +SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future financial condition, results of operations, business strategy and plans, and objectives of management for future operations, as well as statements regarding industry trends, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions. +We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, factors, and assumptions described under the section titled “Risk Factors” and elsewhere in this annual Report on Form 10-K, regarding, among other things: +• +our inability to achieve or sustain profitability; +• +our audited financial statements include a statement that there is a substantial doubt about our ability to continue as a going concern and a continuation of negative financial trends could result in our inability to continue as a going concern. +• +our ability to attain significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies for our diagnostic tests; +• +difficulties managing our growth, which could disrupt our operations; +• +failure to retain sales and marketing personnel, and failure to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests to generate revenue growth; +• +failure to maintain our current relationships, or enter into new relationships, with biopharmaceutical companies; +• +significant fluctuation in our operating results, causing our operating results to fall below expectations or any guidance we provide; +• +the demand for our COVID-19 and antibody testing program and our ability to meet such demand; +• +product performance and reliability to maintain and grow our business; +• +third-party suppliers, including courier services, contract manufacturers and single source suppliers; making us vulnerable to supply problems and price fluctuations; +• +the impact of a pandemic, epidemic, or outbreak of an infectious disease in the United States (U.S.) or worldwide, including the COVID-19 pandemic on our business; +• +natural or man-made disasters and other similar events, including the COVID-19 pandemic, negatively impacting our business, financial condition, and results of operations; +• +failure to offer high-quality support for our diagnostic tests, which may adversely affect our relationships with providers and negatively impact our reputation among patients and providers; +• +our inability to continue to innovate and improve our diagnostic tests and services we offer; +• +security or data privacy breaches or other unauthorized or improper access; +• +significant disruptions in our information technology systems; +• +the incurrence of substantial liabilities and limiting or halting the marketing and sale of our diagnostic tests due to product liability lawsuits; +• +our inability to compete successfully with competition from many sources, including larger companies; +• +performance issues, service interruptions or price increases by our shipping carriers and warehousing providers; +• +cost-containment efforts of our customers, purchasing groups and integrated delivery networks having a material adverse effect on our sales and profitability; +• +potential effects of litigation and other proceedings; +• +general economic and financial market conditions; +• +our ability to attract and retain key personnel; +• +current and future debt financing placing restrictions on our operating and financial flexibility; +1 +• +our need to raise additional capital to fund our existing operations, develop our platform, commercialize new diagnostic tests, or expand our operations; +• +the acquisition of other businesses, which could require significant management attention; +• +the uncertainty of the insurance coverage and reimbursement status of newly approved diagnostic tests; +• +future healthcare reform measures that could hinder or prevent the commercial success of our diagnostic tests; +• +compliance with anti-corruption, anti-bribery, anti-money laundering and similar laws; +• +compliance with healthcare fraud and abuse laws; +• +our ability to develop, receive regulatory clearance or approval or certification for, and introduce new diagnostic tests or enhancements to existing diagnostic tests that will be accepted by the market in a timely manner; +• +failure to comply with ongoing FDA or other domestic and foreign regulatory authority requirements, or unanticipated problems with our diagnostic tests, causing them to be subject to restrictions or withdrawal from the market; +• +future product recalls; +• +legal proceedings initiated by third parties alleging that we are infringing, misappropriating, or otherwise violating their intellectual property rights, the outcome of which would be uncertain; +• +the volatility of the trading price of our common stock; +• +inaccurate estimates or judgments relating to our critical accounting policies, which could cause our operating results to fall below the expectations of securities analysts and investors; and +• +other risks, uncertainties and factors, including those set forth under Risk Factors. +These risks are not exhaustive. Other sections of this Annual Report on Form 10-K may include additional factors that could harm our business and financial performance. New risk factors may emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. +You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K or to conform these statements to actual results or to changes in our expectations. +In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. +You should read this Annual Report on Form 10-K and the documents that we reference and have filed as exhibits with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. +2 +PART I +Item 1. B usiness. +Our mission is to improve every patient’s lung care by empowering physicians with swift, comprehensive and actionable insights. +Our vision is to be a trusted business partner that the world relies on for data-driven diagnostics. +Business Overview +Biodesix, Inc. (“Biodesix”, “we,” “us,” “our” or the “Company”) is a leading data-driven diagnostic solutions company leveraging state of the art technologies with our proprietary artificial intelligence (AI) platform to discover, develop, and commercialize solutions for clinical unmet needs, with a primary focus in lung disease. By combining a multi-omic approach with a holistic view of the patient’s disease state, we believe our solutions provide physicians with greater insights to help personalize their patient’s care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe improves overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic Cortex®, to discover innovative diagnostic tests for clinical use. Because of this approach, we believe we are unique in the diagnostics market as this approach allows for a broader and more holistic understanding of each patient’s disease state. Our data-driven and multi-omic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, patients, researchers, and biopharmaceutical companies. +We operate in a single segment and derive our revenue from two sources: (i) providing diagnostic testing services associated with (a) blood-based lung tests and (b) Coronavirus Disease 2019 (COVID-19) tests (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics (Services). We derived 90% of our total revenues for fiscal 2021 and 2020 from our diagnostic testing business. +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. Since our inception, we have performed over 500,000 tests and continue to generate a large and growing body of clinical evidence. We have participated in 27 clinical studies, five of which are ongoing, and have published over 300 peer-reviewed publications and presentations. We have over 150,000 samples and data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development (R&D) initiatives. +We have commercialized eight diagnostic tests which are currently on market and we perform over 30 assays for research use as part of our laboratory services that have been used by over 50 biopharmaceutical customers and academic partners. +Blood-Based Lung Tests +We have five diagnostic blood-based tests across the lung cancer continuum of care, which generated $18.7 million and $12.6 million in revenue for fiscal 2021 and 2020 , respectively, an annual growth rate of 49%. +Diagnosis +• +Nodify XL2® and Nodify CDT ® tests, together marketed as part of our Nodify Lung ® Nodule Risk Assessment testing strategy, assess the risk of lung cancer to help identify the most appropriate treatment pathway. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +Treatment & Monitoring +• +GeneStrat ddPCR® and VeriStrat® tests, marketed as part of our new IQLung™ testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to establish the patient’s prognosis and help guide treatment decisions. The GeneStrat ddPCR tumor profiling test and the VeriStrat immune profiling test have a 36-hour average turnaround time, providing physicians with timely results to facilitate treatment decisions. +• +GeneStrat NGS™ (NGS) test, our 72-hour blood-based NGS test, was launched in November 2021 to a select group of physicians, with broad US launch in January 2022. The GeneStrat NGS test is marketed as part of the new IQLung testing strategy with the GeneStrat ddPCR and VeriStrat tests. +3 +COVID-19 Tests +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe™ testing program. We generated $30.2 million and $28.3 million in revenue from COVID-19 testing during fiscal 2021 and 2020, respectively. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two United States Food and Drug Administration (FDA) Emergency Use Authorization (EUA)-authorized tests, a part of our customizable WorkSafe™ program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. +In January 2020, the U.S. Department of Health and Human Services Secretary declared a public health emergency for COVID-19 which justified the authorization of emergency use of diagnostic tests for the detection and/or diagnosis of COVID-19. The Bio-Rad SARS-CoV-2 Droplet Digital™ polymerase chain reaction (ddPCR) test and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. The Bio-Rad SARS-CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under the Clinical Laboratory Improvement Amendments (CLIA) to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. Using the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab tests, we operate and have commercialized the Biodesix WorkSafe testing program. +Prior to using the Bio-Rad tests as part of our WorkSafe testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Post-launch development support for these tests have included improvements in on-boarding new personnel, logistics of sample collection, sample receipt and data reporting, all required to support our testing program. Additional releases of the laboratory data management software are ongoing and planned for the foreseeable future. +In addition, during the three months ended June 30, 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass™ SARS-CoV-2 Neutralizing Antibody testing as a service. The test is the first and only surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the receptor binding domain (RBD) in the spike protein of SARS-CoV-2 that are produced in response to vaccination or previous SARS-CoV-2 infection. +These tests under the Biodesix WorkSafe testing program are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems to assist in their back-to-work or back-to-school strategies, a crucial element of restarting economic activity. We have announced multiple partnerships for COVID-19 testing, and maintain an agreement with the State of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State. Additionally, we have overseen and managed onsite testing and validating testing for the Big Ten Conference athletic competitions through the term of our contract which expired on June 30, 2021. +COVID-19 Pandemic +The COVID-19 pandemic has disrupted, and we expect will continue to disrupt, our lung diagnostic testing operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States of Colorado and Kansas’ public health orders and the guidance from the Centers for Disease Control and Prevention (CDC). Employees who can perform their duties remotely are asked to work from home and those on site are asked to follow our social distance guidelines. Our sales, marketing and business development efforts have also been constrained by our operational response to the COVID-19 pandemic due to travel restrictions. We expect to continue to adjust our operational norms to help slow the spread of COVID-19 in the coming months, including complying with government directives and guidelines as they are modified and supplemented. +The COVID-19 pandemic negatively affected, and we expect will continue to negatively affect, our lung diagnostic testing-related revenue and our clinical studies. For example, cancer patients may have more limited access to hospitals, healthcare providers and medical resources as they take steps to control the spread of COVID-19. Our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized. As a result of the COVID-19 pandemic, beginning in the latter half of March 2020, we saw a decline in business with existing and new biopharmaceutical customers. We began to see recovery during the fourth quarter 2020 as our delivered tests exceeded first quarter 2020 delivered tests and we continued to see the recovery extending through 2021. Further, our clinical studies, such as our ongoing INSIGHT and ALTITUDE studies, as well as our arrangements including contracted clinical trials with our biopharmaceutical customers, are expected +4 +to take longer to complete than what we expected before the outbreak of the COVID-19 pandemic. Our biopharmaceutical services revenue grew by approximately 20% during 2021 as compared to 2020; however, we are continuing to experience delays in clinical trials from across the country and world due to COVID-19 restrictions. We expect further improvement in our biopharmaceutical activities during 2022 as compared to 2021. +Conversely, we experienced a significant increase in revenues related to an increase in the demand for our Biodesix WorkSafe testing program, our COVID-19 testing and services, since the onset of the pandemic. COVID-19 diagnostic testing and services contributed approximately $30.2 million and $28.3 million during fiscal years 2021 and 2020, respectively. The first quarter 2021 was our high-water mark for COVID-19 testing revenue. We experienced a steady decline in subsequent quarters as immunizations in the U.S. accelerated. We do not anticipate the need for COVID testing to be commensurate with the peak demand experienced during the first quarter 2021 and instead expect the demand to moderate as new variants and infection occur. The reduction in demand for COVID-19 diagnostic testing will be a key indicator of continued recovery and is taken as a positive sign for both our Lung Diagnostic and Biopharmaceutical Services as we head into 2022. T here is no assurance that our COVID-19 testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. If the pandemic were to dissipate, whether due to a significant decrease in new infections, due to acquiring herd immunity based on previous natural infection, and the availability and rapid distribution of vaccines, the evolution of variant strains that impact diagnostic test performance, or otherwise, the need for COVID-19 testing could decrease significantly and this could have an adverse effect on our results of operations and profitability. As a result, the increase in revenue due to any increase in demand for these diagnostic tests may not be indicative of our future revenue. +See “Risk Factors” for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations. +Full Year Results for 2021 +For the year ended December 31, 2021, compared to the prior year: +• +Total Revenue was $54.5 million, an increase of 20%; +o +Lung Diagnostic Revenue of $18.7 million, an increase of 49% +o +Services Revenue of $5.6 million, an increase of 20% +o +COVID-19 Revenue of $30.2 million, an increase of 7% +• +Gross Margin was $24.0 million, an increase of 2%; +• +Operating Expenses, excluding Direct costs and expenses, were $64.9 million, an increase of 40%; +• +Operating Expenses, excluding Direct costs and expense and non-cash stock compensation expense, were $60.0 million, an increase of 40%; +• +Net Loss was $43.2 million, an increase of 38%; +• +Basic and Diluted Net Loss Per Common Share was $1.58; +• +Net Cash Used by Operating Activities was $28.2 million, compared to $21.4 million used; and +• +Cash and Cash Equivalents was $32.7 million as of December 31, 2021. +5 +Our Market Opportunity +Diagnostic Testing Market Size and Opportunity +Despite significant advances over the last decade, lung cancer is still the deadliest type of cancer in both men and women in the United States. While diagnostic testing has become routinely used at certain points in the lung cancer continuum of care (diagnosis, treatment and monitoring), we believe there is substantial need for novel, advanced testing to improve on the current standard of care. We estimate that in the United States, the lung cancer continuum of care currently represents over 10 million annual testing opportunities and is over a $27 billion market annually for testing alone. +Over the last two decades, the use of biomarker testing in clinical trials has increased, with 55% of oncology trials involving the use of biomarker testing in 2018 versus 15% in 2000. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their research and development pipelines and increase chances of drug development success. We estimate that biopharmaceutical partnering and research opportunities represents over a $2 billion market annually. +Lung Cancer Continuum of Care – Clinical Unmet Needs +Standards of care in lung cancer have evolved rapidly over the past decade, along with our understanding of the disease. With the introduction of numerous treatment options, physicians need an ever-increasing amount of information in order to select the best treatment plan for each individual patient. We believe that the lung cancer continuum of care has a variety of clinical unmet needs ranging from initial diagnosis of lung cancer after discovery of a lung nodule to treatment guidance for early and advanced stage disease, and monitoring for disease progression. +• +Diagnosis : We estimate approximately 1.6 million new incidental lung nodules and potentially 4 million lung nodules from the adoption of screening could be identified annually in the United States. Following initial discovery of a nodule, patients are typically evaluated by a pulmonologist for risk of lung cancer before an invasive procedure is carried out to obtain a tissue sample to confirm diagnosis. This risk assessment is based on clinical factors such as the patient’s smoking history and age, and radiological features such as the size and location of the nodule, obtained from a computed tomography (CT) scan. On initial assessment, we estimate that approximately 80% of patients are identified as low to moderate risk (5-65%) where guideline recommendations for their care plan are unclear, often resulting in either overtreatment of patients with benign nodules or undertreatment in patients with cancer. An estimated 17% of patients with malignant nodules are initially sent to watchful waiting, where a follow-up CT scan is scheduled in three to six months, potentially delaying their diagnosis. Conversely, we estimate that 62% of biopsies and 35% of surgeries performed on lung nodules find benign disease, representing a significant overtreatment that incurs both risk and cost to the patient and their providers. We therefore believe that there is a clear clinical need for blood-based diagnostic testing to help improve the initial risk assessment of pulmonary nodules, helping direct patients to the relevant treatment pathway, and ultimately improving patient outcomes and saving costs to the system. +• +Treatment Guidance – Early Stage : We estimate that there are over 700,000 testing opportunities annually in the United States in early-stage lung cancer to assess a patient’s risk of recurrence following curative-intent surgery, and to detect potential target mutations for therapeutics. Depending on a patient’s risk of recurrence, they may also receive chemotherapy, radiotherapy or chemoradiation post-surgery. The assessment of risk of recurrence is primarily based on the stage of cancer at diagnosis, with stage I patients typically receiving no additional treatment beyond surgery. However, 20 to 40% of patients with stage I disease do still recur within five years following surgery, representing a sub-group of patients who may have benefitted from more intensive treatment protocol. We believe there is a clear clinical need for blood-based diagnostic testing prior to surgery to identify stage I patients who may benefit from a more intensive treatment protocol and we also believe there is the need for identifying stage II and IIIA patients where low risk patients may benefit from a less intensive treatment protocol. There have also been recent advances in the use of targeted therapies in early-stage lung disease. These therapies +6 +typically target specific genomic mutations or alterations found in some tumors. We believe there is therefore an emerging need for testing designed specifically for mutation detection in early-stage disease. +• +Treatment Guidance – Advanced Stage: We estimate that there are over 3 million diagnostic testing opportunities annually in the United States to guide advanced stage lung cancer treatment decisions. With nearly 50 FDA-approved systemic treatment regimens listed in national treatment guidelines for non-small cell lung cancer (NSCLC), there is an elevated need for personalized biomarkers to help physicians identify the right patient for the right treatment. Multiple tissue-based diagnostic tests have been approved to identify patients eligible for targeted therapies and immunotherapy; however, about 50% of patients do not have sufficient tissue collected following diagnosis to facilitate testing. To compound the issue, different molecular tests take varying amounts of time (days versus weeks) to report results back to the ordering physician, which often leads to treatment decisions being made on incomplete information. Therefore, we believe there is an imminent need for a blood-based testing solution that measures tumor mutations and the patient’s immune profile, to provide physicians with more comprehensive and timely information to assess the overall prognosis of the patient and personalize treatment. +• +Monitoring : We estimate that there are over 800,000 testing opportunities in the United States for blood-based tumor and immune profiling to monitor for disease recurrence and progression in NSCLC patients. Unfortunately, advanced stage lung cancer is often terminal, so repeat tissue biopsy to assess the evolution of resistance mutations or to detect disease progression is not feasible from either a cost or risk perspective to the patient, which we believe demonstrates an important need for blood-based testing to help routinely monitor these patients. As a patient progresses through therapies, changes in their immune system occur and blood-based immune profiling could help physicians identify these changes prior to subsequent therapy selection. +Current Limitations in Biomarker Discovery and Companion Diagnostics +We estimate the biopharmaceutical biomarker testing and companion diagnostic market opportunity represents a $2 billion market annually . Over the last two decades, the use of biomarker testing in clinical trials has increased, with 55% of oncology trials involving the use of biomarker testing in 2018 versus 15% in 2000. From 2005 to 2015, a study identified that incorporating biomarkers into clinical development programs increased their probability of therapeutic success rate from phase 1 to FDA-approval by 570%, representing an increase from 1.6% without biomarkers to 10.7% with biomarkers. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their product development efforts and increase chances of drug development success. However, we believe as the market continues to advance, inherent limitations of both biomarker discovery and companion diagnostic development have become more apparent. +Biomarker Discovery : There are many limitations with biomarker discovery in biopharmaceutical drug development, including: +• +Biomarkers with clinical utility are difficult to discover and validate in independent datasets. +• +Classical statistical approaches to biomarker discovery are limited. Single-omic tests fail to see the whole biological picture. +• +Tissue biopsies are limited by the amount of a sample that can be collected: longitudinal testing is difficult and the biology is only from the profile of the tumor (host response is not accounted for). +• +Clinical trials are expensive and take a long period of time. It is often difficult to meet enrollment goals for clinical trials with slow diagnostic testing turnaround times. +Companion Diagnostics (CDx): While developing companion diagnostics is critical to precision medicine, the promise of companion diagnostics has not been fully realized and there are multiple limitations that still need resolution. The path to co-develop a successful companion diagnostic with a corresponding drug has several challenges, including: +• +Traditional companion diagnostic agreements may fail to realize the full value of a testing opportunity, leading to difficulty in funding appropriate commercialization. +• +Drug development is a lengthy, complex and costly process. There can be a financial impact to a pharmaceutical company to have a drug selected by a test. +• +Current diagnostic reimbursement policies may not always support the coverage and payment of new companion diagnostics. +• +Regulatory agencies continue to work on defining the co-development process, but the environment is continually changing. +The Diagnostic Cortex - Our Proprietary Artificial Intelligence (AI) Platform +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic +7 +Cortex, to discover innovative diagnostic tests for clinical use. We focus on developing technologies that are capable of single and multi-omic research and development. +The Diagnostic Cortex is an extensively validated deep learning platform optimized for the discovery of clinical diagnostic tests, which we believe overcomes standard machine learning challenges faced in life sciences research. Researchers commonly encounter issues with machine learning-based biological discoveries that cannot be repeated or validated when assessed in additional specimen cohorts. This challenge, commonly referred to as overfitting, occurs when the machine identifies a perfect pattern in an initial training dataset but is unable to identify the same pattern in a new dataset. For over 15 years we have focused on developing our platform to overcome this challenge through proprietary computational techniques to ensure each diagnostic test that is discovered can be further developed to perform consistently in the clinical testing environment. +We are able to combine blood-based biological information related to the tumor, immune system, and host-status with clinical and radiomic data through our proprietary AI platform, which enables us to interpret the holistic disease state of each patient or clinical dataset we encounter. +We continuously evolve and improve the Diagnostic Cortex platform. These improvements range from basic code optimization to complex improvements such as the incorporation of novel computational methods for the optimization of multi-omic diagnostic tests. Any AI platform is inherently limited without the highest quality data inputs. Therefore, all of the technologies that we employ have been chosen and developed to provide high-quality data to enable our Diagnostic Cortex platform. We feel that this level of data integrity is crucial for the development of diagnostic tests that require the advanced pattern matching abilities of deep learning algorithms. +We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and learn about biological discoveries that are clinically meaningful. Additionally, we incorporate clinical and molecular profiling data aggregated through our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or academic partnerships, into our platform. We have over 150,000 samples and data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external development initiatives. With our data-driven and multi-omic approach as data inputs into the Diagnostic Cortex, we are able to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +The following is a diagram outlining our innovative diagnostic test discovery, development and commercialization infrastructure as outlined in the text above. +We employ multiple technologies, as illustrated below, including genomics, proteomics, transcriptomics, and radiomics, generated by different assay techniques, including ddPCR, NGS, LC-MS, ELISA, and our proprietary DeepMALDI mass spectrometry platform for the blood-based molecular analysis of the tumor, immune system, and host-status of each patient and/or clinical dataset. Through our learning loop, we continuously revisit our technology strategy and roadmap to integrate new technologies into our evolving platform, which ultimately support the addition of new service and product revenue offerings. We focus on developing technologies that are capable of single and multi-omic research and development. +8 +Most diagnostic companies focus their strategy on using a single technology to discover biomarkers for a broad range of clinical questions. We believe that no single technology can interrogate the complexity of the human disease state to help solve all clinical questions. For that reason, we employ a multi-omic approach to solving diagnostic challenges leveraging our proprietary transparent AI platform, the Diagnostic Cortex. Because of this approach, we believe we are unique in the diagnostics market, allowing for a broader and more holistic understanding of each patient’s disease state. +We are experts in many technologies, but we are a true market leader with over 15 years of experience in the field of clinical proteomics. For over 10 years, we have been discovering and developing proteomic-based diagnostic tests and have a deep understanding of how to incorporate technologies that can be applied to blood samples in order to extract important protein-based biological information in the form of diagnostic tests, which can aid clinicians and scientists in understanding the dynamic biology of their system of interest, such as a patient with cancer. +Our suite of technologies that assist us in discovery, development and commercialization of novel diagnostic tests includes: +DeepMALDI Mass Spectrometry +We have developed DeepMALDI, a proprietary high-density matrix-assisted laser desorption/ionization time-of-flight (MALDI-ToF) mass spectrometry (MS) technology, to produce blood-based proteomic data for disease diagnosis, personalized health care, precision medicine for direct treatment options, and disease screening in lung and other disease states. DeepMALDI overcomes the limitations of conventional MALDI and other mass spectrometry methods to produce highly sensitive, stable, and reproducible data by: (1) utilizing optimized signal-to-noise reduction and signal processing algorithms; and (2) novel batch correction methods and spectral alignment methods. The combination of these improvements yields substantially higher quality data content and is thereby much better suited for the discovery of biomarkers with clinical utility. +Our current DeepMALDI methods allow us to achieve finer mass resolution, greater sensitivity, and 20-times faster imaging speeds than other instruments. Additionally, we believe recent enhancements to our DeepMALDI methods and MALDI-ToF technology evolution now allows us to measure more than 2,000 proteins, an improvement from the estimated 900 proteins we could measure a year ago. We intend to maintain our leadership role in the discovery of proteomics-based diagnostic tests. We utilize our DeepMALDI and MALDI-ToF technologies in our discovery and development efforts and as part of our collaborations with our biopharmaceutical customers and academic partners. +Liquid Chromatography Mass Spectrometry MS +We use Multiple Reaction Monitoring (MRM) MS with triple quadrupole mass spectrometers and up-front liquid chromatography (LC) sample injection in the Nodify XL2 test. This mass spectrometry method offers highly sensitive, specific, and cost-effective analysis for simultaneous quantitation of hundreds to several thousands of targeted peptides in a single experiment. We have since included the MRM technologies as part of our services for discovery and development with our biopharmaceutical customers and academic partners. +9 +Enzyme-Linked Immunosorbent Assay +ELISA is the most widely used ligand binding assay platform within and outside the pharmaceutical industry. Formats include direct, indirect and sandwich assays and are typically run in manually or semi-automated modes. We use a semi-automated implementation of ELISA in clinical testing for the Nodify CDT test and the Platelia SARS-CoV-2 Total Ab test, and the cPASS neutralizing antibody test for COVID-19. The acquisition of Oncimmune USA in 2019 expanded our ability to conduct very high throughput and cost-effective ELISAs in our clinical testing laboratory. We have now included the ELISA technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +Droplet Digital Polymerase Chain Reaction Technology (ddPCR) +We use the ddPCR technology for multiplexed, semi-automated nucleic acid detection. This allows high sensitivity, fast turn-around times, flexibility in our laboratory workflows, rapid scaling from low to moderate analyte complexity, and high-volume scalability. ddPCR is an absolute quantitation method based on the partitioning of circulating nucleic acids into up to 20,000 droplets per reaction and is used for the GeneStrat test and Bio-Rad SARS-CoV-2 ddPCR test for COVID-19. We have included the ddPCR technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +Next Generation Sequencing Technology +We use an NGS technology for broad genomic sequencing of clinical specimens. Our strategy with NGS relies on a menu of off-the-shelf and custom research use assays, which we develop and make available as a part of our commercial pipeline and biopharmaceutical test services. The NGS technology integrates automated systems to yield high sensitivity results with a rapid turnaround time. Since adoption of this technology, we have included the NGS technologies for research and product development both internally and externally with our biopharmaceutical customers and academic partners. +Our Solutions and Products +To help address the current limitations with standard of care in lung cancer diagnosis, treatment, and monitoring, we use combinations of tumor, immune and host profiling, radiological imaging, patient clinical profiling, and our proprietary AI platform to provide a holistic view of each patient’s dynamic disease state. +We have five blood-based diagnostic tests across the lung cancer continuum of care to help address clinical unmet needs by physicians. +• +Diagnosis : We believe there is a clinical need to help physicians reclassify risk of malignancy in patients presenting with suspicious lung nodules. We offer the blood-based Nodify Lung Nodule Risk Assessment testing strategy to aid physicians in stratifying patients into distinct nodule management treatment pathways: diagnostic procedure or imaging surveillance. Nodify Lung consists of two blood-based proteomic tests: the Nodify CDT test helps identify patients with lung nodules that are likely malignant and the Nodify XL2 test conversely helps identify those that are likely benign. +• +Treatment Guidance : We believe there is an imminent need for a blood-based testing solution that measures tumor-specific mutations and the patient’s immune profile to provide physicians with more comprehensive information to assess the overall prognosis of the patient and personalize treatment plans. We offer the blood-based IQLung testing strategy, which consists of the GeneStrat ddPCR and GeneStrat NGS tumor profiling tests and the VeriStrat immune profiling test for patients diagnosed with NSCLC. With a 72-hour turnaround time, we are able to quickly provide critical diagnostic information to physicians to facilitate personalized treatment decisions for their patients. +• +Monitoring : We believe longitudinally monitoring advanced NSCLC patients for the dynamic evolution of their tumor and immune profile while on treatment can provide an earlier indication of treatment resistance and/or disease progression. We offer the IQLung testing strategy as a blood-based monitoring tool for physicians to track their patients’ disease evolution. +10 +Diagnosis – Nodule Management +We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our blood-based nodule management offering, Nodify Lung Nodule Risk Assessment assists physicians in reclassifying a patient’s risk of lung cancer by incorporating their protein biomarker results with radiographic imaging and clinical characteristics. Nodify Lung consists of the Nodify CDT and Nodify XL2 proteomic tests, which can be ordered separately or together from a single blood draw to help reclassify risk of cancer to aid physicians in stratifying patients into distinct nodule management pathways: intervention or surveillance. +The Nodify CDT test is used to help identify lung nodules that are likely malignant and the Nodify XL2 test helps identify lung nodules that are likely benign. Nodify Lung is available for patients 40 years or older, with nodules between 8 and 30mm, and less than 65% pre-test risk of lung cancer. The testing strategy starts with the Nodify CDT test to determine if a nodule is likely malignant or at a higher risk of lung cancer. The Nodify CDT test helps physicians identify cancer more quickly by prioritizing patients with a higher risk of malignancy for a diagnostic procedure, such as biopsy or surgery. If the nodule is not identified as having a high risk of malignancy by the Nodify CDT test, then the Nodify XL2 test is performed to help determine if the patient’s nodule is likely benign or has a reduced risk of lung cancer and may be a candidate for CT imaging surveillance. The Nodify Lung testing strategy is represented graphically in the image below starting with the patient’s pre-test risk of malignancy and ending with the guideline-recommended diagnostic procedure for each risk category. +We launched the Nodify Lung combined offering of the Nodify CDT and Nodify XL2 tests in March 2020. However, the Nodify XL2 test has been available to all physicians since September 2019 and has been available to a select group of physicians since October 2018. We acquired the Nodify XL2 test from Integrated Diagnostics (Indi) in July 2018 and acquired the Nodify CDT test from Oncimmune USA in October 2019. +Nodify CDT +The Nodify CDT test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely malignant or at a higher risk of being cancerous. Results allow physicians to identify patients who may be better candidates for timely invasive diagnostic procedures such as bronchoscopy, transthoracic needle biopsy, or surgical resection, with the hope of catching cancer earlier. The Nodify CDT test enhances lung nodule risk assessment to facilitate compliance with clinical treatment guidelines such as those of the American College of Chest Physicians (ACCP). The Nodify CDT test is intended for use in patients who are 40 years or older, have nodules between 8 and 30mm, and pre-test risk of lung cancer of less than 65%. +The test measures the levels of seven circulating autoantibodies (P53, NY-ESO-1, CAGE, GBU4-5, SOX2, HuD, and MAGE A4) associated with lung cancer, combined with an algorithm to report out three potential results: High Level, Moderate Level, or No Significant Levels of Antibodies Detected (NSLAD). The seven autoantibodies have shown to be elevated for all types of lung cancer, and from the earliest stage of the disease. +Unlike the tumor antigens themselves, the autoantibody levels can be measured accurately through a blood sample, based upon the signal amplification generated by the immune response to cancer. This mechanism of action likely reflects very early events in a tumor’s evolution; as the immune system initiates a response to the cancer, it can also trigger an expansion of self-reactive antibodies that can be measured in circulation. +11 +In addition to the test result of High Level, Moderate Level, or NSLAD, each test report includes the patient’s pre-test risk of malignancy as calculated by the Solitary Pulmonary Nodule (SPN) Risk Assessment calculator, and their post-test risk of cancer incorporating the result of the test. The SPN Risk Assessment calculator was developed by Stephen Swensen, M.D., of the Mayo Clinic and is designed to provide a risk of malignancy for a patient with a newly discovered incidental nodule. The model incorporates six clinical and radiologic factors into the equation: age, nodule size, smoking status, nodule location, spiculation (nodule edge characteristic), and previous history of lung cancer. Incorporating the autoantibody levels with the risk model provides physicians with a more accurate assessment of risk. The test has been studied in 14 peer reviewed published studies and presentations. +Nodify XL2 +The Nodify XL2 test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely benign or at a reduced risk of being cancerous. Results allow physicians to identify patients who may be better candidates for routine CT surveillance to monitor for growth or shrinkage of the nodule over time instead of an invasive diagnostic procedure. The Nodify XL2 test is used for patients who are 40 years or older, have nodules between 8 and 30mm, and have a pre-test risk of lung cancer of less than or equal to 50%. +The Nodify XL2 test integrates peptides measured by LC-MS with clinical and radiological characteristics that are combined by an algorithm to report out three potential results: Likely Benign, Reduced Risk, or Indeterminate. Specifically, the Nodify XL2 test measures the relative abundance of two peptides (LG3BP and C163A) in circulation in the patient’s blood. The native proteins from which the peptides are derived, have been associated with an inflammatory response to cancer. The clinical factors are patient age and smoking status, and radiological factors are nodule size, location, and edge characteristics. +In addition to the test result of Likely Benign, Reduced Risk, or Indeterminate, each test report includes the patient’s pre-test risk of lung cancer as calculated by the SPN Risk Assessment calculator, and their post-Nodify XL2 risk of malignancy incorporating the result of the test. Incorporating the peptide levels with the risk model provides physicians with a revised assessment of risk incorporating the patient’s biology. +In summary, the inclusion of the Nodify Lung testing strategy into clinical practice helps physicians reclassify risk of malignancy of low to moderate risk lung nodules by incorporating the patient’s own biology into the assessment. The Nodify CDT test helps physicians identify patients with a high-risk lung nodule who may benefit from timely intervention, which can ultimately help identify lung cancer earlier. The Nodify XL2 test helps physicians identify patients with a very low risk lung nodule who may benefit from CT surveillance and could avoid unnecessary invasive procedures. +Blood samples for the Nodify XL2 and Nodify CDT tests can be collected in the physician’s office, laboratory, or at home through use of mobile phlebotomy. Mobile phlebotomy options facilitate testing for patients even if they are not seen in person by the physician and instead are seen through telehealth visits. This benefits the patient as scheduling can be conveniently fit to their needs and can keep them away from a physician’s office or hospital for safety concerns, especially with the evolving coronavirus pandemic. Additionally, mobile phlebotomy benefits the physician as the logistics around a blood draw or tissue sampling are out of their hands. We have a national network of contracted Nurses and Phlebotomists to support at-home or mobile blood collection. +Both tests require a single blood sample shipped at ambient temperature to our certified, high-complexity clinical laboratory in De Soto, Kansas. Nodify CDT testing requires whole blood and Nodify XL2 testing requires either a whole blood tube, or whole blood spotted onto our proprietary Blood Collection Device (BCD). The introduction of the BCD and now the whole blood tube as qualified specimen collection methods for use with the Nodify XL2 test alleviated the need for serum separation processing steps by phlebotomists at blood draw sites such as centrifugation, and cold chain (dry ice) shipments, which has increased the market access to our proteomic-based tests. Results for the Nodify CDT test alone are typically available within one day. If both tests are ordered for the patient and Nodify CDT returns a result of NSLAD, then both test results are typically available within 4 to 5 days. All results are available through a portal, fax, hard copy, or mobile device. +12 +Treatment Guidance and Monitoring +Profiling the tumor through blood-based testing can help identify mutations in genes that may be driving growth of the tumor and may be targets for therapeutics. However, tumors also suppress intrinsic mechanisms that prevent the patient’s immune system from identifying and eliminating the cancer cells. Profiling the immune system can show if the patient’s immune system may have been subverted and therefore, is less likely to be responsive to immunotherapies. Our blood-based IQLung testing strategy consists of the GeneStrat ddPCR and GeneStrat NGS tumor profiling tests and the VeriStrat immune profiling test, which can be ordered together or separately for patients with NSCLC. Together, the tests typically have a 72-hour turnaround time, providing physicians with timely results to facilitate treatment decisions. +GeneStrat ddPCR +The GeneStrat test is a blood-based tumor profiling test that detects the guideline recommended, actionable mutations in lung cancer: EGFR, KRAS, BRAF, EML4-ALK, ROS-1, and RET. Physicians can order one or any combination of the gene tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat test performance and potential clinical utility have been published in 3 peer reviewed studies. +The GeneStrat test results are typically available within 36 hours from our receipt of the sample in our Boulder, Colorado clinical laboratory. In a study at Eastern Carolina University, it was observed that blood-based testing was up to three weeks faster than tissue-based testing, with tissue-based testing taking a median of 26 days from sample collection. With GeneStrat testing, results are typically available in time for the patients first oncology visit, allowing the patient to start front-line treatment as quickly as possible. In the same study, it was observed that only 4% of patients had tissue-based molecular test results prior to start of front-line treatment. Meanwhile, after integrating Biodesix testing at the institution, 72% of patients had molecular test results available. Testing with the GeneStrat test can help physicians identify driver mutations quickly to help speed up time to treatment. +GeneStrat NGS Test +The GeneStrat NGS test is a blood-based 52-gene tumor profiling test panel that detects the guideline recommended, actionable mutations in lung cancer including five gene classes (SNV, INDELS, CNA, fusions, and exon-skipping). Specific variants of relevance to NSCLC include EGFR, KRAS, BRAF, EML4-ALK, ROS-1, RET, MET, NTRK. The GeneStrat NGS test is used for late-stage, metastatic NSCLC and Physicians can order one or any combination of the IQLung tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat NGS test performance and potential clinical utility have been published in two published studies. +GeneStrat NGS test results are typically available within 72 hours from our receipt of the sample in our Boulder, Colorado clinical laboratory. +13 +We believe that rapid, blood-based tumor profiling with the GeneStrat ddPCR and GeneStrat NGS tests can be complementary to both targeted tissue-based testing (including PD-L1) and tissue-based broad genomic sequencing. Testing with GeneStrat ddPCR and GeneStrat NGS tests at diagnosis can help quickly identify patients who are eligible for targeted therapies. Additionally, blood-based testing upfront can help save valuable tissue for diagnostic evaluation, PD-L1 testing and broad genomic profiling for rare mutations to enroll in clinical trials. +VeriStrat +The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. Results help inform physicians whether their patient has a more aggressive cancer and can help with treatment planning. The VeriStrat test profiles the patient’s immune system by measuring eight protein features measured by mass spectrometry and interpreted by a proprietary machine learning-based algorithm to produce either a VeriStrat Good or VeriStrat Poor test result. +The presence of a VeriStrat Poor result indicates the presence of chronic inflammation and a chronic acute phase immune response. A chronic acute phase immune response can trigger the immune system to provide growth factors to the tumor to increase blood flow and tumor growth. The test has been studied in over 85 peer-reviewed and published clinical studies across many different types of therapies such as chemotherapy, targeted therapies, immune therapies, and combinations. The results consistently show the test to be predictive of outcomes, independent of other prognostic factors including PD-L1 expression and performance status. Patients who test as VeriStrat Poor, on average, have an overall survival that is less than half of those who test as VeriStrat Good, independent of treatment type, demonstrating that the test is strongly prognostic. Conversely, patients with a VeriStrat Good test result typically respond better to standard of care treatments than those patients that test as VeriStrat Poor. By using the VeriStrat test for immune profiling, physicians can help identify the patients with an immune status associated with generally poor prognosis who should be treated with alternate therapies or in clinical trials. +GeneStrat ddPCR testing is performed using PCR technology, GeneStrat NGS testing is performed using Next Generation Sequencing technology, and the protein features in VeriStrat are measured using MALDI-ToF mass spectrometry. Results are typically available within 72 hours through a portal, fax, hard copy, or mobile device. +The GeneStrat ddPCR and GeneStrat NGS tests require whole blood specimen collection tubes, and VeriStrat requires a whole blood sample spotted onto our proprietary BCD. Both sample types are shipped at ambient temperature and testing is performed in our certified, high-complexity clinical laboratory in Boulder, Colorado. +COVID-19 +Biodesix WorkSafe COVID-19 Testing Program +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe testing program. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two diagnostic tests for the SARS-CoV-2 virus that causes COVID-19. The first test is the Bio-Rad SARS-CoV-2 ddPCR test, which is a molecular test intended for detecting active SARS-CoV-2 infection. The test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under CLIA to perform high complexity tests. The second test is the Platelia +14 +SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The test was FDA EUA authorized on April 29, 2020. +Within a month of initiating our development collaboration with Bio-Rad, we were able to launch two tests for commercial use. We were able to bring these tests to market as fast as possible due to our scientific diagnostic expertise, technologies and existing commercial infrastructure. In addition to our launch agility, we have been able to rapidly scale our laboratory operations for high-volume testing. We remain committed to delivering rapid test results in 24 to 48 hours on average. +Using the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab tests, we operate and have commercialized the Biodesix WorkSafe testing program. +Prior to using the Bio-Rad tests as part of our testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Post-launch development support for these tests have included improvements in on-boarding new personnel, logistics of sample collection, sample receipt and data reporting, all required to support our testing program. Additional releases of the laboratory data management software are ongoing and planned for the foreseeable future. +In addition, during the three months ended June 30, 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass™ SARS-CoV-2 Neutralizing Antibody testing as a service. The test is the first and only surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the RBD in the spike protein of SARS-CoV-2 that are produced in response to vaccination or previous SARS-CoV-2 infection. +These tests under the Biodesix WorkSafe testing program are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems to assist in their back-to-work or back-to-school strategies, a crucial element of restarting economic activity. We have announced multiple partnerships for COVID-19 testing, and maintain an agreement with the State of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State. Additionally, we have overseen and managed onsite testing and validating testing for the Big Ten Conference athletic competitions through the term of our contract which expired on June 30, 2021. +Bio-Rad SARS-CoV-2 ddPCR test +The Bio-Rad SARS-CoV-2 ddPCR test, also known as a molecular or viral test, is intended for the qualitative detection of nucleic acid from SARS-CoV-2, the virus that causes COVID-19. The test targets detection of the nucleic acid from SARS-CoV-2 (not from any other viruses or pathogens) in respiratory specimens to identify and isolate infected individuals. Recent studies have shown that ddPCR-based testing is more sensitive than qPCR for detecting SARS-CoV-2, specifically in the reduction of false negative results. In one study, the ddPCR test demonstrated 95% accuracy vs. 47% for other “bulk” RT-PCR technologies used in other molecular tests Specimens are shipped at ambient temperature or dry ice depending on the viral transport media (VTM) used, and testing is performed using ddPCR in our certified, high-complexity clinical laboratory in Boulder, Colorado. Results are typically available through fax, hard copy, or encrypted email within 24 to 48 hours on average from receipt of the sample. +Platelia SARS-CoV-2 Total Ab Test +The Platelia SARS-CoV-2 Total Ab test (also known as a serology or antibody test) is intended for use as an aid in identifying individuals who have developed an adaptive immune response to the SARS-CoV-2 virus, indicating recent or prior infection. The test uses whole blood to detect circulating antibodies against the virus. The sensitivity is 98% and specificity is 99% eight days after the onset of symptoms. At this time, it is not known how long antibodies persist following infection and if the presence of antibodies confers protective immunity. The test is intended for the qualitative detection of total anti-SARS-CoV-2 nucleocapsid antibodies (IgG, IgM and IgA) in human serum or plasma specimens. The test requires a 3 mL blood draw, and samples are shipped at ambient temperature. Testing is conducted using semi-automated ELISA technology in our certified, high-complexity clinical laboratory in De Soto, Kansas. Results are typically available within 24 to 48 hours from receipt of the sample through fax, hard copy, or encrypted email. +Biopharmaceutical Diagnostic Discovery, Development and Testing Services Business +We believe our leadership in clinical proteomics and our multi-omic approach to probe the cancer disease state provides our customers with a clear and distinct advantage over other diagnostic service providers who solely focus on either genomics or proteomics. Similar to our commercial clinical testing business, our biopharmaceutical diagnostic discovery, development and testing services business leverages the Diagnostic Cortex to provide an extensively validated and deep learning approach to discovering new biomarkers, which in turn helps drive the clinical development of therapeutics. We recognize each clinical development program is complex, which is why we offer end-to-end diagnostic solutions, ranging from initial biomarker discovery and feasibility projects to commercialization of companion diagnostics. +15 +To address the increasing complexity of disease biology and new drug mechanisms of action, we employ a range of genomic and proteomic technologies to uncover insights about the tumor biology and patient’s immune response to cancer for therapeutics in clinical development. With our broad technology and service offering, including the performance of over 30 assays for research use as part of our laboratory services (see diagram below), we are able to provide the depth and breadth of biomarker tools for our partners for multi-omic analyses across their product development efforts. Although we recognize the importance of a multi-omic, approach in translational research, we are experts in discovering and developing proteomic-based diagnostic tests to help interrogate the immune profile and host disease state of patients on particular therapeutics. Traditionally, oncology biomarkers have been discovered from tumor tissue, but with the increased trend in the number of programs featuring immuno-oncology agents in therapeutic development, we believe there is a clinical unmet need for blood-based tumor markers and host/immune biomarkers to complement information obtained from tissue. +We believe we provide benefit to our biopharmaceutical customers as they integrate strategies for increasing the probability of success for pivotal clinical trials. Specifically, our diagnostic testing services may help enable quicker enrollment rates for patients in prospective clinical trials, ranging from phase 1 to phase 3, and could help identify patient populations who may experience the greatest benefit from new therapeutics. Ultimately, our goal is to help biopharmaceutical customers realize greater efficiency in their clinical development programs. Additionally, we have the ability to access and leverage our large sample and data biobank for our partners’ data mining needs, including new test discovery. +While our biopharmaceutical discovery, diagnostic development and testing revenue continues to grow, it is important to note that we benefit greatly from these partnerships in many ways that expand beyond revenue. We are continuously expanding our knowledge and biological understanding of multiple diseases and the rapidly evolving treatment landscape, while our Diagnostic Cortex continues to be powered through these biomarker analyses. Additionally, our sample and data biobank continue to grow and can be further leveraged for internal test development and external partnering. Importantly, we look to supplement our product development efforts with companion diagnostics as they are developed. +To date, we have over 50 biopharmaceutical customers and academic partners who have utilized our diagnostic tests and services. The following are a few case studies of early-stage biomarker discovery and development with our biopharmaceutical customers. +• +AstraZeneca: We provided services to AstraZeneca to retrospectively analyze samples from the FLAURA clinical trial (NCT02296125). The goal of this analysis was to interpret and establish the clinical utility of blood-based longitudinal monitoring of EGFR sensitizing and resistance mutations by ddPCR in advanced NSCLC patients treated with osimertinib. The data demonstrated that these circulating DNA mutations could be tracked in blood to interpret the patient’s prognosis, and could help AstraZeneca to identify disease progression 3 months (median) in advance of standard imaging. +• +Genentech: We partnered with Genentech to discover a novel proteomic classifier for advanced NSCLC patients treated with atezolizumab. The test was discovered on a small clinical cohort (n=77) and was independently validated on blinded samples (n=270) from the POPLAR clinical trial (NCT01903993). The validation revealed that the proteomic test was predictive of progression free survival and overall survival for atezolizumab versus the control arm docetaxel. Additionally, an analysis compared the correlation between our proteomic classifier with standard of care biomarkers (PD-L1 expression status and tumor mutation burden), which revealed there was no significant correlation. We published additional work on the Genentech +16 +classifier this fall with three posters presented at the society of immunotherapy conference (SITC). This data reinforces that our classifier provides unique and valuable information in the treatment of patients with advanced NSCLC. It is our belief that Genentech could use this strategy to identify patients that could derive a longer progression free survival from atezolizumab. +• +Merck KGaA & Pfizer: We announced the initiation of a clinical phase development program for the anti-PD-L1 checkpoint inhibitor, avelumab with Merck KGaA and Pfizer on February 12, 2020. The new proteomic test was developed through retrospective analysis of the circulating proteome combined with our proprietary AI platform. We have completed initial discovery of the test that identifies likely responders to avelumab and efforts are now focusing on transferring the test into our CLIA lab in Boulder, Colorado for clinical phase test validation. +• +HiberCell: In January 2021, we announced a broad collaboration with HiberCell for companion diagnostic discovery, development and commercialization. The agreement initially focuses on the further development of an ELISA as a companion diagnostic in future registrational trials in breast cancer for Imprime PGG programs. +Our Competitive Advantages +We believe the following are our key competitive advantages: +• +Our proprietary extensively validated deep learning platform, which is tailored to discover diagnostic tests that address clinical unmet needs. Our platform is an extensively validated deep learning platform optimized for discovery of diagnostic tests. By combining our data-driven and multi-omic approach with deep learning techniques, we believe we have overcome many standard machine learning challenges. This has enabled us to develop commercial tests for clinical unmet needs and collaborate with our biopharmaceutical customers and academic partners. +• +Our data-driven approach to precision medicine combined with our biobank, which enables us to accelerate development of new tests. We have over 150,000 samples and data in our biobank, including tumor profiles and immune profiles, used for both internal and external research and development initiatives. Our biobank, clinical trials, commercial testing and other partnerships provide an ongoing source of new data that further enhances our proprietary AI platform. We are continuously identifying and incorporating new market insights and input from our customers, key opinion leaders, and scientific experts to leverage this data in developing our diagnostic tests. +• +Our leadership in clinical proteomics, demonstrated research, development, and scientific expertise, combined with our intellectual property portfolio. Our leadership in clinical proteomics and our multi-omic approach, we believe provides us with a distinct advantage over our competitors, who focus on any single technology, such as genomics or proteomics. Our certified, high-complexity laboratories offer significant advantages in development of commercial tests. +• +Our proprietary technologies and processes are protected by a portfolio of approximately 109 issued patents in the United States and internationally, and 22 uniquely registered United States trademarks. We take efforts to protect our proprietary position using a variety of methods, such as a pursuit of United States and foreign patent applications related to our proprietary technology, use of trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities. +• +Our demonstrated success commercializing diagnostic tests in lung disease as well as unprecedented turnaround times. With eight diagnostic tests launched and three currently in development, our commercial portfolio of blood-based solutions currently addresses clinical unmet needs within diagnosis, treatment and monitoring of lung cancer. Our diagnostic tests provide rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan. For example, t he blood based IQLung strategy for lung cancer patients integrates the GeneStrat targeted test, the GeneStrat NGS test and the VeriStrat test to support treatment decisions across all stages of lung cancer with results in an unprecedented 36-72 hours, expediting time to treatment. We have displayed agility in our R&D and commercial launch efforts and within a month of initiating a development collaboration, launched three diagnostic tests for COVID-19 for commercial use. +• +Our depth and breadth of point of care access to physicians allows us to drive adoption of our diagnostic tests while incorporating real-life feedback to inform new product development. Our commercial team’s primary focus is to articulate the scientific and clinical evidence behind our tests, how they impact clinical care and can ultimately help to improve patient outcomes. Our demonstrated scientific expertise, leadership in clinical proteomics and breadth of data, including peer-reviewed publications, presentations and clinical studies, forms the basis of our relationships with major hospitals and physician networks across the United States. +• +Our commercial infrastructure, which includes our extensive knowledge and experience in sales, marketing, reimbursement and operations, provides us with the ability to launch, scale and drive revenue. We believe our commitment to commercial excellence helps us to leverage insights, operational excellence and proven approaches to deliver +17 +revenue growth and enhance the brand of our company and products. We are able to deploy rapid clinical testing turnaround times and develop commercial tests at scale. Scaling of our test capacity to meet volumes is then achieved by adding instrumentation and qualified personnel to our quality systems. +Our Strategy +We strive to provide swift, comprehensive and actionable insights to improve patient outcomes across lung disease and to help answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. To achieve this, we intend to: +• +Drive increased awareness, adoption, and reimbursement coverage of our diagnostic tests by: +o +continuously educating physicians, key opinion leaders, hospital systems, advocacy groups, patients, payers, academic research organizations, and technology assessment and guideline organizations on the clinical data and benefits of our tests; +o +utilizing our pulmonology- and oncology-focused sales force and commercial reach with targeted awareness campaigns to employ highly targeted sales and marketing tactics in pulmonology clinics specializing in the management of lung nodules and the diagnosis of lung cancer; +o +continuing to invest in the expansion of our sales force and commercial support team; +o +incorporating our testing services into diagnostic pathways and protocols via a top-down strategy that introduces our diagnostic tests to the largest United States health systems; and +o +leveraging our clinical data to gain broad coverage from public and private payers for our tests. +• +Deepen our relationships with current biopharmaceutical customers and establish new customer opportunities by: +o +selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally; +o +leveraging existing projects and relationships to expand sales with our current biopharmaceutical customers; and +o +targeting companies developing novel companion diagnostic strategies and drug development projects best suited to our platform for new test discovery, development and commercialization. +• +Further demonstrate the clinical utility and health economic benefits of our diagnostic tests by: +o +investing in commercial clinical testing, research studies and clinical trials to further demonstrate the clinical utility of our tests; +o +providing rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan; and +o +providing timely and actionable clinical information to help improve overall patient outcomes and lower the overall healthcare cost. +• +Introduce new diagnostic tests in lung disease by: +o +engaging with our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and to identify additional clinical unmet needs; +o +entering strategic partnerships with biopharmaceutical companies, academic research organizations, technology providers, and other diagnostic companies; and +o +developing companion diagnostic tests to support the therapeutics’ regulatory approval and adoption process for our biopharmaceutical customers. +• +Enhance our proprietary AI platform and expand our technology portfolio by: +o +continuing to invest in R&D capabilities to foster innovation in test discovery and development; +o +identifying, acquiring technologies and integrating new data types into our proprietary AI platform; +o +entering strategic partnerships across our commercial product portfolio and product development efforts in order to further our development capabilities, accelerate launch of commercial products, or expand our service offering; and +o +achieving “Explainable AI” by developing and incorporating computational tools that determine how the Diagnostic Cortex makes decisions for patient classification and outcome prediction. +18 +• +Continue to expand and leverage our biobank by: +o +expanding and enhancing the robustness of our samples and the data set, including through our collaborations and partnerships; +o +pursuing commercial opportunities with companies and researchers who are interested in utilizing our biobank for their own discovery and development efforts; and +o +monetizing these commercial opportunities. +Our Diagnostic Tests in Development +With the goal of finding solutions for clinical unmet needs related to diagnosis, treatment and monitoring in lung disease, our diagnostic tests in development include the following: +Early-Stage NSCLC—Risk of Recurrence (ROR) +Currently, surgical resection of the tumor without systemic or radiation therapy is standard of care for stage I NSCLC patients. However, 20 to 40% of surgically treated patients will suffer a recurrence within 5 years after surgery. From market research with pulmonologists, thoracic surgeons, and medical oncologists, we identified a significant clinical unmet need for a blood-based test to help identify stage I NSCLC patients who are at a higher risk of recurrence and may benefit from a more aggressive surgical procedure, or from neoadjuvant or adjuvant systemic treatment. Based on this unmet diagnostic need, we discovered the Risk of Recurrence (ROR) test, which is a pre-surgery blood-based proteomic test, designed with the Diagnostic Cortex to predict whether a stage I NSCLC patient has a higher risk of recurrence post-surgical resection. Knowing this information early and before surgery may change the surgical plan and/or support treatment decisions such as neoadjuvant or adjuvant therapy, which have the potential to reduce tumor volume and address micro-metastatic disease as early as possible. Our ROR test validated in an independent sample set, and we are currently working with major academic institutions across the United States to further validate the test. +Late-Stage NSCLC—Immunotherapy Treatment Guidance (PIR) +In 2015, the first immunotherapy-based treatment regimen was approved by the FDA for use in lung cancer. Currently, there are 9 immune checkpoint inhibitor (ICI) regimens (single agent or combinations) recommended by the NCCN guidelines for treatment of advanced NSCLC patients. For a portion of patients treated, these drugs can result in significant improvement in overall survival compared with platinum-based chemotherapy options. +The combination ICI regimens see some improvement in performance over single agent ICI, but side effect profiles are worse, and costs are higher than for single agent ICI. In addition, recent data have shown that a subset of patients experience more rapid disease progression on ICI compared with chemotherapy. We utilized the Diagnostic Cortex platform to discover our Primary Immune Response (PIR) test. PIR is a blood-based proteomic test designed to profile a potential to mount an immune response to their cancer and predict those patients likely to respond to ICI monotherapy treatment, ICI + chemotherapy combination treatment, or who would be highly resistant to ICI therapy. Our PIR test has been validated in multiple independent sample sets for advanced stage NSCLC patients treated with single agent ICI, and we are currently working with major academic institutions across the United States to further validate the test in a prospective study called BEACON-Lung. +Monitoring – Progression & Resistance +Blood-based monitoring with our ddPCR technology may offer a feasible method to non-invasively evaluate therapeutic mechanism of action, disease progression, and the emergence of resistance mutations in patients treated with targeted therapies. Our internal validation studies have shown the utility of the GeneStrat EGFR ddPCR test in all three of these indications. The test can identify disease progression up to 3 months (median) in advance of standard imaging. Using ddPCR for longitudinal blood-based monitoring of EGFR cell-free DNA mutations is a cost-effective testing method while patients are being treated with targeted therapies. +Clinical Trials +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. We have participated in 27 clinical studies, 5 of which are ongoing, and have published over 300 peer-reviewed publications and presentations. The following are our ongoing clinical studies for our diagnostic testing solutions. +ORACLE Registry Study (NCT03766958) +The ORACLE registry study was designed to develop real-world clinical utility data for Nodify XL2 and is titled “An Observational Registry Study to Evaluate the Performance of the Nodify XL2 Test”. The study objectives are to show a reduction in invasive procedures on patients with benign nodules compared to a historical control obtained from chart review. The first patient enrolled on October 16, 2018. As of May 1, 2020, 423 patients have been enrolled and are undergoing primary endpoint analysis, with 2-year follow-up estimated to be completed by the first half of 2022. +19 +ALTITUDE Clinical Utility Study (NCT04171492) +The ALTITUDE clinical utility study is designed to evaluate the performance of Nodify Lung (Nodify XL2 and Nodify CDT) in a randomized controlled study (RCT). The study is titled “A Multicenter, Randomized Controlled Trial, Prospectively Evaluating the Clinical Utility of the Nodify XL2 Proteomic Test in Incidentally Discovered Low to Moderate Risk Lung Nodules”. We received central investigational review board (IRB) approval in December 2019 and have an enrollment goal of 2,000 patients. The study objectives are to evaluate how the addition of the Nodify Lung test result impacts the clinical decision making for patients with new, incidentally identified solid lung nodules assessed as low to moderate risk of lung cancer. The trial has an adaptive study design with a blinded standard of care arm and 2:1 randomization for open-label results for Nodify XL2. The study launched in December of 2020. Phase 1 of the study with only Nodify XL2 is expected to enroll 500 patients. Phase 2 of the adaptive study design will include an open-label arm for Nodify CDT, which is aligned with our commercial testing algorithm. +INSIGHT Observational Study (NCT03289780) +The INSIGHT observational study is designed to evaluate the real-world clinical utility and performance of the IQLung (GeneStrat ddPCR, GeneStrat NGS and VeriStrat) testing strategy. The title is “Observational Study Assessing the Clinical Effectiveness of VeriStrat and Validating Immunotherapy Tests in Subjects with Non-Small Cell Lung Cancer (INSIGHT)” and the first patient enrolled was on May 11, 2016. To date, we have over 3,500 patients enrolled with a target 5,000 enrollment goal. Final analysis with 3-year follow-up is estimated to be completed by 2024. Results of an interim analysis were presented at ASCO 2020. The study rationale is to guide the adoption of VeriStrat and inform medical decision making, including treatment choice, and enable the validation of additional mass spectrometry-based proteomic tests. The primary study objective is to describe the impact of the VeriStrat test results on treatment decisions, including but not limited to the percentage change in treatment decision, differences in chosen treatments between patients classified as VeriStrat Good and those classified as VeriStrat Poor, and the percentage of patients receiving systemic therapy or supportive therapies only. +BEACON-Lung Clinical Study (Trial in Progress) +In partnership with ALCMI (Addario Lung Cancer Medical Institute), the BEACON-Lung clinical study is intended to evaluate the performance and utility of our proteomic product currently in development, PIR, in advanced stage NSCLC patients who express high PD-L1. The study title is “A Biomarker Analysis in High PD-L1 Expressing NSCLC Patients Treated with An Immune Checkpoint Inhibitor (ICI) With or Without Platinum-Based Chemotherapy.” The study design is an observational, multicenter, open-label study to assess biomarkers (serum, microbiome, radiomics and tissue) as predictive of early progression in 390 treatment-naive patients with advanced stage NSCLC and PD-L1 greater than or equal to 50% treated with two standard of care regimens, triplet therapy (platinum-based chemotherapy plus ICI regimen) and ICI monotherapy (single agent ICI). The objectives are to collect biospecimens and evaluate candidate biomarkers, with a focus on PIR, to detect early progression on ICI monotherapy versus triplet therapy. +DROPLET +Droplet is an exploratory observational study to assess the utility a novel gene linkage phenomenon as measured by the Bio-Rad SARS-CoV-2 ddPCR test, on the correlative immune response in individuals previously infected with the COVID-19 virus. The primary objective of this study (titled “ddPCR Linkage, Viral Load and Immune Response in Individuals Infected with COVID-19”) is to evaluate the correlation between linkage, viral load and the immune responses in individuals who have had a natural infection with SARS-CoV-2. Fifty patients will be enrolled and serially tested for viral load and immune responses for up to 12 months. More recently, the focus of the study has shifted to monitoring vaccine antibody durability and T cell responses. +Commercialization +For our lung cancer and nodule management tests, commercial efforts are focused on the promotion of our testing strategies to healthcare professionals actively involved in the diagnosis and treatment of lung cancer. Primarily focusing on pulmonology and oncology, the commercial team, consisting of specialty sales representatives, medical affairs, marketing and customer care representatives, works to educate and inform the entire patient care group consisting of physicians, nurses, office staff, laboratory personnel, and administration as to the appropriate use and value provided by our testing. The team’s goal is to drive test adoption through articulating the scientific and clinical evidence behind our tests, how they impact the clinical care of a patient, and how the tests can ultimately help to improve patient outcomes. +Patients with pulmonary nodules are concentrated in the pulmonology sub-specialty, where additional resources such as lung cancer screening and nodule management clinics may exist to provide an increased level of care. We are also engaging large hospital systems in a “top-down” approach, with a goal of incorporating our tests into system wide pathways and protocols. +After a physician orders our tests, blood is collected either in the physician office or laboratory, third-party “store front” patient service centers, or it can be collected in the patient’s home or workplace. We have contracted with a network of patient service centers and mobile phlebotomy services to be enable collection of blood samples outside of the physician office, at home or work for patients across the United States. +20 +For our Biodesix WorkSafe testing program, we have a dedicated outreach team that works with the State of Colorado healthcare providers and hospitals, and employers looking to safely return to work across many industries, including food services, oil and gas, biotechnology and pharmaceuticals, sports teams, universities, and many small businesses. We recognize everyone’s COVID-19 situation is unique, which is why we provide end-to-end customized solutions to support testing for our different customers, such as risk assessment tools, physician ordering services, on-site testing, phlebotomy services, shipping logistics, and ongoing client support. +Our business development team is focused on selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally. We currently hold a medical device establishment license in accordance with the Health Canada Medical Devices Regulations of the Food and Drugs Act and successfully passed an international Health Canada inspection in October 2021. Our team consists of customer facing business development associates that work with our biopharmaceutical customers to identify projects, draw up statements of work and negotiate service agreements. Alliance managers help to manage the contractual obligations and scope of the project, whereas our operations team assures the project is managed with adequate resources and delivers on time. We take a two-pronged approach generating business in this segment. Primarily, we leverage existing projects and relationships to expand sales in current accounts. We also actively map ongoing drug development projects in biopharmaceutical companies and target programs best suited to our platform for new test development. +Coverage and Reimbursement +The primary source of reimbursement for our tests in the United States is from third-party payers including government payers, such as Medicare, and commercial payers, such as insurance companies. Reimbursement for laboratory tests in the United States is determined by various payers, including private third-party payers, managed care organizations, and state and federal health care programs, such as Medicare and Medicaid. In Medicare, coverage of an item or service depends on whether it is “reasonable and necessary” under the section 1862(a)(1)(A) of the Social Security Act (SSA). For single-source laboratory tests, this determination is typically made by the Medicare Administrative Contractor (MAC) with jurisdiction over the laboratory where the test is performed. Our Boulder, Colorado laboratory is currently under the jurisdiction of Novitas Solutions, Inc. Our De Soto, Kansas laboratory is under the jurisdiction of Wisconsin Physicians Service Insurance Corporation, which participates in the MolDX program (administered by another MAC, Palmetto GBA) to set coverage policy for molecular diagnostic tests. +Medicare pays for clinical diagnostic laboratory tests (CDLTs), on the Clinical Laboratory Fee Schedule (CLFS). Section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA), added section 1834A to the SSA, which established the current CLFS rate setting processes and coding provisions for CDLTs, and created a new subcategory of CDLTs called Advanced Diagnostic Laboratory Tests (ADLTs), with separate reporting and payment requirements. +Under section 1834A and its implementing regulations, clinical laboratories that receive the majority of their Medicare revenues from payments made under the CLFS and the Physician Fee Schedule report on a triennial basis (or annually for ADLTs), private payer rates and volumes for their tests with specific billing codes based on final payments made during a set data collection period. The payment rate for a test for the ensuing three-year period (or one year for ADLTs) is set at the weighted median of the rates reported under the specific billing code for that test. Newly established codes for CDLTs are priced until the next private payer rate reporting cycle either based on the payment rate of a comparable code on the CLFS, as determined by CMS ("crosswalking") or at the median of rates submitted by the individual MACs based on statutory and regulatory factors ("gapfilling"). New ADLTs are initially priced at “actual list charge” for a nine-month period, after which they are priced based on private payer rates, with a recoupment provision if actual list charge is more than 130% of the weighted median of private payer rates reported. +The various payers in the United States also determine their own billing rules. In December 2020, Medicare revised its billing rules for clinical laboratory tests to require cancer-related protein-based Multianalyte Assays with Algorithmic Analyses to be billed directly to Medicare by the performing laboratory in most cases when performed on a specimen collected from a hospital outpatient. Molecular pathology tests and most ADLTs are also generally required to be billed directly to Medicare by the laboratory under these circumstances. +For our COVID-19 testing program, the primary source of reimbursement is through contracts with hospitals, companies providing wellness testing for their employees, or direct pay from patients. We believe that our lung cancer tests can both improve patient outcomes and help guide cost-effective treatment choices for patients with and at-risk of lung cancer. Achieving broad coverage and adequate reimbursement for each of our tests is a key component of our financial success and will continue to be important over time. +Under the Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief, and Economic Security Act (CARES), Congress has imposed a broad requirement that Medicare fee-for-service, Medicare Advantage, Medicaid, and commercial payers generally cover clinical diagnostic laboratory tests administered during the Public Health Emergency for the detection of SARS-CoV-2 or the diagnosis of the virus that causes COVID-19. Where applicable, the FFCRA and CARES require payers to cover COVID-19 tests without cost sharing or medical management techniques like prior authorization. Medicare fee-for-service does not require cost sharing or prior authorization for any clinical diagnostic laboratory tests. +The Department of Health & Human Services (HHS) has indicated in guidance that the coverage requirements of the FFCRA and CARES can apply both to infection and serological testing, but that they are only applicable to testing that is “diagnostic,” which “may +21 +include testing of individuals with signs or symptoms compatible with COVID-19, as well as asymptomatic individuals with known or suspected recent exposure to SARS-CoV-2.” Testing that is “not primarily intended for individualized diagnosis or treatment of COVID-19 or another health condition,” including “testing conducted to screen for general workplace health and safety,” is beyond the scope of the statutory coverage requirements. We believe these coverage requirements apply to the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test when performed for diagnostic purposes. In some cases, we submit claims to insurance payers for the Bio-Rad SARS-CoV-2 ddPCR test and/or the Platelia SARS-CoV-2 Total Ab test. In these cases, insurance payers may have a different position on the scope of mandatory coverage of our tests under the FFCRA and CARES. More commonly, we enter into arrangements with clients under which the client pays us directly for testing. +Compliance with applicable laws and regulations, as well as internal compliance policies and procedures adds complexity to the billing process. The Centers for Medicare & Medicaid Services (CMS) is responsible for overseeing the establishment of new Healthcare Common Procedure Coding System (HCPCS) codes for billing the Medicare program and other payers. CMS continuously evaluates and implements changes to the Medicare billing, coding, and reimbursement processes. To receive reimbursement from third-party payers, we bill our tests using a variety of HCPCS codes or Current Procedural Terminology (CPT) codes, as defined by the American Medical Association. For some of the tests we conduct, there may not be a specific CPT or HCPCS code, in which case the test may be billed under a miscellaneous code for an unlisted molecular pathology procedure or unlisted multiple analyte test with algorithmic analysis (MAAA) procedure. Because these miscellaneous codes do not describe a specific service, the third-party payer claim may be examined to determine the service provided, whether the service was appropriate and medically necessary and whether payment should be rendered. This process can result in a delay in processing the claim, a lower reimbursement amount, and/or denial of the claim. +Competitors +We primarily face competition from lung cancer diagnostic solutions companies in the United States, Europe and Asia seeking to answer clinical questions in the space, all of whom provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories and other medical facilities. +Diagnosis—Nodule Management +We are not aware of any other company that offers two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. We are aware of efforts by Veracyte, Inc. to develop and validate a test that may be competitive to the Nodify XL2 and/or Nodify CDT tests in the future. Additionally, Veracyte currently markets a test that is used post-bronchoscopy that is not competitive with our pre-bronchoscopy nodule risk assessment tests. +Prognosis, Treatment Guidance and Monitoring—NSCLC +We are unaware of any other diagnostic test available, commercially or in development, that will compete with our VeriStrat immune profiling test. There is substantial interest and activity in tumor profiling through liquid biopsy. Our genomic test offerings, the GeneStrat ddPCR and GeneStrat NGS tests, face competition from academic hospital laboratories, and companies such as Guardant Health and Foundation Medicine. We believe that there are several companies and academic research institutions in the process of developing tests for monitoring patients on or following treatment for recurrence or progression of lung cancer. +COVID-19 Testing +We believe that our competitors include university and state laboratories, national reference laboratories such as Lab Corporation and Quest Diagnostics, in-hospital laboratories, and a number of other diagnostic providers. We are aware that a number of other companies have announced development efforts to develop COVID-19 tests. +Biopharmaceutical Diagnostic Discovery, Development & Testing Services +We are aware of a number of companies who compete with our diagnostic tests and services, including diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. From the perspective of tumor profiling, we believe Guardant Health and Foundation Medicine are our most significant competitors. Conversely, in the immune profiling market, we believe Adaptive Biotechnologies and Personalis are our most significant competitors. +Clinical Laboratory Operations +We perform the VeriStrat, GeneStrat ddPCR, GeneStrat NGS, and COVID-19 ddPCR tests in our Boulder, Colorado high-complexity CLIA certified clinical laboratory. The laboratory is College of American Pathology (CAP) accredited, New York State Department of Health (NYSDOH)—permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified, along with all other states that require licensing: California, Maryland, Pennsylvania, and Rhode Island. All aspects of the testing process from receipt of the test requisition form through to delivery of test results are performed in the Boulder, Colorado facility. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within 3 days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +22 +The Nodify XL2, Nodify CDT, COVID cPASS and COVID-19 total antibody tests are performed in our De Soto, Kansas high-complexity CLIA certified clinical laboratory. This clinical laboratory is also CAP-accredited, NYSDOH—permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified and licensed by California, Maryland, Pennsylvania, and Rhode Island. Receipt of requisitions and testing is performed in our De Soto, Kansas clinical laboratory. Delivery of the test results is performed by personnel from our Boulder, Colorado headquarters. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within 5 days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +Personnel in both facilities are responsible for quality assurance oversight, licensing, and regulation compliance and maintenance to ensure data integrity and consistent, validated processes. +Supply Chain +We rely on third-party suppliers, including in some instances single source suppliers, to provide us with certain components of our diagnostic tests. The number of suppliers feeding into the production of our diagnostic tests is in excess of 65 worldwide. We consider a select few of these suppliers, located in the United States, Europe and China, as critical single source providers of components. Bio-Rad, as described below, is the sole source supplier for our GeneStrat test and COVID-19 and antibody testing program. Oncimmune is also the sole source supplier for our Nodify CDT tests but there are known secondary suppliers for these materials. We have initiated the second source qualification process for the majority of these critical components. +In addition, we purchase supplies through purchase orders without long-term supply agreements with, or guaranteed commitments from, many of our suppliers, including single source suppliers. Additionally, at present, we rely on contract manufacturers for the production of our diagnostic tests. We depend on our suppliers and contract manufacturers to provide us and our customers with materials in a timely manner that meet our and their quality, quantity and cost requirements. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test, but these supplies are able to be supplied by known suppliers. A disruption to this supply would negatively impact our ability to perform the GeneStrat and SARS-CoV-2 tests until alternatives could be validated. +While we have initiated the second source qualification process for the majority of these critical components, we may not be successful in securing second sourcing for all of them at all or on a timely basis. A disruption to this supply would negatively impact our ability to perform these tests until an alternative supplier could be validated. +All materials for our VeriStrat test and Nodify XL2 tests have alternative suppliers readily available, and a disruption in any single supplier would not materially impact our ability to deliver the test. +The COVID-19 pandemic has allowed us to pressure-test our supply chain and logistics processes as we purchased additional manufacturing capacity above our normal run rates to ensure that supply to execute on tests for the foreseeable future was available in-stock and in-house. Our suppliers have been able to allocate sufficient capacity to meet this increased demand with reasonable lead times and therefore we believe sufficient capacity exists for the expected volumes of all tests for the next 12 months. +Intellectual Property +Our success depends, in part, on our ability to obtain and maintain intellectual property and proprietary protection for our products and other know-how, to operate our business without infringing, misappropriating or otherwise violating the intellectual property and proprietary rights of others, and to defend and enforce our intellectual property and proprietary rights. We take efforts to protect our proprietary position using a variety of methods, which include pursuit of United States and foreign patent applications related to our proprietary technology, inventions and improvements that we determine are important to our business. We also may rely on trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities to develop and maintain our proprietary position. For more information regarding risks relating to intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property.” +We have invested heavily in the protection of our key assets, namely the VeriStrat® and GeneStrat® tests, and we acquired a patent portfolio relating to the Nodify XL2® and Nodify CDT® tests in our acquisitions of Indi in June 2018, and of Oncimmune USA in October 2019 from Oncimmune Limited (Oncimmune). We own patents and patent applications as well as trade secrets relating to our products currently in development, a collection device for whole blood, our business strategy, client lists and business methods. Further, we have expanded our access to key intellectual property through license and co-development agreements, including our Non-Exclusive License Agreement with Bio-Rad (the Bio-Rad License), which allows us to use the Droplet Digital PCR™ technology developed by Bio-Rad and which we employ in our GeneStrat test. +23 +Our patent strategy has focused on creating and acquiring protection for our VeriStrat and Nodify XL2 proteomic tests, while utilizing trade secret and some methods patent protection for our genomic test (the GeneStrat ddPCR and GeneStrat NGS™ tests) and ELISA test (the Nodify CDT test). We have entered into a non-exclusive license agreement with Bio-Rad, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. For more information regarding this license and supply agreement, please see “—Material Agreements—Agreements with Bio-Rad.” Bio-Rad owns patents relating to ddPCR and to which we have a non-exclusive license to utilize for the performance of ddPCR in cancer detection testing for third parties as set forth in the Bio- Rad License Agreement. In addition, we have separately been granted permission by Bio-Rad to use the Bio-Rad SARS-CoV-2 ddPCR test and Platelia SARS-CoV-2 Total Ab test for commercial diagnostic services. For more information regarding the permission granted to us by Bio-Rad with respect to such tests, please see “Business—Material Agreements—Agreements with Bio-Rad.” We are unaware of patents owned by Bio-Rad relating to its COVID- 19 antibody test but acknowledge that Bio-Rad has know-how and trade secrets relating to this test. We have patent protection in the United States and other countries around the world for the primary use of the VeriStrat test for profiling of patients with NSCLC, and various other uses of the VeriStrat test, such as breast cancer, prostate cancer, head and neck cancer have received patent protection. We have also received patent protection relating to our core classifier development program, our Diagnostic Cortex® technologies and our approaches to using MALDI-ToF technology (DeepMALDI® techniques). Additionally, our first device patent was issued in 2019 for our internally designed blood collection device. +As of December 31, 2021, our patent portfolio includes approximately 50 issued United States patents, 59 issued foreign patents, which includes 5 European patents that were nationalized in multiple European countries, and 41 pending applications (including 21 foreign patent applications). With regard to our product development efforts, new applications have been filed around developments relating to ARDS and COVID diagnostics, new analytic methodologies using Shapley values and semi-quantitative spectra analysis in MALDI, and national stage applications are now in active prosecution to protect our pipeline ROR and PIR tests. +The patent portfolio can be broken down into 5 major categories: +1) +Issued patents and patent applications relating to the VeriStrat and Nodify tests and uses of these tests; +2) +Issued patents and patent applications relating to methods for developing classifiers, including using the Diagnostic Cortex and DeepMALDI technologies; +3) +Issued patents and patent applications relating to tests currently in development; +4) +Issued patents and patent applications relating to our novel blood collection device; and +5) +Issued patents and patent applications relating to tests developed for our third-party partners. +The patents relating to the VeriStrat test are scheduled to expire between 2026 and 2032. The patents relating to the Nodify XL2 test are scheduled to expire beginning in 2031 (excluding any patent term extension granted by the United States Patent and Trademark Office (USPTO)), and the patents relating to the Nodify CDT test are scheduled to expire in 2027. The patent related to the blood collection device is scheduled to expire in 2039. Should our current patent applications in prosecution in the United States issue, the resulting patents would be scheduled to have expiration dates between 2036 and 2040 (excluding any patent term extension(s) granted by the USPTO). +We currently have one pending Patent Cooperation Treaty (PCT) application. PCT patent applications are not eligible to become issued patents until, among other things, we file such PCT applications as national stage patent application(s) within 30 months in the countries in which we seek patent protection. If we do not timely file any national stage patent applications, we may lose our priority date with respect to any such PCT patent applications and any patent protection on the inventions disclosed in such PCT patent applications. Provisional patent applications are not eligible to become issued patents but can become the basis of PCT foreign stage and United States non-provisional patent applications, if such applications are filed within 12 months of filing the related provisional patent application. If we do not timely file any non-provisional patent applications, we will lose our priority date and any patent protection on the inventions disclosed in any such provisional patent application. +In addition, the term of individual issued patents depends upon the legal term for patents in the countries in which they are obtained. In most countries in which we have filed, including the United States, the patent term is generally 20 years from the earliest filing date of a non-provisional patent application, assuming the patent has not been terminally disclaimed over a commonly-owned patent or a patent naming a common inventor, or over a patent not commonly owned but that was disqualified as prior art as the result of activities undertaken within the scope of a joint research agreement. The life of a patent, and the protection it affords, is therefore limited and once the patent lives of our issued patents have expired, we may face competition, including from other competing technologies. In the United States, the term of a patent may also be eligible for patent term adjustment for delays within the USPTO. The term of a patent that covers a biological product may also be eligible for patent term extension when FDA approval is granted for a portion of the term effectively lost as a result of the FDA regulatory review period, subject to certain limitations and provided statutory and regulatory requirements are met. Any such patent term extension can be for no more than five years, only one patent per approved product can be extended, the extension cannot extend the total patent term beyond 14 years from approval, and only those claims covering the approved biological product, a method for using it or a method for manufacturing it may be extended. We may not receive an extension if we fail +24 +to exercise due diligence during the testing phase or regulatory review process, fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. There can be no assurance that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. +Our ability to maintain and solidify our proprietary and intellectual property position will depend on our success in obtaining effective patent claims and maintaining and enforcing claims that are granted. However, our owned and licensed patents could be invalidated or narrowed or otherwise fail to adequately protect our proprietary and intellectual property position and our pending owned and licensed patent applications, and any patent applications that we may in the future file or license from third parties, may not result in the issuance of patents. +Because branding is as much a part of any intellectual property strategy as patent or trade secret protection we have a number of registered and pending trademarks relating to our company and products. We have received or filed for trademark protection in the United States for our tradename (Biodesix), the names of five of our commercial tests (namely the VeriStrat, GeneStrat ddPCR, GeneStrat NGS, Nodify XL2 and Nodify CDT tests), and a suite of research tests (ImmunoStrat), as well as having trademark protection for our core development and methodological platforms, such as our Diagnostic Cortex and DeepMALDI technologies. In all, as of December 31, 2021, we have 22 uniquely registered United States trademarks, 11 of which (including Biodesix, VeriStrat, and GeneStrat) have received foreign issuances as well, with 3 additional trademarks pending approving from the USPTO. We will continue to pursue protection in the United States and abroad for our branded assets and will continue to use branding to protect products currently in development, key Biodesix developments and non-trade secret methodologies. +We also rely on trade secrets, including know how, confidential information, unpatented technologies and other proprietary information, to strengthen or enhance our competitive position, protect and maintain aspects of our business that are not amenable to, or that we do not presently consider appropriate for, patent protection, and prevent competitors from reverse engineering or copying our technologies. We have decided that some technologies, such as our laboratory methodologies (including sample preparation and assay development), and some information (such as client and billing information) are best kept as trade secrets. However, trade secrets and confidential know-how are difficult to protect. To avoid inadvertent and improper disclosure of trade secrets, and to avoid the risks of former employees using these trade secrets to future employment, it is our policy to require employees, consultants and independent contractors to assign all rights to intellectual property they develop in connection with their employment with or services for the Company to the Company. We also protect our existing and developing intellectual property expressly through confidentiality provisions in agreements with third parties. There can be no assurance, however, that these agreements will be self-executing or otherwise provide meaningful protection for our trade secrets or other intellectual property or proprietary information, or adequate remedies in the event of unauthorized use or disclosure of such trade secrets or other intellectual property or proprietary information. +We also seek to preserve the integrity and confidentiality of our trade secrets and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in the measures we take to protect and preserve our trade secrets, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. +We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives, which may include objectives within and outside the United States. Despite our efforts to protect our intellectual property rights, and despite the breadth of protection that has issued around our key assets, these rights may not be respected in the future or may be circumvented or challenged (and potentially invalidated) in a legal proceeding in any jurisdiction where we have intellectual property rights. In addition, the laws of various foreign countries where we have received intellectual property protection and where we may eventually distribute our products may not afford the same protections or assurances to the same extent as the laws in the United States. See “Risk Factors—Risks Related to Our Intellectual Property” for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on us. +Government Regulations +Clinical laboratory tests like our diagnostic tests are regulated under CLIA and State law. The FDA regulates medical devices pursuant to the FDCA, including many diagnostic test kits, such as in vitro diagnostic tests (IVDs). However, most Laboratory Developed Tests (LDTs) are not currently subject to the FDA’s regulation (although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to such regulation) because the FDA has historically exercised enforcement discretion over LDTs. LDTs are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. FDA’s authority to regulate LDTs has been contested for many years, and there have been several legislative and administrative proposals regarding LDT regulation seeking to end or limit enforcement discretion and to bring LDTs under new or existing FDA regulatory frameworks: +• +On July 9, 2012, Congress passed legislation in the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA) requiring the agency to notify the Committee on Health, Education, Labor, and Pensions and the House Committee +25 +on Energy and Commerce of its intent to regulate LDTs. This law, though enacted, had a 5-year sunset provision, meaning that FDA is no longer subject to this notification requirement. +• +In October 2014, the FDA issued two draft guidance documents: Framework for Regulatory Oversight of Laboratory Developed Tests , which provided an overview of how the FDA would regulate LDTs through a risk-based approach, and FDA Notification and Medical Device Reporting for Laboratory Developed Tests , which provided guidance on how the FDA intended to collect information on existing LDTs, including adverse event reports. In the Framework for Regulatory Oversight draft guidance, the FDA asserted that LDT manufacturers would be subject to medical device premarket submission, registration, listing, and adverse event reporting requirements phased in over several years based on which tests posed the highest risk to public health. +• +On November 18, 2016, however, the FDA announced that it would not release the final guidance and would instead continue to work with stakeholders, the new administration, and Congress to determine the right approach. +• +On January 13, 2017, the FDA released a discussion paper on possible approaches to regulate LDTs in which it described a policy wherein previously marketed LDTs would not be expected to comply with most or all FDA oversight requirements, except for adverse event and malfunction reporting. In addition, certain new and significantly modified LDTs would not be expected to comply with pre-market review unless the agency determines certain tests could lead to patient harm. +• +In March 2017, the draft Diagnostic Accuracy and Innovation Act (DAIA) was introduced and outlined a risk-based regulatory approach for in vitro clinical tests (IVCT), i.e., all IVDs regardless of whether they are commercially distributed diagnostic kits or LDTs. +• +In April 2017, the FDA issued a document describing 20 case studies of LDTs that raised concerns about the safety and efficacy of this category of tests. +• +In August 2018, the FDA responded to the DAIA draft with its own proposal for IVCTs, including PMA, provisional approval, and precertification, in addition to authority to revoke approval, request raw data, and take corrective action against test developers to protect public health. +• +On October 31, 2018, the FDA issued its Safety Communication entitled “The FDA Warns Against the Use of Many Genetic Tests with Unapproved Claims to Predict Patient Response to Specific Medications” alleging that the agency was “aware” of healthcare providers making “inappropriate changes to a patient’s antidepressant medication based on the results from genetic tests.” Following this Safety Alert, the FDA contacted several laboratories that offered tests that made claims regarding drug responses for specific medications. While most laboratories addressed the FDA’s concerns by removing specific medication names from their labeling, the FDA issued an enforcement letter against a laboratory for making such claims without first undergoing the FDA premarket review. +• +In December 2018, a new draft bill which revised the DAIA and incorporated feedback from the FDA was released. The Verifying Accurate, Leading-edge, IVCT Development (VALID) Act creates a risk-based regulatory framework for IVCT regulation. Under the VALID Act framework, premarket review would be required for certain higher risk tests, while lower risk tests would be subject to a precertification pathway. +• +On April 4, 2019, the FDA issued a warning letter to Inova Genomics Laboratory for its pharmacogenomics tests, i.e., tests that predict medication response, among other things. In this letter, the FDA rebutted Inova’s argument that it believed it was operating within the scope of FDA’s LDT exemption and not subject to the FDA’s premarket review or labeling requirements by noting that the FDA has not created a legal “carve-out” or exemption for LDTs and that it ultimately retains discretion to take action when appropriate. +• +On March 5, 2020, identical versions of the VALID Act were introduced in both chambers of Congress. The same day, the House bill was referred to the House Committee on Energy and Commerce. +• +On August 19, 2020, HHS announced a new policy determining that FDA must engage in notice-and-comment rulemaking before requiring premarket review of LDTs. +• +On November 16, 2020, HHS directed FDA to review voluntarily submitted EUAs for LDTs; if FDA’s review time exceeds 14 days, the submission would be referred to the National Institute of Health National Cancer Institute and also to other scientific government agencies, or to outside technical contractors if FDA remains unable to conduct the reviews. +• +On June 24, 2021, an updated version of the VALID Act was reintroduced in both chambers of Congress. +• +On November 15, 2021, HHS formally rescinded its August 19, 2020 policy statement regarding FDA’s ability to require premarket review of LDTs absent notice-and-comment rulemaking. That same day, FDA revised its policy with respect to COVID-19 diagnostic tests, announcing that developers of LDTs for SARS-CoV-2 were expected to either submit an EUA request or cease marketing and offering their tests within 60 calendar days. +26 +We currently market our GeneStrat, VeriStrat, Nodify XL2 and Nodify CDT tests as LDTs in the United States. As a result, we believe our diagnostic services are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDCA provisions. If the FDA disagrees with the LDT status of any of our tests, the FDA may consider the test to be an unapproved medical device and may subject us to FDA enforcement action, including, without limitation, requiring us to seek clearance, authorization or approval for the laboratory test. If the FDA were to begin enforcement with respect to our LDTs, we could incur substantial costs and delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market requirements. +To date, the FDA has not engaged in notice-and-comment rulemaking or released broad-sweeping guidance over LDTs, but it could choose to do so in the future and if pre-market review is required, our business could be negatively impacted as a result of commercial delay that may be caused by the new requirements. The cost of conducting clinical trials and otherwise developing data and information to support pre-market applications may be significant. If we are required to submit applications for our currently marketed tests, we may be required to conduct additional studies, which may be time-consuming, costly and could result in our currently-marketed tests being withdrawn from the market. Continued compliance with the FDA’s regulations would increase the cost of conducting our business, and subject us to heightened regulation by the FDA including penalties for failure to comply with these requirements. Failure to comply with applicable regulatory requirements could result in an enforcement action by the FDA, such as fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal sanctions. There are other regulatory and legislative proposals that would increase general FDA oversight of clinical laboratories and LDTs. Until the FDA finalizes its regulatory position regarding LDTs, or the VALID Act or other legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval. The outcome and ultimate impact of such proposals on the business is difficult to predict at this time and we are monitoring developments and anticipate that our products will be able to comply with requirements that may be imposed by the FDA. In the meantime, we maintain our CLIA accreditation, which permits the use of LDTs for diagnostics purposes. +FDA Emergency Use Authorization +Section 564 of the FDCA allows the FDA to authorize the shipment of drugs, biological products, or medical devices that either lack required approval, licensure, or clearance (unapproved products), or are approved but are to be used for unapproved ways to diagnose, treat, or prevent serious diseases or conditions in the event of an emergency declaration by the HHS Secretary. 21 U.S.C. § 360bbb-3(a)(1)-(2). +On January 31, 2020, HHS Secretary Alex M. Azar II declared a public health emergency for COVID-19, under 21 U.S.C. § 360bbb-3(b)(1), justifying the authorization of emergency use of IVDs for detection and/or diagnosis of COVID-19. This determination was published in the Federal Register on February 7, 2020. 85 Fed. Reg. 7316 (Feb. 7, 2020). The public health emergency has been extended several times and remains in effect. +While this emergency declaration is effective, the FDA may authorize the use of an unapproved product or an unapproved use of an approved product if it concludes that: +• +an agent referred to in the emergency declaration could cause a serious or life-threatening disease or condition; +• +it is reasonable to believe that the authorized product may be effective in diagnosing, treating, or preventing that disease or condition or a serious or life-threatening disease or condition caused by an approved product or a product marketed under an EUA; +• +the known and potential benefits of the authorized product, when used for that disease or condition, outweigh known and potential risks, taking into consideration the material threat of agents identified in the emergency declaration; +• +there is no adequate, approved, and available alternative to the authorized product for diagnosing, preventing, or treating the relevant disease or condition; +• +any other criteria prescribed by the FDA is satisfied. Id. § 360bbb-3(c). +Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. +The Bio-Rad SARS-CoV-2 ddPCR test, the cPASS neutralization antibody test kit, and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. We have completed all required performance verification studies to validate the use of the tests in our laboratories in accordance with the FDA Policy for Coronavirus Disease-2019 Tests During the Public Health Emergency, CAP and New York State Clinical Laboratory Standards of Practice (NYS CLEP) requirements. The FDA Policy for COVID-19 tests is a guidance document that explains the FDA’s current thinking on the topic, is subject to change, and does +27 +not establish any legally enforceable responsibilities. The FDA does not expect a separate notification or EUA request from high complexity CLIA laboratories that are performing testing for SARS-CoV-2 using only EUA-authorized test kits purchased from commercial manufacturers or their distributors. According to previous versions of the FDA's Policy for COVID-19 tests, a laboratory may make certain modifications to an EUA-authorized test if the modified test is validated using a bridging study without submitting an EUA amendment or formal notification. According to the current FDA Policy for COVID-19 tests (Nov. 15, 2021), a laboratory that modified an EUA authorized test pursuant to the previous policy for use of a new specimen through a bridging study when the new specimen type had been previously authorized for another test of the same technology may continue to offer the modified test without submitting an EUA amendment or formal notification. +Federal and State Laboratory Licensing Requirements +The Biodesix Boulder, Colorado clinical laboratory is a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, Biodesix’s Quality Management System (QMS) holds an ISO 13485:2016 certificate (recently passed recertification audit in December 2021). The Biodesix Boulder, Colorado clinical laboratory has received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers, and Molecular and Cellular Tumor Markers and Virology as well as holding state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +CLIA regulations establish standards for proficiency testing; facility administration; general laboratory systems; pre-analytic, analytic systems, post- analytic systems; personnel qualifications and responsibilities; quality control, quality assessment; and specific provisions for laboratories performing moderate to high complexity tests. Our Boulder, Colorado clinical laboratory is inspected biennially as part of its ongoing certification under CLIA certificate of accreditation by CAP. The Boulder, Colorado clinical laboratory most recently passed its CAP inspection in April 2021. +Under CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of or assessment of health. CLIA requires that a laboratory hold a certificate applicable to the type of laboratory examinations it performs and that it complies with, among other things, standards covering operations, personnel, facilities administration, quality systems and proficiency testing, which are intended to ensure, among other things, that clinical laboratory testing services are accurate, reliable and timely. +The Biodesix De Soto, Kansas clinical laboratory is a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, the De Soto, Kansas clinical laboratory most recently passed its first CAP inspection in June 2021. Biodesix’s QMS holds an ISO 13485:2016 certificate (recently passed surveillance audit in December 2021). The De Soto, Kansas clinical laboratory has received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers and Diagnostic Immunology as well as holding state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +The International Organization for Standardization (ISO) is an independent, non-governmental international organization that defines world-class specifications for products, services and systems, to ensure quality, safety and efficiency. ISO 13485:2016 is a harmonized, international regulatory benchmark for quality management systems that addresses most or all of the QMS requirements in markets including the United States, European Union, Australia, Japan and Canada. The ISO 13485:2016 certificate confirms that an organization operates a QMS that conforms to the standards established by ISO. The FDA has proposed a rule to harmonize and modernize its QSR, which would supplant the existing requirements with ISO 13485:2016. Although this rule has been delayed several times since spring 2018, the Office of Management and Budget (OMB) updated its website (January 2022) to indicate that the FDA’s proposed rule to harmonize the agency’s medical device Quality System Regulation with the ISO 13485 standard has been finished and is now under review by OMB. +To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Laboratories such as ours, which are performing high complexity testing, are required to meet more stringent CLIA requirements than laboratories performing less complex tests, and therefore our laboratories are also subject to random, unannounced survey and inspection at any time. In addition, a laboratory that is certified as “high complexity” under CLIA may develop, manufacture, validate and use proprietary LDTs. CLIA requires analytical validation including accuracy, precision, specificity, sensitivity and establishment of a reference range for any LDT used in clinical testing. The regulatory and compliance standards applicable to the testing we perform may change over time and any such changes could have a material effect on our business. +CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that out-of-state laboratories maintain an in-state laboratory license to perform tests on samples from patients who reside in that state. As a condition of licensure, certain states may require that laboratory personnel meet qualifications, quality control procedures, facility requirements, record maintenance requirements or other state-specific requirements. +Because our Boulder, Colorado clinical laboratory is located in the State of Colorado, we do not need a specific State of Colorado laboratory license, however, we maintain licenses to conduct testing in other states where nonresident laboratories are required to obtain +28 +state laboratory licenses. We maintain licenses for our Boulder, Colorado and De Soto, Kansas laboratories with the NYSDOH. We also hold licenses in other states in which we operate, including California, Maryland, Pennsylvania and Rhode Island, that require licensing of out-of-state laboratories under certain circumstances. Other states may currently have or adopt similar licensure requirements in the future, which may require us to modify, delay or stop its operations in those states until such requirements are met. +Failure to comply with CLIA certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate or license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions, and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. +CLIA and state laws and regulations, operating together, sometimes limit the ability of laboratories to offer consumer-initiated testing, also known as direct access testing. We do not offer direct access testing and instead require that our tests be ordered by licensed healthcare providers. +Our Boulder, Colorado and De Soto, Kansas laboratories are certified and adhere to the NYS CLEP, based on New York State Public Health Law, Article 5 Title 5. NYS CLEP is exempt from CLIA and establishes their own method of laboratory certification and test validation approval. To process New York State patient specimens a laboratory must submit a robust analytical and clinical validation package to demonstrate clinical utility of the test and receive approval prior to offering the test in the state of New York. All of our tests have obtained NYS CLEP approval including GeneStrat ddPCR, GeneStrat NGS, VeriStrat, Nodify XL2 and Nodify CDT tests. NYS CLEP requires semi-annual inspections to ensure the laboratory meets all general and specialty standards. Both Biodesix laboratories passed NYS CLEP inspections in May 2019. Due to the pandemic, routine re-inspections have been delayed by NYS CLEP. +Regulatory framework for medical devices in the United States +Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, which are defined to include, among other things, IVDs. The FDA regulates the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. It is possible that one of our current, or future, tests will be subject to FDA authority and oversight as either an IVD or a CDx pursuant to the FDA’s authority to regulate medical devices under the FDCA. +Medical devices are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +product design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the European Economic Area (EEA), a medical device must meet the Medical Devices Directive’s (MDD)/In Vitro Medical Devices Directive’s (IVDD) Essential Requirements or, applicable on May 26, 2021, the Medical Devices Regulation’s (MDR) / applicable on May 26, 2022, In Vitro Medical Devices Regulation’s (IVDR) General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design +29 +and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a clinical evaluation report (CER) the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk- ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia, of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia, that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. However, the CE mark will be accepted in the UK until July 1, 2023. +Device classification +Under the FDCA, medical devices are classified into one of three classes: Class I, Class II or Class III, depending on the degree of risk to patients that is associated with each medical device and the amount of oversight needed to provide reasonable assurances with respect to safety and effectiveness of the medical device. +Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to a set of FDA regulations, referred to as the General Controls for Medical Devices, which require compliance with the applicable portions of the FDA’s QSR, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements. +Class II devices are subject to the General Controls as well as any special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, patient registries, FDA guidance documents and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process, although some Class II devices are exempt from the 510(k) requirements. +Class III devices include devices deemed by the FDA to pose the greatest risk: such as life-supporting or life-sustaining devices, implantable devices, or those deemed novel and not substantially equivalent to a predicate device following the 510(k) process. CDx tests are regularly considered Class III devices. +Premarket submission process +Unless a statutory or regulatory exemption or enforcement discretion policy applies, before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, the manufacturer must obtain the FDA’s: (1) permission for commercial distribution under section 510(k) of the FDCA (510(k) clearance); or (2) approval of a PMA; or (3) de novo classification and authorization. These processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees. +Under the 510(k)-clearance process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and therefore a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Premarket notifications typically include bench, analytical, and preclinical data. Clinical data is sometimes required to support substantial equivalence. If a manufacturer obtains a 510(k) clearance for its device and then makes a modification that could significantly affect the device’s safety or effectiveness or constitutes a major change or modification in the intended use of the device, a new clearance, authorization or approval may be required. +By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. If the FDA determines that the device is not “substantially equivalent” to a predicate +30 +device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous, costly, and time-consuming PMA approval process or seek reclassification of the device through the de novo process. +To obtain a PMA, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling, and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use. +Once filed as a PMA, the FDA has 180 days to review the filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. +Prior to approval of a PMA, the FDA may conduct inspections of any clinical trial data and clinical trial sites, as well as inspections of any manufacturing facility and processes. The FDA can delay, limit or deny approval of a PMA application for many reasons, including (1) the device may not be shown safe or effective to the FDA’s satisfaction; (2) the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval; (3) the manufacturing process or facilities may not meet applicable requirements; and (4) changes in FDA approval policies or adoption of new regulations may require additional data. +If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when data is available. The PMA process can be expensive, uncertain and lengthy. A number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing. New PMA applications or PMA supplements are required for any modifications to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, materials or design of a device that has been approved through the PMA process. +As a condition of PMA application approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer-term safety and effectiveness data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. +Alternatively, the FDA also allows the submission of a direct de novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of FDASIA, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. +The 510(k), de novo or PMA processes can be expensive, lengthy and unpredictable. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k)-clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device. +Companion Diagnostics and the Premarket Process +We believe that one of our future product candidates may include a companion diagnostic or complementary diagnostic (collectively CDx). CDx’s can identify patients who are most likely to benefit from a particular therapeutic product; identify patients likely to be at increased risk for serious side effects as a result of treatment with a particular therapeutic product; or monitor response to treatment with a particular therapeutic product for the purpose of adjusting treatment to achieve improved safety or effectiveness. The use of the CDx will be stipulated in the labeling of both the CDx and the therapeutic product. The FDA may require an application for the CDx to be separate from the drug approval process, and this could potentially delay the approval of any new drug application or the CDx, or +31 +complicate the review process. CDx’s are generally regulated as Class III medical devices by the FDA and are therefore most often subject to the PMA approval process. +The FDA issued guidance in July 2016 for the co-development of CDx tests with a therapeutic product and issued another draft guidance in December 2018 specific to oncology CDx tests. The FDA finalized this draft guidance in April 2020 in “Developing and Labeling In vitro Companion Diagnostic Devices for a Specific Group of Oncology Therapeutic Products.” The guidance is meant to guide the development of CDx products, which are defined as IVDs that provide information that is essential for the safe and effective use of the therapeutic product. A CDx is often developed and approved or cleared contemporaneously with the therapeutic, and the use of the CDx is stipulated in the labeling of both the CDx and the corresponding therapeutic product. While it supports contemporaneous marketing authorizations, if there are any deficiencies in the submissions, the FDA may place a PMA review of a CDx on hold or request additional testing, which could potentially delay the approval of the corresponding new drug application or the marketing authorization of the CDx, or otherwise complicate the review process. Some oncology CDx tests can be developed in a way that results in labeling for a specific group of oncology therapeutic products, rather than a single therapeutic product. +Post-Market FDA Regulation +Even if regulatory clearance, authorization or approval of a device is granted, the FDA may impose limitations on the uses and indications for which the device may be labeled and promoted, and the device remains subject to significant regulatory requirements. Medical devices may be marketed only for the uses and indications for which they are cleared, authorized or approved. After a device, including a device exempt from FDA premarket review, is placed on the market, numerous post-market regulatory requirements apply, and the FDA has broad authority to enforce these requirements. Medical device manufacturers are subject to unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of any suppliers. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions such as: warning letters, fines, injunctions, consent decrees and civil penalties; unanticipated expenditures, including requirements to repair, replace, and/or refund the cost of the devices, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; the FDA’s refusal of our requests for 510(k) clearance, de novo classification, or PMA of new products, new intended uses or modifications to existing products; the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries; and withdrawing 510(k) clearance or PMAs that have already been granted and criminal prosecution. In the event that a supplier fails to maintain compliance with the FDA’s or our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. +Federal and State Fraud and Abuse Laws +We are subject to federal fraud and abuse laws such as the federal Anti-Kickback Statute (AKS), the federal prohibition against physician self- referral (Stark Law), the Eliminating Kickbacks in Recovery Act (EKRA), and the federal False Claims Act (FCA). We are also subject to similar state and foreign fraud and abuse laws. +The AKS (Social Security Act § 1128B(b)) prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing or ordering, any item or service that may be reimbursable, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. There are a number of statutory exceptions and regulatory safe harbors to the AKS that provide protection from AKS liability to arrangements that fully satisfy the applicable requirements. +EKRA (18 USC § 220) prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program. The term “health care benefit program” is broadly defined such that EKRA extends to referrals reimbursed by both governmental and commercial third-party payers. EKRA includes a number of statutory exceptions that provide protection from EKRA liability if the applicable requirements are met. +The Stark Law (Social Security Act § 1877) generally prohibits, among other things, clinical laboratories and other so-called “designated health services” entities from billing Medicare for any designated health services when the physician ordering the service, or any member of such physician’s immediate family, has a financial relationship, such as a direct or indirect investment interest in or compensation arrangement with the billing entity, unless the arrangement meets an exception to the prohibition. The Stark Law also prohibits physicians from making such referrals to a designated health services entity. There are also similar state laws that apply where Medicaid and/or commercial payers are billed. +The FCA (31 USC § 3729) imposes civil penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment to the government that are false or fraudulent, or knowingly making, using or causing to be made or used a false record or statement material to such a false or fraudulent claim, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. This statute also permits a private individual acting as a “qui tam” whistleblower to bring actions on behalf of the federal government alleging violations of the FCA and +32 +to share in any monetary recovery. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $11,803 to $23,607 per false claim or statement for penalties assessed after December 13, 2021, with respect to violations occurring after November 2, 2015. +Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payer knows or should know is likely to influence the beneficiary to order or receive a reimbursable item or service from a particular provider, practitioner, or supplier, and contracting with an individual or entity that the person knows or should know is excluded from participation in a federal health care program. In addition, federal criminal statutes created by HIPAA prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services. +In addition to these federal laws, there are often similar state anti-kickback and false claims laws that typically apply to arrangements involving reimbursement by a state-funded Medicaid or other health care program. Often, these laws closely follow the language of their federal law counterparts, although they do not always have the same exceptions or safe harbors. In some states, these anti-kickback laws apply with respect to all payers, including commercial payers. +A number of states have enacted laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and other healthcare providers, and, in some states, marketing expenditures. In addition, some state statutes impose outright bans on certain manufacturer gifts to physicians or other health care professionals. Some of these laws, referred to as “aggregate spend” or “gift” laws, carry substantial fines if they are violated. +Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs and extensive annual trainings for all of our employees and contractors. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from participation in government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Anti-Corruption +The Foreign Corrupt Practices Act of 1977 (FCPA) and similar international bribery laws make it unlawful for persons or entities to make payments to foreign government officials to assist in obtaining and maintaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any offer, payment, promise to pay, or authorizing the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to do or omit to do an act in violation of his or her duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business, to any person. In addition to the anti-bribery provisions of the FCPA, the statute also contains accounting requirements designed to operate in tandem with the anti-bribery provisions. Covered companies are required to make and keep books and records that accurately and fairly reflect the transactions of the company and devise and maintain an adequate system of internal accounting controls. With our international operations through our third-party partnerships, we could incur significant fines and penalties, as well as criminal liability, if we fail to comply with either the anti-bribery or accounting requirements of the FCPA, or similar international bribery laws. Even an unsuccessful challenge of our compliance with these laws could cause us to incur adverse publicity and significant legal and related costs. We successfully passed our first FCPA compliance review in 2021 with no findings. +Privacy and Data Protection Laws +Numerous federal and state laws and regulations, including HIPAA, as amended by the HITECH Act, govern the collection, dissemination, security, use and confidentiality of protected health information (PHI) and personal information. In the course of performing our business we obtain personal information, including PHI. Laws and regulations relating to privacy, data protection, and consumer protection are evolving and, in some cases, particularly with regard to newer laws, may be subject to potentially differing interpretations. Under HIPAA and HITECH, the HHS issues regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of PHI, used or disclosed by covered entities (CEs) and their authorized business associates (BAs). Because we are a health care provider that electronically transmits health care information, and we also provide certain services to CEs and receive PHI from them, we are at times either a CE or a BA, as defined +33 +by HIPAA. Our subcontractors that create, receive, maintain, transmit or otherwise process PHI on our behalf are HIPAA BAs and must also comply with HIPAA, as applicable. +HIPAA and HITECH include the privacy and security rules, breach notification requirements and electronic transaction standards. The privacy rule governs the use and disclosure of PHI, generally prohibits the use or disclosure of PHI except as permitted under the rule, and mandates certain safeguards to protect the privacy of PHI. The privacy rule also sets forth individual rights, such as the right to access or amend certain records containing such individual’s PHI, or to request restrictions on the use or disclosure of such individual’s PHI. The security rule requires CEs and BAs to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI (also referred to as ePHI) by implementing administrative, physical and technical safeguards. Under HIPPAA’s breach notification rule, a CE must notify individuals, the Secretary of HHS, and in some circumstances, the media of certain breaches of unsecured PHI or ePHI, and similar breach notification provisions apply to certain BAs under the HITECH Act. +Penalties for failure to comply with a requirement of HIPAA and HITECH vary depending on the number and nature of the violations and any history of prior violations, but can be significant and include civil monetary or criminal penalties. HIPAA is enforced by the Department of Health and Human Services, Office for Civil Rights, and HIPAA also authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in improper use, access to or disclosure of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA CEs, such as us, and their BAs for compliance with the HIPAA privacy and security standards and breach notification rules. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator. +In addition, we may be subject to state privacy, cybersecurity, and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information Act, which, in addition to HIPAA and HITECH, sets forth standards with which all California health care providers must abide. Colorado has enacted the Colorado Privacy Act, and Virginia has enacted the Consumer Data Protection Act, both of which also have standards that must be complied with that supplement Federal data protection requirements, State laws may be more stringent, broader in scope or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other in regards to personal information treatment, which may complicate compliance efforts. For instance, the California Consumer Privacy Act (CCPA) became effective on January 1, 2020 and was amended by the passage of the California Privacy Rights Act (CPRA) in November of 2020. The CCPA, among other things, gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA has been amended from time to time, and it remains unclear what, if any, further modifications will be made to this legislation or how it will be interpreted. Although there are certain exemptions for PHI and clinical trial data, the CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future and the CCPA may increase our compliance costs and potential liability. Additionally, the CPRA will impose additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It would also create a new California data protection agency specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. Similar laws have been proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that could continue to make compliance challenging and costly. +Additionally, the Federal Trade Commission (FTC) and state attorneys general enforce consumer protection laws that prohibit unfair and deceptive acts and practices, including Section 5 of the FTC Act, which creates standards for the collection, use, dissemination and security of health-related and other personal information. Claims of unfair or deceptive trade practices regarding privacy and security can lead to significant liabilities and consequences, including regulatory investigations, penalties, fines and orders as well as civil claims, which could impact our data practices and operations or cause reputational damage. +We may also be subject to laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may add additional compliance burden and complexity. For example, in the EEA, the collection and use of personal data is governed by the European Union's General Data Protection Regulation (GDPR). In the United Kingdom, the GDPR has been adopted in substantially the same form, however the UK may potentially make revisions in the coming years. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze, store, transfer and otherwise process personal data. European and United Kingdom data protection authorities may interpret the GDPR and national laws differently and impose additional requirements, which adds to the complexity of processing personal data in or from the EEA or United Kingdom. Guidance on implementation and compliance practices are often updated or otherwise revised. GDPR applies extra-territorially under certain circumstances and imposes stringent requirements on controllers and processors of personal data, including, for example, requirements to ensure a legal bases to process personal information, provide robust disclosures to individuals, facilitate data subject rights, provide +34 +data security breach notifications within 72 hours after discovering a breach in certain circumstances, limit retention of personal information and apply enhanced protections to health data and other categories of sensitive personal information. The GDPR also has requirements around international transfers of personal data. Requirements around transfers to the United States and other jurisdictions have increased since a July 2020 decision by the Court of Justice of the European Union invalidated the Privacy Shield as a basis to transfer personal data from Europe to the United States, and added requirements for reliance on Standard Contractual Clauses. Regulatory guidance on requirements for international transfers, and other GDPR compliance matters, continues to evolve. Failure to comply with the requirements of the GDPR may result in fines of up to €20 million or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. To comply with the GDPR and other applicable international data protection laws and regulations, we may be required to put in place additional mechanisms ensuring compliance, which may result in other substantial expenditures. +Cybersecurity +Our business relies on secure and continuous processing of information and the availability of our IT networks and IT resources, as well as critical IT vendors that support our technology, research and other data processing operations. While we take steps to protect our systems and data, security incidents, data breaches, computer malware and computer hacking attacks have become more prevalent across industries, including the life sciences sector, and may occur on our systems or those of our third-party service providers. Unauthorized persons may in the future be able to exploit weaknesses in the security systems of our (or our third-party service providers) IT networks and gain access to PHI and other personal information, or sensitive trade secrets or other proprietary information. Any wrongful use or disclosure of PHI, other personal information, trade secrets or other proprietary information by us or our third-party service providers could subject us to regulatory fines or penalties, third-party claims or otherwise could adversely affect our business and results of operations. Although HIPAA and the regulations promulgated thereunder do not provide for a private right of action, failures to adequately protect PHI or our IT systems could be viewed as violations of the HIPAA security rule or violations of other applicable information security laws, regulations, contractual obligations or industry standards, and could further result in costly data breach notification obligations that negatively impact our reputation. +Moreover, data security incidents or data breaches, as well as attacks on our IT systems, could result in operational disruptions or data loss or corruption that could adversely impact our business and operations, result in substantial investment of resources to investigate, recover and remediate and subject us to heightened regulatory scrutiny. +International Regulations +Many countries in which we may offer any of our diagnostic tests in the future have anti-kickback regulations prohibiting providers from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable under any national health care program. In situations involving physicians employed by state-funded institutions or national health care agencies, violation of the local anti-kickback law may also constitute a violation of the FCPA. +The FCPA prohibits any United States individual, business entity or employee of a United States business entity to offer or provide, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether or not such conduct violates local laws. In addition, it is illegal for a company that reports to the SEC to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls. We will also be required to maintain accurate information and control over sales and distributors’ activities that may fall within the purview of the FCPA, its books and records provisions and its anti-bribery provisions. +The standard of intent and knowledge in anti-bribery cases is minimal. Intent and knowledge are usually inferred from that fact that bribery took place. The accounting provisions do not require intent. Violations of the FCPA’s anti-bribery provisions for corporations and other business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Other countries, including the United Kingdom and other OECD Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United Kingdom Anti-Bribery Act. +When marketing our diagnostic tests outside of the United States, we may be subject to foreign regulatory requirements governing human clinical testing, prohibitions on the import of tissue necessary for us to perform our diagnostic tests or restrictions on the export of tissue imposed by countries outside of the United States or the import of tissue into the United States, and marketing approval. These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required. +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the EEA, a medical device must meet MDDs/IVDD Essential Requirements or, applicable on May 26, 2021, the MDR applicable on May 26, 2022, IVDR General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use +35 +or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a CER the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk- ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia , of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia , that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. However, the CE mark will be accepted in the UK until July 1, 2023. +Healthcare Reform +In March 2010, the Patient Protection and Affordable Care Act (ACA) was enacted in the United States. The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private insurers. For example, the ACA requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices. The medical device tax was permanently repealed at the end of 2019. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters, and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict. +Beginning in 2017, the Trump administration sought to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. The Trump administration issued three executive orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. For example, on December 20, 2019, President Trump signed appropriations legislation for fiscal year 2020 that repealed certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high-cost employer-sponsored insurance plans, for tax years beginning after December 31, 2019; the annual fee imposed on certain health insurance providers based on market share, for calendar years beginning December 31, 2020; and the medical device excise tax on non-exempt medical devices, for sales after December 31, 2019. While Congress did not pass comprehensive legislation that would repeal all or part of the ACA, two bills affecting the implementation of certain taxes under the ACA have been signed into law. Specifically, the Tax Cuts and Jobs Act of 2017 (TCJA), among other things, included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment, or penalty, imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Beginning in 2021, the Biden administration has signaled its intent to pursue policies strengthening the ACA. +Other legislative changes have been proposed and adopted in the United States since the ACA was enacted to reduce healthcare expenditures. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions of Medicare payments to providers of up to 2% per fiscal year that started in 2013 and, due to subsequent statutory amendments, will remain in effect through 2030 unless additional Congressional action is taken. In 2020, the CARES Act temporarily suspended the 2% cut in Medicare payments from May 1, 2020 through December 31, 2020, and it extended the sequestration reductions through FY 2030 to offset the cost of such temporary suspension. The Consolidated Appropriations Act, 2021 further extended the temporary suspension through March 31, 2021. On April 14, 2021, Congress enacted legislation that further extended the suspension through December 31, 2021. On December 10, 2021, further legislation was enacted to extend the suspension through March 31, 2022. +The American Taxpayer Relief Act of 2012 made other changes, including reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. If federal spending is reduced, anticipated budgetary shortfalls may also impact the ability of relevant agencies, such as the FDA or the National Institutes of Health to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve R&D, manufacturing, and marketing activities, which may delay our ability to develop, market and sell any products we may develop. Additionally, the Biden administration has already indicated a shift in direction from Trump administration policies by issuing orders and other documents rolling back regulations and Executive Orders from the Trump administration, and as noted, indicating that it will pursue policies strengthening the ACA. The recent change in presidential administration could materially impact our business in ways that are difficult to predict. +36 +In December 2020, in its enactment of the Consolidated Appropriations Act, Congress enacted the No Surprises Act. This law, which took effect January 1, 2022, bars an out-of-network providers from billing patients in excess of the in-network cost sharing for services furnished with respect to a visit at certain in-network health care facilities. The law establishes an independent dispute resolution process between the provider and the payer to determine the appropriate payment rate to the provider. As written, the No Surprises Act may apply to laboratory tests furnished by an independent laboratory with respect to a hospital visit. The law establishes a notice and consent exception that generally does not apply to laboratory tests, although it allows HHS to apply this exception to certain advanced tests. Regulations and subregulatory guidance were issued by HHS, the Department of Labor, and the Department of the Treasury in 2021, with the first set of regulations was issued as an Interim Final Rule on July 1, 2021, and the second set issued as an Interim Final Rule on September 30, 2021. These regulations and subregulatory guidance have provided additional information on the applicability of the No Surprises Act, the rules governing the independent dispute resolution process, and specific provider requirements (including the obligation to furnish a “good faith estimates” of “expected charges” to uninsured or self-pay patients), as well as areas of temporary enforcement discretion. +Environmental, Health and Safety Regulations +We are subject to various federal, state, local, and foreign environmental, health and safety laws and regulations and permitting and licensing requirements. Such laws include those governing laboratory practices, the generation, storage, use, manufacture, handling, transportation, treatment, remediation, release and disposal of, and exposure to, hazardous materials and wastes and worker health and safety. Our operations involve the generation, use, storage and disposal of hazardous materials, and the risk of injury, contamination or non-compliance with environmental, health and safety laws and regulations or permitting or licensing requirements cannot be eliminated. In particular, the introduction of our Bio-Rad SARS-CoV-2 ddPCR and Platelia SARS-CoV-2 Total Ab tests requires that we maintain compliance with applicable and evolving federal and state laws and regulations relating to COVID-19, including the generation, use, storage, and disposal of testing materials and agents. Compliance with environmental laws and regulations has not had a material effect on our capital expenditures, earning or competitive position. Most recently, the Boulder, Colorado clinical laboratory passed an on-site inspection from the CDC in June 2021. +Corporate Information +We were incorporated in Delaware in 2005 as Elston Technologies, Inc. Our principal executive offices are located at 2970 Wilderness Place, Suite 100, Boulder, Colorado 80301, and our telephone number is (303) 417-0500. On June 20, 2006, we changed our name to Biodesix, Inc. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of our IPO. +Additionally, we are a “smaller reporting company ” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million +37 +as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +For certain risks related to our status as an emerging growth company, see “Risk Factors—Risks Related to our Common Stock—We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.” +Human Capital Resources +Our culture is underpinned by our cultural beliefs including an unwavering commitment to inclusion and diversity. We are committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent offering opportunities for our team members to grow and develop in their careers, supported by strong compensation, benefits and health and wellness programs. We regularly engage our team members in monthly all-hands meetings to align and focus on the current state of affairs of our business, our partnerships, new products, clinical trials, and other pertinent information about our business. We engage our team members in programs such as peer recognition, recruitment and our newly introduced Diversity, Equity and Inclusion Council that focus on recognizing outstanding individual contributions to company performance, cultural fit of new team members and acknowledging the diversity of our team to ensure our team members feel valued and can do their best work. We have a national annual community service initiative, “Biodesix Gives Back” that allows each team member to invest ten hours of paid community service to organizations of their choosing. +As of December 31, 2021, we had approximately 218 full-time and part-time employees, all of which are located in the United States. Of our 218 full-time and part-time team members, the majority of our team member base is located in proximity to our corporate office and testing facilities located in Boulder, Colorado and our laboratory in De Soto, Kansas. +Diversity, Equity and Inclusion +We believe that a diverse employee population, including cultural background, gender, ethnicity, sexual orientation and lived experiences, is critical to our success. Our employees are encouraged to leverage their personal strengths and experiences to continually innovate and contribute to the development of new ideas and process improvements that drive better experiences for our partners. +Employee Engagement +Our company culture emphasizes the satisfaction and well-being of our team members and a diverse, engaged workforce. We solicit the opinion and views of our team members through surveys and peer focus groups. We have an established and valued Peer Recognition Culture. Teammates recognize other teammates publicly for their support and contributions fostering collaboration, engagement and retention. We regularly review feedback we receive on our current cultural beliefs to determine if any modifications are needed. During the year ended December 31, 2021, we updated our cultural beliefs to align with our core values that reflect our current focus on Teamwork, Innovation, Making an Impact and Excel. Additionally, the Company annually celebrates our top sales performers through our President’s Club and other top company performers as nominated by fellow team members through our four (4) Performance Excellence Awards that recognize creativity and innovation, an entrepreneurial spirit, a strategic impact on the success of the Company and lastly, embodying the Biodesix cultural beliefs and goes “above and beyond” daily. +Training and Development +We invest in our team members career growth and provide team members with a wide range of development opportunities, including face-to-face, virtual, and self-directed learning, mentoring, coaching, and external development. +Health, Safety and Wellness +The physical health, financial stability, life balance and mental health of each of our team members is vital to our success. We sponsor several cancer awareness activities in our local communities to bring engagement and awareness of health, safety and wellness to positively impact lives. We provide an Employee Assistance Program through our professional employer organization (PEO) to enhance physical, financial, and mental well-being for all our team members. Since the onset of the COVID-19 pandemic, we have successfully transitioned a significant portion of our workforce to a remote working environment and implemented strict safety and social distancing measures in our sites to protect the health and safety of our team members. We also have provided extraordinary safety protocols and standards for all of “essential” team members who work in our Laboratories and our field sales organization including regularly scheduled serial testing for COVID-19. We also have an active “Friends and Family” COVID-19 testing program for our team members, their families and close friends. +Pay Equity +The main objective of our compensation program is to provide a compensation package that will attract, retain, motivate, and reward superior team members who operate in a highly competitive and technologically challenging environment. We emphasize overall Company performance and provide equity incentives for all team members to align their financial interests with the interests of shareholders. In addition, we offer an employee stock purchase plan to all employees in which participants are eligible to purchase shares at a discount to market. We think like customers and act like owners. +38 +Biodesix seeks fairness in total compensation. We benchmark with external comparisons, internal comparisons and look at the relationship between team member roles within the organization. We also review our compensation practices, both in terms of our overall workforce and individual team members, to ensure our pay is fair and equitable. We currently have no pay disparities based on gender, race, or ethnicity. +Available Information +We file with, or furnish to, the SEC reports including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available free of charge on our corporate website (www.biodesix.com) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov. The foregoing website addresses are provided as inactive textual references only. The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this Annual Report on Form 10-K. +Item 1A. Risk Factors. +Risk Factors Summary +The following is a summary of the principal risks that could adversely affect our business, operations and financial results. This summary does not address all of the risk that we face and should be read in conjunction with the entire Risk Factors section below beginning at “Risks Related to Our Business and Industry” within this Item 1A. Risk Factors. +• +We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we achieve profitability, we may not be able to sustain it. +• +Our audited financial statements include a statement that there is a substantial doubt about our ability to continue as a going concern and a continuation of negative financial trends could result in our inability to continue as a going concern. +• +The commercial success of our current and future diagnostic tests and services depends upon attaining significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies. +• +We may encounter difficulties in managing our growth, which could disrupt our operations. +• +If we fail to retain sales and marketing personnel and, as we grow, fail to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests in a cost-effective manner, we may not be able to generate revenue growth. +• +If we cannot maintain our current relationships, or enter into new relationships, with biopharmaceutical companies, our revenue prospects could be reduced. +• +Our commercial success and revenue growth are highly dependent on the demand for, and increased adoption of, our diagnostic tests, including our COVID-19 testing program, which are subject to a number of risks and uncertainty. +• +We need to ensure strong product performance and reliability to maintain and grow our business. +• +We depend upon third-party suppliers, including contract manufacturers and single source suppliers, making us vulnerable to supply problems and price fluctuations. +• +Natural or man-made disasters, pandemics, outbreaks, or other similar events, including a sustained outbreak or second wave of the novel strain of coronavirus disease, COVID-19, could significantly disrupt our business, and negatively impact our business, financial condition and results of operations. +• +Our industry is highly competitive and subject to rapid change, which could make our diagnostic tests and services obsolete. If we are unable to continue to innovate and expand and enhance our diagnostic tests and service offerings, we could lose customers or market share. +• +Any failure to offer high-quality support for our diagnostic tests and services may adversely affect our relationships with providers and negatively impact our reputation among patients and providers, which may adversely affect our business, financial condition and results of operations. +• +We may face additional costs, loss of revenue, significant liabilities, harm to our brand, decreased use of our products or services and business disruption if there are disruptions in our information technology systems, including any security or data privacy breaches or other unauthorized or improper access. +39 +Risk Factors +Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, and results of operations and cash flows. All of the risks described below should be carefully considered together with the other information contained and incorporated by reference in this report. +Risks Related to our Business and Industry +We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we achieve profitability, we may not be able to sustain it. +We have incurred losses since our inception and expect to continue to incur losses for the foreseeable future. We reported net losses of $43.2 million and $31.4 million the years ended December 31, 2021 and 2020, respectively. As a result of these losses, as of December 31, 2021, we had an accumulated deficit of approximately $302.0 million. +We expect that our sales and marketing, research and development, regulatory and other expenses will continue to increase as we expand our marketing efforts for our diagnostic tests and services, expand existing relationships with our customers, obtain regulatory clearances or approvals or certifications for future enhancements to our existing diagnostic tests and services and conduct further clinical trials. In addition, we expect our general and administrative expenses to increase due to the additional costs associated with scaling our business operations and testing capacity, particularly with respect to our COVID-19 testing capacity, as well as being a public company, including due to legal, accounting, insurance, exchange listing and compliance, investor relations and other expenses. As a result, we expect to continue to incur operating losses and may never achieve profitability. We will need to generate significant additional revenue in order to achieve and sustain profitability. Even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. If we do not achieve or sustain profitability, it will be more difficult for us to finance our business and accomplish our strategic objectives, either of which would have a material adverse effect on our business, financial condition and results of operations. +The continuing spread of COVID-19 and the impact to our business may continue to have a material and adverse effect on our ability to generate revenues, maintain compliance with our financial covenants and result in our inability to continue as a going concern. Any such impacts could have a material and adverse effect on the price of our common stock. +Our financial statements as of and for the period ended December 31, 2021 were prepared on the assumption that we would continue as a going concern. These financial statements did not include any adjustments that might result from the outcome of this uncertainty. As of December 31, 2021, we maintained cash and cash equivalents of $32.7 million and we have $10 million in principal balance remaining on our 2021 Term Loan. We have incurred significant losses since inception and, as a result, we have funded our operations to date primarily through the sale of common stock in our IPO in October 2020, the issuance of notes payable, and from our two primary revenue sources: (i) diagnostic testing, which include lung diagnostic testing and COVID-19 testing, and (ii) providing biopharmaceutical companies with development and testing services. Our ability to meet our obligations as they come due may be impacted by our ability to remain compliant with financial covenants in our 2021 Term Loan or to obtain waivers or amendments that impact the related covenants. Due to the continued uncertainty caused by the COVID-19 pandemic, significant risks remain with respect to our ability to meet these thresholds and any material adverse effect on our revenues, income and expenses could impact our ability to maintain compliance with these covenants. As a result of the items mentioned above, our management has determined that there is a substantial doubt about our ability to continue as a going concern over the next twelve months from the date these financial statements were issued. Although we have taken steps to improve our liquidity through the recent amendments to our 2021 Term Loan to modify certain financial covenants and have taken measures to reduce planned capital expenditures and operating expenses, these actions alone will not be sufficient to mitigate our liquidity concerns in the wake of the material impact to our revenues, operating results and cash flows from the continued spread of COVID-19. In addition, if we are not able to improve our operating results, we may need to limit our operations substantially. We will need to raise additional capital in the form of equity or debt to increase our liquidity but there is no assurance that we will be able to secure any such funding in a sufficient amount or on terms that are acceptable to us. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. Furthermore, the reaction of investors to the inclusion of a going concern statement in this report, and our potential inability to continue as a going concern, could materially adversely affect the price of our common stock. +The commercial success of our current and future diagnostic tests and services and our revenue growth depends upon attaining significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies. +Our commercial success depends, in part, on the acceptance of our diagnostic tests and services as being safe and relatively simple for medical personnel to learn and use, clinically flexible, operationally versatile and, with respect to providers and payers, cost effective. We cannot predict how quickly, if at all, payers, providers, clinics and patients will accept future diagnostic tests and services or, if accepted, how frequently they will be used. These constituents must believe that our diagnostic tests offer benefits over other available alternatives. +40 +The degree of market acceptance of our current and future diagnostic tests and services depends on a number of factors, including: +• +whether there is adequate utilization of our tests by clinicians, biopharmaceutical companies and other target groups based on the potential and perceived advantages of our diagnostic tests over those of our competitors; +• +the convenience and ease of use of our diagnostic tests relative to those currently on the market; +• +the effectiveness of our sales and marketing efforts; +• +our ability to provide incremental data that show the clinical benefits and cost effectiveness, and operational benefits, of our diagnostic tests; +• +the coverage and reimbursement acceptance of our products and services; +• +pricing pressure, including from group purchasing organizations (GPOs), seeking to obtain discounts on our diagnostic tests based on the collective bargaining power of the GPO members; +• +negative publicity regarding our or our competitors’ diagnostic tests resulting from defects or errors; +• +the accuracy of our tests relative to those of our competitors; +• +product labeling or product insert requirements by the FDA or other regulatory authorities or conformity assessment bodies; and +• +limitations or warnings contained in the labeling cleared or approved by the FDA or other regulatory authorities or conformity assessment bodies. +Additionally, even if our diagnostic tests achieve widespread market acceptance, they may not maintain that market acceptance over time if competing diagnostic tests or technologies, which are more cost effective or are received more favorably, are introduced. Failure to achieve or maintain market acceptance and/or market share would limit our ability to generate revenue and would have a material adverse effect on our business, financial condition and results of operations. +There is no assurance that our COVID-19 and antibody testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. If the pandemic were to dissipate, whether due to a significant decrease in new infections, due to the availability of vaccines, or otherwise, the need for a COVID-19 test could decrease significantly and this could have an adverse effect on our results of operation and profitability. +We may encounter difficulties in managing our growth, which could disrupt our operations. +As of December 31, 2021, we had approximately 218 full and part-time employees. Over the next several years, we expect to increase significantly the number of our employees and the scope of our operations, particularly in the areas of sales, marketing and reimbursement, product development, regulatory affairs and other functional areas, including finance, accounting, quality and legal. Additionally, we expect to expand our testing capacity as we commercialize additional diagnostic tests. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational quality and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources, we may not be able to manage the expansion of our operations or recruit and train additional qualified personnel in an effective manner. Any inability to manage growth could delay the execution of our business plans or disrupt our operations and have a material and adverse effect on our prospects. +Since our inception, we have experienced multiple cycles of growth and anticipate further growth in our business operations. This future growth could create strain on our organizational, administrative and operational infrastructure, including laboratory operations, quality control, customer service and sales organization management. We expect to continue to increase headcount and to hire more specialized personnel in the future as we grow our business. We will need to continue to hire, train and manage additional qualified scientists, laboratory personnel, client and account services personnel, and sales and marketing staff and improve and maintain our technology to properly manage our growth. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees or if we are not successful in retaining our existing employees, our business may be harmed. +We may not be able to maintain the quality or expected turnaround times of our diagnostic tests and services, or satisfy customer demand as it grows. We may not be able to expand our COVID-19 testing capacity rapidly enough to meet the current and anticipated demand. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures. The time and resources required to implement these new systems and procedures is uncertain, and failure to complete this in a timely and efficient manner could materially adversely affect our operations. Additionally, if we are required to reduce expenses substantially to sustain our operations, we may not have the human resources to maintain growth in our business operations. +41 +If we fail to retain sales and marketing personnel and, as we grow, fail to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests in a cost-effective manner, we may not be able to generate revenue growth. +We have limited experience marketing and selling our diagnostic tests. We currently rely on our direct sales force to sell our diagnostic tests in the United States, and any failure to maintain and grow our direct sales force will negatively affect our business, financial condition and results of operations. The members of our direct sales force are highly trained and possess substantial technical expertise, which we believe is critical in increasing adoption of our diagnostic tests. The members of our United States sales force are at-will employees. The loss of these personnel to competitors, or otherwise, will negatively affect our business, financial condition and results of operations. If we are unable to retain our direct sales force personnel or replace them with individuals of equivalent technical expertise and qualifications, or if we are unable to successfully instill such technical expertise in replacement personnel, it may negatively affect our business, financial condition and results of operations. +In order to generate future growth, we plan to continue to expand and leverage our sales and marketing infrastructure. Identifying and recruiting qualified sales and marketing personnel and training them on how to promote our diagnostic tests, on applicable federal and state laws and regulations and on our internal policies and procedures requires significant time, expense and attention. It often takes several months or more before a sales representative is fully trained and productive. Our sales force may subject us to higher fixed costs than those of companies with competing techniques or diagnostic tests that utilize independent third parties, which could place us at a competitive disadvantage. It will negatively affect our business, financial condition and results of operations if our efforts to expand and train our sales force do not generate a corresponding increase in revenue, and our higher fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand for our diagnostic tests. Any failure to hire, develop and retain talented sales personnel, to achieve desired productivity levels in a reasonable period of time, or timely reduce fixed costs, could negatively affect our business, financial condition and results of operations. Our ability to increase our customer base and achieve broader market acceptance of our diagnostic tests will depend to a significant extent on our ability to expand our marketing efforts. We plan to dedicate significant resources to our marketing programs. It will negatively affect our business, financial condition and results of operations if our marketing efforts and expenditures do not generate a corresponding increase in revenue. In addition, we believe that developing and maintaining broad awareness of our diagnostic tests in a cost-effective manner is critical to achieving broad acceptance of our diagnostic tests. Promotion activities may not generate patient or physician awareness or increase revenue, and even if they do, any increase in revenue may not offset the costs and expenses we incur in building our brand. If we fail to successfully promote, maintain and protect our brand, we may fail to attract or retain the physician acceptance necessary to realize a sufficient return on our brand building efforts, or to achieve the level of brand awareness that is critical for broad use of our diagnostic tests, which in turn could have a material adverse effect on our business, financial condition and results of operations. +If we cannot maintain our current relationships, or enter into new relationships, with biopharmaceutical companies, our revenue prospects could be reduced. +We collaborate with biopharmaceutical companies to analyze patient samples for multiple applications primarily to support clinical trials, including patient identification, companion or complementary diagnostics and retrospective testing. For fiscal years 2021 and 2020, revenue from our top biopharmaceutical customer accounted for 2% and 3% of our total revenue, respectively. The revenue attributable to our biopharmaceutical customers may also fluctuate in the future, which could have a material adverse effect on our financial condition and results of operations. In addition, the termination of these relationships could result in a temporary or permanent loss of revenue. +Our future success depends in part on our ability to maintain these relationships and to establish new relationships. Many factors have the potential to impact such collaborations, including the type of biomarker support required and our ability to deliver it and our biopharmaceutical customers’ satisfaction with our tests or services and other factors that may be beyond our control. Furthermore, our biopharmaceutical customers may decide to decrease or discontinue their use of our tests due to changes in research and product development plans, failures in their clinical trials, financial constraints, or utilization of internal testing resources or tests performed by other parties, or other circumstances outside of our control. In addition to reducing our revenue, the loss of one or more of these relationships may reduce our exposure to research and clinical trials that facilitate the collection and incorporation of new information into our biobank and proprietary AI platform. +We engage in conversations with biopharmaceutical companies regarding potential commercial opportunities on an ongoing basis. There is no assurance that any of these conversations will result in a commercial agreement, or if an agreement is reached, that the resulting relationship will be successful or that clinical or research studies conducted as part of the engagement will produce successful outcomes. Speculation in the industry about our existing or potential relationships with biopharmaceutical companies can also be a catalyst for adverse speculation about us, our tests and our technology, which can adversely affect our reputation and our business. +Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide. +Our quarterly and annual revenue and operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. Our quarterly and annual operating results may fluctuate as a result of a variety of factors, many of which are outside +42 +our control and, as a result, may not fully reflect the underlying performance of our business. These fluctuations may occur due to a variety of factors, including, but not limited to: +• +the level of demand for our diagnostic tests, which may vary significantly; +• +the timing and cost of manufacturing our diagnostic tests, which may vary depending on the quantity of production and the terms of our agreements with third-party suppliers and manufacturers; +• +expenditures that we may incur to acquire, develop, or commercialize additional tests and technologies; +• +unanticipated pricing pressures; +• +the rate at which we grow our sales force and the speed at which newly hired salespeople become effective, and the cost and level of investment therein; +• +the degree of competition in our industry and any change in the competitive landscape of our industry, including consolidation among our competitors or future partners; +• +coverage and reimbursement policies with respect to lung cancer treatment equipment, and potential future diagnostic tests that compete with our diagnostic tests; +• +the timing and success or failure of clinical trials for our diagnostic tests or any enhancements to such tests we develop or competing diagnostic tests; +• +positive or negative coverage, or public perception, of our diagnostic tests or those of our competitors or broader industry trends; +• +the impact, if any, of the spread of COVID-19 and any newly discovered variants, and the resulting effects on the number of patients treated or the demand for our non-COVID-19 tests; +• +the timing and cost of, and level of investment in, research, development, licenses, regulatory approval, conformity certification, commercialization activities, acquisitions and other strategic transactions, or other significant events relating to our diagnostic tests, which may change from time to time; +• +the timing and cost of obtaining regulatory approvals, conformity certifications or clearances for planned or future improvements or enhancements to our diagnostic tests; +• +changes in regulatory requirements or in the status of regulatory approvals or applications or conformity certifications; +• +pricing, discounts, and incentives for our diagnostic tests; +• +future accounting pronouncements or changes in our accounting policies; and +• +general market conditions. +In addition, we can provide no assurances that the demand for our COVID-19 and antibody testing program will be sustained, and even if it is, the period of time for which it would be sustained. As vaccines for COVID-19 become more available and widespread in the future, we expect the demand for our COVID-19 diagnostic and antibody tests will decrease. As a result, the increase in revenue due to any increase in demand for our COVID-19 and antibody testing program is not indicative of results expected for any future period. +The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual financial results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Further, our historical results are not necessarily indicative of results expected for any future period, and quarterly results are not necessarily indicative of the results to be expected for the full year or any other period, and accordingly should not be relied upon as indicative of future performance. +This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any guidance we may provide, or if the guidance we provide is below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any publicly stated guidance we may provide, and could in turn negatively impact our business, financial condition and results of operations. +We need to ensure strong product performance and reliability to maintain and grow our business . +We need to maintain and continuously improve the performance and reliability of our diagnostic tests, including our Biodesix WorkSafe testing program, the Nodify XL2 and Nodify CDT tests, and the GeneStrat and VeriStrat tests, to achieve our profitability objectives. Poor product performance and reliability could lead to customer dissatisfaction, adversely affect our reputation and revenues, and increase our service and distribution costs and working capital requirements. Our diagnostic tests may contain errors or defects, and while we have made efforts to test them extensively, we cannot assure that our current diagnostic tests, or those developed in the future, +43 +will not have performance problems. Performance issues with our diagnostic tests will increase our costs in the near-term and accordingly adversely affect our business, financial condition and results of operations. +We depend upon third-party suppliers, including contract manufacturers and single source suppliers, making us vulnerable to supply problems and price fluctuations. +We rely on third-party suppliers, including in some instances single source suppliers, to provide us with certain components of our diagnostic tests. The number of suppliers feeding into the production of our diagnostic tests is in excess of 65 worldwide. We consider a select few of these suppliers, located in the United States, Europe and China, as critical single source providers of components. Bio-Rad Laboratories, as described below, is the sole source supplier for our GeneStrat tests and COVID-19 diagnostic and antibody testing program. Oncimmune is also the sole source supplier for our Nodify CDT tests. While we have initiated the second source qualification process for the majority of these critical components, we may not be successful in securing second sourcing for all of them at all or on a timely basis. +In addition, we may purchase supplies through purchase orders and may not have long-term supply agreements with, or guaranteed commitments from, many of our suppliers, including single source suppliers. Additionally, at present, we rely on contract manufacturers for the production of our supplies for our diagnostic test. Many of our suppliers and contract manufacturers are not obligated to perform services or supply diagnostic testing materials for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. We depend on our suppliers and contract manufacturers to provide us and our customers with materials in a timely manner that meet our and their quality, quantity and cost requirements. These suppliers and contract manufacturers may encounter problems during manufacturing for a variety of reasons, any of which could delay or impede their ability to meet our demand. These suppliers and contract manufacturers may cease producing the components we purchase from them or otherwise decide to cease doing business with us. Further, we maintain limited volumes of inventory from most of our suppliers and contract manufacturers. If we inaccurately forecast demand for finished goods, we may be unable to meet customer demand which could harm our competitive position and reputation. In addition, if we fail to effectively manage our relationships with our suppliers and contract manufacturers, we may be required to change suppliers or contract manufacturers. While we believe replacement suppliers exist for all materials, components and services necessary to manufacture our diagnostic tests, establishing additional or replacement suppliers for any of these materials, components or services, if required, could be time-consuming and expensive, may result in interruptions in our operations and product delivery, may affect the performance of our diagnostic tests or could require that we modify their processes. Even if we are able to find replacement suppliers, we will be required to verify that the new supplier maintains facilities, procedures and operations that comply with our quality expectations and applicable regulatory requirements. Any of these events could require that we obtain a new regulatory authority approval before we implement the change, which we may not obtain on a timely basis or at all. +If our third-party suppliers fail to deliver the required commercial quantities of materials on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality on a timely basis, the continued commercialization of our diagnostic tests, the supply of our diagnostic tests to customers and the development of any future diagnostic tests will be delayed, limited or prevented, which could have material adverse effect on our business, financial condition and results of operations. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test. Under the terms of this arrangement, we were granted non-exclusive rights to utilize the intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. We agreed to purchase all of the necessary supplies and reagents for such testing exclusively from Bio-Rad. As further consideration for the non-exclusive license, we agreed to pay a royalty of two and one half percent (2.5%) on net service fees (such fees are defined in the Non-Exclusive License Agreement with Bio-Rad) collected from contracted third parties who receive ddPCR services from us. In addition, we have separately been granted permission by Bio-Rad to use the Bio-Rad SARS-CoV-2 ddPCR test and Platelia SARS-CoV-2 Total Ab test for commercial diagnostic services. On May 24, 2021, we entered into the First Amendment to the Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc. which amended the original agreement such that, effective May 1, 2021, we are not required to pay a royalty of two and one half percent (2.5%) on net service fees. For more information regarding this license and supply agreement and the permission granted to us by Bio-Rad with respect to such tests, please see “Business—Material Agreements—Agreements with Bio-Rad” previously filed in our Form S-1 on October 23, 2020 and “First Amendment to the Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated May 24, 2021” previously filed in our Form 10-Q on August 10, 2021. +This relationship may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. We cannot be certain that, following the realization of this relationship, we will achieve the revenue or specific net income that justifies our entry into it. Any termination of this relationship, or delays in entering into new strategic partnership agreements with Bio-Rad, could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +44 +We may not be able to sufficiently reduce costs in the performance, manufacturing and production of our diagnostic tests to achieve sustainable gross margins. +We partner with contract manufacturers in the development and production of supplies for our diagnostic tests. While we are undertaking a number of initiatives designed to reduce the cost of performing our diagnostic tests, including reducing the costs of supplies, there is no guarantee that we will be able to achieve planned cost reductions from our various cost savings initiatives. There may also be unforeseen occurrences that increase our costs, such as increased prices of the components of our diagnostic tests, changes to labor costs or less favorable terms with third-party suppliers or contract manufacturing partners. If we are unable to reduce our costs, or if cost reductions are less significant or less timely than projected, we will not be able to achieve sustainable gross margins, which would adversely affect our ability to invest in and grow our business and adversely impact our business, financial condition and results of operations. +A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide, including the outbreak of the novel strain of coronavirus disease, COVID-19, and its variants could adversely affect our business. +If a pandemic, epidemic or outbreak of an infectious disease occurs in the United States or worldwide, our business may be adversely affected. COVID-19 has spread throughout the United States and to most countries globally. Numerous U.S. state and local jurisdictions have imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. In March 2020, the Governor of Colorado, where our headquarters are located, issued “stay at home” orders limiting non-essential activities, travel and business operations. Such orders or restrictions have resulted in reduced operations at our headquarters, work stoppages, slowdowns and delays, travel restrictions and cancellation of events. Other disruptions or potential disruptions include the inability of our suppliers to manufacture components and parts and to deliver these to us on a timely basis, or at all; disruptions in our production schedule and ability to assemble diagnostic tests; inventory shortages or obsolescence; delays in actions of regulatory bodies; diversion of or limitations on employee resources that would otherwise be focused on the operations of our business; delays in growing or reductions in our sales organization, including through delays in hiring, lay-offs, furloughs or other losses of sales representatives; business adjustments or disruptions of certain third parties, including suppliers, medical institutions and clinical investigators with whom we conduct business; and additional government requirements or other incremental mitigation efforts that may further impact our or our suppliers’ capacity to manufacture our diagnostic tests. +The COVID-19 pandemic also has negatively affected our non-COVID-19 testing-related revenue and our clinical studies. For example, cancer patients may have more limited access to hospitals, healthcare providers and medical resources as they take steps to control the spread of COVID-19. Our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized. As a result of the COVID-19 pandemic, beginning in the latter half of March 2020, we have been receiving fewer samples for non-COVID-19 testing on a daily average basis from our clinical and biopharmaceutical customers than before the outbreak of the COVID-19 pandemic. Further, our clinical studies, such as our ongoing INSIGHT study and our recently launched ALTITUDE study, as well as our arrangements with our biopharmaceutical customers, are expected to take longer to complete than what we expected before the outbreak of the COVID-19 pandemic. +The COVID-19 pandemic has also created an opportunity for our diagnostic tests and we have commercialized two diagnostic tests to test for the presence of COVID-19 and antibodies. We are expecting to increase our testing capacity for our COVID-19 diagnostic and antibody testing program in the near term to meet the rising demand for rapid and accurate testing. We expect that the revenue we generate from this expansion will comprise a significant portion of our revenue for the first quarter of 2021. However, there is no assurance that our COVID-19 diagnostic and antibody testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or be accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. If the pandemic were to dissipate, whether due to a significant decrease in new infections, due to the availability of vaccines, or otherwise, the need for a COVID-19 test could decrease significantly and this could have an adverse effect on our results of operations and profitability. As a result, the increase in revenue due to any increase in demand for these diagnostic tests may not be indicative of our future revenue. +The extent to which the COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity and spread of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. Furthermore, there is no assurance that our diagnostic tests will continue to be effective against the virus in the future. +While the potential economic impact brought by, and the duration of, any pandemic, epidemic or outbreak of an infectious disease, including COVID-19, may be difficult to assess or predict, the widespread COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets and a reduction in our ability to access capital, which could adversely affect our liquidity. In addition, a recession or market correction resulting from the spread of an infectious disease, including COVID-19, could materially affect our business. Such economic recession could have a material adverse effect on our long-term business. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section. +45 +Natural or man-made disasters and other similar events, including the COVID-19 pandemic, may significantly disrupt our business, and negatively impact our business, financial condition and results of operations. +A significant portion of our employee base, operating facilities and infrastructure are centralized in Boulder, Colorado and we operate a laboratory facility in De Soto, Kansas. Any of our facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, wildfires, floods, nuclear disasters, riots, acts of terrorism or other criminal activities, infectious disease outbreaks or pandemic events, including the COVID-19 pandemic, power outages and other infrastructure failures, which may render it difficult or impossible for us to operate our business for some period of time. Our facilities would likely be costly to repair or replace, and any such efforts would likely require substantial time. Any disruptions in our operations could adversely affect our business, financial condition and results of operations and harm our reputation. Moreover, although we have disaster recovery plans, they may prove inadequate. We may not carry sufficient business insurance to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on our business, financial condition and results of operations. In addition, the facilities of our suppliers and manufacturers may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or otherwise materially and adversely affect our business. +Any failure to offer high-quality support for our diagnostic tests and services may adversely affect our relationships with providers and negatively impact our reputation among patients and providers, which may adversely affect our business, financial condition and results of operations. +In implementing and using our diagnostic tests and services, providers depend on our support to resolve issues in a timely manner. We may be unable to respond quickly enough to accommodate short-term increases in demand for customer support. Increased customer demand for support could increase costs and adversely affect our business, financial condition and results of operations. Our sales are highly dependent on our reputation and on positive recommendations from our existing patients, care partners, providers and clinics. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could adversely affect our reputation, our ability to sell our diagnostic tests and services, and in turn our business, financial condition and results of operations. +The sizes of the markets for our diagnostic tests and services and any future diagnostic tests and services may be smaller than we estimate and may decline. +Our estimates of the annual total addressable market for our diagnostic tests and services are based on a number of internal and third-party estimates and assumptions, including, without limitation, the assumed prices at which we can sell our diagnostic tests and services in the market. While we believe our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be correct and the conditions supporting our assumptions or estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. +As a result, our estimates of the annual total addressable market for our diagnostic tests and services in different market segments may prove to be incorrect. If the actual number of patients who would benefit from our diagnostic tests, the price at which we can sell them or the annual total addressable market for them is smaller than we have estimated, it may impair our sales growth and negatively affect our business, financial condition and results of operations. +Our industry is subject to rapid change, which could make our solutions and the diagnostic tests we develop and services we offer, obsolete. If we are unable to continue to innovate and improve our diagnostic tests and services we offer, we could lose customers or market share. +Our industry is characterized by rapid changes, including technological and scientific breakthroughs, frequent new product introductions and enhancements and evolving industry standards, all of which could make our current diagnostic tests and others we are developing obsolete. Our future success will depend on our ability to keep pace with the evolving needs of our customers on a timely and cost-effective basis and to pursue new market opportunities that develop as a result of scientific and technological advances. In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. There have also been advances in methods used to analyze very large amounts of molecular information. We must continuously enhance our offerings and develop new and improved diagnostic tests to keep pace with evolving standards of care. If we do not leverage or scale our sample and data biobank to discover new diagnostic tests or applications or update our diagnostic tests to reflect new scientific knowledge, including about lung cancer biology, information about new cancer therapies or relevant clinical trials, our diagnostic tests could become obsolete and sales of our current diagnostic tests and any new tests we develop could decline or fail to grow as expected. This failure to make continuous improvements to our diagnostic tests to keep ahead of those of our competitors could result in the loss of customers or market share that would adversely affect our business, financial condition and results of operations. +We may face additional costs, loss of revenue, significant liabilities, harm to our brand, decreased use of our products or services and business disruption if there are any security or data privacy breaches or other unauthorized or improper access. +In connection with various facets of our business, we collect and use a variety of personal data, such as names, mailing addresses, email addresses, mobile phone numbers, location information, prescription information and other medical information. Any failure to prevent or mitigate security breaches or improper access to, use, disclosure or other misappropriation of our data or consumers’ personal data +46 +could result in significant liability under state, (e.g., state breach notification and privacy laws such as the CCPA) federal (e.g., HIPAA), and the HITECH Act and laws in other jurisdictions (e.g., the GDPR). Such an incident may also cause a material loss of revenue from the potential adverse impact to our reputation and brand, affect our ability to retain or attract new users of our diagnostic tests and services and potentially disrupt our business. +Unauthorized disclosure of sensitive or confidential patient or employee data, including personally identifiable information, whether through a breach of computer systems, systems failure, employee negligence, fraud or misappropriation, or otherwise, or unauthorized access to or through our information systems and networks, whether by our employees or third parties, could result in negative publicity, legal liability and damage to our reputation. Unauthorized disclosure of personally identifiable information could also expose us to sanctions for violations of data privacy laws and regulations around the world. To the extent that any disruption or security breach resulted in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed. For example, the loss of or damage to clinical trial data, such as from completed or ongoing clinical trials, for any of our product candidates would likely result in delays in our marketing approval efforts and significantly increased costs in an effort to recover or reproduce the data. +As we become more dependent on information technologies to conduct our operations, cyber incidents, including deliberate attacks and attempts to gain unauthorized access to computer systems and networks, may increase in frequency and sophistication. These threats pose a risk to the security of our systems and networks, the confidentiality and the availability and integrity of our data and these risks apply both to us, and to third parties on whose systems we rely for the conduct of our business. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we and our partners may be unable to anticipate these techniques or to implement adequate preventative measures. We have in the past experienced, and may in the future, experience security incidents. While no security incidents in the past have had a material adverse effect on our business, financial condition and results of operations, we cannot predict the impact of any such future events. Further, we do not have any control over the operations of the facilities or technology of our cloud and service providers, including any third-party vendors that collect, process and store personal data on our behalf. Our systems, servers and platforms and those of our service providers may be vulnerable to computer viruses or physical or electronic break-ins that our or their security measures may not detect. Individuals able to circumvent such security measures may misappropriate our confidential or proprietary information, disrupt our operations, damage our computers or otherwise impair our reputation and business. We may need to expend significant resources and make significant capital investments to protect against security breaches or to mitigate the impact of any such breaches. In addition, to the extent that our cloud and other service providers, experience security breaches that result in the unauthorized or improper use of confidential data, employee data or personal data, we may not be indemnified for any losses resulting from such breaches. There can be no assurance that we or our third-party providers will be successful in preventing cyber-attacks or successfully mitigating their effects. Recent cyber-attacks purportedly originated by Russian controlled entities have exacerbated in the wake of Russia’s invasion of Ukraine and our systems may be infiltrated by foreign actors. If we are unable to prevent or mitigate the impact of such security breaches, our ability to attract and retain new customers, patients and other partners could be harmed as they may be reluctant to entrust their data to us, and we could be exposed to litigation and governmental investigations, which could lead to a potential disruption to our business or other adverse consequences. +We have significant payer concentration, with a limited number of customers accounting for a substantial portion of our revenues. +For year ended December 31, 2021, Medicare reimbursed to us 18% of our diagnostic test revenue and two customers accounted for 45% of our total revenue. For the year ended December 31, 2020, Medicare reimbursed to us 17% of our diagnostic test revenue and two customers accounted for 47% of our total revenue. There are risks whenever a large percentage of total revenues are concentrated with a limited number of payers and customers. It is not possible for us to predict the level of demand for our diagnostic tests and services that will be generated by any of these customers in the future. In addition, revenues from these larger customers may fluctuate from time to time based on these customers’ business needs, the timing of which may be affected by market conditions or other factors outside of our control. These payers and customers could also potentially pressure us to reduce the prices we charge for our diagnostic tests and services, which could have an adverse effect on our margins and financial position and could negatively affect our revenues and results of operations. If any of our largest payers terminates its relationship with us or our tests are no longer reimbursable by such payer, such termination could negatively affect our revenues and results of operations. +Our results of operations will be materially harmed if we are unable to accurately forecast customer demand for, and utilization of, our diagnostic tests and manage our inventory. +To ensure adequate inventory supply, we must forecast inventory needs and manufacture our diagnostic tests based on our estimates of future demand for our diagnostic tests. Our ability to accurately forecast demand for them could be negatively affected by many factors, including our failure to accurately manage our expansion strategy, product introductions by competitors, an increase or decrease in customer demand for our diagnostic tests or for those of our competitors, our failure to accurately forecast customer acceptance of new diagnostic tests, unanticipated changes in general market conditions or regulatory matters and weakening of economic conditions or consumer confidence in future economic conditions. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs, which would cause our gross margin to be adversely affected and could impair the strength of our brand. Conversely, if we underestimate customer demand for our diagnostic tests, our supply chain, manufacturing partners and/or internal manufacturing +47 +team may not be able to deliver components and diagnostic tests to meet our requirements, and this could result in damage to our reputation, sales growth and customer relationships. In addition, if we experience a significant increase in demand, such as we are currently experiencing with respect to our COVID-19 and antibody testing program, additional supplies of raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, or suppliers may not be able to allocate sufficient capacity in order to meet our increased requirements, which will adversely affect our business, financial condition and results of operations. +If we experience significant disruptions in our information technology systems, our business may be adversely affected. +We depend on our information technology systems for the efficient functioning of our business, including the performance, distribution and maintenance of our diagnostic tests and services, as well as for accounting, data storage, compliance, purchasing and inventory management. We do not have redundant information technology in all aspects of our systems at this time. Our information technology systems may be subject to computer viruses, ransomware or other malware, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, damage or interruption from fires or other natural disasters, hardware failures, telecommunication failures and user errors, among other malfunctions. We could be subject to an unintentional event that involves a third party gaining unauthorized access to our systems, which could disrupt our operations, corrupt our data or result in release of our confidential information. Technological interruptions would disrupt our operations, including our ability to timely ship and track diagnostic test orders and results, project inventory requirements, manage our supply chain and otherwise adequately service our customers or disrupt our customers’ ability to use our diagnostic tests. In the event we experience significant disruptions, we may be unable to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our business, financial condition and results of operations. +Currently, we carry business interruption coverage to mitigate certain potential losses but this insurance is limited in amount, and we cannot be certain that such potential losses will not exceed our policy limits. The successful assertion of one or more large claims against us that exceed or are not covered by our insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations. We are increasingly dependent on complex information technology to manage our infrastructure. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance our existing systems. Failure to maintain or protect our information systems and data integrity effectively could have a material adverse effect on our business, financial condition and results of operations. +If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit or halt the marketing and sale of our diagnostic tests and services. The expense and potential unavailability of insurance coverage for liabilities resulting from issues with our diagnostic tests and services could harm us and negatively impact sales. +We face an inherent risk of product liability as a result of the marketing and sale of our diagnostic tests and services. For example, we may be sued if our diagnostic tests or services cause or are perceived to cause injury or are found to be otherwise unsuitable during manufacturing, marketing or sale. Any such product liability claim may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. In addition, we may be subject to claims against us even if the apparent injury is due to the actions of others or the pre-existing health of the patient. For example, medical personnel, care partners and patients collect samples for our diagnostic tests. If these medical personnel, care partners or patients are not properly trained, are negligent or use our diagnostic tests incorrectly, the capabilities of such tests may be diminished or the patient may suffer critical injury. We may also be subject to claims that are caused by the activities of our suppliers, such as those who provide us with components and sub-assemblies for our diagnostic tests. +If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or halt the marketing and sale of our diagnostic tests and services. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in: +• +decreased demand for our diagnostic tests and services; +• +harm to our reputation; +• +initiation of investigations by regulators; +• +costs to defend the related litigation; +• +a diversion of management’s time and our resources; +• +substantial monetary awards to trial participants or patients; +• +product recalls, withdrawals, or labeling, marketing, or promotional restrictions; +• +loss of revenue; +• +adverse impact on the market price of our common stock; and +48 +• +exhaustion of any available insurance and our capital resources. +We believe we have adequate product liability insurance, but it may not prove to be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain or obtain insurance at a reasonable cost or in an amount adequate to satisfy any liability that may arise. Our insurance policy contains various exclusions, and we may be subject to a product liability claim for which we have no coverage. The potential inability to obtain sufficient product liability insurance at an acceptable cost to protect against product liability claims could prevent or inhibit the marketing and sale of our diagnostic tests and services. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts, which would have a material adverse effect on our business, financial condition and results of operations. In addition, any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, harm our reputation in the industry, significantly increase our expenses and reduce product sales. +We face competition from many sources, including larger companies, and we may be unable to compete successfully. +There are a number of lung cancer diagnostic solutions companies in the United States, Europe and Asia. Notable competitors in the United States include Veracyte, Inc., Guardant Health, Inc., and Foundation Medicine, Inc. These competitors all provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories and other medical facilities. Many of these organizations are significantly larger with greater financial and personnel resources than us, and enjoy significantly greater market share and have greater resources than we do. As a consequence, they may be able to spend more on product development, marketing, sales and other product initiatives than we can. Some of our competitors have: +• +substantially greater name recognition; +• +broader, deeper, or longer-term relations with healthcare professionals, customers, and third-party payers; +• +more established distribution networks; +• +additional lines of diagnostic tests and the ability to offer rebates or bundle them to offer greater discounts or other incentives to gain a competitive advantage; +• +greater experience in conducting research and development, manufacturing, clinical trials, marketing and obtaining regulatory clearance or approval or certification for diagnostic tests; and +• +greater financial and human resources for product development, sales and marketing and patent litigation. +Our continued success depends on our ability to: +• +further penetrate the lung disease diagnostic solutions market and increase utilization of our diagnostic tests; +• +maintain and widen our technology lead over competitors by continuing to innovate and deliver new product enhancements on a continuous basis; and +• +cost-effectively manufacture our diagnostic tests and their component parts as well as drive down the cost of service. +In addition, competitors with greater financial resources than ours could acquire other companies to gain enhanced name recognition and market share, as well as new technologies or diagnostic tests that could effectively compete with our existing diagnostic tests, which may cause our revenue to decline and would harm our business. +Our competitors also compete with us in recruiting and retaining qualified scientific, management and commercial personnel, as well as in acquiring technologies complementary to, or necessary for, development of our diagnostic tests. Because of the complex and technical nature of diagnostic testing and the dynamic market in which we compete, any failure to attract and retain a sufficient number of qualified employees could materially harm our ability to develop and commercialize our diagnostic tests, which would have a material adverse effect on our business, financial condition and results of operations. +As we attain greater commercial success, our competitors are likely to develop diagnostic tests that offer features and functionality similar to our diagnostic tests that are currently on the market. Improvements in existing competitive diagnostic tests or the introduction of new competitive diagnostic tests may make it more difficult for us to compete for sales, particularly if those competitive diagnostic tests demonstrate better reliability, convenience or effectiveness or are offered at lower prices. +Performance issues, service interruptions or price increases by our shipping carriers and warehousing providers could adversely affect our business and harm our reputation and ability to provide our services on a timely basis. +Expedited, reliable shipping and delivery services and secure warehousing are essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point transport of our diagnostic tests to our customers and for tracking of these shipments, and from time to time require warehousing for our diagnostic tests, sample collection kits and supplies. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any systems, it would be costly to replace such systems in +49 +a timely manner and such occurrences may damage our reputation and lead to decreased demand for our diagnostic tests and increased cost and expense to our business. In addition, any significant increase in shipping or warehousing rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters, civil unrest and disturbances or other service interruptions affecting delivery or warehousing services we use would adversely affect our ability to process orders for our diagnostic tests on a timely basis. +We rely on commercial courier delivery services to transport samples to our laboratory facility in a timely and cost-efficient manner and if these delivery services are disrupted, our business will be harmed. Our business depends on our ability to quickly and reliably deliver test results to our customers. Blood samples are typically received within days from the United States and outside the United States for analysis at our Boulder, Colorado and De Soto, Kansas facilities. Disruptions in delivery service, whether due to labor disruptions, bad weather, natural disaster, civil unrest or disturbances, terrorist acts or threats or for other reasons could adversely affect specimen integrity and our ability to process samples in a timely manner and to service our customers, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected. +Cost-containment efforts of our customers, purchasing groups and governmental purchasing organizations could have a material adverse effect on our sales and profitability. +In an effort to reduce costs, many hospitals in the United States have become members of GPOs and Integrated Delivery Networks (IDNs). GPOs and IDNs negotiate pricing arrangements with medical device companies and distributors on behalf of their members, which may include hospitals and other providers. GPOs and IDNs typically award contracts on a category-by-category basis through a competitive bidding process. Bids are generally solicited from multiple providers with the intention of driving down pricing or reducing the number of vendors. Due to the highly competitive nature of the GPO and IDN contracting processes, we may not be able to obtain new, or maintain existing, contract positions with major GPOs and IDNs. Furthermore, the increasing leverage of organized buying groups may reduce market prices for our diagnostic tests, thereby reducing our revenue and margins. +While having a contract with a GPO or IDN for a given product category can facilitate sales to members of that GPO or IDN, such contract positions can offer no assurance that any level of sales will be achieved, as sales are typically made pursuant to individual purchase orders. Even when a provider is the sole contracted supplier of a GPO or IDN for a certain product category, members of the GPO or IDN are generally free to purchase from other suppliers. Furthermore, GPO and IDN contracts typically are terminable without cause by the GPO or IDN upon 60 to 90 days’ notice. Accordingly, the members of such groups may choose to purchase alternative diagnostic tests due to the price or quality offered by other companies, which could result in a decline in our revenue. +Pricing and reimbursement of medical devices is not harmonized at European level, but is the exclusive competence of the EU Member States. In Europe, pricing and reimbursement decisions are generally made by regional or centralized bodies based on an assessment of the efficacy and clinical effectiveness of the devices or broad device types or procedures. There is a general trend for EU Member States to adopt cost containment measures to control public spend on medical devices. Due to the competitive nature of product offers and prices, we may not be able to obtain new, or maintain existing, contract positions with the EU Member States. +Litigation and other legal proceedings may adversely affect our business. +From time to time, we may become involved in legal proceedings relating to patent and other intellectual property matters, product liability claims, employee claims, tort or contract claims, federal regulatory investigations, securities class action and other legal proceedings or investigations, which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. Litigation is inherently unpredictable and can result in excessive or unanticipated verdicts and/or injunctive relief that affect how we operate our business. We could incur judgments or enter into settlements of claims for monetary damages or for agreements to change the way we operate our business, or both. There may be an increase in the scope of these matters or there may be additional lawsuits, claims, proceedings or investigations in the future, which could have a material adverse effect on our business, financial condition and results of operations. Adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our diagnostic tests and services, even if the regulatory or legal action is unfounded or not material to our operations. +We maintain product and professional liability insurance, but this insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims. Any product liability or professional liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. +General economic and financial market conditions may exacerbate our business risks. +Global macroeconomic conditions and the world’s financial markets remain susceptible to significant stresses, resulting in reductions in available credit and government spending, economic downturn or stagnation, foreign currency fluctuations and volatility in the valuations of securities generally. As a result of uncertainties with respect to financial institutions and the global credit markets and other macroeconomic challenges such as inflationary pressures currently or potentially affecting the economy of the United States and other parts of the world, customers and distributors may experience serious cash flow problems and other financial difficulties, +50 +decreasing demand for our products. Our customers and distributors may respond to such economic pressures by reducing or deferring their capital spending or reducing staff. +In addition, events in the United States or foreign markets, such as the United Kingdom’s exit from the European Union, the worldwide effects from the spread of COVID-19 and political and social unrest in various countries around the world, can impact the global economy and capital markets. Additionally, if our customers and distributors are not successful in generating sufficient revenue or are precluded from securing financing, their businesses will suffer, which may materially and adversely affect our business, financial condition and results of operations. +We may not realize the benefits or costs of our Co-Development and Collaboration Agreement with AVEO Oncology. +In 2014, we entered into a Co-Development and Collaboration Agreement with AVEO Oncology (formerly known as AVEO Pharmaceuticals, Inc.) (AVEO) whereby the two parties agreed to various terms and conditions necessary for the co-development of AVEO’s compound ficlatuzumab (the Collaboration Agreement). +We were granted a limited legal interest in ficlatuzumab and may not have the right to control the development and exploitation of ficlatuzumab. As consideration for the grant, we agreed to cover the first $15.0 million of ficlatuzumab’s clinical development costs, with both parties then sharing all costs equally after the cap was reached. +In October of 2016, the Collaboration Agreement was amended to eliminate the requirement that we cover all of the initial costs. Under the amended terms, we agreed to allow AVEO to recapture its cost that it otherwise would not have been responsible for said recapture to occur out of any royalties or revenues eventually derived from the Collaboration Agreement. As part of the Collaboration Agreement, unless we or AVEO exercise our right to opt-out of co-development, we equally share in any income received from licensing rights to ficlatuzumab to any third parties. In September 2020, we exercised our opt-out right for the payment of half of the development and regulatory costs for ficlatuzumab. This opt-out was effective as of December 2, 2020 with remaining obligations estimated to be $0.1 million. Following the effective date, we will be entitled to a 10% royalty of net sales of ficlatuzumab and 25% of license income generated from the licensing of ficlatuzumab. Ficlatuzumab is currently being evaluated in squamous cell carcinoma of the head and neck (SCCHN), metastatic pancreatic ductal cancer (PDAC), and acute myeloid leukemia (AML). For more information regarding this Collaboration Agreement, please see “Business —Drug Co-Development.” +Our relationship with AVEO may require us to incur non-recurring and other charges, increase our near and long-term expenditures, or disrupt our management and business. We cannot be certain that, following the realization of this relationship, we will achieve the revenue or specific net income that justifies our entry into it. Any termination of this relationship, or delays in entering into new strategic partnership agreements with AVEO, could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +We are exposed to significant future payments and other obligations associated with our acquisitions of Integrated Diagnostics and Oncimmune, U.S.A., and may not realize the advantages we expect from these acquisitions. +In 2018, we purchased select assets and liabilities from Integrated Diagnostics, Inc. and IND Funding, LLC (collectively, the Seller or Indi) which included the CLIA lab in Seattle, Washington, and all rights to the Nodify XL2 test and intellectual property rights related to that test. The purchase was made for total consideration of $27.6 million, consisting of $8.0 million (10,649,604 shares) of our Series G Preferred Stock and contingent consideration with an initial fair market value of $19.6 million. +The acquisition of Indi included a contingent consideration arrangement that requires additional consideration to be paid by us to the Seller based on the milestone of the attainment of a three consecutive month gross margin target of $2 million within a seven-year period. Under the terms of the original agreement, when the gross margin target was met, the Company was required to issue 2,520,108 shares of common stock. For the six months following the achievement of the milestone, the Indi had the option to require the Company to redeem the common shares for $37.0 million in cash over eight equal installments. If Indi elected not to exercise this option, we had 12 months to repurchase the common stock in two equal quarterly cash installments totaling $37 million. +The Company met the gross margin target of $2.0 million for three consecutive months during the three months ended June 30, 2021. The Company entered into an amendment to the original agreement in August 2021 in which all parties agreed to forgo the issuance of common stock and agreed that the Company will in lieu thereof make six quarterly installments of approximately $4.6 million each beginning in January 2022 and a final payment of approximately $9.3 million in July 2023 for a total of $37.0 million. The aggregate amount of payments owed by the Company under this amendment is the same as if Indi had exercised the put right or the Company had exercised the call right provided for in the original agreement. The amendment to the original agreement is subject to consent from our lender under the 2021 Term Loan and related amendments. As of December 31, 2021, we have not made any payments in connection with the contingent consideration. We obtained consent and subsequently made the first milestone payment of $4.6 million in January 2022 and we are in discussions with our lender to obtain consents for future payments. +In addition, on October 31, 2019 we completed an acquisition of United Kingdom-based Oncimmune, Ltd.’s (Oncimmune) United States operations including its CLIA lab in De Soto, Kansas and its incidental pulmonary nodule (IPN) malignancy test, then marketed +51 +in the United States as the EarlyCDT®-Lung. We renamed the test and relaunched the test on February 28, 2020 as the Nodify CDT test and the De Soto, Kansas lab will be the sole United States provider of the Nodify CDT test. +As part of the acquisition, we and Oncimmune entered into several agreements to govern the relationship between the parties and to allow us to provide the Nodify CDT test. The overarching umbrella Purchase and Commercialization Agreement (PCA) defines the general relationship between the parties. Included under the PCA was (a) an APA whereby we acquired all of the United States assets associated with the De Soto, Kansas clinical laboratory, as well as the trademarks and patent application associated with the test; (b) an intellectual property license granting us the rights necessary under Oncimmune’s background intellectual property rights to perform the Nodify CDT test; (c) a supply agreement for supplying us with the necessary materials and reagents needed to run the Nodify CDT test; and (d) a development agreement where Oncimmune agrees to assist us in further developing the Nodify CDT test. We were also granted an option through December 31, 2020 to acquire the rights to expand the field of use of the Nodify CDT test to include lung cancer screening, which we elected to not exercise. +We agreed to a revenue share payment of 8% of recognized revenue for non-screening tests up to an annual minimum volume and 5% thereafter, with an escalating minimum through the first four years of sales. An insignificant amount of royalty payments was paid for the year ended December 31, 2020. In September 2020, we notified Oncimmune that we would not exercise this option for expansion of the field of use. +Our acquisitions may require us to incur non-recurring and other charges, increase our near and long-term expenditures, or disrupt our management and business. We cannot be certain that, following the realization of these acquisitions, we will achieve the revenue or specific net income that justifies our entry into them. This could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +We are highly dependent on our senior management team and key personnel, and our business could be harmed if we are unable to attract and retain personnel necessary for our success. +We are highly dependent on our senior management and other key personnel. Our success will depend on our ability to retain senior management and to attract and retain qualified personnel in the future, including sales and marketing professionals, scientists, clinical specialists, and other highly skilled personnel and to integrate current and additional personnel in all departments. The loss of members of our senior management, sales and marketing professionals, scientists, clinical and regulatory specialists could result in delays in product development and harm our business. If we are not successful in attracting and retaining highly qualified personnel, it would have a material adverse effect on our business, financial condition and results of operations. +Our research and development programs and laboratory operations depend on our ability to attract and retain highly skilled scientists and technicians. +We may not be able to attract or retain qualified scientists and technicians in the future due to the competition for qualified personnel among life science businesses, particularly near our headquarters in Boulder, Colorado and our laboratory facility in De Soto, Kansas. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. We may have difficulties locating, recruiting, or retaining qualified salespeople. Recruiting and retention difficulties can limit our ability to support our research and development and sales programs. To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have issued and may continue to issue equity awards that vest over time. The value to employees of equity awards that vest over time may be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Our employment arrangements with our employees provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We also do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. +Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture and our business may be harmed. +We believe that our culture has been and will continue to be a critical contributor to our success. We expect to continue to hire aggressively as we expand, and we believe our corporate culture has been crucial in our success and our ability to attract highly skilled personnel. If we do not continue to develop our corporate culture or maintain and preserve our core values as we grow and evolve, we may be unable to foster the innovation, curiosity, creativity, focus on execution, teamwork and the facilitation of critical knowledge transfer and knowledge sharing we believe we need to support our growth. Moreover, liquidity available to our employee securityholders could lead to disparities of wealth among our employees, which could adversely impact relations among employees and our culture in general. Our anticipated headcount growth and our transition from a private company to a public company may result in a change to our corporate culture, which could harm our business. +52 +Our ability to utilize our net operating loss carryforwards and research and development credit may be limited. +In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code) a corporation that undergoes an ownership change, generally defined as a greater than 50% change by value in its equity ownership by certain shareholders over a three-year period, is subject to limitations on its ability to utilize its pre-change net operating losses (NOLs) and its research and development credit carryforwards to offset future taxable income. The applicable rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning, directly or indirectly, 5% or more of the stock of a company, as well as changes in ownership arising from new issuances of stock by the company. We believe that our NOLs are currently not subject to limitation under these rules. However, if we undergo an ownership change now or in the future, our ability to utilize NOLs and research and development credit carryforwards could be limited by Sections 382 and 383 of the Code. Future changes in stock ownership may be beyond our control. In addition, our ability to deduct net interest expense may be limited if we have insufficient taxable income for the year during which the interest is incurred, and any carryovers of such disallowed interest would be subject to the limitation rules similar to those applicable to NOLs and other attributes. For these reasons, in the event we experience a change of control, we may not be able to utilize a material portion of the NOLs, research and development credit carryforwards or disallowed interest expense carryovers, even if we attain profitability. +The terms of our secured credit agreement require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business. +On March 19, 2021 (Effective Date), we entered into an agreement with Silicon Valley Bank, a California corporation (SVB or Lender) to refinance long-term debt (2021 Term Loan). The initial amount borrowed under the 2021 Term Loan was $30 million and provides for an “interest-only” period from the Effective Date through February 28, 2023, with interest due and payable monthly on the first calendar day of each month. However, the Company achieved a revenue milestone of at least $65 million on a trailing twelve-month basis during the three months ended March 31, 2021 which automatically extended the interest-only period through February 28, 2024. Further, we granted the Lender a security interest in substantially all of our assets. +The 2021 Term Loan may be prepaid by us at any time, subject to a prepayment penalty of up to 3% of the outstanding principal amount, depending on the date of prepayment. The 2021 Term Loan contains customary affirmative and negative covenants for a loan, requires us to comply with a minimum liquidity ratio covenant, and has a trailing six month rolling minimum revenue requirement. Failure to comply with the covenants and loan requirements may result in an event of default. +On December 31, 2021, we entered into the Consent and Second Amendment to Loan and Security Agreement (Second Amendment) to, among other things, amend our 2021 Term Loan and First Amendment to obtain consent for the $4.6 million January 2022 milestone payment under the Indi APA, repay $20 million in outstanding principal on December 31, 2021, waive the $600,000 prepayment fee on the $20 million Term Loan repayment, and waive the minimum revenue covenant as of December 31, 2021 and modify the minimum revenue requirement to not less 75% for the three months ended March 31, 2022 and not less than 75% on a trailing six month rolling basis for each quarter thereafter of the Company’s projected revenue performed at the end of each reporting period. +The 2021 Term Loan also contains certain covenants limiting the ability of the Company to, among other things, incur future debt, transfer assets except for the ordinary course of business, make acquisitions, pay dividends or make other certain restricted payments, or sell assets, subject to certain exceptions, without the prior written consent of the Lender. These covenants may restrict our ability to pursue new business opportunities and access additional capital. +In the event of a default, including, among other things, our failure to make any payment when due or our failure to comply with any covenant under the 2021 Term Loan, the Lender may elect to declare all amounts outstanding to be immediately due and payable, and may proceed against the collateral granted to them to secure such indebtedness, including a royalty-free license or other right to use all of our intellectual property, which could have a material adverse effect on our business, financial condition, and results of operations. +We will need to raise additional capital to fund our existing operations, develop our platform, commercialize new diagnostic tests or expand our operations. +We will need to raise additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, including to: +• +increase our sales and marketing efforts to drive market adoption of and address competitive developments; +• +fund development and marketing efforts of our diagnostic tests or any other future diagnostic tests; +• +expand our technologies into other types of cancer management and lung disease detection diagnostic tests; +• +acquire, license, or invest in technologies; +• +acquire or invest in complementary businesses or assets; and +• +finance capital expenditures and general and administrative expenses. +53 +Our present and future funding requirements will depend on many factors, including: +• +our ability to achieve revenue growth; +• +our rate of progress in establishing payer coverage and reimbursement arrangements with domestic and international commercial third-party payers and government payers; +• +the cost of expanding our laboratory operations and offerings, including our sales and marketing efforts; +• +our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of and reimbursement for our diagnostic tests; +• +our rate of progress in, and cost of research and development activities associated with, diagnostic tests in research and early development; +• +the effect of competing technological and market developments; +• +costs related to international expansion; and +• +the potential cost of and delays in product development as a result of any regulatory oversight applicable to our diagnostic tests. +The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, our stockholders could experience dilution. Any preferred equity securities issued also could provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our platform technologies or diagnostic tests, pay a portion of our royalties, or grant licenses on terms that are not favorable to us. +We may acquire other businesses, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our results of operations. +As part of our business strategy, we may in the future make additional acquisitions or investments in complementary companies, diagnostic tests or technologies that we believe fit within our business model and can address the needs of our customers and potential customers. In the future, we may not be able to acquire and integrate other companies, diagnostic tests or technologies in a successful manner. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. In addition, the pursuit of potential acquisitions may divert the attention of management and cause us to incur additional expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, including increases in revenue, and any acquisitions we complete could be viewed negatively by our customers, investors and industry analysts. +Future acquisitions may reduce our cash available for operations and other uses and could result in amortization expense related to identifiable assets acquired. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our common stock. The sale or issuance of equity to finance any such acquisitions would result in dilution to our stockholders. The incurrence of indebtedness to finance any such acquisition would result in fixed obligations and could also include covenants or other restrictions that could impede our ability to manage our operations. In addition, our future results of operations may be adversely affected by the dilutive effect of an acquisition, performance earn-outs or contingent bonuses associated with an acquisition. Furthermore, acquisitions may require large, onetime charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based compensation expenses and the recording and subsequent amortization of amounts related to certain purchased intangible assets, any of which items could negatively affect our future results of operations. We may also incur goodwill impairment charges in the future if we do not realize the expected value of any such acquisitions. +Also, the anticipated benefit of any strategic alliance, joint venture or acquisition may not materialize, or such strategic alliance, joint venture or acquisition may be prohibited. For example, our 2021 Term Loan restricts our ability to pursue certain mergers, acquisitions, amalgamations or consolidations that we may believe to be in our best interest. Additionally, future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results. +54 +Risks Related to our Governmental Regulation +The insurance coverage and reimbursement status of newly approved diagnostic tests, particularly in a new category of diagnostics and therapeutics, is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for current or future diagnostic tests could limit our ability, and that of our collaborators, to fully commercialize our diagnostic tests and decrease our ability to generate revenue. +The availability and extent of reimbursement by governmental and private payers is essential for most patients to be able to afford the clinical diagnostic tests and cellular therapeutics that we and our collaborators currently or in the future plan to develop and sell. In addition, because our clinical diagnostics and diagnostic tests represent new approaches to the research, diagnosis, detection and treatment of diseases, we cannot accurately estimate how our diagnostic tests, and those jointly created with our collaborators, would be priced, whether reimbursement could be obtained or any potential revenue generated. Sales of our diagnostic tests will depend substantially, both domestically and internationally, on the extent to which the costs of our diagnostic tests are paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payers. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize some of our diagnostic tests or services. Even if coverage is provided, the available reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize an adequate return on our investment in any of our diagnostic tests or services. Changes in the reimbursement landscape may occur, which are outside of our control, and may impact the commercial viability of our diagnostic tests. +There is significant uncertainty related to the insurance coverage and reimbursement of newly launched, cleared, authorized or approved diagnostic tests. In the United States, many significant decisions about reimbursement for new diagnostics and medicines are typically made by the CMS, an agency within the HHS. CMS decides whether and to what extent a new diagnostic or medicine will be covered and reimbursed under Medicare, although it frequently delegates this authority to local Medicare Administrative Contractors (MACs). Private payers tend to follow Medicare to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for novel diagnostic tests such as ours. Additionally, reimbursement authorities or bodies in Europe may be more conservative than CMS. For example, a number of cancer drugs have been approved for reimbursement in the United States and have not been approved for reimbursement, or have been approved under restricted conditions, in certain European countries. +Outside the United States, the reimbursement process and timelines vary significantly. In Europe, pricing and reimbursement of medical devices is the exclusive competence of the EU Member States. However, the European Commission is facilitating a voluntary corporation between the EU Member States on health technology assessments (HTA) which consists of a network of the EU Member States’ national authorities and bodies responsible for HTA and a joint action to support cooperation at scientific and technical level between the HTA bodies. We cannot be sure that such prices and reimbursement decisions will be acceptable to us or our collaborators. If the regulatory authorities in these foreign jurisdictions set prices or make reimbursement criteria that are not commercially attractive for us or our collaborators, our revenues and the potential profitability of our products in those countries would be negatively affected. An increasing number of countries are taking initiatives to control the healthcare budget by focusing cost-cutting efforts on medicinal products, and to a lesser extent, medical devices, provided under their state-run healthcare systems. These price control efforts have impacted all regions of the world, but have been most prominent in the EU. Additionally, some countries require approval of the sale price of a product before it can be marketed or mandatory discounts or profit caps may be applied. Further, after the sale price is approved, it remains subject to review during the product lifecycle. In many countries, the pricing review period begins after marketing or product licensing approval is granted or the CE mark is obtained. As a result, we or our collaborators might obtain marketing approval for a product or service in a particular country, but then may experience delays in the reimbursement approval or be subject to price regulations that would delay the commercial launch of our product or service, possibly for lengthy time periods, which could negatively impact the revenues we are able to generate from the sale of that product or service in that particular country. +Moreover, increasing efforts by governmental and third-party payers, in the United States and abroad, to cap or reduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for newly cleared, authorized, certified or approved devices and medicines and, as a result, they may not cover or provide adequate payment for our clinical diagnostics to be sold by us or our collaborators. For example, in May 2018 the United States government released a “blueprint,” or plan, to reduce the cost of drugs. This blueprint contains certain measures that HHS has been working to implement, although it is possible that HHS’s regulatory priorities may change under the new Biden administration. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, which are, in some cases, designed to encourage importation from other countries and bulk purchasing. +We expect to experience pricing pressures on our clinical diagnostics sold by us and our collaborators due to the trend toward value-based pricing and coverage, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs, surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new diagnostic tests. +55 +Measures to reduce healthcare costs may hurt our business. +The majority of our customers are healthcare providers who depend upon reimbursement by government and commercial insurance payers for lung cancer diagnostic solutions services. With a majority of United States patients with lung cancer covered by Medicare, the Medicare reimbursement rate is an important factor in a customer’s decision to use our diagnostic tests and limits the prices we may charge for them. Commercial insurance payers may also exert downward pressure on payment rates for lung cancer treatment services. A reduction in reimbursement rates for lung cancer treatments may adversely affect our customers’ businesses and cause them to enact cost reduction measures that may include reducing the scope of their programs, thereby potentially reducing demand for our diagnostic tests. +Healthcare reform measures could hinder or prevent the commercial success of our diagnostic tests. +In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system in ways that may harm our future revenues and profitability and the demand for our diagnostic tests. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. Current and future legislative proposals to further reform healthcare or reduce healthcare costs may limit coverage of or lower reimbursement for the procedures associated with the use of our diagnostic tests. The effect of any healthcare reform initiative implemented in the future could impact our revenue from the sale of our diagnostic tests. For example, the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the ACA), contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. +There have been judicial challenges to certain aspects of the ACA, as well as efforts by the Trump administration and Congress to repeal, replace or alter the implementation of certain aspects of the ACA. For example, as part of the Tax Cuts and Jobs Act of 2017 (TCJA), Congress eliminated the tax penalty, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance. The Further Consolidated Appropriations Act of 2020, Pub. L. No. 116-94, signed into law December 20, 2019, fully repealed the ACA’s “Cadillac Tax” on certain high-cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share (repeal effective in 2021), and the medical device excise tax on non-exempt medical devices. On December 14, 2018, a Texas District Court Judge invalidated the ACA in its entirety because he concluded that the individual mandate, which was repealed by Congress as noted above, is unconstitutional and cannot be severed from the remainder of the ACA. The Fifth Circuit Court of Appeals affirmed the district court’s ruling that the individual mandate was unconstitutional, but it remanded the case back to the district court for further analysis of whether the mandate could be severed from the ACA; that is, whether the entire ACA was therefore also invalid. The Supreme Court of the United States granted certiorari on March 2, 2020 and heard oral argument on November 10, 2020; the case is expected to be decided by mid-2021. It is unclear how this decision, subsequent appeals, and other efforts to challenge, repeal, or replace, or alter the implementation of the ACA will affect our business, financial condition and results of operations. +In addition, other legislative changes have been proposed and adopted since the ACA was enacted. For example, the Budget Control Act of 2011, among other things, included reductions to CMS payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030 unless additional Congressional action is taken, with the exception of a temporary suspension of the 2% cut in Medicare payments from May 1, 2020 through March 31, 2021. Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced CMS payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover Medicare overpayments to providers from three to five years. +The Biden administration and Congress may continue to pursue significant changes to the current healthcare laws, and the Biden administration has indicated its intent to strengthen the ACA and focus on reducing the cost of healthcare. We face uncertainties that might result from modifications or repeal of any of the provisions of the ACA, including as a result of current and future executive orders and legislative actions. The impact of those changes on us and potential effect on the medical device industry as a whole is currently unknown. Any changes to the ACA are likely to have an impact on our results of operations, and may negatively affect our business, financial condition and results of operations. We cannot predict what other healthcare programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the United States on our business, financial condition and results of operations. +The continuing efforts of the government, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce costs of healthcare may harm: +• +our ability to set a price that we believe is fair for our diagnostic tests; +• +our ability to generate revenue and achieve or maintain profitability; and +• +the availability of capital. +56 +The ACA substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacts our industry. Future changes in healthcare policy could increase our costs and subject us to additional regulatory requirements that may interrupt commercialization of our current and future solutions. Future changes in healthcare policy could also decrease our revenue and impact sales of and reimbursement for our current and future diagnostic tests. +We must comply with anti-corruption, anti-bribery, anti-money laundering and similar laws. +We are subject to the FCPA, which generally prohibits companies in the United States from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business and requires companies to maintain accurate books and records and internal controls. We are also subject to requirements under the United States Treasury Department’s Office of Foreign Assets Control, United States domestic bribery laws and other anti-corruption, anti-bribery and anti-money laundering laws. While we have policies and procedures in place designed to promote compliance with such laws, our employees or other agents may nonetheless engage in prohibited conduct under these laws for which we or our executives might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have an adverse effect on our business, financial condition and results of operations. +Furthermore, international customers may currently order our diagnostic tests, either directly from us or through a potential joint venture, and we are subject to the FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non-United States government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent distributors to sell our diagnostic tests internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents and we could be held responsible for their actions. Other United States companies in the medical device and biopharmaceutical field have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including laws promulgated by OECD countries in which we operate, such as Israel. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees and could result in a material adverse effect on our business, prospects, financial condition and results of operations. We could also suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures. +We must comply with healthcare fraud and abuse laws. +Various federal and state laws, as well as the laws of foreign countries, prohibit payments to induce the referral, purchase, order or use of healthcare products or services and require medical device companies to limit prevent, and/or monitor, and report certain payments to third-party payers, health care professionals, and other individuals. These healthcare fraud and abuse, anti-kickback, public reporting and aggregate spend laws affect our sales, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with lung cancer treatment providers, hospitals, physicians or other potential purchasers or users, including patients, of medical devices and services. They also impose additional administrative and compliance burdens on us. In particular, these laws influence, among other things, how we structure our sales offerings, including discount practices, customer support, education and training programs and physician consulting and other service arrangements. These laws prohibit certain marketing initiatives that are commonplace in other industries. If we were to offer or pay inappropriate inducements for the purchase, order or use of our diagnostic tests or our services, or our arrangements are perceived as inappropriate inducements, we could be subject to claims under various healthcare fraud and abuse laws. +Restrictions under applicable United States federal and state healthcare laws and regulations include the following: +• +the federal Anti-Kickback Statute, a criminal law, prohibits, among other things, persons and entities from knowingly and willfully offering, paying, soliciting or receiving any remuneration, directly or indirectly, in cash or in kind, to induce or reward purchasing, leasing, ordering, or arranging for, referring, or recommending the purchase, lease, order of any good or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid; +• +the Eliminating Kickbacks in Recovery Act, which prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program; +• +the Beneficiary Inducement Statute, which prohibits any person, organization, or entity from giving anything of value to a federal health care program beneficiary that is likely to induce or influence the beneficiary’s choice of provider, practitioner, or supplier for covered services; +• +the federal civil False Claims Act, which may be enforced through civil whistleblower or qui tam actions and is often used to enforce the federal Anti-Kickback Statute and other healthcare laws and regulations, imposes civil penalties and potential exclusion from federal healthcare programs, against individuals or entities for, among other things, knowingly presenting, or +57 +causing to be presented, to the federal government, claims for payment that are false or fraudulent or for making a false record or statement material to an obligation to pay the federal government or for knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the federal government; +• +federal criminal statutes created by HIPAA impose criminal liability for, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program, including private insurance plans, or, in any matter involving a healthcare benefit program, for knowingly and willfully making materially false, fictitious, or fraudulent statements in connection with the delivery of or payment for health care benefits; and +• +analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers, including private insurers. +Other federal and state laws, as well as the laws of foreign countries, generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payments to government or commercial payers that are false or fraudulent, or for items or services that were not provided as claimed. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of product candidates and medical devices from government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations. Moreover, any investigation into our practices could cause adverse publicity and require a costly and time-consuming response. If any physicians or other healthcare providers or entities with whom we expect to do business are found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Manufacturers can also be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by providing inaccurate billing or coding information to customers, by providing improper financial inducements, or through certain other activities. We attempt to ensure that any billing and coding information we provide for our diagnostic tests emphasizes the need for physicians and other providers to make independent judgments, use accurate and appropriate billing and coding that complies with all applicable payer policies, and document the medical need for their patients as appropriate. Nevertheless, the government may not regard any billing errors that may be made by our customers as inadvertent and may examine our role in providing information to our customers, physicians and patients concerning the benefits and potential coverage of more frequent therapy. +FDA regulation of our industry generally or our tests specifically could be disruptive to our business. +Our operations are subject to extensive federal, state, local and foreign laws and regulations, including FDA laws and regulations, all of which are subject to change. These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. We believe that we are in material compliance with all statutory and regulatory requirements applicable to us, but there is a risk that one or more government agencies could take a contrary position, or that a private party could file suit under the qui tam provisions of the federal False Claims Act or a similar state law. Such occurrences, regardless of their outcome, could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations, and other private third-party payers. +The FDA has recently increased its attention to marketing of pharmacogenetic tests. For example, in late 2018, the FDA issued a safety communication regarding genetic laboratory tests with claims to predict a patient’s response to specific medications that have not been reviewed by the FDA and may not be supported by clinical evidence. Among other tests, the FDA notice cited genetic tests that claim results can be used to help physicians identify which antidepressant medication would have increased effectiveness or side effects compared to other antidepressant medications. As explained by the FDA in its update to this safety communication, the FDA sent notices to several firms marketing such pharmacogenetic tests where the FDA believes the relationship between genetic variations and the medication’s effects has not been established, including a warning letter sent to a laboratory, in part, for failing to obtain premarket review of its test. HHS recently issued an announcement stating that the FDA cannot require premarket review of any LDT without engaging in formal notice-and-comment rulemaking, as opposed to through guidance documents, compliance manuals, website statements, or other informal issuances. +The HHS announcement was made on the Department’s website and we can provide no assurances that the HHS statement will not be rescinded or revised or that it would preclude the FDA from renewing its attention on diagnostic tests, including those that we provide. If this were to happen, it may impact our marketing practices relating to the relevant tests, which in turn may have an adverse impact on our business, financial condition and results of operations. +The SARS-CoV-2 tests we perform are currently the subject of EUAs, which permit the use of unapproved medical products or unapproved uses of medical products to be used in an emergency to diagnose, treat, or prevent serious or life-threatening diseases or +58 +conditions when there are no adequate, approved, and available alternatives, as provided under section 564 for the Federal Food, Drug, and Cosmetic Act (FDCA). EUAs are temporary authorizations that are revoked at the end of the public health emergency, when there is an adequate, approved, or available alternative, or when there are performance or safety concerns. These EUAs also set out conditions for laboratories who are authorized to perform the particular test. The HHS statement mentioned above did not affect EUAs for COVID-19 laboratory-developed tests that were already in effect at the time the statement was released. The HHS statement did not affect EUAs issued for commercially developed COVID-19 IVD tests, which apply to test developers and authorized laboratories. +The EUA for Bio-Rad’s SARS-CoV-2 Droplet Digital PCR™ test provides several conditions for authorized laboratories, including that the test result reports will include Fact Sheets that are authorized as part of the EUA, deviations from the authorized procedures, including specimen types, are not permitted, notification of public health authorities of intent to run the test prior to initiating testing, collection and reporting of performance data to the FDA, including false positives, false negatives, and significant deviations from the established performance characteristics, and appropriate training and protective equipment for laboratory staff. This EUA also states that authorized laboratories must maintain records associated with the EUA and be made available to the FDA for inspection upon request. Printed materials, advertising, and promotion related to use of the test must be consistent with the authorized labeling and Fact Sheets, as well as other terms set forth in the EUA and any applicable requirements under the FDCA and its implementing regulations, and conspicuously bear the following statements: +• +This test has not been FDA cleared or approved; +• +This test has been authorized by the FDA under an EUA for use by authorized laboratories; +• +This test has been authorized only for the detection of nucleic acid from SARS-CoV-2, not for any other viruses or pathogens; and +• +This test is only authorized for the duration of the declaration that circumstances exist justifying the authorization of emergency use of in vitro diagnostics for detection and/or diagnosis of COVID-19 under Section 564(b)(1) of the Act, 21 U.S.C. § 360bbb-3(b)(1), unless the authorization is terminated or revoked sooner. +Other statements that appear in advertising and promotional materials must not represent or suggest that this test is safe or effective for the detection of SARS-CoV-2. +The EUA for Bio-Rad’s serological test for the antibodies associated with SARS-CoV-2, also sets out several conditions for authorized laboratories that mirror the conditions for the PCR test described above, except that the printed materials, advertising, and promotion of the test must conspicuously bear the following statements: +• +This test has not been FDA cleared or approved; +• +This test has been authorized by the FDA under an EUA for use by authorized laboratories; +• +This test has been authorized only for the detection of total antibodies, including IgM/IgG/IgA, against SARS-CoV-2, not for any other viruses or pathogens; and +• +This test is only authorized for the duration of the declaration that circumstances exist justifying the authorization of emergency use of in vitro diagnostics for detection and/or diagnosis of COVID-19 under Section 564(b)(1) of the Act, 21 U.S.C. § 360bbb-3(b)(1), unless the authorization is terminated or revoked sooner. +Failure to comply with federal, state and foreign laboratory licensing requirements and the applicable requirements of the FDA or any other regulatory authority, could cause us to lose the ability to perform our tests, experience disruptions to our business, or become subject to administrative or judicial sanctions. +The diagnostic testing industry is subject to extensive laws and regulations, many of which have not been interpreted by the courts, including the application of the FDA’s EUA authority. As noted above, the EUAs for the COVID-19 tests that are part of our Biodesix WorkSafe testing program set out certain conditions for authorized laboratories using the tests, which have not received premarket clearance, approval, or a de novo from the FDA. If we fail to meet these conditions, the FDA may take enforcement action, such as issuing a warning letter, seeking an injunction, seizure, fines, or criminal penalties. Pursuant to the August 19, 2020 statement by HHS, the FDA cannot require any LDT to undergo premarket approval until it has engaged in notice-and-comment rulemaking. Laboratory tests that have already received an EUA to detect the COVID-19 virus were “unaffected” by the announcement. Tests without FDA clearance, approval, or authorization would not be considered covered countermeasures under the Public Readiness and Emergency Preparedness Act (PREP Act). The HHS statement also did not affect EUAs issued for commercially developed COVID-19 IVD tests, which apply to test developers and authorized laboratories. +We are also subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA requires virtually all laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification is also +59 +a prerequisite to be eligible to bill state and federal health care programs, as well as many private third-party payers, for laboratory testing services. As a condition of CLIA certification, each of our laboratories is subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by CMS, a CMS agent (typically a state agency), or, if the laboratory holds a CLIA certificate of accreditation, a CMS-approved accreditation organization. +Sanctions for failure to comply with CLIA requirements, including proficiency testing violations, may include suspension, revocation, or limitation of a laboratory’s CLIA certificate, which is necessary to conduct our business, as well as the imposition of significant fines or criminal penalties. +Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing licensure, or our failure to renew a CLIA certificate, a state or foreign license, or accreditation, could have a material adverse effect on our business. If the CLIA certificate of any one of our laboratories is revoked, CMS could seek revocation of the CLIA certificates of our other laboratories based on their common ownership or operation, even though they are separately certified. +In addition, we are subject to state laws and regulations governing laboratory licensure. Some states have enacted state licensure laws that are more stringent than CLIA. Although we have obtained licenses from states where we believe we are required to be licensed, we may become aware of other states that require out-of-state laboratories to obtain licensure in order to accept specimens from the state, and it is possible that other states currently have such requirements or will have such requirements in the future. +We may also be subject to regulation in foreign jurisdictions as we seek to expand international utilization of our tests or such jurisdictions adopt new licensure requirements, which may require review of our tests in order to offer them or may have other limitations that may limit our ability to make our tests available outside of the United States. Complying with licensure requirements in new jurisdictions may be expensive, time-consuming and subject us to significant and unanticipated delays. Changes in state or foreign licensure laws that affect our ability to offer and provide diagnostic services across state or foreign country lines could materially and adversely affect our business. In addition, state and foreign requirements for laboratory certification may be costly or difficult to meet and could affect our ability to receive specimens from certain states or foreign countries. +Failure to comply with applicable clinical laboratory licensure requirements may result in a range of enforcement actions, including suspension, limitation or revocation of our CLIA certificate and/or state licenses, imposition of a directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing clinical laboratory licensure or our failure to renew our CLIA certificate, a state or foreign license or accreditation, could have a material adverse effect on our business, financial condition and results of operations. Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so. +Our Boulder, Colorado and De Soto, Kansas laboratories are both CAP-accredited clinical laboratories regulated by CMS pursuant to CLIA. We also have a current CLIA certificate for each facility. To maintain these certificates, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our laboratory from time to time. Furthermore, our diagnostic tests are categorized as LDTs and are not currently subject to FDA regulation, although certain components provided by third parties and used to create and/or administer the test may be. LDTs are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. The FDA’s authority to regulate LDTs has been frequently contested, and HHS recently issued a public statement purporting to rescind the FDA’s policies regarding the premarket review of LDTs. According to the HHS statement, the FDA will not require premarket review of LDTs unless it engages in notice-and-comment rulemaking. There is no guarantee, however, that the HHS statement will not be revised or rescinded, that legislation reforming the federal government’s regulation of LDTs will not be passed, or that LDTs will otherwise continue to be able to operate without first receiving FDA premarket review. Failure to adhere to any new FDA regulation would result in fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal penalties. +Changes in the way that the FDA regulates tests performed by laboratories like ours could result in delay or additional expense in offering our tests and tests that we may develop in the future. +Historically, the FDA has exercised enforcement discretion with respect to most LDTs and has not required laboratories that furnish LDTs to comply with the agency’s requirements for medical devices (e.g., establishment registration, device listing, quality systems regulations, premarket clearance or premarket approval, and post-market controls). In recent years, however, the FDA publicly announced its intention to regulate certain LDTs and issued two draft guidance documents that set forth a proposed phased-in risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. However, these guidance documents were withdrawn at the end of the Obama administration and replaced by an informal discussion paper reflecting some of the feedback that the FDA had received on LDT regulation. The FDA acknowledged that the discussion paper in January 2017 does not represent the formal position of the FDA and is not enforceable. Nevertheless, the FDA wanted to share its synthesis of the feedback that it had received in the hope that it might advance public discussion on future LDT oversight. HHS has since issued a statement purporting to rescind FDA’s policies regarding the premarket review of LDTs, stating that FDA must engage in notice and comment rulemaking (as opposed to through guidance documents, compliance manuals, website statements, or other informal issuances) prior to requiring premarket review of LDTs. HHS issued this statement on its website and it may be subject to change. Also, it is possible that Congress will pass legislation to reform +60 +the federal government’s regulation of LDTs or that FDA will engage in notice-and-comment rulemaking to require premarket review of LDTs, which could result in delay or additional expense in offering our tests and tests that we may develop in the future. +Our current line of diagnostic tests is covered under CLIA and CMS, although our COVID testing program and select partnerships we may enter may cause us to be subject to additional FDA requirements. +The laws and regulations governing the marketing of diagnostic products are evolving, extremely complex and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, including in vitro diagnostics and, therefore, potentially our clinical laboratory tests. +Pursuant to the FDCA and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion, and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. Although the FDA has asserted that it has authority to regulate the development and use of LDTs, such as our and many other laboratories’ tests, as medical devices, it has generally exercised enforcement discretion and is not otherwise regulating most tests developed and performed within a single high complexity CLIA-certified laboratory. On August 19, 2020, HHS issued a statement purporting to rescind the FDA’s policies regarding the premarket review of LDTs, absent notice-and-comment rulemaking. the FDA’s policies to date have been articulated through guidance documents, compliance manuals, website statements, and other informal issuances. The FDA could, at any time, engage in notice-and-comment rulemaking, or Congress could take action to amend the law to change the current regulatory framework for in vitro diagnostics and LDTs. Further, the HHS statement was issued on its website and may be subject to change, particularly given the reasoning that additional flexibility is needed due to the COVID-19 pandemic. +We believe that our tests, as utilized in our clinical laboratory, are and would be considered LDTs and that as a result, the FDA does not require that we obtain regulatory clearances or approvals for our LDTs or their components pursuant to the FDA’s current policies and guidance. Although we believe that our tests and test components are either exempt from FDA medical device regulations or are subject to an enforcement discretion policy, it is possible that the FDA would not agree with our determinations or that the FDA will change its regulations and policies such that our products become regulated as medical devices. +In contrast with our LDTs, the FDA has regulatory jurisdiction over the two FDA EUA-authorized COVID-19 tests that were developed by Bio-Rad, which we offer as part of our Biodesix WorkSafe testing programs. +Our operations, therefore, are or may become subject to extensive regulation by the FDA in the United States. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +test design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage, and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales, and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export. +The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated with them, are subject to general controls. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk associated with them, are subject to general controls and premarket approval. +Before a new medical device or service, or a new intended use for an existing product or service, can be marketed in the United States, a company must first submit and receive either 510(k) clearance, de-novo authorization, or premarket approval (PMA) from the FDA, unless an exemption applies. Most Class I devices and some Class II devices are exempt from these requirements. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is substantially equivalent to a legally-marketed predicate device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (preamendments device), a device that was originally on the United States market pursuant to an approved PMA and later down-classified, or a 510(k)-exempt device. To be substantially equivalent, the proposed device must have the +61 +same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. +In the process of obtaining PMA approval, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. +The FDA also allows the submission of a direct de-novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA), a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. +The 510(k), de-novo or PMA process can be expensive, lengthy and unpredictable. The FDA can delay, limit, or deny clearance or approval of a device for many reasons, including: +• +our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or conformity assessment body that the diagnostic tests are safe or effective for their proposed intended uses; +• +the disagreement of the FDA with the design or implementation of our clinical trials or the interpretation of data from clinical trials; +• +serious and unexpected adverse device effects experienced by participants in our clinical trials; +• +the data from our clinical trials may be insufficient to support clearance or approval, where required; +• +our inability to demonstrate that the clinical and other benefits of the device outweigh the risks; +• +the manufacturing process or facilities we use may not meet applicable requirements; and +• +the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance or approval. +The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by any such agency, which may include any of the following sanctions: +• +adverse publicity, warning letters, untitled letters, it has come to our attention letters, fines, injunctions, consent decrees and civil penalties; +• +repair, replacement, refunds, recall or seizure of our diagnostic tests; +• +operating restrictions, partial suspension, or total shutdown of production; +• +denial of our requests for regulatory clearance or premarket approval of new diagnostic tests or services, new intended uses, or modifications to existing diagnostic tests or services; +• +withdrawal of regulatory clearance or premarket approvals that have already been granted; or +• +criminal prosecution. +As discussed above, we believe that our current line of diagnostic tests and their components are LDTs, subject to state licensing requirements and federal regulation by CMS under CLIA, although our COVID-19 testing program and select partnerships we may enter may cause us to be subject to additional FDA regulations discussed above. +While we believe that we are currently in material compliance with applicable laws and regulations, it is possible that the FDA, or other regulatory agencies, would not agree with our determinations. If our products became become subject to 510(k) or other similar FDA regulations, we would need to comply with the applicable regulations or face significant civil and criminal penalties. In addition, IVDs and CDx tests are widely considered to be Class III devices, and it is possible that in the future, we may develop tests that fall into this category. CDx tests in particular may require further administrative procedures in the PMA process. Exposure to these additional regulatory requirements would also affect our business, financial condition and results of operations. +62 +Our future success depends on our ability to develop, receive regulatory clearance or approval or certification for, and introduce new diagnostic tests or enhancements to existing diagnostic tests that will be accepted by the market in a timely manner. There is no guarantee that the FDA will grant 510(k) clearance or PMA approval of our future diagnostic tests and failure to obtain necessary clearances or approvals for our future diagnostic tests would adversely affect our ability to grow our business. +It is important to our business that we build a pipeline of diagnostic test offerings that address limitations of current lung disease diagnostic tests. As such, our success will depend in part on our ability to develop and introduce new diagnostic tests. However, we may not be able to successfully develop and obtain regulatory clearance or approval or certification for enhancements to our existing diagnostic tests, or new diagnostic tests for any number of reasons, including due to the cost associated with certain regulatory approval requirements, or these diagnostic tests may not be accepted by physicians or users. +The success of any new diagnostic test or enhancement to an existing diagnostic test will depend on a number of factors, including our ability to, among others: +• +identify and anticipate physician and patient needs properly; +• +develop and introduce new diagnostic tests or enhancements to our existing diagnostic tests in a timely manner; +• +avoid infringing upon, misappropriating, or violating the intellectual property rights of third parties; +• +demonstrate, if required, the safety and efficacy of new diagnostic tests with data from clinical studies; +• +obtain the necessary regulatory clearances or approvals or certifications for new diagnostic tests or enhancements to existing diagnostic tests; +• +comply fully with FDA and foreign regulations on marketing of new diagnostic tests or modified diagnostic tests; and +• +provide adequate training to potential users of our diagnostic tests. +If we do not develop new diagnostic tests or enhancements to our existing diagnostic tests in time to meet market demand or if there is insufficient demand for these diagnostic tests or enhancements, or if our competitors introduce new diagnostic tests with functionalities that are superior to ours, our results of operations will suffer. +Some of our future diagnostic tests may require FDA clearance of a 510(k) submission. Other diagnostic tests may require the approval of a PMA. In addition, some of our future diagnostic tests may require clinical trials to support regulatory approval and we may not successfully complete these clinical trials. The FDA may not approve or clear these diagnostic tests for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or premarket approval of new diagnostic tests. Failure to receive clearance or approval for our new diagnostic tests would have an adverse effect on our ability to expand our business. +Modifications to our marketed tests may require new 510(k) clearances or PMA approvals, or may require us to cease marketing or recall the modified tests until clearances or approvals are obtained. +Modifications to our diagnostic tests may require new regulatory approvals or clearances, including 510(k) clearances or premarket approvals, or require us to recall or cease marketing the modified systems until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We have made modifications to our diagnostic tests in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our diagnostic tests as modified, which could require us to redesign our diagnostic tests and harm our operating results. In these circumstances, we may be subject to significant enforcement actions. +If a manufacturer determines that a modification to an FDA-cleared device could significantly affect its safety or efficacy, or would constitute a major change in its intended use, then the manufacturer must file for a new 510(k) clearance or possibly a premarket approval application. Where we determine that modifications to our diagnostic tests require a new 510(k) clearance or premarket approval application, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. Obtaining clearances and approvals can be a time-consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced diagnostic tests in a timely manner, which in turn would harm our future growth. +63 +If we or our suppliers fail to comply with ongoing FDA or other domestic and foreign regulatory authority or conformity assessment body requirements, or if we experience unanticipated problems with our diagnostic tests, they could be subject to restrictions or withdrawal from the market. +Any medical device that we manufacture, including those for which we obtain regulatory clearance or approval or certification, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such diagnostic test, will be subject to continued regulatory review, oversight, and periodic inspections by the FDA and other domestic and foreign regulatory bodies or conformity assessment bodies. In particular, we and our suppliers may be required to comply with FDA’s Quality System Regulations (QSR codified at 21 C.F.R. § 820) for medical devices and ISO regulations for the manufacture of our diagnostic tests and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any diagnostic test for which we obtain clearance or approval. Regulatory bodies, such as the FDA, and conformity assessment bodies enforce the QSR and other regulations through periodic inspections and audits. The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies or conformity assessment bodies, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, one or more of the following enforcement actions: +• +untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; +• +unanticipated expenditures to address or defend such actions; +• +customer notifications for repair, replacement, or refunds; +• +recall, detention, or seizure of our diagnostic tests; +• +operating restrictions or partial suspension or total shutdown of production; +• +refusing or delaying our requests for 510(k) clearance or premarket approval of new diagnostic tests or modified versions of current diagnostic tests; +• +operating restrictions; +• +withdrawing 510(k) clearances on PMA approvals that have already been granted; +• +revocation of EUAs that have been authorized previously; +• +refusal to grant export approval for our diagnostic tests; and +• +criminal prosecution. +If any of these actions were to occur it would harm our reputation and cause our diagnostic test sales and profitability to suffer and may prevent us from generating revenue. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements which could result in our failure to produce our diagnostic tests on a timely basis and in the required quantities, if at all. +In addition, we are required to conduct surveillance to monitor the safety or effectiveness of our diagnostic tests, and we must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our diagnostic tests. Later discovery of previously unknown problems with our diagnostic tests, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such diagnostic tests or manufacturing processes, withdrawal of the diagnostic tests from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties which would adversely affect our business, operating results and prospects. +Our diagnostic tests and services may in the future be subject to product recalls that could harm our reputation, business and financial results. +Medical devices can experience performance problems in the field that require review and possible corrective action. The occurrence of component failures, manufacturing errors, software errors, design defects or labeling inadequacies affecting a medical device could lead to a government-mandated or voluntary recall by the device manufacturer, in particular when such deficiencies may endanger health. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our diagnostic tests and services in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. Product recalls may divert management attention and financial resources, expose us to product liability or other claims, harm our reputation with customers and adversely impact our business, financial condition and results of operations. Other jurisdictions have similar recall requirements. +64 +Legislative or regulatory reforms may make it more difficult and costly for us to obtain regulatory clearance or approval or certification of any future diagnostic tests and to manufacture, market and distribute our diagnostic tests after clearance or approval is obtained. +From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. For example, the Verifying Accurate, Leading-edge IVCT Development (VALID) Act recently introduced in Congress would codify into law the term “in vitro clinical test” in order to create a new medical product category separate from medical devices that would include products currently regulated as in vitro diagnostics as well as LDTs. +In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our diagnostic tests. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of planned or future diagnostic tests. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. +Any change in the laws or regulations that govern the clearance and approval processes relating to our current, planned and future diagnostic tests could make it more difficult and costly to obtain clearance or approval for new diagnostic tests or to produce, market and distribute existing diagnostic tests. Significant delays in receiving clearance or approval or the failure to receive clearance or approval for any new diagnostic tests would have an adverse effect on our ability to expand our business. +Clinical trials may be necessary to support future product submissions to FDA. These clinical trials are expensive and will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new diagnostic tests and will adversely affect our business, operating results and prospects. +Initiating and completing clinical trials necessary to support any future PMA applications, and additional safety and efficacy data beyond that typically required for a 510(k) clearance, for our possible future product candidates, will be time consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical trials may not have favorable results in later clinical trials. +Conducting successful clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our diagnostic tests or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. +Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required and we may not adequately develop such protocols to support clearance and approval. Further, the FDA may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our diagnostic tests or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, the FDA may not consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects. +If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval or certification for or commercialize our diagnostic tests and services. +We may not have the ability to independently conduct our pre-clinical and clinical trials for our future diagnostic tests and services and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct such trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our diagnostic tests and services on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control. +65 +Our use, disclosure, and other processing of personally identifiable information, including health information, is subject to HIPAA and other federal, state, and foreign privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our business, operating results and prospects. +We maintain and process, and our third-party vendors, collaborators, contractors and consultants maintain and process on our behalf, a large quantity of sensitive information, including confidential business, personal and patient health information in connection with our clinical studies and our employees, and are subject to data privacy and protection laws and regulations that apply to the collection, transmission, storage and use of personally identifying information, which among other things, impose certain requirements relating to the privacy, security and transmission of personal information. Failure by us or our third-party vendors, collaborators, contractors and consultants to comply with any of these laws and regulations could result in notification obligations or enforcement actions against us, which could result in fines, imprisonment of company officials and public censure, claims for damages by affected individuals, damage to our reputation and loss of goodwill, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects. These laws, rules and regulations evolve frequently and their scope may continually change, through new legislation, amendments to existing legislation and changes in enforcement, and may be inconsistent from one jurisdiction to another. The interpretation and application of consumer, health-related and data protection laws, especially with respect to genetic samples and data, in the United States, the European Union (EU) and elsewhere, are often uncertain, contradictory and in flux. As a result, implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. +In the United States, numerous federal and state laws and regulations, including federal health information privacy laws, state data breach notification laws, state health information privacy laws and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), that govern the collection, use, disclosure and protection of health-related and other personal information could apply to our operations or the operations of our collaborators. +Domestic laws in this area are complex and developing rapidly. Many state legislatures have adopted legislation relating to privacy, data security and data breaches. Laws in all 50 states require businesses to provide notice to customers whose personally identifiable information has been disclosed as a result of a data breach. The laws are not consistent, and compliance in the event of a widespread data breach is costly. States are also frequently amending existing laws, requiring attention to frequently changing regulatory requirements. For example, California recently enacted the CCPA, which became effective on January 1, 2020. The CCPA, among other things, requires new disclosures to California consumers and affords such consumers new abilities to access and delete their personal information, opt-out of certain sales of personal information and receive detailed information about how their personal information is used. The CCPA provides for fines of up to $7,500 per violation, as well as a private right of action for data breaches that is expected to increase the frequency of data breach litigation. While the CCPA has already been amended multiple times, it is unclear how this legislation will be further modified or how it will be interpreted. Interpretations of the CCPA may continue to evolve with regulatory guidance and the CCPA continue to be amended, including through a ballot initiative, the CPRA. That passed in November 2020. The CPRA will impose additional data protection obligations on companies doing business in California, including additional consumer rights, including regarding certain uses of sensitive data. It also creates a new California data protection agency specifically tasked to enforce the law, which may likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. The effects of this legislation potentially are far-reaching, however, and may require us to modify our data processing practices and policies and incur substantial compliance-related costs and expenses. The CCPA and other changes in state and federal laws or regulations relating to privacy, data protection and information security, particularly any new or modified laws or regulations that require enhanced protection of certain types of data or new obligations with regard to data retention, transfer or disclosure, could increase the cost of providing our offerings, require significant changes to our operations or even prevent us from providing certain offerings in jurisdictions in which we currently operate and in which we may operate in the future. +Because of the breadth of these data protection laws and the narrowness of their exceptions and safe harbors, it is possible that our business or data protection policies could be subject to challenge under one or more of such laws. The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of heightened regulatory focus on data privacy and security issues. Although we endeavor to comply with our published policies and documentation and ensure their compliance with current laws, rules and regulations, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policy and other documentation that provide promises and assurances about privacy and security can subject us to potential state and federal action in the United States if they are found to be deceptive, unfair, or misrepresentative of our actual practices. Any failure by us or other parties with whom we do business to comply with this documentation or with federal, state, local or international regulations could result in proceedings against us by governmental entities, private parties or others. In many jurisdictions, enforcement actions and consequences for noncompliance are rising. +If our operations are found to be in violation of any of the data protection laws described above or any other laws that apply to us, we may be subject to penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from participation in government healthcare programs, injunctions, private qui tam actions brought by individual whistleblowers in the name of the government, class action litigation and the curtailment or restructuring of our operations, as well as additional reporting obligations and oversight if we become subject to a corrective action plan or other agreement +66 +to resolve allegations of non-compliance with these laws, any of which could adversely affect our ability to operate our business and our results of operations. +In addition, numerous state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability, integrity, and other processing of PHI and PII. These laws and regulations include HIPAA. HIPAA establishes a set of national privacy and security standards for the protection of protected health information (as defined in HIPAA, PHI) by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services. We are a covered entity under HIPAA when we are conducting our clinical trials. We are a covered entity with regard to our observational studies and clinical trials, and also a business associate under HIPAA for certain other business activities, and we execute business associate agreements with our clients. +HIPAA requires covered entities and business associates, such as us, to develop and maintain policies with respect to the protection of, use and disclosure of electronic PHI, including the adoption of administrative, physical and technical safeguards to protect such information, and certain notification requirements in the event of a data breach. +HIPAA imposes mandatory penalties for certain violations. Penalties for violations of HIPAA and its implementing regulations start at $119 per violation and are subject to a cap of $1,785,651 for violations of the same standard in a single calendar year. However, a single breach incident can result in violations of multiple standards. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. +In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities and business associates. With regard to business associates, those audits assess the business associate’s compliance with the HIPAA Privacy and Security Standards. Such audits are conducted randomly and after an entity experiences a breach affecting more than 500 individuals’ data. Undergoing an audit can be costly, can result in fines or onerous obligations, and can damage a business associate’s reputation. +In addition to HIPAA, numerous other federal, state, and foreign laws and regulations protect the confidentiality, privacy, availability, integrity and security of PHI and other types of PII. Some of these laws and regulations may be preempted by HIPAA with respect to PHI, or may exclude PHI from their scope but impose obligations with regard to PII that is not PHI, and in some cases, can impose additional obligations with regard to PHI. These laws and regulations are often uncertain, contradictory, and subject to changing or differing interpretations, and we expect new laws, rules and regulations regarding privacy, data protection, and information security to be proposed and enacted in the future. HHS is also proposing amendments to the HIPPA Privacy Rule to modernize certain data sharing provisions and enhance patient access to their information. This complex, dynamic legal landscape regarding privacy, data protection, and information security creates significant compliance issues for us and our clients and potentially exposes us to additional expense, adverse publicity and liability. While we have implemented data privacy and security measures in an effort to comply with applicable laws and regulations relating to privacy and data protection, some PHI and other PII or confidential information is transmitted to us by third parties, who may not implement adequate security and privacy measures, but it is possible that laws, rules and regulations relating to privacy, data protection, or information security may be interpreted and applied in a manner that is inconsistent with our practices or those of third parties who transmit PHI and other PII or confidential information to us. If we or these third parties are found to have violated such laws, rules or regulations, it could result in government-imposed fines, orders requiring that we or these third parties change our or their practices, or criminal charges, which could adversely affect our business. +Complying with these various laws and regulations could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business. +We may eventually operate in a number of countries outside of the United States whose laws, including data privacy laws, may in some cases be more stringent than the requirements in the United States. For example, EU and UK data privacy laws have specific requirements relating to cross-border transfers of personal data to certain jurisdictions, including to the United States, have strict requirements relating to personal data collection, use or sharing, and have more stringent requirements relating to organizations’ privacy programs and provide stronger individual rights. Moreover, we may also be subject to evolving international privacy and data security regulations which could result in greater compliance costs and in turn lead to penalties, where such compliance programs are not implemented correctly. +Certain of our processing activities are subject to the EU General Data Protection Regulation and the UK General Data Protection Regulation (collectively, the “GDPR”) – including, those involving pseudonymised / key-coded data - as the GDPR applies extra-territorially. The GDPR imposes strict requirements on controllers and processors processing personal data, including, for example, requirements to: (i) identify a legal basis for the processing of personal data, (ii) provide robust disclosures to individuals, (iii) respond to requests from individuals to exercise their data subject rights, (iv) provide personal data breach notifications within 72 hours after discovering the breach, (v) limit the collection and retention of personal data, (vi) impose specific contractual obligations on processors engaged to process personal data on the instructions of the controller, and (vii) apply enhanced protections to health data and other special categories of personal data. +67 +The EU GDPR also provides that EU Member States may make their own further laws and regulations limiting the processing of personal data, including genetic, biometric or health data, which could limit our ability to use and share such personal data and cause our costs to increase and harm our financial condition. +Failure to comply with the requirements of the GDPR may result in fines of up to €20 million (£17.5 million in the case of the UK GDPR) or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. GDPR compliance may require us to put in place additional mechanisms, which may result in compliance costs and other substantial expenditures. This may be onerous and adversely affect our business, financial condition, results of operations and the profitability of our platform of diagnostic tests. Failure to comply with the GDPR and other countries’ privacy or data security-related laws, rules or regulations could result in material penalties imposed by regulators, affect our compliance with contracts entered into with our collaborators and other third-party payers, and have an adverse effect on our business and financial condition. Currently, the GDPR is only applicable to us as a processor, but as we continue to expand into the European market, the GDPR will have direct applicability to us as a controller. +The GDPR also prohibits the transfer of personal data from the EEA/UK to a country outside of the EEA/UK (e.g., the United States) unless made to a country deemed to have adequate data privacy laws by the European Commission (or UK Government in case of the UK GDPR) or a data transfer mechanism has been put in place. Until recently, one such data transfer mechanism was the EU-US Privacy Shield. However, in July 2020 the Court of Justice of the European Union (CJEU) declared the Privacy Shield to be invalid. The CJEU upheld the validity of standard contractual clauses (SCCs) as a legal mechanism to transfer personal data but companies relying on SCCs will need to carry out a transfer privacy impact assessment, which among other things, assesses laws governing access to personal data in the recipient country and considers whether supplementary measures that provide privacy protections additional to those provided under SCCs will need to be implemented to ensure an essentially equivalent level of data protection to that afforded in the EEA. In turn, the findings of the CJEU will have significant implications for cross-border data flows and may lead to increased transaction, compliance, and technological costs to support international data transfers. +Organizations operating in Canada and covered by the Personal Information Protection and Electronic Documents Act (PIPEDA), or equivalent Canadian provincial laws, must obtain an individual’s consent when they collect, use or disclose that individual’s personal information. Individuals have the right to access and challenge the accuracy of their personal information held by an organization, and personal information may only be used for the purposes for which it was collected. If an organization intends to use personal information for another purpose, it must again obtain that individual’s consent. +We regularly monitor, defend against and respond to attacks to our networks and other information security incidents. Despite our information security efforts, our facilities, systems, and data, as well as those of our third-party service providers, may be vulnerable to privacy and information security incidents such as data breaches, viruses or other malicious code, coordinated attacks, data loss, phishing attacks, ransomware, denial of service attacks, or other security or IT incidents caused by threat actors, technological vulnerabilities or human error. If we, or any of our vendors that support our IT or have access to our data, including any third-party vendors that collect, process and store personal data on our behalf, fail to comply with laws requiring the protection of personal information, or fail to safeguard and defend personal information or other critical data assets or IT systems, we may be subject to regulatory enforcement and fines as well as private civil actions. We may be required to expend significant resources in the response, containment, mitigation of cybersecurity incidents as well as in defense against claims that our information security was unreasonable or otherwise violated applicable laws or contractual obligations. +Our employees, collaborators, independent contractors and consultants may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements. +We are exposed to the risk that our employees, collaborators, independent contractors and consultants may engage in fraudulent or other illegal activity with respect to our business. Misconduct by these employees could include intentional, reckless and/or negligent conduct or unauthorized activity that violates: +• +FDA regulations, including those laws requiring the reporting of true, complete, and accurate information to the FDA authorities; +• +federal and state healthcare fraud and abuse laws and regulations; or +• +laws that require the true, complete and accurate reporting of financial information or data. +In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Misconduct by these parties could also involve individually identifiable information, including, without limitation, the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. Any incidents or any other conduct that leads to an employee, contractor, or other agent, or our company, receiving an FDA debarment or exclusion by the HHS Office of Inspector General (OIG) could result in penalties, a loss of business from third parties, and severe reputational harm. +68 +We have adopted a Code of Business Conduct and Ethics and compliance policies to govern and deter such behaviors, but it is not always possible to identify and deter misconduct by our employees and other agents, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, treble damages, monetary fines, disgorgement, imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and curtailment of our operations. +Clinical development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results. +Our ongoing research and development and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. We are currently conducting pre-and post-market clinical studies of some of our tests. In the future we may conduct clinical trials to support approval of new diagnostic tests and services, or new indications. Clinical studies may need to be conducted in compliance with FDA regulations or the FDA may take enforcement action. The data collected from these clinical studies may ultimately be used to support marketing authorization for these diagnostic tests and services. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims or that the FDA or foreign authorities and conformity assessment bodies will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our tests are safe and effective for the proposed indicated uses, which could cause us to abandon development of our tests and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, may impact our ability to commercialize our tests and generate revenues. +Many of the factors that may cause or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval or certification. The commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial. +We may find it necessary to engage contract research organizations to perform data collection and analysis and other aspects of our clinical trials, which might increase the cost and complexity of our trials. We may also depend on clinical investigators, medical institutions, and contract research organizations to perform the trials, and would control only certain aspects of their activities. Nevertheless, we would be responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on these third parties would not relieve us of our regulatory responsibilities. We and our third-party contractors are required to comply with good clinical practices (GCPs) which are regulations and guidelines enforced by the FDA, and comparable regulations enforced by foreign regulatory authorities for products in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any third-party contractor fails to comply with applicable GCPs, the clinical data generated in clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities or conformity assessment bodies may require us to perform additional clinical trials before clearing or approving our marketing applications. A failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory clearance or approval or certification process. In addition, if these parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality, completeness or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical trials may have to be extended, delayed or terminated. +Many of these factors could be beyond our control. We may not be able to undertake additional trials, repeat trials or enter into new arrangements with third parties without undue delays or considerable expenditures. If there are delays in testing or clearances or approvals as a result of the failure to perform by third parties, our research and development costs would increase and we may not be able to obtain regulatory clearance or approval or certification for our tests. In addition, we may not be able to establish or maintain relationships with these parties on favorable terms, if at all. Each of these outcomes would harm our ability to market our tests, or to achieve sustained profitability. +The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects. +We cannot be certain that the results of our future clinical trials will support our future product claims or that the FDA or comparable foreign regulatory authorities or conformity assessment bodies will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to +69 +commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the future product’s profile. +Our billing, collections and claims processing activities are complex and time-consuming, and any delay in transmitting and collecting claims or failure to comply with applicable billing requirements, could have an adverse effect on our future revenue. +Billing for our tests is complex, time-consuming and expensive. Depending on the billing arrangement and applicable law, we bill various payers, such as government payers, insurance companies and patients, all of which may have different billing requirements. We may face increased risk in our collection efforts, including long collection cycles and the risk that we may never collect at all, either of which could adversely affect our business, financial condition and results of operations. Several factors make the billing process complex, including: +• +differences between the list price for our tests and the reimbursement rates of payers; +• +compliance with complex federal and state regulations related to billing government healthcare programs, including Medicare and Medicaid, to the extent our tests are covered by such programs; +• +differences in coverage among payers and the effect of patient co-payments or co-insurance; +• +differences in information and billing requirements among payers; +• +changes to codes and coding instructions governing our tests; +• +incorrect or missing billing information; and +• +the resources required to manage the billing and claims appeals process. +These billing complexities and the related uncertainty in obtaining payment for our tests could negatively affect our revenue and cash flow, our ability to achieve profitability and the consistency and comparability of our results of operations. In addition, if claims for our tests are not submitted to payers on a timely basis, or if we fail to comply with applicable billing requirements, it could have an adverse effect on our revenue and our business. +Third-party payers require us to identify the test for which we are seeking reimbursement using a Current Procedural Terminology (CPT) code. The CPT code set is maintained by the American Medical Association (AMA). In cases where there is not a specific CPT code to describe a test, such as with Nodify CDT and GeneStrat, the test may be billed under an unlisted molecular pathology procedure code or through the use of a combination of single gene CPT codes, depending on the payer. The Protecting Access to Medicare Act of 2014 (PAMA) authorized the adoption of new, temporary billing codes and unique test identifiers for FDA-cleared or approved tests as well as advanced diagnostic laboratory tests. The AMA has created a new section of CPT codes, Proprietary Laboratory Analyses codes to facilitate implementation of this section of PAMA. In addition, CMS may assign unique level II Healthcare Common Procedure Coding System codes to tests that are not already described by a unique CPT code. VeriStrat and Nodify XL2 both have test specific CPT codes, but the GeneStrat and Nodify CDT tests do not at this time. +In the instance where a code used does not describe a specific test, the insurance claim must be examined to determine what test was provided, whether the test was appropriate and medically necessary, and whether payment should be rendered, which may require a letter of medical necessity from the ordering physician. This process can result in a delay in processing the claim, a lower reimbursement amount or denial of the claim. As a result, obtaining approvals from third-party payers to cover our tests and establishing adequate reimbursement levels is an unpredictable, challenging, time-consuming and costly process and we may never be successful. +We and our third-party manufacturers and suppliers must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do, or interrupt our, business. +Our research and development activities and our third-party manufacturers’ and suppliers’ activities involve the generation, use, storage and disposal of hazardous materials. We work with materials, including chemicals, biological agents and compounds and samples that could be hazardous to human health and safety or the environment. Our operations also produce hazardous and biological waste products. Accordingly, we and our third-party manufacturers and suppliers are subject to federal, state, local and foreign environmental, health and safety laws and regulations, and permitting and licensing requirements, including those governing the generation, use, manufacture, storage, handling, transportation, release and disposal of, and exposure to, these materials, and worker health and safety. +We cannot eliminate the risk of contamination or injury resulting from such hazardous materials. We also cannot guarantee that the procedures utilized by our third-party manufacturers for handling and disposing of hazardous materials and wastes comply with all applicable environmental, health and safety laws and regulations. As a result, we may be held liable for any resulting damages, costs or liabilities, including cleanup costs and liabilities, which could be significant, or our commercialization, research and development efforts and business operations may be restricted or interrupted. +Environmental, health and safety laws and regulations are complex, change frequently and have tended to become more stringent. Compliance with such laws and regulations is expensive, and current or future environmental, health and safety laws and regulations +70 +may restrict our operations. If we do not comply with applicable environmental health and safety laws and regulations, and permitting and licensing requirements, we may be subject to fines, penalties, a suspension of our business or other sanctions. +Risks Related to our Intellectual Property +Our success may be impaired if we are unable to obtain, maintain and protect our intellectual property rights. +Our commercial success will depend in part on our ability to obtain and maintain patent and other intellectual property protection in the United States and other countries with respect to our diagnostic tests, products and services and technology. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, to protect our proprietary technology and prevent others from duplicating our suite of diagnostic tests and products. However, these means may afford only limited protection and may not: +• +prevent our competitors from duplicating our diagnostic tests and products, including our COVID-19 testing program and Nodify XL2, Nodify CDT, GeneStrat and VeriStrat tests; +• +prevent our competitors from gaining access to our proprietary information and technology, including the Diagnostic Cortex platform, tech platforms such as the DeepMALDI analysis and intellectual property covering technologies that allow us to develop “test algorithms”; or +• +allow us to gain or maintain a competitive advantage. +Any of our patents, including those we may license, may be challenged, invalidated, rendered unenforceable or circumvented. Consequently, we do not know whether any of our diagnostic tests, products and services will be protectable or remain protected by valid and enforceable patents. We may not prevail if our patents are challenged by competitors or other third parties. The United States federal courts or equivalent national courts or patent offices elsewhere may invalidate our patents, find them unenforceable, or narrow their scope. Furthermore, competitors may be able to design around our patents by developing similar or alternative technologies or products in a non-infringing manner, or obtain patent protection for more effective technologies, designs or methods, including for treating lung cancer. If these developments were to occur, our diagnostic tests and products may become less competitive and sales may decline. +We have filed numerous patent applications seeking protection of diagnostic tests and other inventions originating from our research and development. Our patent applications may not result in issued patents, and any patents that are issued may not provide meaningful protection against competitors or competitive technologies. Further, the examination process may require us to narrow the claims for our pending patent applications, which may limit the scope of patent protection that may be obtained if these applications issue. The scope of a patent may also be reinterpreted and significantly reduced after issuance. Even if patent applications we license or own currently or in the future issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with the protection or competitive advantages we are seeking. +Moreover, some of our owned and in-licensed patents and patent applications are, and may in the future be, co-owned with third parties. If we are unable to obtain or maintain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products and technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects. +The patent position of biotechnology companies generally is highly uncertain, involves complex legal and factual questions, and has been the subject of much litigation in recent years. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the determination of patent rights with respect to pharmaceutical compounds and technologies commonly involves complex legal and factual questions, which has in recent years been the subject of much litigation. Various courts, including the United States Supreme Court have rendered decisions that affect the scope of patentability of certain inventions or discoveries relating to biotechnology. These decisions state, among other things, that a patent claim that recites an abstract idea, natural phenomenon, or law of nature (for example, the relationship between particular genetic variants and cancer) are not themselves patentable. Precisely what constitutes a law of nature or abstract idea is uncertain, and it is possible that certain aspects of our technology could be considered unpatentable under applicable law. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. Depending on decisions by the United States Congress, the federal courts and the United States Patent and Trademark Office (USPTO), the laws and regulations governing patents could change in unpredictable ways that would weaken our and our licensors’ ability to obtain new patents or to enforce our existing owned or in-licensed patents and patents that we might obtain or in-license in the future. Additionally, our pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. The scope of patent protection outside of the United States is also uncertain. Changes in either the patent laws or their interpretation in the United States and other countries may diminish our +71 +ability to protect our inventions, obtain, maintain, and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property rights or narrow the scope of our owned and licensed patents. +If we are unable to obtain and maintain patent protection for our technology, or if the scope of the patent protection obtained is not sufficient, our competitors could develop and commercialize diagnostic tests, products and services similar or superior to ours, and our competitive position may be adversely affected. It is also possible that we will fail to identify patentable aspects of inventions made in the course of our development and commercialization activities before it is too late to obtain patent protection on them. Therefore, we may miss potential opportunities to strengthen our patent position. In addition, the patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. +Additionally, while software and other of our proprietary works may be protected under copyright law, we have chosen not to register any copyrights in these works, and instead, primarily rely on protecting our software as a trade secret. In order to bring a copyright infringement lawsuit in the United States, the copyright must be registered. Accordingly, the remedies and damages available to us for unauthorized use of our copyrights may be limited. +If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed. +In addition to seeking patent protection for the patents underlying our diagnostic tests, products and services, we also rely upon unpatented trade secrets, know-how and continuing technological innovation to develop and maintain a competitive position. Trade secrets and know-how can be difficult to protect. We seek to protect such proprietary information, in part, through confidentiality agreements with our employees, collaborators, contractors, advisors, consultants and other third parties and invention assignment agreements with our employees. We also have agreements with some of our consultants that require them to assign to us any inventions created as a result of their working with us. The confidentiality agreements are designed to protect our proprietary information and, in the case of agreements or clauses containing invention assignment, to grant us ownership of technologies that are developed through a relationship with employees or third parties. +We cannot guarantee that we have entered into such agreements with each party that has or may have had access to our trade secrets or proprietary information. Additionally, despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to, or independently developed by, a competitor or other third party, our competitive position would be materially and adversely harmed. Furthermore, we expect these trade secrets, know-how and proprietary information to over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology and the movement of personnel from academic to industry scientific positions. Consequently, we may be unable to prevent our proprietary technology from being exploited in the United States and abroad, which could affect our ability to expand in domestic and international markets or require costly efforts to protect our technology. +We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known, or be independently discovered by, competitors. To the extent that our employees, consultants, contractors or collaborators use intellectual property rights owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions, which could have a material adverse effect on our business, financial condition and results of operations. +We may be subject to claims that we or our employees have misappropriated the intellectual property rights of a third party, including trade secrets or know-how, or are in breach of non-competition or non-solicitation agreements with our competitors, and third parties may claim an ownership interest in intellectual property we regard as our own. +Many of our employees and consultants were previously employed at or engaged by universities or other medical device, diagnostic, biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees, consultants and contractors, may have executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees, consultants and independent contractors do not use the intellectual property rights, proprietary information, know-how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, used, infringed, misappropriated or otherwise violated the intellectual property rights or disclosed the alleged trade secrets or other proprietary information, of these former employers, competitors or other third parties, or to +72 +claims that we have improperly used or obtained such trade secrets. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Any litigation or the threat of litigation may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize potential diagnostic tests, products and services, which could harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management and other employees. +Additionally, we may be subject to claims from third parties challenging our ownership interest in intellectual property rights we regard as our own, based on claims that our employees or consultants have breached an obligation to assign inventions to another employer, to a former employer, or to another person or entity. Litigation may be necessary to defend against any other claims, and it may be necessary or we may desire to enter into a license to settle any such claim; however, there can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our diagnostic tests or products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. +An inability to incorporate technologies or features that are important or essential to our diagnostic tests or products could have a material adverse effect on our business, financial condition and results of operations, and may prevent us from selling our rights to our COVID-19 testing program, either of the Nodify XL2 and Nodify CDT tests, or the VeriStrat and GeneStrat tests. +In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property rights to execute agreements assigning such intellectual property rights to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property rights that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property rights. Such claims could have a material adverse effect on our business, financial condition, results of operations, and prospects. +Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future diagnostic tests, products and services. +Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. In 2011, the Leahy-Smith America Invents Act (Leahy-Smith Act) was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and also may affect patent litigation. These also include provisions that switched the United States from a first-to-invent system to a first-inventor-to-file system, allow third-party submission of prior art to the USPTO during patent prosecution and set forth additional procedures to attack the validity of a patent by the USPTO administered post grant proceedings, including post-grant review, inter partes review and derivation proceedings. Under a first-inventor-to-file system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor was the first to invent the claimed invention. The USPTO recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective in 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition and results of operations. +In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the United States Supreme Court and the United States Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Recent United States Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents, once obtained. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by United States and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future. +If our trademarks and tradenames are not adequately protected, then we may not be able to build name recognition in our markets and our business may be adversely affected. +Our trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be violating or infringing on other marks. We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these trademarks or trade names, which we need to build name recognition among potential partners and customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement or +73 +dilution claims brought by owners of other trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. +We have not yet registered certain of our trademarks in all of our potential markets, although we have registered several connected to our diagnostic tests, products and services in the United States. If we apply to register these and trademarks in the United States and other countries, our applications may not be allowed for registration in a timely fashion or at all, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademark applications and registrations, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would. +Our efforts to enforce or protect our rights related to trademarks, trade secrets, domain names or other intellectual property rights may be ineffective, could result in substantial costs and diversion of resources and could adversely affect our business, financial condition and results of operations. +We may become involved in lawsuits to protect or enforce our patents, the patents of our licensors or other intellectual property rights, which could be expensive, time consuming and unsuccessful. +Competitors or other third parties may infringe, misappropriate or otherwise violate our patents, the patents of our licensors or other intellectual property rights, or we may be required to defend against claims of infringement, misappropriation or other violations. In addition, our patents also may become involved in inventorship, priority or validity disputes. To counter or defend against such claims can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke those parties to assert counterclaims against us alleging that we infringe their patents or other intellectual property. In any such proceeding, a court or other administrative body may decide that a patent or other intellectual property right owned by us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover such technology. Grounds for a validity challenge could include an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, written description, non-enablement or failure to claim patent-eligible subject matter. Grounds for an unenforceability assertion could include an allegation that someone connected with prosecution of the patent withheld information material to patentability from the USPTO, or made a misleading statement, during prosecution. Third parties also may raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include reexamination, post-grant review, inter partes review, interference proceedings, derivation proceedings and equivalent proceedings in foreign jurisdictions, including opposition proceedings. Such proceedings could result in the revocation or cancellation of or amendment to our patents in such a way that they no longer cover our diagnostic tests, products and services or prevent third parties from competing with our diagnostic tests, products and services. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which the patent examiner and we or our licensing partners were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we could lose at least part, and perhaps all, of the patent protection on our diagnostic tests, products and services. An adverse result in any litigation or other proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. +Moreover, some of our owned and in-licensed patents and patent applications are, and may in the future be, co-owned with third parties. If we are unable to obtain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing diagnostic tests, products, services or technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations. +Even if resolved in our favor, litigation or other proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our management and other personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on our common stock price. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from +74 +the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations. +Third parties may initiate legal proceedings alleging that we are infringing, misappropriating, or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business. +The intellectual property landscape in the field of precision oncology is in flux, and it may remain uncertain for the coming years. There may be significant intellectual property related litigation and proceedings relating to our owned and in-licensed, and other third party, intellectual property and proprietary rights in the future. As we move into new markets and applications for our diagnostic tests, products or services, incumbent participants in such markets may assert their patents and other intellectual property rights against us as a means of slowing our entry into such markets or as a means to extract substantial license and royalty payments from us. Our competitors and others may now and, in the future, have significantly larger and more mature patent portfolios than we currently have. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product or service revenue and against whom our own patents may provide little or no deterrence or protection. Therefore, our commercial success depends in part on our non-infringement of the patents or other intellectual property rights of third parties. +However, we may in the future be subject to claims that we, or other parties we have agreed to indemnify, infringe, misappropriate or otherwise violate patents or other intellectual property rights owned or controlled by third parties. Because patent applications are published sometime after filing, and because applications can take several years to issue, there may be additional currently pending third-party patent applications that are unknown to us, which may later result in issued patents. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. We may not have sufficient resources to bring these actions to a successful conclusion. +There is a substantial amount of litigation and other patent challenges, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology industry, including patent infringement lawsuits, interferences, oppositions and inter partes review proceedings before the USPTO, and corresponding foreign patent offices. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, including our competitors, exist in the fields in which we are developing diagnostic tests and in which we may develop future diagnostic tests, products and services. As the precision oncology industry expands and more patents are issued, the risk increases that our diagnostic tests may be subject to claims of infringement of the patent rights of third parties. Numerous significant intellectual property issues have been litigated, are being litigated and will likely continue to be litigated, between existing and new participants in our existing and targeted markets, and competitors have and may assert that our diagnostic tests or services infringe their intellectual property rights as part of a business strategy to impede our successful entry into or growth in those markets. +We could incur substantial costs and divert the attention of our management and technical personnel in defending against any of these claims. Parties making claims against us may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. +Because of the inevitable uncertainty in intellectual property litigation, we could lose a patent infringement or other action asserted against us regardless of our perception of the merits of the case. There is no assurance that a court would find in our favor on questions of infringement, validity, enforceability, or priority. A court of competent jurisdiction could hold that these third-party patents are valid, enforceable, and infringed, which could materially and adversely affect our ability to commercialize any product candidates we may develop and any other product candidates or technologies covered by the asserted third-party patents. In order to successfully challenge the validity of any such United States patent in federal court, we would need to overcome a presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such United States patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such United States patent. +Parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell diagnostic tests, products or services, and could result in the award of substantial damages against us, including treble damages, attorney’s fees, costs, and expenses if we are found to have willfully infringed. In the event of a successful claim of infringement against us, we may be required to pay damages and ongoing royalties, which could be significant, and obtain one or more licenses from third parties, or be prohibited from selling certain diagnostic tests, products or services. We may not be able to obtain these licenses on acceptable or commercially reasonable terms, if at all, or these licenses may be non-exclusive, which could result in our competitors gaining access to the same intellectual property. In addition, we could encounter delays in diagnostic test introductions while we attempt to develop alternative diagnostic tests, products or services to avoid infringing third-party patents or intellectual property rights. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing diagnostic tests, products or services, and the prohibition of sale of any of our diagnostic tests, products or services could materially affect our business and our ability to gain market acceptance for our diagnostic tests, products and services. +Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or +75 +developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. +In addition, our agreements with some of our customers, suppliers or other entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims, including the types of claims described above. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results or financial condition. +We may be subject to claims challenging the priority or inventorship of our patents and other intellectual property rights. +We or our licensors may be subject to claims that former employees, collaborators or other third parties have an interest in our owned or in-licensed patents, trade secrets or other intellectual property rights as an inventor or co-inventor. For example, we or our licensors may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or our or our licensors’ ownership of our owned or in-licensed patents, trade secrets or other intellectual property rights. If we or our licensors fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property rights that are important to our product candidates. +If we or our licensors are unsuccessful in any interference proceeding or other priority or inventorship dispute, we may be required to obtain and maintain licenses from third parties, including parties involved in any such interference proceedings or other priority or inventorship disputes. Such licenses may not be available on commercially reasonable terms or at all, or may be non-exclusive. If we are unable to obtain and maintain such licenses, we may need to cease the development, manufacture, and commercialization of one or more of our diagnostic tests, products or services. The loss of exclusivity or the narrowing of our owned and licensed patent claims could limit our ability to stop others from using or commercializing similar or identical technology and products. Any of the foregoing could result in a material adverse effect on our business, financial condition, results of operations, or prospects. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. +Obtaining and maintaining our patent protection depends on compliance with various required procedures, document submissions, fee payments and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. +Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States at several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees due to non-United States patent agencies. We are also dependent on our licensors to take the necessary action to comply with these requirements with respect to our licensed intellectual property rights. The USPTO and various non-US governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors may be able to enter the market without infringing our patents and this circumstance would have a material adverse effect on our business. +Issued patents covering our diagnostic tests and any other or future diagnostic tests, products or services could be found invalid or unenforceable if challenged. +The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability and some of our patents or patent applications, including licensed patents, may be challenged, in courts or patent offices in the United States and abroad, in opposition, derivation, reexamination, inter partes review, post-grant review or interference. Additionally, if we and our licensing partners initiate or become involved in legal proceedings against a third party to enforce a patent covering one of our diagnostic tests, products, services or technologies, the defendant could counterclaim that the patent covering our diagnostic tests, products or services is invalid or unenforceable. In patent litigation in the United States, counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including patent eligible subject matter, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement during prosecution. In addition, the United States now awards patent priority to the first party to file a patent application, and others may submit patent claims covering our inventions prior to us. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or +76 +unenforceability, we would lose at least part, and perhaps all, of the patent protection on our diagnostic tests or any diagnostic tests, products and services that we may develop. +A successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights, which could have a material adverse impact on our business. Furthermore, if the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the outcome, it could dissuade companies from collaborating with us to license, develop or commercialize current or future diagnostic tests, products or services. +We may not be aware of all third-party intellectual property rights potentially relating to our current or future diagnostic tests, products or services. +Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until approximately 18 months after filing or, in some cases, not until such patent applications issue as patents. We, or our current or future license partners or collaborators, might not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings, derivation proceedings or other post-grant proceedings declared by the USPTO. The outcome of such proceedings is uncertain, and other patent applications may have priority over our patent applications. Such proceedings could also result in substantial costs to us and divert our management’s attention and resources. +We rely on licenses from third parties in relation to certain diagnostic tests, products and services and if we lose these licenses then we may be subjected to future litigation. +We are a party to license agreements that grant us rights to use certain intellectual property rights, including patents and patent applications, typically in certain specified fields of use, in connection with our diagnostic tests, products and services. Some of those licensed rights could provide us with freedom to operate for aspects of our diagnostic tests, products and services. We may need to obtain additional licenses from others to advance our research, development and commercialization activities. +The in-licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to in-license or acquire third-party intellectual property rights that we may consider attractive or necessary. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. +Furthermore, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. In addition, we expect that competition for the in-licensing or acquisition of third-party intellectual property rights for product candidates that are attractive to us may increase in the future, which may mean fewer suitable opportunities for us as well as higher acquisition or licensing costs. We may be unable to in-license or acquire the third-party intellectual property rights for product candidates on terms that would allow us to make an appropriate return on our investment. If we are unable to successfully obtain rights to suitable product candidates, our business, financial condition, results of operations and prospects for growth could suffer. +Our existing license agreements impose, and we expect that our future license agreements will impose, various diligence, royalty payment, milestone payment, insurance and other obligations on us. If we fail to comply with these obligations or other obligations in our license agreements, our licensors may have the right to terminate these agreements, in which event we may not be able to develop and market any product or use any technology that is covered by these agreements. If our license agreements terminate, or we experience a reduction or elimination of licensed rights under these agreements, we may have to negotiate new or reinstated licenses with less favorable terms or we may not have sufficient intellectual property rights to operate our business. The occurrence of such events could materially harm our business. +Our success may depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for our licensed intellectual property rights. Our licensors may not successfully prosecute the patent applications we license. Even if patents issue in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents or may pursue such litigation less aggressively than we would. Without protection for the intellectual property rights we license, other companies might be able to offer substantially identical diagnostic tests for sale, which could adversely affect our competitive business position and harm our business prospects. +Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations and prospects. +77 +Moreover, disputes may also arise between us and our current or future licensors regarding intellectual property rights subject to a license agreement, including those relating to: +• +the scope of rights granted under the license agreement and other interpretation-related issues; +• +whether, and the extent to which, our diagnostic tests, products, services, technology, and processes infringe on intellectual property rights of the licensor that is not subject to the licensing agreement; +• +whether our licensor or its licensor had the right to grant the license agreement; +• +whether third parties are entitled to compensation or equitable relief, such as an injunction, for our use of the intellectual property rights without their authorization; +• +our involvement in the prosecution of licensed patents and our licensors’ overall patent enforcement strategy; +• +the amounts of royalties, milestones, or other payments due under the license agreement; +• +our right to sublicense patent and other rights to third parties under collaborative development relationships; +• +our diligence obligations under the license agreement and what activities satisfy those diligence obligations; +• +the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property rights by our licensors and us and our collaborators; and +• +the priority of invention of patented technology. +If we do not prevail in such disputes, we may lose any or all of our rights under such license agreements. +In addition, the agreements under which we currently license intellectual property rights or technology from third parties are complex and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property rights or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Moreover, if disputes over intellectual property rights that we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, or are insufficient to provide us the necessary rights to use the intellectual property rights, we may be unable to successfully develop and commercialize any affected diagnostic tests, products or services, which could have a material adverse effect on our business, financial conditions, results of operations and prospects. +Absent the license agreements, we may infringe patents subject to those agreements, and if the license agreements are terminated, we may be subject to litigation by the licensor. Litigation could result in substantial costs to us and distract our management. If we do not prevail, we may be required to pay damages, including treble damages, attorneys’ fees, costs and expenses and royalties or be enjoined from selling our diagnostic tests, products or services, which could adversely affect our ability to offer diagnostic tests, products or services, our ability to continue operations and our financial condition. +Some intellectual property that we in-license may have been developed through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements and a preference for companies based in the United States. Compliance with such regulations may limit our exclusive rights, and limit our ability to contract with manufacturers that are not based in the United States. +Certain of the intellectual property that we license may have been developed through the use of United States government funding and therefore may be subject to certain federal regulations. As a result, the United States government may have certain rights to intellectual property embodied in our diagnostic tests, products and services pursuant to the Bayh-Dole Act of 1980 (Bayh-Dole Act). These United States government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the United States government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). To date, none of our commercialized products are subject to march-in rights. The United States government also has the right to take title to these inventions if we, or the applicable licensor, fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us or the applicable licensor to expend substantial resources. In addition, the United States government requires that any products of the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for United States manufacturers may limit our ability to contract +78 +with product manufacturers outside of the United States for products covered by such intellectual property. To the extent any of our current or future owned or licensed intellectual property is generated through the use of United States government funding, the provisions of the Bayh-Dole Act may similarly apply. Any failure by us to comply with federal regulations regarding intellectual property rights that were developed through the use of United States government funding could have a material adverse effect on our business, financial condition, results of operations, and prospects. +Patent terms may be inadequate to protect our competitive position on our diagnostic tests, products and services for an adequate amount of time. +Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest United States non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. +Even if patents covering our diagnostic tests, products and services are obtained, once the patent life has expired, we may be open to competition from competitive diagnostic tests, products and services. Given the amount of time required for the development, testing and regulatory review of potential new diagnostic tests, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing diagnostic tests, products or services similar or identical to ours. +We may not be able to protect our intellectual property rights throughout the world. +Third parties may attempt to commercialize competitive diagnostic tests, products or services in foreign countries where we do not have any patents or patent applications and/or where legal recourse may be limited. This may have a significant commercial impact on our foreign business operations. +Filing, prosecuting and defending patents on our diagnostic tests, products and services in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing diagnostic tests or products made using our inventions in and into the United States or other jurisdictions. Competitors may use our diagnostic tests, products, services and technologies in jurisdictions where we have not obtained patent protection to develop their own diagnostic tests and, further, may export otherwise infringing diagnostic tests or products to territories where we have patent protection but enforcement is not as strong as that in the United States. These diagnostic tests and products may compete with our diagnostic tests, products or services and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. +Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing diagnostic tests, products and services in violation of our intellectual property rights generally. Proceedings to enforce our intellectual property rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license. +Many countries, including India, China, and certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our current or future licensors are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition and results of operations may be adversely affected. +Intellectual property rights do not necessarily address all potential threats. +The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example: +• +others may be able to make diagnostic tests or products that are similar to our Nodify XL2, Nodify CDT, GeneStrat or VeriStrat tests or the COVID-19 tests that we use in our COVID-19 testing program or utilize similar technology that is not covered by the claims of our patents or that incorporates certain technology in our Nodify XL2, Nodify CDT, GeneStrat or VeriStrat tests or such COVID-19 tests that is in the public domain; +• +we, or our current or future licensors or collaborators, might not have been the first to make the inventions covered by the applicable issued patent or pending patent application that we own or license now or may own or license in the future; +79 +• +we, or our current or future licensors or collaborators, might not have been the first to file patent applications covering certain of our or their inventions; +• +others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights; +• +it is possible that our current or future pending patent applications will not lead to issued patents; +• +issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties; +• +our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive diagnostic tests, products and services for sale in our major commercial markets; +• +we may not develop additional proprietary technologies that are patentable; +• +the patents of others may harm our business; and +• +we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property rights. +Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. +General Risk Factors +We expect that the price of our common stock will fluctuate substantially and you may not be able to sell your shares at or above the price you paid for them. +The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including: +• +volume and customer mix for our COVID-19, Nodify XL2, Nodify CDT, GeneStrat and VeriStrat testing; +• +the introduction of new diagnostic tests or enhancements to such tests by us or others in our industry; +• +disputes or other developments with respect to our or others’ intellectual property rights; +• +our ability to develop, obtain regulatory clearance or approval or certification for, and market new and enhanced diagnostic tests on a timely basis; +• +product liability claims or other litigation; +• +quarterly variations in our results of operations or those of others in our industry; +• +media exposure of our diagnostic tests or of those of others in our industry; +• +changes in governmental regulations or in the status of our regulatory approvals or applications; +• +changes in earnings estimates or recommendations by securities analysts; and +• +general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors. +In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may significantly affect the market price of our common stock, regardless of our actual operating performance, and you may not realize any return on your investment in us and may lose some or all of your investment. +In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert management’s attention and resources from our business. +Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline. +If a trading market for our common stock develops, the trading market will be influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a newly public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little +80 +experience with us, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. +Shares of our common stock may be at risk for delisting from the Nasdaq Global Select Market in the future and delisting may adversely affect the value of your investment in the Company. +Shares of our common stock may be at risk of delisting from the Nasdaq Global Select Market if the bid price per share of our common stock does not remain above the applicable listing standards in the future. Moreover, there is no assurance that we will be able to take action to meet these listing standards if such bid price falls below the minimum required price. If our common stock were to be delisted, the liquidity of our common stock would be adversely affected and the market price of our common stock could decrease further. Our failure to be listed on NASDAQ or another established securities trading market or quotation system could have a material adverse effect on the value of your investment in the Company. +We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors. +We are an “emerging growth company,” as defined in the JOBS Act. We may take advantage of certain exemptions and relief from various public reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act). We will be exempt from any rules that could be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements; we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved. +Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of our IPO. +We are also a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our common shares held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common shares held by nonaffiliates exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +Investors may find our common stock less attractive to the extent we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline or become more volatile. +If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. +The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. It is possible that interpretation, industry practice and guidance may evolve over time. If our assumptions change or if actual circumstances differ +81 +from our assumptions, our operating results may be adversely affected and could fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. +Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders. +Our officers, directors and principal stockholders each holding more than 5% of our common stock collectively control approximately 66.3% of our outstanding common stock as of December 31, 2021. As a result, these stockholders, if they act together, will be able to control the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change of control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of our other stockholders. +We expect to incur significant additional costs as a result of being a public company, which may adversely affect our business, financial condition and results of operations. +As a result of our IPO completed in October 2020, we expect to incur costs associated with corporate governance requirements that are applicable to us as a public company, including rules and regulations of the SEC, under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Securities Exchange Act of 1934, as amended (the Exchange Act), as well as the rules of Nasdaq. These rules and regulations are expected to significantly increase our accounting, legal and financial compliance costs and make some activities more time-consuming. We also expect these rules and regulations to make it more expensive for us to maintain directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers. Accordingly, increases in costs incurred as a result of becoming a publicly traded company may adversely affect our business, financial condition and results of operations. +If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock. +As a result of becoming a public company, we are required, under Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ended December 31, 2021. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis. +During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. The effectiveness of our controls and procedures may be limited by a variety of factors, including: +• +faulty human judgment and simple errors, omissions, or mistakes; +• +fraudulent action of an individual or collusion of two or more people; +• +inappropriate management override of procedures; and +• +the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial control. +When we cease to be an “emerging growth company” under the federal securities laws, our auditors will be required to express an opinion on the effectiveness of our internal controls. If we are unable to confirm that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline. +Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud. +We are subject to the periodic reporting requirements of the Exchange Act. We have designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected. +82 +Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management. +Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. +Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. +Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees. +Our amended and restated certificate of incorporation specifies that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders. Notwithstanding the foregoing, the exclusive forum provision will not apply to any claim to enforce any liability or duty created by the Exchange Act or the Securities Act and for which the federal courts have exclusive jurisdiction. We believe this exclusive forum provision benefits us by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in such action. +Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us. +Our amended and restated articles of incorporation provide that we will indemnify our directors and officers to the fullest extent permitted by Section 145 of the Delaware General Corporate Law. +In addition, as permitted by the Delaware General Corporate Law, our amended and restated articles of incorporation and our indemnification agreements that we have entered into with our directors and officers provide that: +• +we will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by applicable law. Such law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful; +• +we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law; +• +we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification; +• +the rights conferred in our amended and restated articles of incorporation are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and +• +we may not retroactively amend our amended and restated articles of incorporation provisions to reduce our indemnification obligations to directors, officers, employees and agents. +83 +1B. Unresolved S taff Comments. +None. +Item 2. Pro perties. +Our headquarters is located in Boulder, Colorado, where we lease office and laboratory space, under an operating lease agreement that expires in January 2023, which has recently been amended to extend to January 2024. We also lease office and laboratory space located in De Soto, Kansas, under an operating lease agreement that expires in October 2023. A portion of our employees are located outside of Colorado and Kansas, and others work from home. We believe our existing facilities meet our current needs. We will need additional office space in the future as we continue to build and expand our development, commercial and support teams. We believe we can find suitable additional space in the future on commercially reasonable terms. +Location +Use +Square Feet +Expiration +Boulder, Colorado +Office and laboratory +29,722 +January 14, 2024 +De Soto, Kansas +Office and laboratory +9,066 +October 31, 2023 +Item 3. Legal Proceedings. +From time to time, we may become involved in legal proceedings or investigations which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. In September 2021, we reached a settlement agreement with the plaintiffs, which received preliminary approval from the Circuit Court of the City of St. Louis, State of Missouri (the Court) on November 10 th , regarding a dispute involving the Telephone Consumer Protection Act (TCPA). On January 31, 2022, the Court approved the final settlement payment to third parties of approximately $210,000 which was accrued as a legal contingency during the year ended December 31, 2021. We are not presently a party to any other legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition, or cash flows. +Item 4. Mine Saf ety Disclosures. +None. +84 +PART II +Item 5. Market for Registrant’s Common Equity, Related Stock holder Matters and Issuer Purchases of Equity Securities. +Market Information +Our common stock is traded on The NASDAQ Global Market under the symbol "BDSX." The high and low closing prices for our common stock on The NASDAQ Global Market from January 1, 2021 to December 31, 2021 were $31.21 and $4.09, respectively. +Holders of our Common Stock +As of March 9, 2022, there were approximately 204 holders of our common stock. +Dividend Policy +We have never declared or paid dividends on our common stock and do not expect to pay dividends on our common stock for the foreseeable future. We anticipate that all of our liquidity in the foreseeable future will be used for the operation and growth of our business. Any future determination to declare dividends will be subject to the discretion of our Board of Directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects, and any other factors deemed relevant by our Board of Directors. In addition, the terms of our term loan restrict our ability to pay dividends on our common stock, and we may also enter into credit agreements or other borrowing arrangements in the future that will further restrict our ability to declare or pay dividends on our common stock. +Use of Proceeds +On December 30, 2021, the Company raised approximately $16.3 million in gross proceeds from the sale of 3,756,994 common shares in an at-the-market offering. The Company received net proceeds of $15.7 million after deducting underwriting discounts and commissions and offering expenses payable by the Company. The net proceeds received were used to, among other things, fund the partial repayment of the 2021 Term Loan (see – Part II - Item 8, Financial Statements and Supplementary Data). +We registered these shares under the Securities Act on a Registration Statement on Form S-3 (Registration No. 333-261095), which was filed on November 24, 2021 and declared effective on November 29, 2021. +Recent Sales of Unregistered Securities +There were no sales of unregistered securities for the year ended December 31, 2021. From January 1, 2020 through December 31, 2020, we granted stock options under our 2016 and 2006 Stock Plans to purchase 0.8 million shares of our common stock at exercise prices ranging from $0.77 to $6.83 per share, and issued an aggregate of 0.4 million shares of common stock pursuant to the exercise of stock options with aggregate proceeds of approximately $1.3 million. These issuances were undertaken in reliance upon an exemption from registration under Rule 701 of the Securities Act of 1933. +Item 6. [ Reserved] +85 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +The following discussion of our financial condition and results of operations should be read together with our audited financial statements and related notes and other financial information included elsewhere in this Annual Report on Form 10-K. +In addition to historical financial information, this discussion and other parts of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part II, Item 1A below. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ from those anticipated. +These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. +The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), is provided to supplement the audited financial statements and the related notes in Part II - Item 8 of this Annual Report on Form10-K. We intend for this discussion to provide you with information that will assist you in understanding our financial statements, the changes in key items in those financial statements from year to year and the primary factors that accounted for those changes. Data for the years ended December 31, 2021 and 2020 has been derived from our audited financial statements included in this Annual Report on Form 10-K. +Overview +We are a leading data-driven diagnostic solutions company leveraging state of the art technologies with our proprietary AI platform to discover, develop, and commercialize solutions for clinical unmet needs, with a primary focus in lung disease. By combining a technology multi-omic approach with a holistic view of the patient’s disease state, we believe our solutions provide physicians with greater insights to help personalize their patient’s care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe helps improve overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI-based Diagnostic Cortex® platform to discover innovative diagnostic tests for clinical use. The Diagnostic Cortex is an extensively validated deep learning platform optimized for the discovery of diagnostic tests, which we believe overcomes standard machine learning challenges faced in life sciences research. Our data-driven and multi-omic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage with our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic treatment landscape to identify additional clinical unmet needs where a diagnostic test could help improve patient care. Additionally, we incorporate clinical and molecular profiling data from our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or academic partnerships, to continue to advance our platform. We have over 150,000 samples and data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development initiatives. +We have commercialized eight diagnostic tests which are currently available for use by physicians. Our Nodify XL2 and Nodify CDT tests, marketed as part of the Nodify Lung Nodule Risk Assessment testing strategy, assess the risk of lung cancer to help identify the most appropriate treatment pathway. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our GeneStrat ddPCR, GeneStrat NGS, and VeriStrat tests, marketed as the IQLung testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to establish the patient’s prognosis and help guide treatment decisions. The GeneStrat targeted tumor profiling test and the VeriStrat immune profiling test now have a less than 36-hour average turnaround time, down from the previous 72-hour average turnaround time, providing physicians with timely results to facilitate treatment decisions. In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe™ testing program. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two FDA EUA authorized tests, a part of our customizable program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. Then U.S. Health and Human Services Secretary Azar +86 +declared a public health emergency for COVID-19 in February 2020 which justified the authorization of emergency use of diagnostic tests for the detection and/or diagnosis of COVID-19. The Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. The Bio-Rad SARS-CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under CLIA to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. In addition to the seven tests currently available to physicians, the Company launched the GeneStrat NGS™ (NGS) test, our 72-hour blood-based NGS test, in November 2021 to a select group of physicians, with broad US launch in the first quarter 2022. +Prior to using the Bio-Rad SARS-CoV-2 tests as part of our testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Post-launch development support for these tests have included improvements in on-boarding new personnel, logistics of sample collection, sample receipt and data reporting, all required to support our testing program. Additional releases of the laboratory data management software are ongoing and planned for the foreseeable future. +Beginning in the quarter ended June 30, 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass SARS-CoV-2 Neutralizing Antibody testing as a service. The test is the first surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the RBD in the spike protein of SARS-CoV-2 that are produced in response to vaccination or previous SARS-CoV-2 infection. +These tests under the Biodesix WorkSafe testing program are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems to assist in their back-to-work or back-to-school strategies. We have announced multiple partnerships for COVID-19 testing, and maintain an agreement with the State of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State. Additionally, we have overseen and managed onsite testing and validating testing for the Big Ten Conference athletic competitions through the term of our contract which expired on June 30, 2021. +In addition to the eight diagnostic tests currently on the market, we perform over 30 assays for research use as part of our laboratory services that have been used by over 50 biopharmaceutical companies and academic partners. All of our diagnostic testing is performed at one of our two accredited, high-complexity clinical laboratories in Boulder, Colorado and De Soto, Kansas. +Since our inception, we have performed over 500,000 tests and continue to generate a large and growing body of clinical evidence consisting of over 300 clinical and scientific peer-reviewed publications, presentations, and abstracts. Through ongoing study of each of our tests, we continue to grow our depth of understanding of disease biology and the broad utility of each of our tests. We believe we are poised for rapid growth by leveraging our scientific development and laboratory operations expertise along with our commercial infrastructure which includes sales, marketing, reimbursement, and regulatory affairs. +In the United States, we market our tests to clinical customers through our targeted sales organization, which includes sales representatives that are engaged in sales efforts and promotional activities primarily to pulmonologists, oncologists, cancer centers and nodule clinics. We market our tests and services to biopharmaceutical companies globally through our targeted business development team, which promotes the broad utility of our tests and testing capabilities throughout drug development and commercialization which is of value to pharmaceutical companies and their drug-development process. +We have funded our operations to date principally from net proceeds from the sales of our common stock through both an IPO and issuances from our Form S-3 shelf, the sale of convertible preferred stock, revenue from diagnostic testing and services, and the incurrence of indebtedness. We had cash and cash equivalents of $32.7 million and $62.1 million as of December 31, 2021 and 2020, respectively. +Factors Affecting Our Performance +We believe there are several important factors that have impacted our operating performance and results of operations, including: +• +Testing volume and customer mix. Our revenues and costs are affected by the volume of testing and mix of customers from period to period. We evaluate both the volume of our commercial tests, or the number of tests that we perform for patients on behalf of clinicians, as well as tests for biopharmaceutical companies. Our performance depends on our ability to retain and broaden adoption with existing customers, as well as attract new customers. We believe that the test volume we receive from clinicians and biopharmaceutical companies are indicators of growth in each of these customer verticals. Customer mix for our tests has the potential to significantly impact our results of operations, as the average selling price for biopharmaceutical +87 +sample testing is currently significantly greater than our average selling price for clinical tests since we are not a contracted provider for, or our tests are not covered by all clinical patients’ insurance. We evaluate our average selling price for tests that are covered by Medicare, Medicare Advantage and commercial payers to understand the trends in reimbursement and apply those trends to our revenue recognition policies. +• +Reimbursement for clinical diagnostic testing. Our revenue depends on achieving broad coverage and reimbursement for our tests from third-party payers, including both commercial and government payers. Payment from third-party payers differs depending on whether we have entered into a contract with the payers as a “participating provider” or do not have a contract and are considered a “non-participating provider.” Payers will often reimburse non-participating providers, if at all, at a lower rate than participating providers. +Historically, we have experienced situations where commercial payers proactively reduced the amounts they were willing to reimburse for our tests, and in other situations, commercial payers have determined that the amounts they previously paid were too high and have sought to recover those perceived excess payments by deducting such amounts from payments otherwise being made. When we contract to serve as a participating provider, reimbursements are made pursuant to a negotiated fee schedule and are limited to only covered indications. Becoming a participating provider generally results in higher reimbursement for covered indications and lack of reimbursement for non-covered indications. As a result, the impact of becoming a participating provider with a specific payer will vary. If we are not able to obtain or maintain coverage and adequate reimbursement from third-party payers, we may not be able to effectively increase our testing volume and revenue as expected. Additionally, retrospective reimbursement adjustments can negatively impact our revenue and cause our financial results to fluctuate. +• +Investment in clinical studies and product innovation to support growth. A significant aspect of our business is our investment in research and development, including the development of new products and our investments in clinical utility studies. We have invested heavily in clinical studies for our on market and pipeline products. Our studies focus primarily on the clinical utility of our tests including the ongoing INSIGHT study which seeks to enroll up to 5,000 patients to continue our clinical understanding of the predictive and prognostic value of the VeriStrat test. The ALTITUDE study, launched during the fourth quarter 2020, seeks to further demonstrate the efficacy of the Nodify XL2 and Nodify CDT tests. A secondary focus of our studies is understanding the economic impact of our tests in assisting with decisions related to patient management and the potential impact of our tests in reducing overall healthcare costs. +Our clinical research has resulted in approximately 90 peer-reviewed publications for our tests. In addition to clinical studies, we are collaborating with investigators from multiple academic cancer centers. We believe these studies are critical to gaining physician adoption and driving favorable coverage decisions by payers and expect our investments in research and development to increase. Further we also expect to increase our research and development expenses to fund further innovation and develop new clinically relevant tests. +• +Ability to attract new biopharmaceutical customers and maintain and expand relationships with existing customers . Our business development team promotes the broad utility of our products for biopharmaceutical companies in the United States and internationally. Our revenue, business opportunities and growth depend in part on our ability to attract new biopharmaceutical customers and to maintain and expand relationships with existing biopharmaceutical customers. We expect to increase our sales and marketing expenses in furtherance of this as we continue to develop these relationships, we expect to support a growing number of investigations and clinical trials. If our relationships expand, we believe we may have opportunities to offer our platform for companion diagnostic development, novel target discovery and validation efforts, and to grow into other commercial opportunities. For example, we believe our multi-omic data including genomic and proteomic data, in combination with clinical outcomes or claims data, has revenue-generating potential, including for novel target identification and companion diagnostic discovery and development. +• +Motivating and expanding our field sales force and customer support team . Our field sales force is the primary point of contact in the clinical setting. These representatives of the company must cover expansive geographic regions which limits their time for interaction and education of our products in the clinical setting. We plan to invest heavily in the field sales force to increase the total number of sales representatives and thereby reduce the geographic footprint each representative must cover. This investment will allow the larger sales force to maximize their education and selling efforts and achieve greater returns. Additionally, we plan to invest in the Boulder-based marketing and customer support teams to continue to provide the field team with the resources to be successful in the field. +While each of these areas present significant opportunities for us, they also pose significant risks and challenges that we must address. See Part II, Item 1A. “Risk Factors” for more information. +COVID-19 Pandemic +The COVID-19 pandemic has disrupted, and we expect will continue to disrupt, our lung diagnostic testing operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees +88 +working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States of Colorado and Kansas’ public health orders and the guidance from the CDC. Employees who can perform their duties remotely are asked to work from home and those on site are asked to follow our social distance guidelines. Our sales, marketing and business development efforts have also been constrained by our operational response to the COVID-19 pandemic. We expect to continue to adjust our operational norms to help slow the spread of COVID-19 in the coming months, including complying with government directives and guidelines as they are modified and supplemented. +On September 9, 2021, President Biden signed two new Executive Orders that would require vaccinations for all federal workers and contractors. In addition, it was also announced that the Department of Labor’s Occupational Safety and Health Administration (OSHA) and the CMS would each be releasing emergency rules that would respectively require (i) employers with 100 or more employees and (ii) workers in health care setting that receive Medicare and Medicaid reimbursement to implement vaccination and testing protocols. In January 2022, the United States Supreme Court blocked the Biden administration from enforcing its sweeping vaccine-or-test requirements for large private companies, but allowed a vaccine mandate to stand for medical facilities that take Medicare or Medicaid payments. We are currently a party to several federal contracts and in order to remain compliant with President Biden’s Executive Orders, all Biodesix teammates were required to have received an effective dose of the COVID-19 vaccine no later than January 4, 2022. Exemptions were requested for qualifying medical reasons or sincerely held religious belief, subject to review and approval. +The COVID-19 pandemic and the surge associated with the Delta and Omicron variants have negatively affected, and we expect will continue to negatively affect, our lung diagnostic testing-related revenue and our clinical studies. For example, cancer patients may have more limited access to hospitals, healthcare providers and medical resources as they take steps to control the spread of COVID-19. Our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized. As a result of the COVID-19 pandemic, beginning in the latter half of March 2020, we saw a decline in business with existing and new biopharmaceutical customers. We began to see recovery during the fourth quarter 2020 as our delivered tests exceeded first quarter 2020 delivered tests and we expect to continue to see the recovery extending into 2022; however, the rate of growth experienced since we began to see recovery is below our expectations and has been impacted by ongoing surges, such as the surge in the Delta and Omicron variants, which have negatively impacted patients willingness or ability to gain access to healthcare providers and medical resources. Further, our clinical studies, such as our ongoing INSIGHT and ALTITUDE studies, as well as our arrangements including contracted clinical studies with our biopharmaceutical customers, are expected to take longer to complete than what we expected before the outbreak of the COVID-19 pandemic. Our biopharmaceutical services revenue grew by approximately 20% during 2021 as compared to 2020; however, we are continuing to experience delays in clinical trials from across the country and world due to COVID-19 restrictions. We expect further improvement in our biopharmaceutical activities during 2022 as compared to 2021. +Conversely, we experienced a significant increase in revenues related to an increase in the demand for our Biodesix WorkSafe testing program, our COVID-19 testing program, since the onset of the pandemic. COVID-19 diagnostic services contributed approximately $30.2 million and $28.3 million during fiscal years 2021 and 2020, respectively. The first quarter 2021 was our high-water mark for COVID-19 testing revenue. We experienced a steady decline in subsequent quarters as immunizations in the U.S. accelerated. We do not anticipate the need for COVID testing to be commensurate with the peak demand experienced during the first quarter 2021 and instead expect the demand to moderate as new variants and infection occur. The reduction in demand for COVID-19 diagnostic testing will be a key indicator of continued recovery and is taken as a positive sign for both our Lung Diagnostic and Biopharmaceutical Services as we head into 2022. T here is no assurance that our COVID-19 testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. If the pandemic were to dissipate, whether due to a significant decrease in new infections, due to acquiring herd immunity based on previous natural infection, and the availability and rapid distribution of vaccines, the evolution of variant strains that impact diagnostic test performance, or otherwise, the need for COVID-19 testing could decrease significantly and this could have an adverse effect on our results of operations and profitability. As a result, the increase in revenue due to any increase in demand for these diagnostic tests may not be indicative of our future revenue. See Part II., Item 1A. “Risk Factors” for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations. +Fourth Quarter and Full Year 2021 Financial and Operational Highlights +The Company generated record revenue in fiscal year 2021 of $54.5 million, representing an increase of 20% as compared to fiscal year 2020. The following were significant developments affecting our business, capital structure and liquidity during the year ended December 31, 2021 as compared to the same period in 2020 unless otherwise noted: +• +Total revenue of $7.2 million and $54.5 million for the fourth quarter and fiscal year 2021, respectively, with continued lung diagnostic year over year growth despite COVID-19 variant surges; +• +Core lung diagnostic revenue of $5.4 million and $18.7 million for the fourth quarter and fiscal year 2021, respectively, an increase of 48% and 49%. Nodify nodule management tests and sales force expansion continue to drive lung diagnostic growth; +89 +• +Biopharmaceutical Services revenue of $1.4 million and $5.6 million for the fourth quarter and fiscal year 2021, respectively, a decrease of 29% and increase 20%; +• +COVID-19 testing revenue of $0.4 million and $30.2 million for the fourth quarter and fiscal year 2021, respectively, a decrease of 98% and increase 7%. The decline over the fourth quarter of 2020 is commensurate with the shift away from lab-based testing and towards point-of-care and at-home rapid antigen testing during much of the back half of 2021; +• +Fourth quarter 2021 gross margin of $4.7 million or 65% as a percentage of revenue as compared to 46% primarily driven by the mix shift of sales to higher-margin core lung diagnostics and away from lower-margin COVID-19 testing; +• +Operating expenses (excluding direct costs and expenses) of $16.4 million and $64.9 million for the fourth quarter and fiscal year 2021, an increase of 9% and 40% as the Company doubled the size of the lung focused direct and dedicated sales force in 2021; +• +Net loss of $13.3 million and $43.2 million for the fourth quarter and fiscal year 2021, respectively, an increase of 193% and 38%; +• +Cash and cash equivalents of $32.7 million, inclusive of a fourth quarter 2021 equity capital issuance of $15.7 million in net proceeds and the partial prepayment of $20 million of the 2021 Term Loan. +Components of Operating Results +Revenues +We derive our revenue from two primary sources: (i) providing diagnostic testing in the clinical setting (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, clinical trial testing, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics (Services). +Diagnostic Tests +Diagnostic test revenue is generated from delivery of results from our diagnostic tests. In the United States, we performed tests as both an in-network and out-of-network service provider depending on the test performed and the contracted status of the insurer. We provide diagnostic tests in two primary categories: (i) core lung diagnostics testing and (ii) COVID-19 testing. +We consider diagnostic testing to be completed upon the delivery of test results to our customer, either the prescribing physician or third-party to which we contracted for services to be performed, which is considered the performance obligation. The fees for such services are billed either to a third party such as Medicare, medical facilities, commercial insurance payers, or to the patient. We determine the transaction price related to our contracts by considering the nature of the payer, the historical amount of time until payment by a payer and historical price concessions granted to groups of customers. +Services +Services revenue is generated from the delivery of our on-market tests, pipeline tests, custom diagnostic testing, and other scientific services for a purpose as defined by any individual customer. At times we collaborate with large biopharmaceutical companies in an attempt to discover biomarkers that would be helpful in their drug development or marketing. The performance obligations and related revenue for these sales is defined by a written agreement between us and our customer. These services are generally completed upon the delivery of testing results, or other contractually defined milestone(s), to the customer, which is considered the performance obligation. Customers for these services are typically large pharmaceutical companies where collectability is reasonably assured and therefore revenue is accrued upon completion of the performance obligations. Revenue derived from services is often unpredictable and can cause dramatic swings in our overall net revenue line from quarter to quarter. +Operating Expenses +Direct costs and expenses +Cost of diagnostic testing generally consists of cost of materials, direct labor, including bonus, employee benefits, equipment and infrastructure expenses associated with acquiring and processing test samples, including sample accessioning, test performance, quality control analyses, charges to collect and transport samples; curation of test results for physicians; and in some cases, license or royalty fees due to third parties. Costs associated with performing our tests are recorded as the tests are processed regardless of whether revenue was recognized with respect to the tests. Infrastructure expenses include depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs. Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents. While we do not believe the technologies underlying these licenses are necessary to permit us to provide our tests, we do believe these technologies are potentially valuable and of possible strategic importance to us or our +90 +competitors. Under these license agreements, we are obligated to pay aggregate royalties ranging from 1% to 8% of sales in which the patents or know-how are used in the product or service sold, sometimes subject to minimum annual royalties or fees in certain agreements. +We expect the aggregate cost of diagnostic testing to increase in line with the increase in the number of tests we perform, but the cost per test to decrease modestly over time due to the efficiencies we may gain as test volume increases, and from automation and other cost reductions. Cost of services includes costs incurred for the performance of development services requested by our customers. Costs of development services will vary depending on the nature, timing and scope of customer projects. +Research and development +Research and development expenses consist of costs incurred to develop technology and include salaries and benefits, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services, clinical studies, other outside costs and costs to develop our technology capabilities. Research and development expenses account for a significant portion of our operating expenses and consist primarily of external and internal costs incurred in connection with the discovery and development of our product candidates. +External expenses include: (i) payments to third parties in connection with the clinical development of our product candidates, including contract research organizations and consultants; (ii) the cost of manufacturing products for use in our preclinical studies and clinical trials, including payments to contract manufacturing organizations (CMOs) and consultants; (iii) scientific development services, consulting research fees and for sponsored research arrangements with third parties; (iv) laboratory supplies; and (v) allocated facilities, depreciation and other expenses, which include direct or allocated expenses for IT, rent and maintenance of facilities. External expenses are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers or our estimate of the level of service that has been performed at each reporting date. We track external costs by the stage of program, clinical or preclinical. +Internal expenses include employee-related costs, including salaries and related benefits for employees engaged in research and development functions. We do not track internal costs by product candidate because these costs are deployed across multiple programs and, as such, are not separately classified. +Research and development costs are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or services are rendered. Costs to develop our technology capabilities are recorded as research and development. +We expect our research and development expenses to increase as we continue to innovate and develop additional products and expand our data management resources. As our services revenue grows, an increasing portion of research and development dollars are expected to be allocated to cost of goods for biopharmaceutical service contracts. This expense, though expected to increase in dollars, is expected to decrease as a percentage of revenue in the long term, though it may fluctuate as a percentage of our revenues from period to period due to the timing and extent of these expenses. +Sales, marketing, general and administrative +Our sales and marketing expenses are expensed as incurred and include costs associated with our sales organization, including our direct sales force and sales management, client services, marketing and reimbursement, as well as business development personnel who are focused on our biopharmaceutical customers. These expenses consist primarily of salaries, commissions, bonuses, employee benefits, and travel, as well as marketing and educational activities and allocated overhead expenses. We expect our sales and marketing expenses to increase in dollars as we expand our sales force, increase our presence within the United States, and increase our marketing activities to drive further awareness and adoption of our tests and our future products. These expenses, though expected to increase in dollars, are expected to decrease as a percentage of revenue in the long term, though they may fluctuate as a percentage of our revenues from period to period due to the timing and extent of these expenses. +Our general and administrative expenses include costs for our executive, accounting, finance, legal and human resources functions. These expenses consist principally of salaries, bonuses, employee benefits, and travel, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. We expect that our general and administrative expenses will continue to increase in dollars, primarily due to increased headcount and costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, maintaining compliance with exchange listing and requirements of the SEC, director and officer insurance premiums and investor relations. These expenses, though expected to increase in dollars, are expected to decrease as a percentage of revenue in the long term, though they may fluctuate as a percentage from period to period due to the timing and extent of these expenses. +Change in Fair Value of Contingent Consideration +In connection with the purchase transaction of Indi, we recorded contingent consideration pertaining to the amounts potentially payable to Indi shareholder pursuant to the terms of the asset purchase agreement. The fair value of contingent consideration was assessed at each balance sheet date and changes, if any, to the fair value are recognized as operating expenses within the statement of operations. +91 +The Company met the gross margin target of $2.0 million for three consecutive months during the three months ended June 30, 2021. Subsequent changes to the contingent consideration following the achievement of the gross margin target are recorded as ‘Interest expense’ in the statements of operations resulting from the passage of time and fixed payment schedule. The significant unobservable inputs used in the measurement of fair value included the probability of successful achievement of the specified product gross margin targets, the period in which the targets were expected to be achieved, and discount rates which ranged from 11% to 13.5%. As a result of the achievement of the gross margin target, the only significant unobservable input used in the measurement of fair value includes the discount rate since all other inputs became fixed and determinable. +Non-Operating Expenses +Interest Expense and Interest Income +Interest expense consists of cash and non-cash interest from our 2021 Term Loan, the 2018 Notes, Paycheck Protection Program loan, convertible debt and changes in the value of our contingent consideration associated with the passage of time subsequent to the achievement of the contingency in the second quarter 2021. Our convertible debt, along with the related accrued interest, was automatically converted to 1,848,280 shares of our common stock upon completion of our IPO in October 2020. Interest income, which is included in ‘Other income, net’ in the statements of operations consists of income earned on our cash and cash equivalents. +Results of Operations +The following table sets forth the significant components of our results of operations for the periods presented (in thousands, except percentages): +Year Ended December 31, +Change +2021 +2020 +$ +% +Revenues +$ +54,506 +$ +45,557 +$ +8,949 +20 +% +Operating expenses +Direct costs and expenses +30,518 +21,998 +8,520 +39 +% +Research and development +12,789 +10,818 +1,971 +18 +% +Sales, marketing, general and administrative +50,517 +34,857 +15,660 +45 +% +Change in fair value of contingent consideration +1,622 +818 +804 +98 +% +Total operating expenses +95,446 +68,491 +26,955 +39 +% +Loss from operations +(40,940 +) +(22,934 +) +(18,006 +) +(79 +)% +Other (expense) income +Interest expense +(4,508 +) +(7,604 +) +(3,096 +) +(41 +)% +Change in fair value of warrant liability +— +(1,252 +) +(1,252 +) +(100 +)% +Gain on debt extinguishments, net +2,298 +— +2,298 +100 +% +Other (expense) income, net +(9 +) +440 +449 +102 +% +Total other expense +(2,219 +) +(8,416 +) +(6,197 +) +(74 +)% +Net loss +$ +(43,159 +) +$ +(31,350 +) +$ +(11,809 +) +(38 +)% +Revenues +We generate revenue from our diagnostic tests and services that we provide. Our revenues for the periods indicated were as follows (in thousands, except percentages): +Year Ended December 31, +Change +2021 +2020 +$ +% +Diagnostic revenue +$ +48,937 +$ +40,919 +$ +8,018 +20 +% +Services revenue +5,569 +4,638 +931 +20 +% +Total revenue +$ +54,506 +$ +45,557 +$ +8,949 +20 +% +Total revenue increased $8.9 million or 20% for the year ended December 31, 2021 compared to the year ended December 31, 2020. +Diagnostic test revenue increased $8.0 million or 20% for the year ended December 31, 2021 compared to the year ended December 31, 2020. The primary driver of the increase in revenue for diagnostic testing was attributable to the success in our targeted strategy of growth in our core lung diagnostic testing. Lung diagnostic revenue grew by $6.1 million or 49% for the year ended December 31, 2021 compared to the same period in 2020 driven primarily from an increase in Nodify XL2 and Nodify CDT tests delivered. We began to see recovery during the fourth quarter 2020 in lung diagnostic testing as our delivered tests exceeded first quarter 2020 delivered tests as healthcare practitioners, including pulmonologists, increasingly returned to pre-pandemic related care. The increase in Diagnostic test revenue was also attributable to the expansion of the sales organization during fiscal year 2021. However, the Company’s sales efforts continued to be impacted by the COVID-19 pandemic and the surge associated with the Delta and Omicron variants which have +92 +negatively affected, and we expect may continue to negatively affect, the growth rate of our lung diagnostic testing-related revenue and our clinical studies. +In addition to lung diagnostic testing revenue, our COVID-19 testing revenue increased by $1.9 million, or 7% from $28.3 million in fiscal year 2020 to $30.2 million in 2021 due primarily to the delivery of our COVID-19 tests that were delivered in the first half of 2021. The first quarter 2021 was our peak for COVID-19 testing revenue but we have experienced a substantial decline in COVID-19 testing revenue subsequently as a result of the expiration of our contract with the Big Ten during the second quarter 2021 and as immunizations in the U.S. accelerated. The longevity and extent of COVID-19 revenue is uncertain and may not be indicative of our future revenue and we expect it to vary based on new variants and rates of infection. +Services revenue increased $0.9 million or 20% for the year ended December 31, 2021 compared to the year ended December 31, 2020, due primarily to the recovery in testing volumes from clinical studies and services. +Operating Expenses +Direct costs and expenses +Direct costs and expenses related to revenue increased $8.5 million or 39% for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase in direct costs and expenses is primarily driven by the increase in lung diagnostic tests delivered during the year ended December 31, 2021 compared to the same period in 2020 and an increase in cost per COVID-19 test. +Research and Development +Research and development expenses increased $2.0 million or 18% for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase in cost was due primarily to increased employee compensation and benefits costs associated with non-cash stock-based compensation as a result of the transition from a private to a public company and increased headcount of our research and development personnel, partially offset by decreased spending on clinical trials. +The following table summarizes our external and internal costs for the years ended December 31, 2021 and 2020 (in thousands, except percentages): +Year Ended December 31, +Change +2021 +2020 +$ +% +External expenses: +Clinical trials and associated costs +$ +2,061 +$ +2,487 +$ +(426 +) +(17 +)% +Other external costs +3,810 +2,823 +987 +35 +% +Total external costs +5,871 +5,310 +561 +11 +% +Internal expenses +6,918 +5,508 +1,410 +26 +% +Total research and development expenses +$ +12,789 +$ +10,818 +$ +1,971 +18 +% +Sales, Marketing, General and Administrative +Sales, marketing, general and administrative expenses increased $15.7 million or 45% for the year ended December 31, 2021 compared to the year ended December 31, 2020. This increase was driven primarily by increases in employee compensation and benefits associated with expansion of the Company’s workforce and increased non-cash share-based compensation expense. This increase is also the result of increases in non-employee costs associated with legal and other fees as a result of the transition from a private to a public company. +Change in Fair Value of Contingent Consideration +Change in fair value of contingent consideration increased $0.8 million or 98% for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is a result of the change in fair value to reflect the passage of time, changes in discount rate, as well as estimates regarding the period in which targets that trigger the payment of contingent consideration will be achieved and subsequently paid. The gross margin target was met during the three months ended June 30, 2021. The net change to contingent consideration through the date the gross margin target was met is recorded as operating expenses in the statements of operations. Subsequent changes to the contingent consideration following the achievement of the gross margin target are recorded as ‘Interest expense’ in the statements of operations resulting from the passage of time and fixed payment schedule. +93 +Non-Operating Expenses +Interest Expense +Interest expense decreased $3.1 million or 41% for the year ended December 31, 2021 compared to the year ended December 31, 2020. This decline was due to a decrease of interest expense related to convertible notes, which were converted to common stock upon the completion of our IPO in October 2020, and a decrease resulting from the refinancing of our term loan, reducing near-term interest costs. Partially offsetting this decline is the increase to contingent consideration recorded as ‘Interest expense’ resulting from the passage of time and fixed payment schedule during the year ended December 31, 2021 of $2.2 million. +Change in Fair Value of Warrant Liability +During the year ended December 31, 2020, we recognized a charge for the change in estimated fair value of our warrant liability related to warrants issued in connection with our Series G preferred stock of $1.3 million. Effective with the closing of our initial public offering in October 2020, the warrants to purchase Series G preferred stock were automatically converted to warrants to acquire common stock and the carrying value of the warrants of $1.6 million were reclassified to additional paid-in capital. +Gain on Debt Extinguishment, net +During the year ended December 31, 2021, we recognized a $2.3 million net gain on debt extinguishment. The Company recorded a gain on debt extinguishment of $3.1 million related to the legal release and forgiveness of the Paycheck Protection Program Loan in full. The gain was partially offset by losses on debt extinguishment of $0.7 million and $0.1 million resulting from the repayment and termination of our 2018 secured promissory note with Innovatus and the write-off of debt issuance costs associated with a $20 million prepayment of our 2021 Term Loan, respectively. +Other (expense) income, net +Other expense, net for the year ended December 31, 2021 is primarily attributable to a loss on disposal of property and equipment. Other income, net for the year ended December 31, 2020 was primarily attributable to sublease income from two subleases that expired in the second and third quarter of 2020 and a gain on disposal of property and equipment. +Liquidity and Capital Resources +We are an emerging growth company and, as such, have yet to generate positive cash flows from operations. We have funded our operating activities primarily through financing activities, which include both debt and equity offerings. In October 2020, we completed an IPO, resulting in net proceeds of approximately $63.8 million after deducting offering costs, underwriting discounts and commissions. +During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). As a result of the pandemic, the Company diversified its diagnostic testing beyond lung diagnostic testing to include the critical service of COVID-19 diagnostic testing. Beginning in the third quarter 2020, the Company’s COVID-19 testing services began to experience rapid growth with a peak in the first quarter 2021; however, subsequent to this peak, we have experienced a rapid decline in COVID-19 testing revenue primarily as a result of a few significant contracts that have expired as well as the ongoing increase in COVID-19 vaccination rates across the U.S. In addition, the COVID-19 pandemic negatively affected, and we expect may continue to negatively affect, our lung diagnostic testing-related revenue and our clinical studies. We began to see recovery beginning in the fourth quarter 2020 as our core lung diagnostics delivered tests exceeded first quarter 2020 delivered tests and have experienced continued recovery during 2021 as lung diagnostic revenue grew 49% during 2021 as compared to 2020. However, given the continuation of the pandemic through COVID-19 variants, including the associated hospitalization surges and the impact on the medical ecosystem, which include clinical studies and pulmonary practices, the demand for our lung diagnostic testing and biopharmaceutical services has not recovered in line with our expectation from the time of our IPO. While the full outcome of the COVID-19 pandemic is unknown, it continues to negatively impact our ability to grow and scale our business in line with our expectations and disclosures at the time of our IPO. As a result, the items identified above have had an adverse effect on our revenue, results of operations and cash flows. +In March 2021, we completed the closing of our 2021 Term Loan for a principal amount of $30 million and extinguished our prior 2018 term loan for $25.9 million. The 2021 Term Loan contains customary affirmative covenants, including covenants regarding compliance with applicable laws and regulation, payment of taxes, insurance coverage, notice of certain events, and reporting requirements. Further, the 2021 Term Loan contains customary negative covenants limiting the ability to, among other things, incur future debt, transfer assets except for the ordinary course of business, make acquisitions, make certain restricted payments, and sell assets, subject to certain exceptions. The 2021 Term Loan requires the Company to comply with a minimum liquidity ratio covenant (as defined in the 2021 Term Loan) of not less than 0.95 to 1.00, and has a trailing six-month rolling revenue requirement of not less than 70% of the Company’s projected revenue performed at the end each reporting period. +During the second quarter 2021, the Company determined that it would apply for forgiveness under the SBA’s Loan Forgiveness program, a change from its previous intent to repay. Subsequently, in July 2021 the Company applied for loan forgiveness and on August 17, 2021, the Company received legal release and formal notification that the PPP Loan was forgiven in full. As of and for the three +94 +months ended September 30, 2021, the Company reduced the ‘Current portion of notes payable’ and recorded a gain on extinguishment in the statements of operations for the $3.1 million forgiven. +On September 30, 2021, we entered into the Consent and First Amendment to Loan and Security Agreement (the 2021 Term Loan Amendment) to, among other things, amend our 2021 Term Loan to eliminate the revenue covenant for the period ended September 30, 2021 and modify the revenue covenant threshold for the three month period ended December 31, 2021. In addition, we agreed to establish a restricted cash collateral account for $15 million for the benefit of our lender if the balance of our cash and cash equivalents declines below $40 million. +On December 30, 2021, the Company raised approximately $16.3 million in gross proceeds from the sale of 3,756,994 common shares at a public offering price of $4.35 per share in an at-the-market offering. The Company received net proceeds of $15.7 million after deducting underwriting discounts and commissions and offering expenses payable by the Company. +On December 31, 2021, we entered into the Consent and Second Amendment to Loan and Security Agreement (Second Amendment) to, among other things, amend our 2021 Term Loan and First Amendment to obtain consent for the $4.6 million January 2022 milestone payment under the Indi APA, repay $20 million in outstanding principal on December 31, 2021, waive the $600,000 prepayment fee on the $20 million Term Loan repayment, and waive the minimum revenue covenant as of December 31, 2021 and modify the minimum revenue requirement to not less 75% for the three months ended March 31, 2022 and not less than 75% on a trailing six month rolling basis for each quarter thereafter of the Company’s projected revenue performed at the end of each reporting period. The Lender agreed to apply the full amount of funds previously established within the restricted cash collateral account to partially prepay the $20 million in outstanding principal, thereby eliminating the restricted cash collateral account. As of December 31, 2021, the Company was in compliance with all restrictive and financial covenants associated with its borrowings. +As of December 31, 2021, we maintained cash and cash equivalents of $32.7 million and we have $10 million in principal balance remaining on our 2021 Term Loan. We have incurred significant losses since inception and, as a result, we have funded our operations to date primarily through the sale of common stock in our IPO in October 2020, the issuance of notes payable, and from our two primary revenue sources: (i) diagnostic testing, which include lung diagnostic testing and COVID-19 testing, and (ii) providing biopharmaceutical companies with development and testing services. In accordance with Accounting Standards Update 2014-15 (ASC Topic 205-40), Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods. In evaluating the Company’s ability to continue as a going concern, management projected its cash flow sources and needs and evaluated the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements were issued. Management considered the Company’s current projections of future cash flows, current financial condition, sources of liquidity and debt obligations for at least one year from the date of issuance of this Form 10-K in considering whether it has the ability to meet its obligations. +Our ability to meet our obligations as they come due may be impacted by our ability to remain compliant with financial covenants in our 2021 Term Loan or to obtain waivers or amendments that impact the related covenants. Due to the continued uncertainty caused by the COVID-19 pandemic, significant risks remain with respect to our ability to meet these thresholds and any material adverse effect on our revenues, income and expenses could impact our ability to maintain compliance with these covenants. +Based on our current operating plan, unless we raise additional capital (debt or equity) or obtain waiver from complying with such financial covenants, we expect that we will be unable to maintain our financial covenants under our 2021 Term Loan during the next twelve months, which could result in an Event of Default, as defined, causing an acceleration of the outstanding balance. We have taken steps to improve our liquidity through and the actions noted above and have also undertaken several proactive measures to mitigate the financial and operational impacts of COVID-19 through the reduction of planned capital expenditures and certain operating expenses but we do not expect that these actions alone will be sufficient to maintain our financial covenants. In addition, we have entered into negotiations with certain creditors to modify existing terms of arrangements to delay near term cash requirements and extend the period of payments; however, those negotiations are not final at this time and may not result in final agreement. We plan to raise additional funding through the issuance of equity or debt securities; however, we have not secured such funding at the time of this filing and any such financing activities are subject to market conditions. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. There can be no assurance that additional capital will be available to us or, if available, will be available in sufficient amounts or on terms acceptable to us or on a timely basis nor can there be any assurance that the Company will be a beneficiary of the COVID-19 Action Plan. If adequate capital resources are not available on a timely basis, we intend to consider limiting our operations substantially. This limitation of operations could include a hiring freeze, reductions in our workforce, reduction in cash compensation, deferring capital expenditures, and reducing other operating costs. +The Company’s revenues, results of operations and cash flows have been materially adversely impacted by the items noted above. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term while we make +95 +investments to support our anticipated growth. Our current operating plan, which is in part determined based on our most recent historical actual results and trends, along with the items noted above, raises substantial doubt about the Company’s ability to continue as a going concern. Our audited financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments that might be necessary should we be unable to continue as a going concern. +Cash Flows +The following summarizes our cash flows for the periods indicated (in thousands): +Year Ended December 31, +2021 +2020 +Net cash flows (used in) provided by: +Operating activities +$ +(28,223 +) +$ +(21,366 +) +Investing activities +(2,547 +) +(2,927 +) +Financing activities +1,262 +81,131 +Net increase in cash and cash equivalents and restricted cash +$ +(29,508 +) +$ +56,838 +Our cash flows resulted in a net decrease in cash of $29.5 million during the year ended December 31, 2021 compared to a net increase in cash of $56.8 million for the year ended December 31, 2020. For the year ended December 31, 2021, net cash used in operating activities increased by approximately $6.9 million, primarily due to a year-over-year increase in net loss of $11.8 million and decrease in non-cash adjustments to net loss of $4.5 million driven primarily by a decrease in amortization of convertible notes debt discount in 2020 of $4.4 million and an increase in net gain on debt extinguishment in 2021 of $2.3 million. This is partially offset by an increase in stock-based compensation expense of $1.2 million, increase in contingent consideration of $0.8 million, and increase in other non-cash items of $0.2 million. In addition, the Company experienced favorable changes in net working capital of $9.4 million primarily as a result of increased cash collections from customers, partially offset by increased payments to vendors. +Net cash used in investing activities during the year ended December 31, 2021 totaled $2.5 million, a decrease of $0.4 million compared to the same period in 2020. The decrease in net cash used in investing activities was primarily due to payments in 2020 to acquire Oncimmune assets that are not present in 2021. This is partially offset by an increase in purchases of property and equipment during 2021 in support of our operations. +Net cash provided by financing activities during the year ended December 31, 2021 totaled $1.3 million, a decrease of $79.9 million compared to the same period in 2020. The net cash provided by financing activities for the year ended December 31, 2021 primarily resulted from $15.7 million net proceeds from our at-the-money public offering, net proceeds from our 2021 Term Loan of $29.9 million, and proceeds from the issuance of common stock under the ESPP and exercise of stock options of approximately $1.0 million, primarily offset by the repayment of $25.3 million from our 2018 Term Loan and a $20 million prepayment on our 2021 Term Loan. The net cash provided by financing activities for the year ended December 31, 2020 primarily resulted from $72.0 million gross proceeds from our initial public offering, $13.0 million in proceeds from the issuance of convertible notes payable, $1.3 million proceeds from stock option exercises, and $3.1 from proceeds from our paycheck protection program loan, offset by equity financing and other costs associated with our initial public offering of $8.3 million. +Contractual Obligations and Commitments +The following table summarizes our non-cancelable contractual obligations and commitments as of December 31, 2021 (in thousands): +Payments due by period (1) +Total +Less than +1 year +1 to 3 +years +4 to 5 +years +More than +5 years +Operating lease obligations (2) +$ +937 +$ +775 +$ +158 +$ +4 +$ +— +Borrowings and interest (3) +14,386 +532 +5,368 +8,486 +— +Fair value of contingent consideration (4) +37,000 +18,500 +18,500 +— +— +Total +$ +52,323 +$ +19,807 +$ +24,026 +$ +8,490 +$ +— +(1) +Royalty payments that we may owe are not included as the amount and timing of such payments is uncertain. +(2) +We are obligated under non-cancellable operating leases for all of our facilities. Lease terms for our facilities range from less than one to three years and generally require us to pay real estate taxes, certain insurance and operating costs. +(3) +Includes the 2021 Term Loan payments of principal, interest and final payment fee of $2.7 million payment due upon loan maturity. +(4) +The gross margin target associated with the purchase transaction of Indi was achieved in the quarter ending June 30, 2021, giving rise to the previously disclosed contingent obligations of $37.0 million in the aggregate payable through the issuance of Company’s shares of common stock subject to a fixed price put option. The Company entered into an amendment in August 2021 to the original agreement in which all parties agreed to forgo the issuance of shares of common stock of the Company that would otherwise be issued to it, and the Company will instead make six quarterly installment payments of $4.6 million beginning in January 2022 and a final payment of approximately $9.3 million in July 2023 for a total of $37.0 million. The aggregate amount of payments owed by the Company under this +96 +amendment is the same as if Indi had exercised the put right or the Company had exercised the call right provided for in the original agreement. +Off-Balance Sheet Arrangements +None. +Critical Accounting Policies and Significant Judgments and Estimates +In accordance with accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Certain of these estimates significantly influence the portrayal of our financial condition and results of operations and require us to make difficult, subjective or complex judgments. Our critical accounting policies primarily relate to our fair value estimates, and are described in greater detail in Note 2 to our financial statements in Part 8 of this Annual Report on Form 10-K. +Revenue Recognition +We recognize revenue when our customers obtain control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for our goods or services. To determine revenue recognition for our arrangements with our customers, we perform a five-step process, which includes: (i) identifying the contract(s) with a customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations in the contract; and (v) recognizing revenue when (or as) we satisfy our performance obligations. +Diagnostic test revenues +Diagnostic test revenues are recognized upon completion of our performance obligation to the deliver test results to our customer, either the prescribing physician or third-party to which we contracted for services to be performed. We consider diagnostic testing to be completed upon the delivery of test results to our customer which is considered the performance obligation. The fees for such services are billed either to a third party such as Medicare, medical facilities, commercial insurance payers, or to the patient. We determine the transaction price related to our contracts by considering the nature of the payer, the historical amount of time until payment by a payer and historical price concessions granted to groups of customers. These estimates require significant judgment by management. +Service revenues +Service revenues are recognized upon completion of our performance obligation to deliver testing results for assay development and testing services. The performance obligations and related revenue for these sales is defined by a written agreement between us and our customer. These services are generally completed upon the delivery of testing results, or other contractually defined milestone(s), to the customer, which is considered the performance obligation. Customers for these services are typically large pharmaceutical companies where collectability is reasonably assured and therefore revenue is accrued upon completion of the performance obligations. Revenue derived from services is often unpredictable and can cause dramatic swings in our overall net revenue line from quarter to quarter. +Share-based Compensation and Grant Date Fair Value +Share-based compensation related to stock options granted to our employees, directors and non-employees is measured at the grant date based on the fair value of the award. For our service-based awards, the fair value of each award is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. Compensation expense for share-based awards with performance conditions is recognized based upon the probability the performance conditions will be met as defined in the grant. Restricted stock units are measured at their grant date fair value using the closing price of our common stock on the date of grant and recognized to expense on a straight-line basis over the vesting period of each award. We estimate forfeitures and adjust these estimates to actual forfeitures as they occur. +We use the Black-Scholes option-pricing model to estimate the fair value of our share-based option awards, which requires assumptions to be made related to expected term of an award, expected volatility, the risk-free rate and expected dividend yield. Following the completion of our initial public offering, our Board of Directors has determined the fair value of our common stock is based on our closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded. Changes in these subjective assumptions can materially affect the estimated value of equity grants and the share-based compensation that we record in our financial statements. +Recently Issued Accounting Pronouncements +In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC Topic 842). The new guidance maintains two classifications of leases: finance leases, which replace capital leases, and operating leases. Lessees will need to recognize a right-of-use asset and a lease liability on the balance sheet for those leases previously classified as operating leases under the old guidance. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for direct costs. The accounting standard will be effective for the Company beginning January 1, 2022. B ased on our current analysis expect the adoption to result in the recognition of approximately $1.5 million of right of use assets and associated lease liabilities, inclusive of both lease and +97 +non-lease components, in our balance sheet and do not expect any material impact to our statement of operations or statement of cash flows. We are implementing new processes and internal controls over lease recognition, which will ultimately assist in the application of the new lease standard. +In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (ASC Topic 326). This ASU requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for the Company beginning January 1, 2023 with early adoption permitted. The Company is currently evaluating this guidance and assessing the overall impact on its financial statements. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) until December 31, 2025 (the year ended December 31st following the fifth anniversary of our initial public offering. +Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which: (i) the market value of our common shares held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common shares held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. +Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk. +We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. +Interest Rate Risk +We are exposed to market risk for changes in interest rates related primarily to our cash and cash equivalents, marketable securities and our indebtedness, including our outstanding 2021 Term Loan. As of December 31, 2021, we had $10 million outstanding on the 2021 Term Loan subject to a floating per annum rate equal to the greater of (i) 2.00% above the prime rate, or (ii) 5.25% . Historically, we have not entered into derivative agreements such as interest rate caps and swaps to manage our floating interest rate exposure. +Periodically throughout the year, we have maintained balances in various operating accounts in excess of federally insured limits. Our cash and cash equivalents are funds held in checking and bank savings accounts, primarily at two U.S. financial institutions. We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. We continually monitor our positions with, and the credit quality of, the financial institutions with which we invest. +As of December 31, 2021 , a hypothetical 100 basis point increase in interest rates would not have a material impact on our investment portfolio, financial position or results of operations. +Item 8. Financial Statement s and Supplementary Data. +The financial statements and supplementary data are as set forth in the index to the financial statements on page F-1. +98 +Item 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure. +None. +Item 9A. Controls and Procedures. +Evaluation of Disclosure Controls and Procedures +We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. +Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the criteria established in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), using the 2013 framework. Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021 , the Company's internal control over financial reporting was effective based on the criteria set forth by COSO. +This annual report does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2021 , there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information. +None. +99 +PART III +Item 10. Directors, Executive Off icers and Corporate Governance. +The information required by this item with respect to directors is incorporated by reference from the information under the captions "Board and Corporate Governance Matters—Election of Directors" and "—Director Independence" contained in our Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2021 in connection with the solicitation of proxies for our 2022 Annual Meeting of Stockholders (the Proxy Statement). Certain information required by this item concerning executive officers is set forth in the Proxy Statement under the caption "Executive Compensation—Executive Officers" and is incorporated herein by reference. +Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16(a) of the Exchange Act. This disclosure is contained in the section entitled "Stock Ownership—Delinquent Section 16(a) Reports" in the Proxy Statement and is incorporated herein by reference. +We have adopted a Code of Business Conduct and Ethics that applies to all of our officers and employees, including our President and Chief Executive Officer, our Chief Financial Officer and other employees who perform financial or accounting functions. The Code of Business Conduct and Ethics sets forth the basic principles that guide the business conduct of our employees. Stockholders may request a free copy of our Code of Business Conduct and Ethics by contacting Biodesix, Inc., Attention: Chief Financial Officer, 2970 Wilderness Place, Suite 100, Boulder, Colorado 80301. +To date, there have been no waivers under our Code of Business Conduct and Ethics. We intend to disclose future amendments to certain provisions of our Code of Business Conduct and Ethics or waivers of such Codes granted to executive officers and directors on our website at http://www.biodesix.com within four business days following the date of such amendment or waiver. +Our Board of Directors has appointed an Audit Committee, comprised of Ms. Jean Franchi, as Chairwoman, Mr. Hany Massarany and Dr. Matthew Strobeck. The Board of Directors has determined that Ms. Franchi qualifies as an Audit Committee Financial Expert under the definition outlined by the Securities and Exchange Commission. In addition, each of the members of the Audit Committee qualifies as an "independent director" under the current rules of The NASDAQ Stock Market and Securities and Exchange Commission rules and regulations. +Item 11. Executiv e Compensation. +The information required by this item is incorporated by reference from the information under "Executive Compensation" contained in the Proxy Statement and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Own ers and Management and Related Stockholder Matters. +The information required by this item is incorporated by reference from the information under the captions "Stock Ownership—Security Ownership of Certain Beneficial Owners and Management" and "Executive Compensation—Equity Compensation Plan Information" contained in the Proxy Statement and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this item is incorporated by reference from the information under the caption "Board and Corporate Governance Matters—Certain Relationships and Related Party Transactions" and "—Director Independence" contained in the Proxy Statement and is incorporated herein by reference. +Item 14. Principal Accoun tant Fees and Services. +The information required by this item is incorporated by reference from the information under the caption "Audit Matters—Principal Accountant Fees and Services" contained in the Proxy Statement and is incorporated herein by reference. +100 +PART IV +Item 15. Exhibits, Financ ial Statement Schedules. +(a) +Documents filed as a part of the report. +1. +Financial Statements +Reference is made to the Index to Financial Statements of Biodesix, Inc. included in Item 8 of Part II hereof. +2. +Financial Statement Schedules +All schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto. +3. +See Item 15(b) below. Each management contract or compensating plan or arrangement required to be filed has been identified. +(b) +Exhibits. +Item 16. Form 10-K Summary. +Not applicable. +101 +Exhibit Index +Exhibit +Number +Description +3.1** +Amended and Restated Certificate of Incorporation of Biodesix, Inc., dated October 30, 2020 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on December 10, 2020). +3.2** +Amended and Restated Bylaws of Biodesix, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on October 12, 2020). +4.1** +Specimen stock certificate evidencing shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 21, 2020). +4.2** +Eleventh Amended and Restated Investor Rights Agreement, by and among Biodesix, Inc. and the investors listed on Exhibit A thereto, dated October 10, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +4.3** +Warrant held by Innovatus Life Sciences Lending Fund I, LP, to Purchase Series G Preferred Stock, dated February 23, 3018 (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +4.4** +Secured Promissory Note held by Innovatus Life Sciences Lending Fund I, LP, in Biodesix, Inc., dated February 23, 2018 (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +4.5** +Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.5 to the Company's Form 10-K filed with the SEC on March 16, 2021). +10.1+** +Biodesix, Inc. Amended and Restated 2006 Employee, Director and Consultant Stock Plan, as amended to date (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.1+** +Form of Stock Option Grant Notice under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.2+** +Form of Option Agreement under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.3+** +Form of Notice of Exercise under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.3 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.3+** +Biodesix, Inc. 2016 Equity Incentive Plan, as amended to date (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.4.1+** +Form of Stock Option Grant Notice under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.4.2+** +Form of Option Agreement under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.4.3+** +Form of Notice of Exercise under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.3 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.5+** +Biodesix, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 26, 2020). +10.5.1+** +Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5.1 to the Company's Form 10-K filed with the SEC on March 16, 2021). +10.5.2+** +Forms of Restricted Stock Unit Award Grant Notice and Award Agreement under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5.2 to the Company's Form 10-Q filed with the SEC on August 10, 2021). +102 +10.6+** +Biodesix, Inc. 2020 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 26, 2020). +10.7.1+** +Biodesix, Inc., First Amended Bonus-to-Options Program, adopted by the Board of Directors on October 15, 2010 (incorporated by reference to Exhibit 10.5.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.7.2+** +Biodesix, Inc., Second Amended Bonus-to-Options Program, adopted by the Board of Directors on June 21, 2011 (incorporated by reference to Exhibit 10.5.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.7.3+** +Biodesix, Inc., Third Amended Bonus-to-Options Program, adopted by the Board of Directors on December 31, 2015 (incorporated by reference to Exhibit 10.5.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.8.1+** +Form of Stock Option Grant Notice under the Biodesix, Inc. Bonus-To-Options Program (incorporated by reference to Exhibit 10.6.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.8.2+** +Form of Option Agreement under the Biodesix, Inc. Bonus-To-Options Program (incorporated by reference to Exhibit 10.6.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.9+** +Form of Indemnification Agreement, by and between Biodesix, Inc. and each of its directors and executive officers (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 14, 2020). +10.10.1†+** +Executive Employment Letter, by and between Biodesix, Inc. and Scott Hutton, dated February 16, 2018 (incorporated by reference to Exhibit 10.9.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.10.2†+** +Executive Employment Letter, by and between Biodesix, Inc. and Scott Hutton, dated February 23, 2020 (incorporated by reference to Exhibit 10.9.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.11.1†+** +Employment Letter, by and between Biodesix, Inc. and Robin Harper Cowie, dated March 11, 2011 (incorporated by reference to Exhibit 10.10.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.11.2†+** +Executive Employment Letter, by and between Biodesix, Inc. and Robin Harper Cowie, dated February 23, 2020 (incorporated by reference to Exhibit 10.10.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.12+** +Consulting Agreement, by and between David Brunel and Biodesix, Inc., dated September 19, 2020 (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.13.1†** +Office Lease between Aero-Tech Investments, LLC and Biodesix, Inc., dated October 5, 2011 (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.13.2* +Office Lease between Aero-Tech Investments, LLC and Biodesix, Inc., dated January 24, 2022. +10.14†** +Lease Assignment of De Soto Facility, dated November 1, 2019 (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.15.1†** +Loan and Security Agreement, by and among Innovatus Life Sciences Lending Fund I, LP, the Lenders listed therein, and Biodesix, Inc., dated February 23, 2018 (incorporated by reference to Exhibit 10.13.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.15.2†** +Limited Consent Agreement and Second Amendment to Loan and Security Agreement, by and among Innovatus Life Sciences Lending Fund I, LP, the Lenders listed therein, and Biodesix, Inc., dated June 30, 2018, as amended to date (incorporated by reference to Exhibit 10.14.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.16** +Patent Assignment between Biodesix, Inc., and Integrated Diagnostics, Inc., dated June 30, 2018 (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +103 +10.17†** +IP Assignment Agreement between Oncimmune Limited, and Biodesix, Inc., dated October 31, 2019 (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.18†** +IP License Agreement between Oncimmune Limited, and Biodesix, Inc., dated October 31, 2019 (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.19†** +Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated August 1, 2019 (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.20†** +Supply Agreement between Biodesix, Inc., and Oncimmune, dated October 31, 2019 (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.21†** +Supply Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated August 1, 2019 (incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.22†** +Co-Development and Collaboration Agreement between AVEO Pharmaceuticals, Inc., and Biodesix, Inc., dated April 9, 2014, as amended October 14, 2016 (incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.23†** +Contingent Value Rights Agreement between Biodesix, Inc. and Holders on Schedule A mentioned within, dated February 22, 2016 (incorporated by reference to Exhibit 10.22 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.24†** +Asset Purchase Agreement among Biodesix, Inc., Integrated Diagnostics, Inc., and the stockholders of Integrated Diagnostics, Inc., listed therein, dated June 30, 2018 (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.25** +Amendment No. 2 to Asset Purchase Agreement and Plan of Reorganization (incorporated by reference to Exhibit 10.38 to the Company's Form 10-Q filed with the SEC on August 10, 2021). +10.26†** +Asset Purchase Agreement between Oncimmune Limited and Biodesix, Inc., dated June 27, 2019, as amended to date (incorporated by reference to Exhibit 10.24 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.27†** +COVID-19 Testing Laboratory Services Agreement by and between Biodesix, Inc., and Centura Health Corporation, dated April 3, 2020 (incorporated by reference to Exhibit 10.25 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.28†** +First Amendment to COVID-19 Testing Laboratory Services Agreement by and between Biodesix, Inc. and Centura Health Corporation, dated April 23, 2020 (incorporated by reference to Exhibit 10.26 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.29†** +Second Amendment to COVID-19 Testing Laboratory Services Agreement by and between Biodesix, Inc. and Centura Health Corporation, dated May 27, 2020 (incorporated by reference to Exhibit 10.27 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.30†** +Third Amendment to COVID-19 Testing Laboratory Services Agreement by and between Biodesix, Inc. and Centura Health Corporation, dated August 7, 2020 (incorporated by reference to Exhibit 10.28 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.31†** +Contract Agreement between Biodesix, Inc. and the Colorado Department of Public Health and Environment, dated September 11, 2020 (incorporated by reference to Exhibit 10.29 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.32†** +Material Transfer Agreement by and between Biodesix, Inc. and Bio-Rad Laboratories, Inc., dated March 23, 2020 (incorporated by reference to Exhibit 10.30 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.33†** +First Amendment to Material Transfer Agreement by and between Biodesix, Inc. and Bio-Rad Laboratories, Inc. dated April 3, 2020 (incorporated by reference to Exhibit 10.31 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +104 +10.34†** +Material Transfer Agreement by and between Biodesix, Inc. and Bio-Rad Laboratories, Inc., dated April 17, 2020 (incorporated by reference to Exhibit 10.32 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.35†** +Price Agreement by and between Biodesix, Inc. and Bio-Rad Laboratories, Inc., dated May 12, 2020 (incorporated by reference to Exhibit 10.33 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.36** +Letter from Bio-Rad Laboratories, Inc. dated August 7, 2020 (incorporated by reference to Exhibit 10.33 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 21, 2020). +10.37** +Letter from Bio-Rad Laboratories, Inc. dated August 14, 2020 (incorporated by reference to Exhibit 10.34 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 21, 2020). +10.38** +First Amendment to the Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated May 24, 2021 (incorporated by reference to Exhibit 10.37 to the Company's Form 10-Q filed with the SEC on August 10, 2021). +10.39** +Loan and Security Agreement, dated March 19, 2021 (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on March 23, 2021). +10.40** +Consent and First Amendment to Loan and Security Agreement, dated September 30, 2021 (incorporated by reference to Exhibit 10.39 to the Company's Form 10-Q filed with the SEC on November 15, 2021). +10.41** +Purchase Agreement, dated March 7, 2022, by and between Biodesix, Inc. and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on March 7, 2022). +10.42** +Registration Rights Agreement, dated March 7, 2022, by and between Biodesix, Inc. and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K filed with the SEC on March 7, 2022). +23.1* +Consent of independent registered public accounting firm. +24.1* +Power of Attorney (included on the signature page of this Form 10-K). +31.1* +Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2* +Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS* +Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. +101.SCH* +Inline XBRL Taxonomy Extension Schema Document +101.CAL* +Inline XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF* +Inline XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +Inline XBRL Taxonomy Extension Label Linkbase Document +101.PRE* +Inline XBRL Taxonomy Extension Presentation Linkbase Document +104 +Cover Page Interactive Data File (embedded within the Inline XBRL document) +† Portions of this exhibit have been omitted as the Registrant has determined that the omitted information (i) is not material and (ii) would likely cause competitive harm to the Registrant if publicly disclosed. ++ Indicates management contract or compensatory plan. +* Filed herewith. +**Previously filed. +105 +SIGNAT URES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized . +Biodesix, Inc. +Date: March 14, 2022 +By: +/s/ RYAN H. SIUREK +Ryan H. Siurek +Chief Accounting Officer +POWER OF ATTORNEY +Each person whose signature appears below constitutes and appoints Scott Hutton and Robin Harper Cowie, and each of them, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to file with the Securities and Exchange Commission this Form 10-K and any and all amendments and exhibits thereto, and all documents in connection therewith, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and purposes as he or she might or could do in person, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his or her substitutes may lawfully do or cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. +Name +Title +Date +/s/ SCOTT HUTTON +President, Chief Executive Officer (Principal Executive Officer +March 14, 2022 +Scott Hutton +/s/ ROBIN HARPER COWIE +Chief Financial Officer, Secretary and Treasurer +March 14, 2022 +Robin Harper Cowie +/s/ JOHN PATIENCE +Chairman and Director +March 14, 2022 +John Patience +/s/ JEAN FRANCHI +Director +March 14, 2022 +Jean Franchi +/s/ JON FAIZ KAYYEM +Director +March 14, 2022 +Jon Faiz Kayyem, Ph.D. +/s/ HANY MASSARANY +Director +March 14, 2022 +Hany Massarany +/s/ JACK SCHULER +Director +March 14, 2022 +Jack Schuler +/s/ MATTHEW STROBECK +Director +March 14, 2022 +Matthew Strobeck, Ph.D. +/s/ CHARLES WATTS +Director +March 14, 2022 +Charles Watts, M.D. +106 +Item 8. Financial Statements and Supplementary Data +BIODESIX, Inc. +INDEX TO FINANCIAL STATEMENTS +Report of Independent Registered Public Accounting Firm ( KPMG LLP , Denver, CO , Auditor Firm ID: 185 ) +F- 2 +Balance Sheets as of December 31, 2021 and 2020 +F- 3 +Statements of Operations for the Years ended December 31, 2021 and 2020 +F- 4 +Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years ended December 31, 2021 and 2020 +F- 5 +Statements of Cash Flows for the Years ended December 31, 2021 and 2020 +F- 6 +Notes to Financial Statements +F- 8 +F- 1 +Report of Independent Regist ered Public Accounting Firm +To the Board of Directors and Stockholders of +Biodesix, Inc.: +Opinion on the Financial Statements +We have audited the accompanying balance sheets of Biodesix, Inc. (the Company) as of December 31, 2021 and 2020, the related statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. +Going Concern +The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and needs to raise additional equity or debt capital to fund its operations. These matters raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. +Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 2016 +Denver, Colorado +March 14, 2022 +F- 2 +BIODESIX, INC. +Balance Sheets +(in thousands, except share data) +As of December 31, +2021 +2020 +Assets +Current assets +Cash and cash equivalents +$ +32,712 +$ +62,126 +Accounts receivable, net of allowance for doubtful accounts of $ 158 and $ 180 +3,656 +15,304 +Other current assets +7,245 +8,710 +Total current assets +43,613 +86,140 +Non‑current assets +Property and equipment, net +4,179 +3,178 +Intangible assets, net +11,617 +13,260 +Goodwill +15,031 +15,031 +Other long-term assets +1,657 +3,461 +Total non‑current assets +32,484 +34,930 +Total assets +$ +76,097 +$ +121,070 +Liabilities and Stockholders' Equity +Current liabilities +Accounts payable +$ +1,662 +$ +8,964 +Accrued liabilities +7,665 +7,789 +Deferred revenue +1,850 +3,532 +Current portion of contingent consideration +17,764 +— +Current portion of notes payable +19 +11,840 +Total current liabilities +28,960 +32,125 +Non‑current liabilities +Long‑term notes payable, net of current portion +9,993 +15,926 +Contingent consideration +16,028 +29,932 +Other long-term liabilities +1,389 +1,921 +Total non‑current liabilities +27,410 +47,779 +Total liabilities +56,370 +79,904 +Commitments and contingencies +Stockholders' equity +Preferred stock, $ 0.001 par value, 5,000,000 authorized; +0 (2021 and 2020) issued and outstanding +— +— +Common stock, $ 0.001 par value, 200,000,000 authorized; +30,789,649 (2021) and 26,561,504 (2020) shares issued and outstanding +31 +27 +Additional paid‑in capital +321,669 +299,953 +Accumulated deficit +( 301,973 +) +( 258,814 +) +Total stockholders' equity +19,727 +41,166 +Total liabilities and stockholders' equity +$ +76,097 +$ +121,070 +The accompanying Notes are an integral part of these financial statements. +F- 3 +BIODESIX, INC. +Statements of Operations +(in thousands, except per share data) +Year Ended December 31, +2021 +2020 +Revenues +$ +54,506 +$ +45,557 +Operating expenses: +Direct costs and expenses +30,518 +21,998 +Research and development +12,789 +10,818 +Sales, marketing, general and administrative +50,517 +34,857 +Change in fair value of contingent consideration +1,622 +818 +Total operating expenses +95,446 +68,491 +Loss from operations +( 40,940 +) +( 22,934 +) +Other (expense) income: +Interest expense +( 4,508 +) +( 7,604 +) +Change in fair value of warrant liability +— +( 1,252 +) +Gain on debt extinguishments, net +2,298 +— +Other (expense) income, net +( 9 +) +440 +Total other expense +( 2,219 +) +( 8,416 +) +Net loss +$ +( 43,159 +) +$ +( 31,350 +) +Net loss per share, basic and diluted +$ +( 1.58 +) +$ +( 6.48 +) +Weighted-average shares outstanding, basic and diluted +27,365 +4,838 +The accompanying Notes are an integral part of these financial statements. +F- 4 +BIODESIX, INC. +Statements of Convertible Preferred Sto ck and Stockholders' Equity (Deficit) +(in thousands) +Convertible Preferred Stock +Common Stock +Additional Paid‑In +Accumulated +Total Stockholders' Equity +Shares +Amount +Shares +Amount +Capital +Deficit +(Deficit) +Balance ‑ January 1, 2020 +118,766 +$ +193,959 +255 +$ +1 +$ +2,324 +$ +( 227,464 +) +$ +( 225,139 +) +Issuance of common stock in initial public offering, net of discounts and commission of $ 5,040 and direct offering costs of $ 3,203 +— +— +4,000 +4 +63,753 +— +63,757 +Conversion of preferred stock into common stock upon initial public offering +( 118,766 +) +( 193,959 +) +20,091 +20 +193,939 +— +193,959 +Conversion of convertible debt into common stock upon initial public offering +— +— +1,848 +2 +26,614 +— +26,616 +Reclassification of preferred stock warrant liability and put option into additional paid-in capital upon initial public offering +— +— +— +— +8,274 +— +8,274 +Exercise of stock options +— +— +368 +— +1,340 +— +1,340 +Stock‑based compensation +— +— +— +— +3,709 +— +3,709 +Net loss +— +— +— +— +— +( 31,350 +) +( 31,350 +) +Balance ‑ December 31, 2020 +— +— +26,562 +27 +299,953 +( 258,814 +) +41,166 +Issuance of common stock, net of discounts and commission of $ 664 +— +— +3,757 +4 +15,675 +— +15,679 +Issuance of common stock under employee stock purchase plan +— +— +43 +— +328 +— +328 +Exercise of stock options +— +— +428 +— +769 +— +769 +Stock‑based compensation +— +— +— +— +4,944 +— +4,944 +Net loss +— +— +— +— +— +( 43,159 +) +( 43,159 +) +Balance - December 31, 2021 +— +$ +— +30,790 +$ +31 +$ +321,669 +$ +( 301,973 +) +$ +19,727 +The accompanying Notes are an integral part of these financial statements. +F- 5 +BIODESIX, INC. +Statements of Cash Flows +(in thousands) +Year Ended December 31, +2021 +2020 +Cash flows from operating activities +Net loss +$ +( 43,159 +) +$ +( 31,350 +) +Adjustments to reconcile net loss to net cash, cash equivalents, and restricted +cash used in operating activities +Depreciation and amortization +3,178 +2,903 +Amortization of convertible notes debt discount +— +4,389 +Gain on debt extinguishments, net +( 2,298 +) +— +Stock‑based compensation expense +4,944 +3,709 +Change in fair value of warrant liability +— +1,252 +Change in contingent consideration +1,622 +818 +Provision for doubtful accounts +193 +296 +Accrued interest, amortization of debt issuance costs and other +2,706 +1,418 +Changes in operating assets and liabilities: +Accounts receivable +11,454 +( 10,308 +) +Other current assets +1,369 +( 6,588 +) +Other long-term assets and liabilities +875 +( 1,808 +) +Accounts payable and other accrued liabilities +( 7,425 +) +11,654 +Deferred revenue +( 1,682 +) +2,249 +Net cash and cash equivalents and restricted cash used in operating activities +( 28,223 +) +( 21,366 +) +Cash flows from investing activities +Purchase of property and equipment +( 2,241 +) +( 1,945 +) +Patent costs and intangible asset acquisition, net +( 306 +) +( 232 +) +Payments to acquire Oncimmune assets +— +( 750 +) +Net cash and cash equivalents and restricted cash used in investing activities +( 2,547 +) +( 2,927 +) +Cash flows from financing activities +Proceeds from initial public offering +— +72,000 +Proceeds from the issuance of common stock +16,343 +— +Proceeds from issuance of common stock under employee stock purchase plan +328 +— +Proceeds from exercise of stock options +769 +1,340 +Proceeds from issuances of convertible notes payable +— +12,955 +Proceeds from term loan and notes payable +30,078 +3,085 +Repayment of term loan and notes payable +( 45,428 +) +— +Payment of debt issuance costs +( 164 +) +— +Equity financing costs +( 664 +) +( 8,243 +) +Other +— +( 6 +) +Net cash and cash equivalents and restricted cash provided by financing activities +1,262 +81,131 +Net increase (decrease) in cash and cash equivalents and restricted cash +( 29,508 +) +56,838 +Cash, cash equivalents, and restricted cash ‑ beginning of period +62,306 +5,468 +Cash, cash equivalents, and restricted cash ‑ end of period +$ +32,798 +$ +62,306 +The accompanying Notes are an integral part of these financial statements. +F- 6 +BIODESIX, INC. +Statements of Cash Flows +(in thousands) +(Continued from the previous page) +Supplemental cash flow information : +Year Ended December 31, +2021 +2020 +Conversion of preferred stock into common stock +$ +— +$ +193,959 +Conversion of convertible notes and accrued interest into common stock +— +26,616 +Reclassification of put option liability to additional paid-in capital +— +6,650 +Value of put option recorded at issuance of convertible debt payable +— +3,389 +Cash paid for interest +1,676 +1,844 +Reclassification of warrant liability to additional paid-in capital +— +1,624 +Non-cash debt issuance costs included in Accrued liabilities +15 +— +The accompanying Notes are an integral part of these financial statements. +F- 7 +BIODESIX, INC. +Notes to Financ ial Statements +Note 1 – Organization and Description of Business +Biodesix, Inc. (the “Company”, “Biodesix”, “we” “us” and “our”), formerly Elston Technologies, Inc., was incorporated in Delaware in 2005. The Company’s headquarters are in Colorado, with laboratories in Colorado and Kansas. The Company conducts all of its operations within a single legal entity. Biodesix is a data-driven diagnostic solutions company leveraging state of the art technologies with its proprietary artificial intelligence platform to discover, develop, and commercialize solutions for clinical unmet needs, with a primary focus in lung disease. In addition to diagnostic tests, the Company provides biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. +The Company performs its blood-based diagnostic tests in its laboratory facilities, which are located in Boulder, Colorado and De Soto, Kansas. In May 2020, the Federal Drug Administration (FDA) granted Emergency Use Authorization (EUA) of the Bio-Rad SARS-CoV-2 Droplet Digital™ polymerase chain reaction (ddPCR) test to detect Coronavirus Disease 2019 (COVID-19) infection. In April 2020, the FDA authorized the Platelia SARS-CoV-2 Total Ab test to detect COVID-19 antibodies. Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety. +Blood-Based Lung Tests +The Company offers five blood-based lung cancer tests across the lung cancer continuum of care: +Diagnosis +• +Nodify XL2® and Nodify CDT ® tests, together marketed as part of our Nodify Lung ® Nodule Risk Assessment testing strategy, assess the risk of lung cancer to help identify the most appropriate treatment pathway. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +Treatment & Monitoring +• +GeneStrat ddPCR® and VeriStrat® tests, marketed as part of our new IQLung™ testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to establish the patient’s prognosis and help guide treatment decisions. The GeneStrat ddPCR tumor profiling test and the VeriStrat immune profiling test have a 36-hour average turnaround time, providing physicians with timely results to facilitate treatment decisions. +• +GeneStrat NGS™ (NGS) test, our 72-hour blood-based NGS test, was launched in November 2021 to a select group of physicians, with national launch in January 2022. The 52-gene panel includes guideline recommended mutations to help physicians treating advanced-stage lung cancer patients identify targeted therapy mutations, such as EGFR, ALK, KRAS, MET, NTRK, ERBB2, and others, and delivers them in an expedited timeframe so patient treatment can begin sooner. The GeneStrat NGS test is marketed as part of the new IQ Lung testing strategy with the GeneStrat ddPCR and VeriStrat tests. +COVID-19 Tests +We operate and have commercialized the Biodesix WorkSafe™ testing program, under which the Company offers three SARS-CoV-2 tests: +• +Bio-Rad SARS-CoV-2 ddPCR test, which is authorized by the FDA to be performed by Clinical Laboratory Improvement Amendments (CLIA) authorized laboratories that perform high complexity tests. The ddPCR test is designed to detect the presence of infection by the SARS-CoV-2 virus. +• +Platelia SARS-CoV-2 Total Ab test, which is an antibody test, authorized by the FDA, intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. +• +cPass™ SARS-CoV-2 Neutralization Antibody test , which is the first blood-based surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the receptor binding domain (RBD) in the spike protein of SARS-CoV-2 that are produced in response to vaccination or a previous SARS-CoV-2 infection. This test was commercially introduced during the second quarter 2021 in partnership with GenScript Biotech Corporation. +F- 8 +These tests under the Biodesix WorkSafe testing program are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems to assist in their back-to-work or back-to-school strategies, a crucial element of restarting economic activity. +In developing the Company's products, the Company has built or gained access to unique biorepositories, proprietary technology, and bioinformatics methods that it believes are important to the development of new targeted therapies, determining clinical trial eligibility and guiding treatment selection. The Company’s testing services are made available through its clinical laboratories. +Initial Public Offering +On October 27, 2020, the Company completed its initial public offering (IPO), in which it issued and sold 4,000,000 shares of its common stock at a public offering price of $ 18.00 per share. The Company received net proceeds of $ 63.8 million after deducting underwriting discounts and commissions and offering expenses payable by the Company. In addition, in connection with the IPO, all shares of the Company’s then-outstanding convertible preferred stock and convertible notes payable were automatically converted into 21,939,025 shares of common stock, and all then outstanding warrants to purchase the Company’s Series G convertible preferred stock were automatically converted into warrants to purchase 103,326 shares of the Company’s common stock. +At-the-Money Offering +On December 30, 2021, the Company raised approximately $ 16.3 million in gross proceeds from the sale of 3,756,994 common shares at a public offering price of $ 4.35 per share in an at-the-market offering. The Company received net proceeds of $ 15.7 million after deducting underwriting discounts and commissions and offering expenses payable by the Company. The net proceeds received were used to, among other things, fund the partial repayment of the 2021 Term Loan (see Note 8 - Debt ). +Note 2 – Summary of Significant Accounting Policies +Basis of Presentation and Estimates +The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates include: revenue recognition; the estimation of the fair value of goodwill and other intangible assets; fair value of stock options; income tax uncertainties, including a valuation allowance for deferred tax assets; and contingencies. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recognized revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions. Certain prior period amounts have been reclassified to conform to the current period presentation. +During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The COVID-19 pandemic negatively affected, and we expect will continue to negatively affect, our lung diagnostic testing-related revenue and our clinical studies. +As of December 31, 2021, we maintained cash and cash equivalents of $ 32.7 million and we have $ 10 million in principal balance outstanding on our 2021 Term Loan. We have incurred significant losses since inception and, as a result, we have funded our operations to date primarily through the sale of common stock in our IPO in October 2020, the issuance of notes payable, and from our two primary revenue sources: (i) diagnostic testing, which include lung diagnostic testing and COVID-19 testing, and (ii) providing biopharmaceutical companies with development and testing services. In accordance with Accounting Standards Update 2014-15 (ASC Topic 205-40), Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods. In evaluating the Company’s ability to continue as a going concern, management projected its cash flow sources and needs and evaluated the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements were issued. Management considered the Company’s current projections of future cash flows, current financial condition, sources of liquidity and debt obligations for at least one year from the date of issuance of this Form 10-K in considering whether it has the ability to meet its obligations. +Our ability to meet our obligations as they come due may be impacted by our ability to remain compliant with financial covenants in our 2021 Term Loan (see Note 8 – Debt ) or to obtain waivers or amendments that impact the related covenants. Due to the continued uncertainty caused by the COVID-19 pandemic, significant risks remain with respect to our ability to meet these thresholds and any material adverse effect on our revenues, income and expenses could impact our ability to maintain compliance with these covenants. +F- 9 +Based on our current operating plan, unless we raise additional capital (debt or equity) or obtain a waiver from complying with such financial covenants, we expect that we will be unable to maintain our financial covenants under our 2021 Term Loan during the next twelve months, which could result in an Event of Default, as defined, causing an acceleration and repayment of the outstanding balance. We have taken steps to improve our liquidity through raising debt and equity capital during 2021, amendments to our 2021 Term Loan and have also undertaken several proactive measures to mitigate the financial and operational impacts of the COVID-19 pandemic through the reduction of planned capital expenditures and certain operating expenses but we do not expect that these actions alone will be sufficient to maintain our financial covenants. In addition, we have entered into negotiation with certain creditors to modify existing terms of arrangement to delay near term cash requirements and extend the period of payments; however, those negotiations are not final at this time and may not result in final agreement. To maintain an adequate amount of available liquidity and execute our current operating plan, we will need to continue to raise additional funds from external sources, such as through the issuance of equity or debt securities; however, we have not secured such funding at the time of this filing and any such financing activities are subject to market conditions. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. There can be no assurance that additional capital will be available to us or, if available, will be available in sufficient amounts or on terms acceptable to us or on a timely basis. If adequate capital resources are not available on a timely basis, we intend to consider limiting our operations substantially. This limitation of operations could include a hiring freeze, reductions in our workforce, reduction in cash compensation, deferring capital expenditures, and reducing other operating costs. +The Company’s revenues, results of operations and cash flows have been materially adversely impacted by the items noted above. Our current operating plan, which is in part determined based on our most recent historical actual results and trends, along with the items noted above, raises substantial doubt about the Company’s ability to continue as a going concern. Our audited financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments that might be necessary should we be unable to continue as a going concern. +Segment Reporting +The Company has a single operating segment focused on providing diagnostic testing services to customers. All of the Company’s revenue and long-lived assets were derived or located in the United States for the years ended December 31, 2021 and 2020 . +Revenue Recognition +The Company generates revenues from (i) diagnostic tests and (ii) assay development and testing services (services revenue). +Diagnostic test revenues consist of blood-based lung tests and COVID-19 tests, which are recognized in the amount expected to be received in exchange for diagnostic tests when the diagnostic tests are delivered. The Company determines the transaction price related to its blood-based lung diagnostic test contracts using a portfolio approach by considering the nature of the payer and historical price concessions granted to groups of customers. The transaction price associated with COVID-19 testing arrangements are determined on the basis of the individual contract with each customer. +Services revenue consists of various types of tests or other scientific services for a purpose as defined by any individual customer, which are often larger biopharmaceutical companies, as defined by a written agreement between the Company and the customer. These services are generally completed upon the delivery of testing results, or achievement of contractual milestone(s) as defined in the customer agreements. Revenue for these services is recognized upon delivery of the completed test results, or upon completion of the contractual milestone(s). +The Company recognizes revenues related to blood-based lung diagnostic billings based on estimates of the amounts ultimately expected to be collected from customers on a portfolio approach as discussed above. In determining the amount to accrue for a delivered test, the Company considers factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. Variable consideration, if any, is estimated based on an analysis of historical experience and adjusted as better estimates become available. These estimates require significant judgment by management. +The Company also provides services to patients with whom the Company does not have contracts as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification 606 (ASC 606). The Company recognizes revenue for these patients when contracts, as defined in ASC 606, are established at the amount of consideration to which it expects to be entitled, or when the Company receives substantially all of the consideration subsequent to satisfaction and delivery of the performance obligations. +Deferred revenue consists of payments received for research, development, and testing services fees received prior to the completion of performance of these tests and services. +See Note 11 — Revenue and Accounts Receivable Credit Concentration for additional information. +F- 10 +Direct Costs and Expenses +The components of our cost of diagnostic tests and testing services consist of cost of materials, direct labor, including bonus, benefit and stock-based compensation, depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs associated with acquiring and processing test samples, including sample accessioning, test performance, quality control analyses, charges to collect and transport samples; curation of test results for physicians; and in some cases, license or royalty fees due to third parties. +Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents. Costs associated with performing tests are expensed as the test is processed regardless of whether and when revenue is recognized with respect to that test. +Research and Development Expenses +Research and development expenses include external and internal costs incurred to develop our technology, collect clinical samples, and conduct clinical studies to develop and support our products. External costs consist primarily of payments to clinical trial sites, sample acquisition costs and laboratory supplies purchased in connection with the Company’s discovery and preclinical activities, process development and clinical development activities. Internal costs consist primarily of salaries and benefits, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs . +The Company estimates and accrues its expenses resulting from its obligations under contracts with vendors and consultants in connection with conducting research and development activities. The financial terms of these contracts vary from contract to contract and may result in payments that do not match the periods over which materials or services are provided under such contracts. The Company’s estimates depend on the timeliness and accuracy of the data provided by consultants and vendors regarding the status of each activity. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information received. Research and development costs are expensed as incurred. +Sales, Marketing, General and Administrative Expenses +Selling expenses consist primarily of costs associated with our sales organization, including our direct sales force and sales management, client services, marketing, and reimbursement, as well as business development personnel who are focused on our biopharmaceutical customers. These expenses consist primarily of salaries, commissions, bonuses, employee benefits, travel, and stock-based compensation, as well as marketing and educational activities and allocated overhead expenses. +Sales, marketing, general and administrative expenses also include costs for our marketing and sales organizations, and other functions including finance, legal, human resources, and information technology. +These expenses consist principally of salaries, bonuses, employee benefits, travel, stock-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. +Concentrations of Credit Risk and Other Uncertainties +Substantially all of the Company’s cash and cash equivalents are deposited with two major financial institutions in the United States. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it holds cash. Periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. +Several of the components of the Company's sample collection kit and test reagents, and certain test systems and related test kits are obtained from single-source suppliers. If these single-source suppliers fail to satisfy the Company's requirements on a timely basis, it could suffer delays in being able to deliver its diagnostic solutions, a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results. +For a discussion of credit risk concentration of accounts receivable as of December 31, 2021 and 2020, see Note 11 – Revenue and Accounts Receivable Credit Concentration . +Cash and Cash Equivalents +Cash equivalents consist of short-term, highly-liquid instruments with an original maturity of three months or less from the date of purchase. +Restricted Cash +Restricted cash consists of deposits related to the Company’s corporate credit card and a letter of credit related to an operating lease agreement. As of December 31, 2021 and 2020 , the Company had $ 0.1 million and $ 0.2 million restricted cash, respectively, which was included in ‘Other current assets’ in the accompanying balance sheets. +F- 11 +Accounts Receivable and Allowance for Doubtful Accounts +Accounts receivable are stated at the amount management expects to collect from customers based on their outstanding invoices. Management reviews accounts receivable quarterly to determine if any receivable will potentially be uncollectible and to estimate the amount of allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value based on historical experience, customer creditworthiness, facts, and circumstances specific to outstanding balances, and payment terms. +Inventory +Inventory consists primarily of material supplies, which are consumed in the performance of testing services and charged to 'Direct costs and expenses'. Inventory is stated at cost and reported within ‘Other current assets’ in the balance sheet and were $ 2.9 million and $ 3.2 million as of December 31, 2021 and 2020 , respectively. +Property and Equipment +Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and five years . Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the statements of operations in the period realized. +Long-lived assets to be held and used are evaluated for impairment when events or circumstances indicate the carrying value of a long-lived asset or asset group is less than the undiscounted cash flows from the use and eventual disposition over its remaining useful life. The Company assesses recoverability by comparing the sum or projected undiscounted cash flows from the use and eventual disposition of the asset or asset group to its carrying value, and records an impairment loss if the carrying value is greater than the undiscounted future cash flows. There were no impairments for the years ended December 31, 2021 and 2020 . +Intangible Assets +Intangible assets primarily consist of intangible assets acquired as part of business combinations, external costs associated with patent applications that are probable of future economic benefits, and trademark costs. Finite-lived intangibles are stated at cost, net of accumulated amortization. The Company amortizes finite-lived intangible assets using the straight-line method over their estimated useful lives of 9 to 10 years, based on management's estimate of the period over which their economic benefits will be realized, product life and patent life. Trademarks are considered indefinite lived and are not amortized. +Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate a reduction to fair value below their carrying amounts. There were no impairments for the years ended December 31, 2021 and 2020 . +Goodwill +Goodwill represents the excess of purchase price over amounts allocated to acquired assets and liabilities assumed in business combinations. The carrying value of goodwill is evaluated for impairment at least annually or more frequently when events or circumstances occur indicate a potential for impairment. The annual impairment test is performed on the last day of our fourth quarter. Prior to performing a quantitative evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of the reporting unit exceeds its carrying value. In the event the Company determines that it is more likely than not the carrying value of our single reporting unit is higher than its estimated fair value, quantitative testing is performed comparing recorded values to estimated fair values. If impairment is present, the impairment loss is measured as the excess of the recorded goodwill over its implied fair value. Through December 31, 2021 , there were no accumulated impairment losses. +Fair Value of Financial Instruments +U.S. GAAP for fair value establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). We utilize a combination of market and income approaches to value our financial instruments. Our financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. Fair value measurements are categorized within the fair value hierarchy based upon the lowest level of the most significant inputs used to determine fair value. The three levels of the hierarchy and the related inputs are as follows: +Level +Inputs +1 +Unadjusted quoted prices in active markets for identical assets and liabilities. +2 +Unadjusted quoted prices in active markets for similar assets and liabilities; +Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or +Inputs other than quoted prices that are observable for the asset or liability. +3 +Unobservable inputs for the asset or liability. +F- 12 +The carrying amounts of certain financial instruments including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. +See Note 4 — Fair Value for further discussion related to estimated fair value measurements. +Contingent Consideration +In connection with the purchase transaction with Integrated Diagnostics, Inc. (Indi), the Company recorded contingent consideration for amounts potentially payable to Indi’s shareholder upon attainment of a three-consecutive month gross margin target of $ 2.0 million within the seven-year period after the acquisition date. The fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value through the date the gross margin target was met is recorded as operating expenses in the statements of operations. Subsequent changes to the contingent consideration following the achievement of the gross margin target are recorded as ‘Interest expense’ in the statements of operations resulting from the passage of time and fixed payment schedule. The significant unobservable inputs used in the measurement of fair value include the probability of successful achievement of the specified product gross margin targets, the period in which the targets were expected to be achieved, and discount rates which ranged from 11 % to 13.5 %. As a result of the achievement of the gross margin target, the only significant unobservable input used in the measurement of fair value includes the discount rate since all other inputs became fixed and determinable. Significant increases or decreases in the discount rate would result in a significantly higher or lower fair value measurement. +Warrant Liability +Prior to the completion of the Company’s IPO in October 2020, certain warrants issued to purchase convertible preferred stock were classified as liabilities with changes in the estimated fair value of these liabilities recognized in our results of operations. Upon completion of the Company’s IPO in October 2020, the warrants were automatically converted to warrants to purchase common stock. Accordingly, the warrants were remeasured to an estimate of fair value and recognized in our results of operations and then reclassified to additional paid-in capital. +Put Option Liability +During 2020 and 2019, the Company issued convertible debt with terms that provided for a conversion rate to the convertible debtholders that was more favorable than the price that other investors would pay for common stock in certain situations, including the completion of an IPO. As a result, the convertible debt is a financial instrument that was bifurcated into two instruments, a debt obligation and a put option liability, which represented the estimated fair value of the favorable conversion rate. The estimated fair value of the put option liability was separated from the convertible debt at inception and reported as a liability and debt discount, and amortized to interest expense. As a result of our IPO, the convertible debt was automatically converted to common stock and the put option liability was remeasured to an estimate of fair value and recognized in our results of operations and then reclassified to additional paid-in capital. +Share‑Based Compensation +Stock Options +The Company grants service condition and performance condition stock options. Stock options are granted with exercise prices equal to the fair market value of our common stock on the date of grant. The grant date fair value of each employee stock option is estimated on the date of grant using the Black-Scholes option-pricing model, which requires the use of assumptions, including the expected term of the option, expected volatility of our stock price, expected dividend yield, and the risk-free interest rate, among others. We estimate forfeitures and adjust these estimates to actual forfeitures as they occur. These assumptions involve inherent uncertainties including market conditions and employee behavior that are generally outside of the Company’s control. Service condition stock options are expensed based on the grant date fair value of the awards using the straight-line method over the requisite service period. Performance-condition stock options vest based on achievement of multiple weighted performance goals, certification of performance achievement by the Compensation Committee of the Board of Directors, and continued service. For performance-condition stock options, compensation expense is updated for our expected performance level against performance goals at the end of each reporting period, which involves judgment as to achievement of certain performance metrics. +Restricted Stock Units (RSUs) +The Company grants service-condition RSUs. As a result of our IPO, the grant date fair values of these RSUs are based on the closing market price of our common stock on the grant date. We estimate forfeitures and adjust these estimates to actual forfeitures as they occur. The service-condition RSUs vest based on continued service with compensation expense recognized on a straight-line basis over the requisite service period. +See Note 12 — Share-Based Compensation for additional information related to share-based compensation. +Net Loss per Common Share +Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing net +F- 13 +loss by the weighted-average number of common share equivalents outstanding for the period, if dilutive, using the treasury stock method. Potentially dilutive securities consisting of options to purchase common stock, warrants to purchase common stock, RSUs and shares subject to purchase under our employee stock purchase plan were excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive for all periods presented. +Until the Company’s IPO in October 2020, basic and diluted net loss attributable to common stockholders per share was calculated using the two-class method. The net loss was attributable entirely to common stockholders because the participating securities did not have a contractual obligation to share in the Company’s losses. As the Company has reported a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share for all periods presented. +Note 3 – Recent Accounting Pronouncements +Recently Issued Accounting Standards Not Yet Adopted +In February 2016, the FASB issued ASU No. 2016-02 , Leases (ASC Topic 842). The new guidance maintains two classifications of leases: finance leases, which replace capital leases, and operating leases. Lessees will need to recognize a right-of-use asset and a lease liability on the balance sheet for those leases previously classified as operating leases under the old guidance. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for direct costs. The accounting standard will be effective for the Company beginning January 1, 2022. Based on our current analysis we expect the adoption to result in the recognition of approximately $ 1.5 million of right of use assets and associated lease liabilities, inclusive of both lease and non-lease components, in our balance sheet and do not expect any material impact to our statement of operations or statement of cash flows. We are implementing new processes and internal controls over lease recognition, which will ultimately assist in the application of the new lease standard. +In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for the Company beginning January 1, 2023 with early adoption permitted. The Company is currently evaluating this guidance and assessing the overall impact on its financial statements. +Note 4 - Fair Value +Recurring Fair Value Measurements +Our borrowing instruments are recorded at their carrying values in the balance sheets, which may differ from their respective fair values. The fair values of outstanding borrowings, which are classified as Level 2, approximate their carrying values as of December 31, 2021 and 2020, based on interest rates currently available for similar borrowings and were (in thousands): +As of December 31, +2021 +2020 +Carrying Value +Fair Value +Carrying Value +Fair Value +Borrowings +$ +10,012 +$ +10,012 +$ +27,766 +$ +27,766 +The financial liabilities that are measured and recorded at estimated fair value on a recurring basis consist of our contingent consideration associated with our acquisition of Indi, and prior to the completion of our IPO in October 2020, the warrant liability, put option liability and contingent value rights granted to certain holders of our convertible preferred stock and debt instruments, which were accounted for as liabilities and remeasured through our statements of operations. The table below presents the reported fair values of contingent consideration, which is classified as Level 3 in the fair value hierarchy, as of the dates indicated (in thousands): +As of December 31, +Description +2021 +2020 +Current portion of contingent consideration +$ +17,764 +$ +— +Contingent consideration +16,028 +29,932 +Total contingent consideration +$ +33,792 +$ +29,932 +The following table presents the changes in contingent consideration for the year ended December 31, 2021 (in thousands): +Year Ended +Level 3 Rollforward +December 31, 2021 +Beginning balances - January 1, 2021 +$ +29,932 +Changes in fair value +1,622 +Interest expense +2,238 +Ending balances - December 31, 2021 +$ +33,792 +F- 14 +The following table presents the changes in these financial liabilities for the year ended December 31, 2020 (in thousands): +For the Year Ended December 31, 2020 +Level 3 Rollforward +Contingent +Consideration +Put +Option +Liability +Warrant +Liability +Contingent +Value Rights +Beginning balances - January 1, 2020 +$ +29,114 +$ +3,261 +$ +372 +$ +60 +Additions +— +3,389 +— +— +Changes in fair value +818 +— +1,252 +( 60 +) +Reclassified to additional paid-in capital +— +( 6,650 +) +( 1,624 +) +— +Ending balances - December 31, 2020 +$ +29,932 +$ +— +$ +— +$ +— +Contingent Consideration +In connection with the acquisition of Indi in 2018, the Company recorded contingent consideration for amounts contingently payable to Indi's selling shareholders pursuant to the terms of the asset purchase agreement (Indi APA). The contingent consideration arrangement requires additional consideration to be paid by the Company to Indi upon attainment of a three-consecutive month gross margin target of $ 2.0 million within the seven-year period after the acquisition date. Under the terms of the agreement, when the gross margin target was met the Company was required to issue 2,520,108 shares of common stock. For the six months following the achievement of the gross margin target, Indi had the option to require the Company to redeem these common shares for $ 37.0 million in cash over eight equal quarterly installments. If Indi elected to not exercise its option, the Company had 12 months to repurchase the common stock in two equal and consecutive quarterly cash installments totaling $ 37.0 million. +The Company met the gross margin target of $ 2.0 million for three consecutive months during the three months ended June 30, 2021. The Company entered into an amendment to the original agreement in August 2021 in which all parties agreed to forgo the issuance of common stock and agreed that the Company will in lieu thereof make six quarterly installments of approximately $ 4.6 million beginning in January 2022 and a final payment of approximately $ 9.3 million in July 2023 for a total of $ 37.0 million. The aggregate amount of payments owed by the Company under this amendment is the same as if Indi had exercised the put right or the Company had exercised the call right provided for in the original agreement. Our ability to make these payments are subject to consent from our lender under the 2021 Term Loan and related amendments (see Note 8 - Debt ). We obtained consent and subsequently made the first milestone payment of $ 4.6 million in January 2022 and we are in discussions with our lender to obtain consents for future payments. +The significant unobservable inputs used in the measurement of fair value include the probability of successful achievement of the specified product gross margin targets, the period in which the targets were expected to be achieved, and discount rates which ranged from 11 % to 13.5 %. As a result of the achievement of the gross margin target, the only significant unobservable input used in the measurement of fair value includes the discount rate since all other inputs became fixed and determinable. Significant increases or decreases in the discount rate would result in a significantly higher or lower fair value measurement. +Contingent consideration expected to be paid in the next twelve months is recorded in the balance sheets as ‘Current portion of contingent consideration’ while the remaining amount to be paid is recorded as ‘Contingent consideration’ within non-current liabilities. The net change to contingent consideration through the date the gross margin target was met is recorded as operating expenses in the statements of operations. Subsequent changes to the contingent consideration following the achievement of the gross margin target are recorded as ‘Interest expense’ in the statements of operations resulting from the passage of time and fixed payment schedule. The net change to contingent consideration recorded as operating expenses during the years ended December 31, 2021 and 2020 was a loss of $ 1.6 million and $ 0.8 million, respectively. The amount recorded as ‘Interest expense’ during the year ended December 31, 2021 was $ 2.2 million. +Put Option Liability +The put option liability was valued based on the calculated returns as a result of the various discounts included in the Company’s convertible notes payable and the related probability assessments of the various settlement scenarios. During 2020, the Company recognized an addition to the put option liability of $ 3.4 million in connection with a favorable conversion rate granted to holders of issued convertible debt. The put option liability was settled upon the closing of the Company’s IPO in October 2020 and reclassified to additional paid-in capital. +Warrant Liability +In connection with entering into the 2018 Notes, the Company issued to the lender a warrant to purchase 613,333 shares of Series G convertible preferred stock, at an exercise price of $ 0.75 per share, subject to adjustment upon specified dilutive issuances. The warrant was immediately exercisable upon issuance and expires on February 23, 2028 . The estimated fair value of the warrant on the issuance date of $ 0.3 million was recorded as a debt discount and as a preferred stock warrant liability. Through the effective date of the Company’s IPO, the Series G warrants were remeasured to an estimate of fair value using a Black Scholes pricing model. As a result of the Company’s IPO, the preferred stock warrants were automatically converted to warrants to purchase 103,326 shares of common stock with a weighted average exercise price of $ 4.46 and were also transferred to additional paid-in capital. During 2020, the Company recorded an increase in the value of the warrant liability of $ 1.3 million. +F- 15 +Contingent Value Rights +In addition to the shares of Series F Preferred Stock that were issued in January 2016, investors who purchased more than their pro‑rata amount in the financing described above received a calculated number of contingent value rights (CVRs). In connection with the Series F financing, the Company issued 3,999 CVRs originally valued at $ 0.5 million. One CVR represents 0.00375 % of the Company’s interest in the drug ficlatuzumab. The initial estimated value of the CVRs were recorded as a liability and as a reduction to the Series F proceeds. Upon receipt by the Company or a milestone, royalty, or any other type of payment from the Company’s ownership rights in the drug, the Company was required to make a cash payment to the CVR holders equal to 15 % of net proceeds, as defined. In September 2020, the Company exercised its opt-out right with AVEO Oncology (AVEO) for the payment of 50 % of development and regulatory costs for ficlatuzumab. As a result, the CVRs were settled effective December 2, 2020. See Note 15 – Commitments and Contingencies for a discussion of the Co-Development Agreement with AVEO. +Non-Financial Assets and Liabilities +Our non-financial assets, which primarily consist of property and equipment, goodwill, and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. There were no changes to the valuation methods during the periods presented. +Note 5 – Property and Equipment +Property and equipment consist of the following (in thousands): +As of December 31, +2021 +2020 +Lab equipment +$ +6,784 +$ +5,730 +Leasehold improvements +2,339 +1,845 +Computer equipment +700 +871 +Furniture and fixtures +391 +424 +Software +600 +651 +Vehicles +97 +— +Construction in process +17 +381 +10,928 +9,902 +Less accumulated depreciation +( 6,749 +) +( 6,724 +) +Total property and equipment, net +$ +4,179 +$ +3,178 +Depreciation expense related to pr operty and equipment was: +Year Ended December 31, +2021 +2020 +Direct costs and expenses +$ +614 +$ +361 +Selling, marketing, general and administrative +614 +478 +Total +$ +1,228 +$ +839 +Note 6 – Goodwill and Intangible Assets +Intangible assets, excluding goodwill, consist of the following (in thousands): +December 31, 2021 +December 31, 2020 +Cost +Accumulated +Amortization +Net Carrying Value +Cost +Accumulated +Amortization +Net Carrying Value +Intangible assets subject to amortization +Patents +$ +1,755 +$ +( 566 +) +$ +1,189 +$ +1,474 +$ +( 494 +) +$ +980 +Purchased technology +16,900 +( 6,572 +) +10,328 +16,900 +( 4,694 +) +12,206 +Intangible assets not subject to +amortization +Trademarks +100 +— +100 +74 +— +74 +Total +$ +18,755 +$ +( 7,138 +) +$ +11,617 +$ +18,448 +$ +( 5,188 +) +$ +13,260 +F- 16 +Amortization expense related to definite-lived intangible assets was (in thousands): +Year Ended December 31, +2021 +2020 +Direct costs and expenses +$ +5 +$ +13 +Sales, marketing, general and administrative +1,945 +2,051 +Total +$ +1,950 +$ +2,064 +Future estimated amortization expense of intangible assets is (in thousands): +As of +December 31, 2021 +2022 +$ +1,975 +2023 +1,969 +2024 +1,959 +2025 +1,954 +2026 +1,941 +2027 and thereafter +1,719 +Total +$ +11,517 +Note 7 – Accrued Liabilities +Accrued liabilities consist of the following (in thousands): +As of December 31, +2021 +2020 +Compensation related accruals +$ +4,029 +$ +3,975 +Accrued clinical trial expense +870 +715 +Other expenses +2,766 +3,099 +Total accrued liabilities +$ +7,665 +$ +7,789 +Note 8 – Debt +Our long-term debt consists of notes payable associated with our 2021 Term Loan, 2018 Notes and Paycheck Protection Program, each of which is described in further detail below. Long-term notes payable were as follows (in thousands): +As of December 31, +2021 +2020 +2021 Term Loan +$ +10,000 +$ +— +2018 Notes +— +24,972 +Paycheck Protection Program +— +3,107 +Other +75 +— +Unamortized debt discount and debt issuance costs +( 63 +) +( 313 +) +10,012 +27,766 +Less: current maturities +19 +11,840 +Long-term notes payable +$ +9,993 +$ +15,926 +2021 Term Loan +On March 19, 2021 (Effective Date), the Company entered into a Loan and Security Agreement (the 2021 Term Loan) by and between Silicon Valley Bank (SVB or Lender) and the Company, as borrower, whereby subject to the terms and conditions of the 2021 Term Loan, SVB advanced to the Company an original principal amount of $ 30 million. +The 2021 Term Loan provides for an “interest-only” period from the Effective Date through February 28, 2023, with interest due and payable monthly on the first calendar day of each month. However, the Company achieved a revenue milestone of at least $ 65 million on a trailing twelve-month basis during the three months ended March 31, 2021 which automatically extended the interest-only period through February 28, 2024. Beginning on the first calendar day of the month following the end of the interest-only period, the 2021 Term Loan shall be payable in (i) consecutive equal installments of principal through March 1, 2026, plus (ii) monthly payments of accrued interest. The principal amount outstanding under the 2021 Term Loan shall accrue interest at a floating per annum rate equal to the greater of (i) 2.00% above the prime rate, or (ii) 5.25%, which interest, in each case, shall be payable monthly. Changes to the interest rate applicable to the 2021 Term Loan based on changes to the prime rate shall be effective on the effective date of any change to the prime rate. +F- 17 +The Company’s final payment, due at maturity on March 1, 2026 , shall include all outstanding principal and accrued and unpaid interest, lender fees and expenses, of which the majority will include a final payment of $ 2.7 million, and all other sums, if any, that shall have become due and payable hereunder with respect to the 2021 Term Loan. The $ 2.7 million final payment will be amortized as interest expense over the term of the 2021 Term Loan. The Company has the option to prepay, prior to maturity, the total outstanding principal amount plus accrued and unpaid interest, subject to a prepayment penalty of 3 % of the principal amount if paid prior to the first anniversary of the Effective Date, 2 % of the principal amount if paid on or after the first anniversary but prior to the second anniversary of the Effective Date, 1 % of the principal amount if paid on or after the second anniversary but prior to October 19, 2025, and 0 % thereafter. +The Company granted the Lender a security interest in substantially all of the Company’s assets. The 2021 Term Loan requires the Company to comply with a minimum liquidity ratio covenant (as defined) by the 2021 Term Loan of not less than 0.95 to 1.00, and has a trailing six month rolling minimum revenue requirement of not less than 70 % of the Company’s projected revenue performed at the end of each reporting p eriod. On September 30, 2021, we entered into the Consent and First Amendment to Loan and Security Agreement (First Amendment) to, among other things, amend our 2021 Term Loan to eliminate the revenue covenant for the period ended September 30, 2021 and modify the revenue covenant threshold for the three month period ended December 31, 2021. In addition, we agreed to establish a restricted cash collateral account for $ 15 million for the benefit of our lender if the balance of our cash and cash equivalents declines below $ 40 million. On December 31, 2021, we entered into the Consent and Second Amendment to Loan and Security Agreement (Second Amendment) to, among other things, amend our 2021 Term Loan and First Amendment to obtain consent for the $ 4.6 million January 2022 milestone payment under the Indi APA, repay $ 20 million in outstanding principal on December 31, 2021, waive the $ 600,000 prepayment fee on the $ 20 million Term Loan repayment , and waive the minimum revenue covenant as of December 31, 2021 and modify the minimum revenue requirement to not less 75 % for the three months ended March 31, 2022 and not less than 75 % on a trailing six month rolling basis for each quarter thereafter of the Company’s projected revenue performed at the end of each reporting period . The Lender agreed to apply the full amount of funds previously established within the restricted cash collateral account to partially prepay the $ 20 million in outstanding principal, thereby eliminating the restricted cash collateral account. The Company recorded a loss on extinguishment of $ 0.1 million resulting from the write-off of debt issuance costs associated with the $ 20 million repayment of our 2021 Term Loan. +The 2021 Term Loan contains certain covenants limiting the ability of the Company to, among other things, incur future debt, transfer assets except for the ordinary course of business, make acquisitions, pay dividends or make other certain restricted payments, or sell assets, subject to certain exceptions, without the prior written consent of the Lender. Failure to comply with the covenants and loan requirements may result in an event of default. As of December 31, 2021 , the Company was in compliance with all restrictive and financial covenants associated with its borrowings. In the event of a default, including, among other things, our failure to make any payment when due or our failure to comply with any covenant under the 2021 Term Loan, the Lender may elect to declare all amounts outstanding to be immediately due and payable, and may proceed against the collateral granted to them to secure such indebtedness, including a royalty-free license or other right to use all of our intellectual property without charge. +2018 Notes +In February 2018, the Company issued long-term debt of $ 23.0 million to Innovatus Life Sciences Lending Fund (Innovatus or Lender) (the 2018 Notes). Innovatus is also a holder of the Company’s common stock. +At the time of issuance, the Company paid a facility fee of $ 0.2 million and issued a warrant to Innovatus, with an initial estimated fair value of $ 0.3 million, for the purchase of 613,333 shares of Series G preferred stock. The facility fee and the estimated warrant fair value were recorded as debt discount and is amortized to interest expense over the term of the 2018 Notes. The 2018 Notes bore annual interest at 10 %, of which 7.5 % was payable in cash, with the remaining 2.5 % added to principal through December 31, 2020. Total interest added to principal was $ 1.7 million as of March 31, 2021 and December 31, 2020. +On March 19, 2021, in connection with entering into the 2021 Term Loan agreement with SVB, the Company repaid all outstanding principal, accrued and unpaid interest, and prepayment fees in the amount of $ 25.9 million due under the 2018 Notes and contemporaneously terminated the related Loan and Security Agreement, dated as of February 23, 2018, as amended, between Innovatus and the Company. As a result of the extinguishment of the 2018 Notes, the Company recognized a loss on debt extinguishment of $ 0.7 million during the three months ended March 31, 2021. +Paycheck Protection Program Note Payable +In April 2020, the Company entered into a loan pursuant to the Paycheck Protection Program under the CARES Act, as administered by the U.S. Small Business Administration (the SBA). The loan, in the principal amount of $ 3.1 million (the PPP Loan), was disbursed by JPMorgan Chase Bank (JPM) pursuant to a Paycheck Protection Program Promissory Note and Agreement (the Note and Agreement). +The PPP Loan had a maturity date on the two-year anniversary of the funding date, April 2022, and included a fixed rate of 1.00 % per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (as discussed below), were scheduled to commence in September 2021. The Company did not provide any collateral or guarantees in connection with the PPP Loan, nor did the +F- 18 +Company pay any facility charge to obtain the PPP Loan. The Note and Agreement contained customary events of default, including those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. +All or a portion of the PPP Loan may be forgiven by the SBA upon application by the Company. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and covered utilities during the eight-week period beginning on the approval date of the PPP Loan. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee earning more than $ 100,000 , prorated annually. Not more than 40 % of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $ 100,000 or less annually are reduced by more than 25 %. During the second quarter of 2021, the Company determined that it would apply for forgiveness under the SBA’s Loan Forgiveness program, a change from its previous intent to repay. Subsequently, in July 2021 the Company applied for loan forgiveness and on August 17, 2021, the Company received legal release and formal notification that the PPP Loan was forgiven in full. During the three months ended September 30, 2021, the Company reduced the ‘Current portion of notes payable’ and recorded a gain on extinguishment in the statements of operations for the $ 3.1 million forgiven. +Scheduled principal repayments (maturities) of long-term obligations were as follows (in thousands): +As of +December 31, 2021 +2022 +$ +19 +2023 +15 +2024 +4,017 +2025 +4,818 +2026 +1,206 +2027 and thereafter +— +Total +$ +10,075 +Note 9 – Warrants to Pur chase Convertible Preferred Stock +The Company issued warrants to purchase shares of convertible preferred stock in conjunction with the sale of certain of the convertible preferred shares and issuance of debt. Through the closing of the Company’s IPO, the preferred warrants were classified as liabilities with estimated fair value remeasured at each reporting date reported within in the accompanying statements of operations. +The following table presents the activity for convertible preferred stock warrants (in thousands, except weighted average exercise price): +Series E +Series G (1) +Warrants +Weighted +Average +Exercise +price +Warrants +Weighted +Average +Exercise +price +Outstanding ‑ January 1, 2020 +925 +$ +5.00 +613 +$ +0.75 +Granted +— +— +— +— +Forfeited/canceled +( 925 +) +( 5.00 +) +— +— +Exercised +— +— +— +— +Reclassification of warrant liability to additional paid-in capital +— +— +( 613 +) +( 0.75 +) +Outstanding ‑ December 31, 2020 +— +$ +— +$ +— +$ +— +The warrants to purchase Series E convertible preferred stock were not exercised and expired during the three months ended June 2020. +(1) On October 27, 2020, all convertible preferred stock converted to common stock at the completion of our IPO, and as a consequence, the warrants to purchase Series G convertible preferred stock were converted to 103,326 warrants to purchase common stock at $ 4.46 per share, which have an expiration date of February 23, 2028 . All common stock warrants remain outstanding as of December 31, 2021. +Note 10 – Equity +Common Stock +The Company’s Restated Certificate of Incorporation authorizes the Company to issue up to 200,000,000 shares of common stock with a par value of $ 0.001 per share. The holder of each share of common stock is entitled to one vote per share. The common shareholders are entitled to dividends whenever funds and assets are legally available and when and if declared by the Board of Directors. The +F- 19 +Company is currently subject to restrictions on the payment of dividends (see Note 8 - Debt ) and no dividends have been declared as of December 31, 2021. +On October 27, 2020, the Company issued and sold 4,000,000 shares of common stock in a registered IPO at a price to the public of $ 18.00 per share. The net proceeds to the Company were approximately $ 63.8 million, after deducting underwriting discounts and commissions of $ 5.0 million and direct offering expenses of approximately $ 3.2 million. +On December 30, 2021, the Company raised approximately $ 16.3 million in gross proceeds from the sale of 3,756,994 common shares at a public offering price of $ 4.35 per share in an at-the-market offering. The Company received net proceeds of $ 15.7 million, after deducting underwriting discounts and commissions and offering expenses payable of approximately $ 0.7 million. +Preferred Stock +The Company’s Restated Certificate of Incorporation authorizes the Company to issue up to 5,000,000 shares of preferred stock with a par value of $ 0.001 per share. As of December 31, 2021 and 2020 , no shares of preferred stock were issued or outstanding. +Note 11 – Revenue and Accounts Receivable Credit Concentration +We derive our revenue from two primary sources: (i) providing diagnostic testing in the clinical setting (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, clinical trial testing, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics (Services). +Diagnostic test revenues consist of blood-based lung tests and COVID-19 tests, which are recognized in the amount expected to be received in exchange for diagnostic tests when the diagnostic tests are delivered. The Company conducts diagnostic tests and delivers the completed test results to the prescribing physician or patient, as applicable. The fees for diagnostic tests are billed either to a third party such as Medicare, medical facilities, commercial insurance payers, or to the patient. The Company determines the transaction price related to its diagnostic test contracts by considering the nature of the payer, historical price concessions granted to groups of customers, and its historical collection experience using a portfolio approach. The Company recognizes revenues for diagnostic tests upon delivery of the tests to the physicians requesting the tests or patient, as applicable. +Services revenue consists of on-market tests, pipeline tests, custom diagnostic testing, and other scientific services for a purpose as defined by any individual customer, which is often with biopharmaceutical companies. The performance obligations and related revenue for these sales is defined by a written agreement between the Company and the customer. These services are generally completed upon the delivery of testing results, or other contractually defined milestone(s), to the customer. Revenue for these services is recognized upon delivery of the completed test results, or upon completion of the contractual milestone(s). +Revenues consisted of the following (in thousands): +Year Ended December 31, +2021 +2020 +Diagnostic tests +$ +48,937 +$ +40,919 +Services +5,569 +4,638 +Total revenue +$ +54,506 +$ +45,557 +Deferred Revenue +Deferred Revenue consists of cash payments from customers received in advance of delivery. As test results are delivered, the Company recognizes the deferred revenue in ‘Revenues’ in the statements of operations. Of the $ 3.5 million in ‘Deferred Revenue’ recorded in the balance sheet as of December 31, 2020 , $ 3.0 million was recognized in revenues. During the year ended December 31, 2021 $ 1.4 million was added to 'Deferred revenue' for up-front cash payments received for which revenue recognition criteria have not been met. The 'Deferred revenue' of $ 1.9 million recorded in the balance sheet as of December 31, 2021 is expected to be recognized in revenues over the next twelve months as test results are delivered and services are performed. As of December 31, 2021 and 2020 , the Company had $ 0.8 million and $ 1.4 million in non-current deferred revenue, respectively, recorded within ‘Other long-term liabilities’ in the balance sheets which represent amounts to be recognized in excess of twelve months from the respective balance sheet date. +The Company’s customers in excess of 10% of total revenue, and their related revenue as a percentage of total revenue were as follows: +Year Ended December 31, +2021 +2020 +The Big Ten Conference +40 +% +30 +% +Centura Healthcare +5 +% +17 +% +In addition to the above table, we collect reimbursement on behalf of customers covered by Medicare, which accounted for 18 % and 17 % of the Company’s total revenue for the years ended December 31, 2021 and 2020, respectively. The Company is subject to credit +F- 20 +risk from its accounts receivable related to services provided to its customers. The Company does not perform evaluations of customers' financial condition and does not require collateral. +The Company’s third-party payors and other customers in excess of 10% of accounts receivable, and their related accounts receivable as a percentage of total accounts receivable were as follows: +As of December 31, +2021 +2020 +Medicare +30 +% +6 +% +Janssen Research and Development, LLC +14 +% +5 +% +LabCorp DD (formerly Covance) +11 +% +2 +% +The Big Ten Conference +— +% +35 +% +Centura Healthcare +— +% +24 +% +Note 12 – Share Based Compensation +Predecessor 2016 and 2006 Equity Incentive Plans +Under the 2006 Equity Incentive Plan (2006 Plan), the Company was authorized to grant incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards and RSUs. No additional awards may be granted under the 2006 Plan. +In February 2016, the Company adopted the 2016 Equity Incentive Plan (2016 Plan) as a successor to and continuation of the prior 2006 Plan. The 2016 Plan provided for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSUs, and other stock awards to directors, employees, and consultant . Awards granted under the 2016 Plan or the 2006 Plan that were unallocated, expired or otherwise terminated, or were forfeited, cancelled, or repurchased by the Company, became available for future issuance under the 2016 Plan. In addition, shares subject to an award were withheld to satisfy a participant’s tax withholding obligations, or were reacquired by the Company as consideration for the exercise or purchase price of a stock award also became available for future issuance under the 2016 Incentive Plan. No additional awards may be granted under the 2016 Plan. +2020 Equity Incentive Plan +Effective upon the closing of our IPO, the Company’s Board of Directors approved the 2020 Equity Incentive Plan (2020 Plan), which replaced the 2016 Plan. The 2020 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSUs, performance awards and other stock awards. Officers, directors, employees, consultants, agents, and independent contractors who provide services to the Company may receive awards. The terms of all awards are governed by an agreement between the Company and the recipients, as administered and approved by the Compensation Committee of the Board of Directors. Any awards that expire or are forfeited under the 2016 Plan or 2006 Plan become available for issuance under the 2020 Plan. +The number of shares reserved for issuance under the 20 20 Plan is 1,893,395 , plus an annual increase added on the first day of each calendar year, beginning with the calendar year ending December 31, 2022, and continuing until, and including, the calendar year ending December 31, 2030. The annual increase will be equal to the lesser of (i) 4 % of the number of shares of our common stock issued and outstanding as of December 31st of the immediately preceding calendar year and (ii) such lesser amount determined by the Board of Directors. Up to 1,893,395 sh ares of our common stock that may be issued under the 2020 Plan may be issued in satisfaction of incentive stock option awards. +To the extent an equity award granted under the 2020 Plan (other than any substitute award) or granted under any other equity plan maintained by us under which awards are outstanding as of the effective date of the 2020 Plan (the Prior Plans) expires or otherwise terminates without having been exercised or paid in full, or is settled in cash, the shares subject to such award will become available for future grant under the 2020 Plan. In addition, to the extent shares subject to an award are withheld to satisfy a participant’s tax withholding obligation upon the exercise or settlement of such award (other than any substitute award) or to pay the exercise price of a stock option granted under the 2020 Plan or a Prior Plan, such shares will become available for future grant under the 2020 Plan. The total number of shares available for grant under all Plans was 630,685 at December 31, 2021. +Employee Stock Purchase Plan +Effective with our IPO in October 2020, the Company’s Board of Directors and its stockholders approved the Company’s Employee Stock Purchase Plan (ESPP). A total of 338,106 shares of our common stock have been reserved for issuance under the ESPP. The maximum number of shares of our common stock available under the ESPP will automatically increase on the first trading day of each calendar year by an amount equal to the lesser of (i) 1 % of the shares of our common stock issued and outstanding on December 31st of the immediately preceding calendar year, and (ii) an amount determined by our Board of Directors. +Subject to any plan limitations, the ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. The price at which common stock is purchased under the ESPP is equal to 85 % of the fair market value of the Company’s common stock on the first or last day of the +F- 21 +offering period, whichever is lower. No employee may participate in an offering period if the employee owns 5% or more of the total combined voting power or value of the Company’s stock. The initial offering period was from January 1, 2021 through August 31, 2021. On a go-forward basis, the ESPP provides for successive six-month offering periods beginning on September 1st and March 1st of each year. As of December 31, 2021 , 42,855 shares have been issued under the ESPP leaving 295,251 shares remaining for future issuance. +Description of Awards Granted +The Company has granted incentive stock options, non-statutory stock options, performance-based stock options, and RSUs. +Incentive stock options, which may only be issued to employees, are granted at an exercise price per share equal to the closing market price of the Company’s common stock on the grant date, and vest over time as determined by the Compensation Committee, provided that the term of the options may not exceed ten years from the date of grant. Accelerated vesting may occur in the event of an optionee's death, disability, or other events. +Non-statutory stock options, which may be issued to employees, non-employees and directors, are granted at an exercise price per share equal to the closing market price of the Company’s common stock on the grant date, and vest over time as determined by the Compensation Committee, provided that the term of the options may not exceed ten years from the date of grant. Accelerated vesting may occur in the event of an optionee's death, disability, or other events. +Performance-based stock options are typically granted on an annual basis and consist of a performance-based and service-based component. The performance targets and vesting conditions for performance-condition options are based on achievement of recognized revenue targets. Performance-based options vest in three equal annual installments beginning one year after the grant date , pending certification of performance achievement by the Compensation Committee and continued service. The fair value of performance-condition awards is based on the closing market price of the Company’s common stock on the grant date. On January 1, 2019, the Company granted 168,466 performance-condition options, with an exercise price of $ 0.77 per share and a term of ten years . During the year ended December 31, 2021 and 2020, the performance-conditions w ere met and 56,156 opti ons and 56,155 options, respectively, vested. During the year ended December 31, 2019, the performance-conditions were not met and 56,155 options were forfeited. +RSUs and the related terms and conditions are awarded at the discretion of the Compensation Committee. RSU holders have a contractual right to receive a share of common stock when vested. RSUs vest over time as determined by the Compensation Committee. RSU agreements may provide for accelerated vesting in the event of a stock unit holder's death, disability, or retirement or other events. +Our Compensation Committee may grant other stock awards that are based on or related to shares of our common stock, such as awards of shares of common stock granted as bonus and not subject to any vesting conditions, deferred stock units, stock purchase rights, and shares of our common stock issued in lieu of our obligations to pay cash under any compensatory plan or arrangement. To date, t he Company has granted service-condition RSUs. +Bonus-To-Options Program +The Company also has a Bonus-to-Options Program (the “Bonus Option Program”), is separate from predecessor Plans and was initially adopted by the Board of Directors in 2008, and subsequently amended and restated in 2010, 2011 and 2015. For fiscal year 2022, the Bonus Option Program is subject to the shares reserved under the 2020 Plan. The Bonus Option Program, which is limited to participation of the Chief Executive Officer, direct reports to the Chief Executive Officer and Vice Presidents of the Company, allows participants who so elect to convert all or a portion of their annual cash bonus into fully vested, non-qualified stock options to purchase shares of common stock (Bonus Options). The exercise price for the options under the Bonus Option Program equals the then current price for the shares of the common stock as of the grant date, as disclosed below under “ Fair Value of Common Stock ”. Bonus Options issued must be exercised within a ten-year term. +The Company recorded the following activity related to the Bonus Option Program during the year ended December 31, 2021 (in thousands, excepted weighted average exercise price and weighted average contractual life): +Number of +Options +Weighted +Average +Exercise +Price +Weighted +Average +Contractual +Life (Years) +Aggregate +Intrinsic +Value +Outstanding ‑ January 1, 2021 +173 +$ +11.11 +4.9 +$ +1,723 +Granted +266 +20.67 +— +— +Forfeited/canceled +( 46 +) +20.03 +— +— +Exercised +( 20 +) +7.69 +— +— +Outstanding ‑ December 31, 2021 +373 +$ +17.00 +7.5 +$ +76 +Exercisable ‑ December 31, 2021 +373 +$ +17.00 +7.5 +$ +76 +The Company recorded $ 0.8 million and $ 3.4 million during the years ended December 31, 2021 and 2020, respectively, associated with the estimate of options to be delivered to eligible participants under the Bonus Option Program and which were granted in February +F- 22 +2022 and 2021 by the Compensation Committee of the Board of Directors. In determining the amount of stock compensation to recognize under the Bonus Option Program, the Company estimates the bonus attainment for the year and determines the expected number of options to be delivered to eligible participants. A Black-Scholes option pricing model is used to determine the estimated fair value of the expected number of options to be delivered to eligible participants. The key elements in determining the estimated fair value include assumptions for volatility, the risk-free interest rate, expected dividends and strike price, utilizing the measurement date closing stock price until the grants are authorized. +Share-Based Compensation Expense +Pre-tax share-based compensation expense reported in the Company’s statements of operations was (in thousands): +Year Ended December 31, +2021 +2020 +Direct costs and expenses +$ +49 +$ +— +Research and development +572 +589 +Sales, marketing, general and administrative +4,323 +3,120 +Total +$ +4,944 +$ +3,709 +The unrecognized remaining share-based compensation expense for options and RSUs was approximately $ 7.8 million as of December 31, 2021 , and is expected to be amortized to expense over the next 3.8 years. +Stock Options +Stock option activity during the year ended December 31, 2021, excluding the Bonus Option Program described above, was (in thousands, except weighted average exercise price and weighted average contractual life): +Number of +Options +Weighted +Average +Exercise +Price +Weighted +Average +Contractual +Life (Years) +Aggregate +Intrinsic +Value +Outstanding - January 1, 2021 +2,321 +$ +1.82 +7.4 +$ +42,580 +Granted +1,190 +17.87 +— +— +Forfeited/canceled +( 225 +) +7.22 +— +— +Exercised +( 408 +) +1.51 +— +— +Outstanding ‑ December 31, 2021 +2,878 +$ +8.08 +7.7 +$ +6,288 +Exercisable ‑ December 31, 2021 +1,428 +$ +5.02 +6.7 +$ +3,849 +Fair Value of Common Stock +Prior to the Company’s IPO, the fair value of the Company’s common stock underlying the stock options was determined by the Board of Directors with assistance from management and, in part, on input from an independent third-party valuation firm. The Board of Directors determined the fair value of common stock by considering a number of objective and subjective factors, including valuations of comparable companies, sales of convertible preferred stock, operating and financial performance, the lack of liquidity of the Company’s common stock and the general and industry-specific economic outlook. Subsequent to the Company’s IPO, the fair value of the Company’s common stock is determined based on its closing market price on the date of grant. +The estimated grant date fair value of stock options was calculated using the Black-Scholes option-pricing model, based on the following assumptions: +• +Expected Term : The expected term represents the period that the options granted are expected to be outstanding using the simplified method (based on the mid-point between the vesting date and the end of the contractual term). +• +Expected Volatility : The Company uses an average historical stock price of selected comparable companies over the expected term of the awards as the Company does not have sufficient trading history for its common stock. +• +Risk-Free Interest Rate : The Company uses the risk-free interest rate over the expected term of the options based on the constant maturity rate of U.S. Treasury securities with similar maturities as of the date of the grant. +• +Expected Dividend Yield : The Company is currently subject to restrictions on the payment of dividends (see Note 8 - Debt ) and no dividends have been declared as of December 31, 2021 and 2020. The Company has not paid and does not anticipate paying any dividends in the near future. Therefore, the expected dividend yield was zero. +F- 23 +The fair value of each option grant was estimated on the grant date with the following weighted average assumptions for the years ended December 31, 2021 and 2020: +Year Ended December 31, +2021 +2020 +Expected term (in years) +6.01 +5.73 +Expected volatility +68.5 +% +77.0 +% +Risk‑free rate +0.79 +% +0.34 +% +Expected dividend yield +— +% +— +% +Restricted Stock Units +During the year ended December 31, 2021 , the Company granted 71,707 service-condition RSUs. As of December 31, 2021 , there were 150,811 RSUs outstanding, with a weighted average grant date fair value of $ 5.30 per share. +Note 13 – Net Loss per Common Share +Basic earnings per share (EPS) excludes dilution and is computed by dividing net loss attributable to the Company’s stockholders by the weighted-average shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, resulting in the issuance of shares of common stock that would then share in the earnings or losses of the Company. +In connection with the acquisition of Indi in 2018, the Company recorded contingent consideration (See Note 4 – Fair Value ) for amounts contingently payable to Indi's selling shareholders pursuant to the terms of the asset purchase agreement. The contingent consideration arrangement requires additional consideration to be paid by the Company to Indi upon attainment of a three-consecutive month gross margin target of $ 2.0 million within the seven-year period after the acquisition date. If the gross margin target was met, the Company was required to issue 2,520,108 shares of common stock. The Company met the gross margin target of $ 2.0 million for three consecutive months during the three months ended June 30, 2021. In August 2021, the Company entered into an amendment of the original agreement in which all parties agreed to forgo the issuance of common stock. As a result of the achievement of the gross margin target, the Company included the 2,520,108 shares of common stock in the calculation of weighted-average shares outstanding used in computing basic and diluted net loss per share from the date the gross margin target was met until the amendment was executed. These shares are not included in the statements of convertible preferred stock and stockholders' equity (deficit) or shares issued and outstanding in the accompanying balance sheets. +Basic and diluted loss per share for the years ended December 31, 2021 and 2020 were (in thousands, except per share amounts): +Year Ended December 31, +2021 +2020 +Numerator +Net loss attributable to common stockholders +$ +( 43,159 +) +$ +( 31,350 +) +Denominator +Weighted-average shares outstanding used +in computing net loss per share, basic and diluted +27,365 +4,838 +Net loss per share, basic and diluted +$ +( 1.58 +) +$ +( 6.48 +) +The potentially dilutive securities as of December 31, 2021 and 2020 primarily represent the shares subject to future issuance under stock options awards, warrants, RSUs, and shares subject to purchase under our employee stock purchase plan and would be subject to the treasury stock method when dilutive the terms of which are described in further detail in Note 12 – Share Based Compensation . The following outstanding common stock equivalents were excluded from diluted net loss attributable to common stockholders for the periods presented because inclusion would be anti-dilutive (in thousands): +Year Ended December 31, +2021 +2020 +Options to purchase common stock +3,251 +2,495 +Shares committed under ESPP +30 +— +Warrants +103 +103 +Restricted stock units +151 +79 +Total +3,535 +2,677 +F- 24 +Note 14 - Income Taxes +Since inception, the Company has incurred net taxable losses, and accordingly, no current provision for income taxes has been recorded. The effective income tax rate of the provision for income taxes differs from the federal statutory rate as follows: +Year Ended December 31, +2021 +2020 +Federal statutory income tax rate +21 +% +21 +% +State income taxes, net of federal benefit +5 +2 +Research and developments credits +1 +( 1 +) +Permanent items +( 1 +) +( 6 +) +Change in valuation allowance +( 26 +) +( 16 +) +Effective income tax rate +— +% +— +% +The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities are as follows (in thousands): +As of December 31, +2021 +2020 +Deferred Tax Assets: +Net operating loss carryforwards +$ +61,874 +$ +53,128 +Research and development tax credits +3,372 +2,860 +Interest expense limitation +554 +— +Property and equipment +215 +279 +Stock-based compensation +1,977 +865 +Accruals and reserves +1,618 +1,406 +Total +69,610 +58,538 +Valuation allowance +( 67,457 +) +( 56,083 +) +Total deferred tax assets after valuation allowance +2,153 +2,455 +Deferred Tax Liabilities: +Intangible assets +( 2,153 +) +( 2,455 +) +Total deferred tax liabilities +( 2,153 +) +( 2,455 +) +Net deferred tax assets and liabilities +$ +— +$ +— +At December 31, 2021 , the Company had $ 267.1 million and $ 4.2 million of federal net operating loss and research and experimentation tax carryforwards, respectively, which are set to expire beginning in 2026 . The Internal Revenue Code contains provisions that may limit the net operating loss carryovers available to be used in any year if certain events occur, including significant changes in ownership interest. +In assessing the realizability of its deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As the Company does not have any historical taxable income, projections of future taxable income over the periods in which the deferred tax assets are deductible, and after consideration of the history of operating losses, the Company does not believe it is more likely than not that it will realize the benefits of net deferred tax assets and, accordingly, has established a valuation allowance equal to 100 % of net deferred tax assets. The valuation allowance increased by $ 11.4 million during 2021 and $ 7.0 million during 2020. +F- 25 +During 2021, the Company determined that it now has uncertain tax positions related to its U.S. research and development credits. As of December 31, 2021 and 2020 , there was no accrued interest related to uncertain tax positions. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change in the next twelve months. A reconciliation of beginning and ending balances for unrecognized tax benefits is as follows (in thousands): +Year Ended December 31, +2021 +2020 +Balance at January 1 +$ +715 +$ +— +Additions for tax positions related to the current year +128 +106 +Additions for tax positions related to prior years +— +609 +Reductions for tax positions related to prior years +— +— +Reductions related to settlements +— +— +Reductions related to a lapse of statute +— +— +Balance at December 31 +$ +843 +$ +715 +The Company monitors proposed and issued tax law, regulations, and cases to determine the potential impact of uncertain income tax positions. At December 31, 2021 , the Company had not identified any potential subsequent events that would have a material impact on unrecognized income tax benefits within the next twelve months. +The Company’s federal and state returns for all years remain open to examination by tax authorities. +Note 15 – Commitments and Contingencies +Leases +The Company leases facilities under non‑cancelable operating leases. Rent expense was $ 1.2 million and $ 1.7 million for the years ended December 31, 2021 and 2020, respectively. +Future minimum lease payments, which do not include amounts for common area maintenance, insurance, or taxes, for operating lease obligations are as follows (in thousands): +As of +December 31, 2021 +2022 +$ +775 +2023 +149 +2024 +9 +2025 +3 +2026 +1 +2027 and thereafter +— +Total +$ +937 +Co‑Development Agreement +In April 2014 and amended in October 2016, the Company entered into a worldwide agreement with AVEO to develop and commercialize AVEO's hepatocyte growth factor inhibitory antibody ficlatuzumab with the Company's proprietary companion diagnostic test, BDX004, a version of the Company’s serum protein test that is commercially available to help physicians guide treatment decisions for patients with advanced non‑small cell lung cancer (NSCLC). Under the terms of the agreement, AVEO will conduct a proof‑of‑concept (POC) clinical study of ficlatuzumab for NSCLC in which BDX004 will be used to select clinical trial subjects (the NSCLC POC Trial). Under the agreement, the Company and AVEO would share equally in the costs of the NSCLC POC Trial, and each would be responsible for 50 % of development and regulatory costs associated with all future clinical trials agreed upon by the Company and AVEO. The Company and AVEO continue to conduct POC clinical trials of ficlatuzumab in combination with BDX004. +In September 2020, the Company exercised its opt-out right with AVEO for the payment of 50 % of development and regulatory costs for ficlatuzumab effective December 2, 2020 (the Effective Date). In September 2021, AVEO announced that the FDA has granted Fast Track Designation (FTD) to ficlatuzumab for the treatment of patients with relapsed or recurrent head and neck squamous cell carcinoma. In November 2021 AVEO also announced plans to initiate a potential registrational Phase 3 clinical trial for ficlatuzumab in the first half of 2023. The Company has $ 0.1 million in remaining obligations related to the AVEO agreement as of December 31, 2021 . Following the Effective Date, the Company is entitled to a 10 % royalty of net sales of ficlatuzumab and 25 % of license income generated from the licensing of ficlatuzumab from AVEO. +There were no expenses related to this agreement for the year ended December 31, 2021 . Expenses related to this agreement for the year ended December 31, 2020 were approximately $ 0.9 million. +F- 26 +License Agreement +In August 2019, we entered into a non-exclusive license agreement with Bio-Rad Laboratories, Inc. (Bio-Rad) (the Bio-Rad License). Under the terms of the Bio-Rad License, the Company received a non-exclusive license, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of Droplet Digital PCR™ (ddPCR) in cancer detection testing for third parties in the United States. The Company also agreed to purchase all of the necessary supplies and reagents for such testing exclusively from Bio-Rad, pursuant to a separately executed supply agreement (the Supply Agreement) with Bio-Rad. As further consideration for the non-exclusive license, the Company agreed to pay a royalty of 2.5 % on the net revenue received for the performance of such ddPCR testing collected from third parties. On May 24, 2021, the Company entered into the First Amendment to the Non-Exclusive License Agreement with Bio-Rad which amended the Bio-Rad License such that, effective May 1, 2021, the Company will no longer pay a royalty of 2.5 % on the net revenue received for the performance of such ddPCR testing collected from third parties. The Bio-Rad License expires in August 2024 . Either party may terminate for the other’s uncured material breach or bankruptcy events. Bio-Rad may terminate the Bio-Rad License if the Company does not purchase licensed products under the Supply Agreement for a consecutive twelve-month period or for any material breach by us of the Supply Agreement. Royalty expense under the Bio-Rad License was not significant for the year ended December 31, 2021 and $ 0.1 million for the year ended December 31, 2020. +On May 13, 2021 (Effective Date), we reached agreement with CellCarta Biosciences Inc. (formerly Caprion Biosciences, Inc.) (the CellCarta License) on a new royalty bearing license agreement for the Nodify XL2 test. The parties agreed to terminate all prior agreements and replace with this new arrangement, which has a 1 % fee on net sales made from the first commercial sale of the Nodify XL2 test to the Effective Date as an upfront make-good payment covering past royalties due and a royalty rate of 0.675 % on future Nodify XL2 test net sales worldwide for 15 years from the first commercial sale, ending in 2034 . Royalty expense under the CellCarta License for the year ended December 31, 2021 was $ 0.1 million. +As part of the acquisition of Oncimmune, the Company entered into several agreements to govern the relationship between the parties. The Company agreed to a license agreement and royalty payment related to an acquired diagnostic test of 8 % of recognized revenue for non-screen tests up to an annual minimum volume and 5 % thereafter, with an escalating minimum through the first four years of sales . Royalty expenses of $ 0.7 million and $ 0.3 million were incurred for the years ended December 31, 2021 and 2020, respectively. +Litigation, Claims and Assessments +From time to time, we may become involved in legal proceedings or investigations which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. In September 2021, we reached a settlement agreement with the plaintiffs, which received preliminary approval from the Circuit Court of the City of St. Louis, State of Missouri (the Court) on November 10 th , regarding a dispute involving the Telephone Consumer Protection Act (TCPA). On January 31, 2022, the Court approved the final settlement payment to third parties of approximately $ 210,000 which was accrued as a legal contingency during the year ended December 31, 2021. We are not presently a party to any other legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition, or cash flows. +Note 16 – Subsequent Events +Common Stock Purchase Agreement +On March 7, 2022 (the Effective Date), the Company entered into a purchase agreement, dated as of March 7, 2022 with Lincoln Park Capital Fund, LLC, an Illinois limited liability company (Lincoln Park), pursuant to which Lincoln Park has committed to purchase up to $ 50.0 million of the Company's common stock (the Purchase Agreement). Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $ 50.0 million of the Company’s common stock. Such sales of common stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company’s sole discretion, over the 36-month period commencing on the Effective Date. The number of shares the Company may sell to Lincoln Park on any single business day in a regular purchase is 50,000 shares, but that amount may be increased up to 100,000 shares, depending upon the market price of the Company’s common stock at the time of sale and subject to a maximum limit of $ 1.5 million per regular purchase. The purchase price per share for each such regular purchase will be based on prevailing market prices of the Company’s common stock immediately preceding the time of sale as computed under the Purchase Agreement. In addition to regular purchases, the Company may also direct Lincoln Park to purchase other amounts as accelerated purchases or as additional accelerated purchases. +Under applicable rules of the Nasdaq Capital Market, in no event may the Company issue or sell to Lincoln Park under the Purchase Agreement more than 19.99% of the shares of the Company’s common stock outstanding immediately prior to the execution of the Purchase Agreement (the Exchange Cap), unless (i) the Company obtains stockholder approval to issue shares of common stock in excess of the Exchange Cap or (ii) the average price of all applicable sales of common stock to Lincoln Park under the Purchase Agreement equals or exceeds $2.20 per share, such that issuances and sales of the common stock to Lincoln Park under the Purchase Agreement would be exempt from the Exchange Cap limitation under applicable Nasda q rules. +F- 27 +Lincoln Park has no right to require the Company to sell any shares of common stock to Lincoln Park, but Lincoln Park is obligated to make purchases as the Company directs, subject to certain conditions. In all instances, the Company may not sell shares of its common stock to Lincoln Park under the Purchase Agreement if doing so would result in Lincoln Park beneficially owning more than 9.99 % of its common stock. +Actual sales of shares of common stock to Lincoln Park under the Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the common stock and determinations by the Company as to the appropriate sources of funding for the Company and its operations. The net proceeds, if any, under the Purchase Agreement will depend on the frequency and prices at which the Company sells shares of its common stock to Lincoln Park. The Company intends to use any net proceeds from the sale of its common stock to Lincoln Park to advance its growth strategy and for general corporate purposes. On the Effective Date, the Company issued 184,275 shares of common stock to Lincoln Park as a commitment fee and, upon the available amount being reduced to an amount equal to or less than $ 20.0 million, the Company will be required to issue 61,426 shares (collectively, the Commitment Shares). +The Purchase Agreement may be terminated by the Company at any time, at its sole discretion, without any cost or penalty, by giving one business day notice to Lincoln Park to terminate the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the common stock. Although the Company has agreed to reimburse Lincoln Park for a limited portion of the fees it incurred in connection with the Purchase Agreement, the Company did not pay any additional amounts to reimburse or otherwise compensate Lincoln Park in connection with the transaction, other than the issuance of the Commitment Shares. +Centennial Valley Properties I, LLC Lease Agreement +On March 11, 2022, the Company entered into a Lease Agreement (the Lease) with Centennial Valley Properties I, LLC, a Colorado limited liability company (the Landlord) for office and laboratory space located at 919 West Dillion Road; Louisville, Colorado (the Leased Premises). The purpose of the Lease is to replace the Company’s current leased premises at 2970 Wilderness Place, Suite 100 in Boulder, Colorado and the Company intends to move its corporate headquarters to the Leased Premises by mid-2023. +T he initial term of the Lease wi ll extend twelve years (the Initial Term) from the commencement date, which is the earlier of: (i) the Company conducting revenue generating business (as defined in the Lease), or (ii) April 1, 2023 (the Commencement Date), unless earlier terminated in accordance with the Lease. The Company has two renewal options to extend the term of the Lease for an additional seven or ten year terms for each renewal. +Under the Lease, the Company will lease approximately 79,980 square feet at the Leased Premises. The Company will pay base rent over the life of the Lease beginning at approximately $ 227,000 per month and escalating, based on fixed escalation provisions, to $ 326,000 per month, plus certain operating expenses and taxes. The Company's obligation to pay base rent shall be abated, commencing as of the Commencement Date and ending on and including the date that is 12 months after the Commencement Date (the Abated Rent Period). Further, the Company's obligation to pay base rent with respect to a portion of the area of the Lease Premises equal to 19,980 square feet shall be abated (the Partial Abated Rent), commencing as of the day after the end of the Abated Rent Period and ending on and including the date that is 24 months after the Commencement Date (the Partial Abated Rent Period). Pursuant to a work letter entered by the parties in connection with the Lease, the Landlord will contribute an aggregate of $ 18.8 million toward the cost of construction and improvements for the Leased Premises and the Company exercised its option for an additional tenant improvement allowance of up to $ 25.00 per rentable square foot (the Extra Allowance Amount). The Company will repay the Extra Allowance Amount actually funded by the Landlord in equal monthly payments with an interest rate of 6 % per year over the Initial Term excluding any part of the Abated Rent Period or Partial Abated Rent Period, which shall start to accrue on the date that the Landlord first disburses the Extra Allowance Amount. +The Lease includes various covenants, indemnities, defaults, termination rights, and other provisions customary for lease transactions of this nature, including maintaining a $ 5.0 million letter of credit (subject to contingent reduction over the term of the lease) to secure the performance of the Company’s obligations under the Lease. The $ 5.0 million letter of credit has to be cash collateralized by the Company through a restricted cash account for the benefit of the Landlord. +F- 28 \ No newline at end of file diff --git a/raw/filings/0001439725/2021/0000950170-22-003495/filing_metadata.csv b/raw/filings/0001439725/2021/0000950170-22-003495/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..f5ad8ed4b698a2b157e9322961dd90404188a382 --- /dev/null +++ b/raw/filings/0001439725/2021/0000950170-22-003495/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001439725,BDSX,BIODESIX INC,10-K,2022-03-14,2021-12-31,2022-03-14T10:18:09.000Z,0000950170-22-003495,bdsx-20211231.htm,10-K,14986225,1,1,https://www.sec.gov/Archives/edgar/data/1439725/000095017022003495/bdsx-20211231.htm,https://www.sec.gov/Archives/edgar/data/1439725/000095017022003495/,2021,2021,1 diff --git a/raw/filings/0001439725/2021/0000950170-22-003495/item1.txt b/raw/filings/0001439725/2021/0000950170-22-003495/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..fa0312d935a4689546d3d268592785cd06378b43 --- /dev/null +++ b/raw/filings/0001439725/2021/0000950170-22-003495/item1.txt @@ -0,0 +1,554 @@ +Item 1. B usiness. +Our mission is to improve every patient’s lung care by empowering physicians with swift, comprehensive and actionable insights. +Our vision is to be a trusted business partner that the world relies on for data-driven diagnostics. +Business Overview +Biodesix, Inc. (“Biodesix”, “we,” “us,” “our” or the “Company”) is a leading data-driven diagnostic solutions company leveraging state of the art technologies with our proprietary artificial intelligence (AI) platform to discover, develop, and commercialize solutions for clinical unmet needs, with a primary focus in lung disease. By combining a multi-omic approach with a holistic view of the patient’s disease state, we believe our solutions provide physicians with greater insights to help personalize their patient’s care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe improves overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic Cortex®, to discover innovative diagnostic tests for clinical use. Because of this approach, we believe we are unique in the diagnostics market as this approach allows for a broader and more holistic understanding of each patient’s disease state. Our data-driven and multi-omic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, patients, researchers, and biopharmaceutical companies. +We operate in a single segment and derive our revenue from two sources: (i) providing diagnostic testing services associated with (a) blood-based lung tests and (b) Coronavirus Disease 2019 (COVID-19) tests (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics (Services). We derived 90% of our total revenues for fiscal 2021 and 2020 from our diagnostic testing business. +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. Since our inception, we have performed over 500,000 tests and continue to generate a large and growing body of clinical evidence. We have participated in 27 clinical studies, five of which are ongoing, and have published over 300 peer-reviewed publications and presentations. We have over 150,000 samples and data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development (R&D) initiatives. +We have commercialized eight diagnostic tests which are currently on market and we perform over 30 assays for research use as part of our laboratory services that have been used by over 50 biopharmaceutical customers and academic partners. +Blood-Based Lung Tests +We have five diagnostic blood-based tests across the lung cancer continuum of care, which generated $18.7 million and $12.6 million in revenue for fiscal 2021 and 2020 , respectively, an annual growth rate of 49%. +Diagnosis +• +Nodify XL2® and Nodify CDT ® tests, together marketed as part of our Nodify Lung ® Nodule Risk Assessment testing strategy, assess the risk of lung cancer to help identify the most appropriate treatment pathway. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +Treatment & Monitoring +• +GeneStrat ddPCR® and VeriStrat® tests, marketed as part of our new IQLung™ testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to establish the patient’s prognosis and help guide treatment decisions. The GeneStrat ddPCR tumor profiling test and the VeriStrat immune profiling test have a 36-hour average turnaround time, providing physicians with timely results to facilitate treatment decisions. +• +GeneStrat NGS™ (NGS) test, our 72-hour blood-based NGS test, was launched in November 2021 to a select group of physicians, with broad US launch in January 2022. The GeneStrat NGS test is marketed as part of the new IQLung testing strategy with the GeneStrat ddPCR and VeriStrat tests. +3 +COVID-19 Tests +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe™ testing program. We generated $30.2 million and $28.3 million in revenue from COVID-19 testing during fiscal 2021 and 2020, respectively. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two United States Food and Drug Administration (FDA) Emergency Use Authorization (EUA)-authorized tests, a part of our customizable WorkSafe™ program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. +In January 2020, the U.S. Department of Health and Human Services Secretary declared a public health emergency for COVID-19 which justified the authorization of emergency use of diagnostic tests for the detection and/or diagnosis of COVID-19. The Bio-Rad SARS-CoV-2 Droplet Digital™ polymerase chain reaction (ddPCR) test and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. The Bio-Rad SARS-CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under the Clinical Laboratory Improvement Amendments (CLIA) to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. Using the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab tests, we operate and have commercialized the Biodesix WorkSafe testing program. +Prior to using the Bio-Rad tests as part of our WorkSafe testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Post-launch development support for these tests have included improvements in on-boarding new personnel, logistics of sample collection, sample receipt and data reporting, all required to support our testing program. Additional releases of the laboratory data management software are ongoing and planned for the foreseeable future. +In addition, during the three months ended June 30, 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass™ SARS-CoV-2 Neutralizing Antibody testing as a service. The test is the first and only surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the receptor binding domain (RBD) in the spike protein of SARS-CoV-2 that are produced in response to vaccination or previous SARS-CoV-2 infection. +These tests under the Biodesix WorkSafe testing program are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems to assist in their back-to-work or back-to-school strategies, a crucial element of restarting economic activity. We have announced multiple partnerships for COVID-19 testing, and maintain an agreement with the State of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State. Additionally, we have overseen and managed onsite testing and validating testing for the Big Ten Conference athletic competitions through the term of our contract which expired on June 30, 2021. +COVID-19 Pandemic +The COVID-19 pandemic has disrupted, and we expect will continue to disrupt, our lung diagnostic testing operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States of Colorado and Kansas’ public health orders and the guidance from the Centers for Disease Control and Prevention (CDC). Employees who can perform their duties remotely are asked to work from home and those on site are asked to follow our social distance guidelines. Our sales, marketing and business development efforts have also been constrained by our operational response to the COVID-19 pandemic due to travel restrictions. We expect to continue to adjust our operational norms to help slow the spread of COVID-19 in the coming months, including complying with government directives and guidelines as they are modified and supplemented. +The COVID-19 pandemic negatively affected, and we expect will continue to negatively affect, our lung diagnostic testing-related revenue and our clinical studies. For example, cancer patients may have more limited access to hospitals, healthcare providers and medical resources as they take steps to control the spread of COVID-19. Our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized. As a result of the COVID-19 pandemic, beginning in the latter half of March 2020, we saw a decline in business with existing and new biopharmaceutical customers. We began to see recovery during the fourth quarter 2020 as our delivered tests exceeded first quarter 2020 delivered tests and we continued to see the recovery extending through 2021. Further, our clinical studies, such as our ongoing INSIGHT and ALTITUDE studies, as well as our arrangements including contracted clinical trials with our biopharmaceutical customers, are expected +4 +to take longer to complete than what we expected before the outbreak of the COVID-19 pandemic. Our biopharmaceutical services revenue grew by approximately 20% during 2021 as compared to 2020; however, we are continuing to experience delays in clinical trials from across the country and world due to COVID-19 restrictions. We expect further improvement in our biopharmaceutical activities during 2022 as compared to 2021. +Conversely, we experienced a significant increase in revenues related to an increase in the demand for our Biodesix WorkSafe testing program, our COVID-19 testing and services, since the onset of the pandemic. COVID-19 diagnostic testing and services contributed approximately $30.2 million and $28.3 million during fiscal years 2021 and 2020, respectively. The first quarter 2021 was our high-water mark for COVID-19 testing revenue. We experienced a steady decline in subsequent quarters as immunizations in the U.S. accelerated. We do not anticipate the need for COVID testing to be commensurate with the peak demand experienced during the first quarter 2021 and instead expect the demand to moderate as new variants and infection occur. The reduction in demand for COVID-19 diagnostic testing will be a key indicator of continued recovery and is taken as a positive sign for both our Lung Diagnostic and Biopharmaceutical Services as we head into 2022. T here is no assurance that our COVID-19 testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. If the pandemic were to dissipate, whether due to a significant decrease in new infections, due to acquiring herd immunity based on previous natural infection, and the availability and rapid distribution of vaccines, the evolution of variant strains that impact diagnostic test performance, or otherwise, the need for COVID-19 testing could decrease significantly and this could have an adverse effect on our results of operations and profitability. As a result, the increase in revenue due to any increase in demand for these diagnostic tests may not be indicative of our future revenue. +See “Risk Factors” for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations. +Full Year Results for 2021 +For the year ended December 31, 2021, compared to the prior year: +• +Total Revenue was $54.5 million, an increase of 20%; +o +Lung Diagnostic Revenue of $18.7 million, an increase of 49% +o +Services Revenue of $5.6 million, an increase of 20% +o +COVID-19 Revenue of $30.2 million, an increase of 7% +• +Gross Margin was $24.0 million, an increase of 2%; +• +Operating Expenses, excluding Direct costs and expenses, were $64.9 million, an increase of 40%; +• +Operating Expenses, excluding Direct costs and expense and non-cash stock compensation expense, were $60.0 million, an increase of 40%; +• +Net Loss was $43.2 million, an increase of 38%; +• +Basic and Diluted Net Loss Per Common Share was $1.58; +• +Net Cash Used by Operating Activities was $28.2 million, compared to $21.4 million used; and +• +Cash and Cash Equivalents was $32.7 million as of December 31, 2021. +5 +Our Market Opportunity +Diagnostic Testing Market Size and Opportunity +Despite significant advances over the last decade, lung cancer is still the deadliest type of cancer in both men and women in the United States. While diagnostic testing has become routinely used at certain points in the lung cancer continuum of care (diagnosis, treatment and monitoring), we believe there is substantial need for novel, advanced testing to improve on the current standard of care. We estimate that in the United States, the lung cancer continuum of care currently represents over 10 million annual testing opportunities and is over a $27 billion market annually for testing alone. +Over the last two decades, the use of biomarker testing in clinical trials has increased, with 55% of oncology trials involving the use of biomarker testing in 2018 versus 15% in 2000. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their research and development pipelines and increase chances of drug development success. We estimate that biopharmaceutical partnering and research opportunities represents over a $2 billion market annually. +Lung Cancer Continuum of Care – Clinical Unmet Needs +Standards of care in lung cancer have evolved rapidly over the past decade, along with our understanding of the disease. With the introduction of numerous treatment options, physicians need an ever-increasing amount of information in order to select the best treatment plan for each individual patient. We believe that the lung cancer continuum of care has a variety of clinical unmet needs ranging from initial diagnosis of lung cancer after discovery of a lung nodule to treatment guidance for early and advanced stage disease, and monitoring for disease progression. +• +Diagnosis : We estimate approximately 1.6 million new incidental lung nodules and potentially 4 million lung nodules from the adoption of screening could be identified annually in the United States. Following initial discovery of a nodule, patients are typically evaluated by a pulmonologist for risk of lung cancer before an invasive procedure is carried out to obtain a tissue sample to confirm diagnosis. This risk assessment is based on clinical factors such as the patient’s smoking history and age, and radiological features such as the size and location of the nodule, obtained from a computed tomography (CT) scan. On initial assessment, we estimate that approximately 80% of patients are identified as low to moderate risk (5-65%) where guideline recommendations for their care plan are unclear, often resulting in either overtreatment of patients with benign nodules or undertreatment in patients with cancer. An estimated 17% of patients with malignant nodules are initially sent to watchful waiting, where a follow-up CT scan is scheduled in three to six months, potentially delaying their diagnosis. Conversely, we estimate that 62% of biopsies and 35% of surgeries performed on lung nodules find benign disease, representing a significant overtreatment that incurs both risk and cost to the patient and their providers. We therefore believe that there is a clear clinical need for blood-based diagnostic testing to help improve the initial risk assessment of pulmonary nodules, helping direct patients to the relevant treatment pathway, and ultimately improving patient outcomes and saving costs to the system. +• +Treatment Guidance – Early Stage : We estimate that there are over 700,000 testing opportunities annually in the United States in early-stage lung cancer to assess a patient’s risk of recurrence following curative-intent surgery, and to detect potential target mutations for therapeutics. Depending on a patient’s risk of recurrence, they may also receive chemotherapy, radiotherapy or chemoradiation post-surgery. The assessment of risk of recurrence is primarily based on the stage of cancer at diagnosis, with stage I patients typically receiving no additional treatment beyond surgery. However, 20 to 40% of patients with stage I disease do still recur within five years following surgery, representing a sub-group of patients who may have benefitted from more intensive treatment protocol. We believe there is a clear clinical need for blood-based diagnostic testing prior to surgery to identify stage I patients who may benefit from a more intensive treatment protocol and we also believe there is the need for identifying stage II and IIIA patients where low risk patients may benefit from a less intensive treatment protocol. There have also been recent advances in the use of targeted therapies in early-stage lung disease. These therapies +6 +typically target specific genomic mutations or alterations found in some tumors. We believe there is therefore an emerging need for testing designed specifically for mutation detection in early-stage disease. +• +Treatment Guidance – Advanced Stage: We estimate that there are over 3 million diagnostic testing opportunities annually in the United States to guide advanced stage lung cancer treatment decisions. With nearly 50 FDA-approved systemic treatment regimens listed in national treatment guidelines for non-small cell lung cancer (NSCLC), there is an elevated need for personalized biomarkers to help physicians identify the right patient for the right treatment. Multiple tissue-based diagnostic tests have been approved to identify patients eligible for targeted therapies and immunotherapy; however, about 50% of patients do not have sufficient tissue collected following diagnosis to facilitate testing. To compound the issue, different molecular tests take varying amounts of time (days versus weeks) to report results back to the ordering physician, which often leads to treatment decisions being made on incomplete information. Therefore, we believe there is an imminent need for a blood-based testing solution that measures tumor mutations and the patient’s immune profile, to provide physicians with more comprehensive and timely information to assess the overall prognosis of the patient and personalize treatment. +• +Monitoring : We estimate that there are over 800,000 testing opportunities in the United States for blood-based tumor and immune profiling to monitor for disease recurrence and progression in NSCLC patients. Unfortunately, advanced stage lung cancer is often terminal, so repeat tissue biopsy to assess the evolution of resistance mutations or to detect disease progression is not feasible from either a cost or risk perspective to the patient, which we believe demonstrates an important need for blood-based testing to help routinely monitor these patients. As a patient progresses through therapies, changes in their immune system occur and blood-based immune profiling could help physicians identify these changes prior to subsequent therapy selection. +Current Limitations in Biomarker Discovery and Companion Diagnostics +We estimate the biopharmaceutical biomarker testing and companion diagnostic market opportunity represents a $2 billion market annually . Over the last two decades, the use of biomarker testing in clinical trials has increased, with 55% of oncology trials involving the use of biomarker testing in 2018 versus 15% in 2000. From 2005 to 2015, a study identified that incorporating biomarkers into clinical development programs increased their probability of therapeutic success rate from phase 1 to FDA-approval by 570%, representing an increase from 1.6% without biomarkers to 10.7% with biomarkers. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their product development efforts and increase chances of drug development success. However, we believe as the market continues to advance, inherent limitations of both biomarker discovery and companion diagnostic development have become more apparent. +Biomarker Discovery : There are many limitations with biomarker discovery in biopharmaceutical drug development, including: +• +Biomarkers with clinical utility are difficult to discover and validate in independent datasets. +• +Classical statistical approaches to biomarker discovery are limited. Single-omic tests fail to see the whole biological picture. +• +Tissue biopsies are limited by the amount of a sample that can be collected: longitudinal testing is difficult and the biology is only from the profile of the tumor (host response is not accounted for). +• +Clinical trials are expensive and take a long period of time. It is often difficult to meet enrollment goals for clinical trials with slow diagnostic testing turnaround times. +Companion Diagnostics (CDx): While developing companion diagnostics is critical to precision medicine, the promise of companion diagnostics has not been fully realized and there are multiple limitations that still need resolution. The path to co-develop a successful companion diagnostic with a corresponding drug has several challenges, including: +• +Traditional companion diagnostic agreements may fail to realize the full value of a testing opportunity, leading to difficulty in funding appropriate commercialization. +• +Drug development is a lengthy, complex and costly process. There can be a financial impact to a pharmaceutical company to have a drug selected by a test. +• +Current diagnostic reimbursement policies may not always support the coverage and payment of new companion diagnostics. +• +Regulatory agencies continue to work on defining the co-development process, but the environment is continually changing. +The Diagnostic Cortex - Our Proprietary Artificial Intelligence (AI) Platform +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic +7 +Cortex, to discover innovative diagnostic tests for clinical use. We focus on developing technologies that are capable of single and multi-omic research and development. +The Diagnostic Cortex is an extensively validated deep learning platform optimized for the discovery of clinical diagnostic tests, which we believe overcomes standard machine learning challenges faced in life sciences research. Researchers commonly encounter issues with machine learning-based biological discoveries that cannot be repeated or validated when assessed in additional specimen cohorts. This challenge, commonly referred to as overfitting, occurs when the machine identifies a perfect pattern in an initial training dataset but is unable to identify the same pattern in a new dataset. For over 15 years we have focused on developing our platform to overcome this challenge through proprietary computational techniques to ensure each diagnostic test that is discovered can be further developed to perform consistently in the clinical testing environment. +We are able to combine blood-based biological information related to the tumor, immune system, and host-status with clinical and radiomic data through our proprietary AI platform, which enables us to interpret the holistic disease state of each patient or clinical dataset we encounter. +We continuously evolve and improve the Diagnostic Cortex platform. These improvements range from basic code optimization to complex improvements such as the incorporation of novel computational methods for the optimization of multi-omic diagnostic tests. Any AI platform is inherently limited without the highest quality data inputs. Therefore, all of the technologies that we employ have been chosen and developed to provide high-quality data to enable our Diagnostic Cortex platform. We feel that this level of data integrity is crucial for the development of diagnostic tests that require the advanced pattern matching abilities of deep learning algorithms. +We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and learn about biological discoveries that are clinically meaningful. Additionally, we incorporate clinical and molecular profiling data aggregated through our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or academic partnerships, into our platform. We have over 150,000 samples and data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external development initiatives. With our data-driven and multi-omic approach as data inputs into the Diagnostic Cortex, we are able to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +The following is a diagram outlining our innovative diagnostic test discovery, development and commercialization infrastructure as outlined in the text above. +We employ multiple technologies, as illustrated below, including genomics, proteomics, transcriptomics, and radiomics, generated by different assay techniques, including ddPCR, NGS, LC-MS, ELISA, and our proprietary DeepMALDI mass spectrometry platform for the blood-based molecular analysis of the tumor, immune system, and host-status of each patient and/or clinical dataset. Through our learning loop, we continuously revisit our technology strategy and roadmap to integrate new technologies into our evolving platform, which ultimately support the addition of new service and product revenue offerings. We focus on developing technologies that are capable of single and multi-omic research and development. +8 +Most diagnostic companies focus their strategy on using a single technology to discover biomarkers for a broad range of clinical questions. We believe that no single technology can interrogate the complexity of the human disease state to help solve all clinical questions. For that reason, we employ a multi-omic approach to solving diagnostic challenges leveraging our proprietary transparent AI platform, the Diagnostic Cortex. Because of this approach, we believe we are unique in the diagnostics market, allowing for a broader and more holistic understanding of each patient’s disease state. +We are experts in many technologies, but we are a true market leader with over 15 years of experience in the field of clinical proteomics. For over 10 years, we have been discovering and developing proteomic-based diagnostic tests and have a deep understanding of how to incorporate technologies that can be applied to blood samples in order to extract important protein-based biological information in the form of diagnostic tests, which can aid clinicians and scientists in understanding the dynamic biology of their system of interest, such as a patient with cancer. +Our suite of technologies that assist us in discovery, development and commercialization of novel diagnostic tests includes: +DeepMALDI Mass Spectrometry +We have developed DeepMALDI, a proprietary high-density matrix-assisted laser desorption/ionization time-of-flight (MALDI-ToF) mass spectrometry (MS) technology, to produce blood-based proteomic data for disease diagnosis, personalized health care, precision medicine for direct treatment options, and disease screening in lung and other disease states. DeepMALDI overcomes the limitations of conventional MALDI and other mass spectrometry methods to produce highly sensitive, stable, and reproducible data by: (1) utilizing optimized signal-to-noise reduction and signal processing algorithms; and (2) novel batch correction methods and spectral alignment methods. The combination of these improvements yields substantially higher quality data content and is thereby much better suited for the discovery of biomarkers with clinical utility. +Our current DeepMALDI methods allow us to achieve finer mass resolution, greater sensitivity, and 20-times faster imaging speeds than other instruments. Additionally, we believe recent enhancements to our DeepMALDI methods and MALDI-ToF technology evolution now allows us to measure more than 2,000 proteins, an improvement from the estimated 900 proteins we could measure a year ago. We intend to maintain our leadership role in the discovery of proteomics-based diagnostic tests. We utilize our DeepMALDI and MALDI-ToF technologies in our discovery and development efforts and as part of our collaborations with our biopharmaceutical customers and academic partners. +Liquid Chromatography Mass Spectrometry MS +We use Multiple Reaction Monitoring (MRM) MS with triple quadrupole mass spectrometers and up-front liquid chromatography (LC) sample injection in the Nodify XL2 test. This mass spectrometry method offers highly sensitive, specific, and cost-effective analysis for simultaneous quantitation of hundreds to several thousands of targeted peptides in a single experiment. We have since included the MRM technologies as part of our services for discovery and development with our biopharmaceutical customers and academic partners. +9 +Enzyme-Linked Immunosorbent Assay +ELISA is the most widely used ligand binding assay platform within and outside the pharmaceutical industry. Formats include direct, indirect and sandwich assays and are typically run in manually or semi-automated modes. We use a semi-automated implementation of ELISA in clinical testing for the Nodify CDT test and the Platelia SARS-CoV-2 Total Ab test, and the cPASS neutralizing antibody test for COVID-19. The acquisition of Oncimmune USA in 2019 expanded our ability to conduct very high throughput and cost-effective ELISAs in our clinical testing laboratory. We have now included the ELISA technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +Droplet Digital Polymerase Chain Reaction Technology (ddPCR) +We use the ddPCR technology for multiplexed, semi-automated nucleic acid detection. This allows high sensitivity, fast turn-around times, flexibility in our laboratory workflows, rapid scaling from low to moderate analyte complexity, and high-volume scalability. ddPCR is an absolute quantitation method based on the partitioning of circulating nucleic acids into up to 20,000 droplets per reaction and is used for the GeneStrat test and Bio-Rad SARS-CoV-2 ddPCR test for COVID-19. We have included the ddPCR technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +Next Generation Sequencing Technology +We use an NGS technology for broad genomic sequencing of clinical specimens. Our strategy with NGS relies on a menu of off-the-shelf and custom research use assays, which we develop and make available as a part of our commercial pipeline and biopharmaceutical test services. The NGS technology integrates automated systems to yield high sensitivity results with a rapid turnaround time. Since adoption of this technology, we have included the NGS technologies for research and product development both internally and externally with our biopharmaceutical customers and academic partners. +Our Solutions and Products +To help address the current limitations with standard of care in lung cancer diagnosis, treatment, and monitoring, we use combinations of tumor, immune and host profiling, radiological imaging, patient clinical profiling, and our proprietary AI platform to provide a holistic view of each patient’s dynamic disease state. +We have five blood-based diagnostic tests across the lung cancer continuum of care to help address clinical unmet needs by physicians. +• +Diagnosis : We believe there is a clinical need to help physicians reclassify risk of malignancy in patients presenting with suspicious lung nodules. We offer the blood-based Nodify Lung Nodule Risk Assessment testing strategy to aid physicians in stratifying patients into distinct nodule management treatment pathways: diagnostic procedure or imaging surveillance. Nodify Lung consists of two blood-based proteomic tests: the Nodify CDT test helps identify patients with lung nodules that are likely malignant and the Nodify XL2 test conversely helps identify those that are likely benign. +• +Treatment Guidance : We believe there is an imminent need for a blood-based testing solution that measures tumor-specific mutations and the patient’s immune profile to provide physicians with more comprehensive information to assess the overall prognosis of the patient and personalize treatment plans. We offer the blood-based IQLung testing strategy, which consists of the GeneStrat ddPCR and GeneStrat NGS tumor profiling tests and the VeriStrat immune profiling test for patients diagnosed with NSCLC. With a 72-hour turnaround time, we are able to quickly provide critical diagnostic information to physicians to facilitate personalized treatment decisions for their patients. +• +Monitoring : We believe longitudinally monitoring advanced NSCLC patients for the dynamic evolution of their tumor and immune profile while on treatment can provide an earlier indication of treatment resistance and/or disease progression. We offer the IQLung testing strategy as a blood-based monitoring tool for physicians to track their patients’ disease evolution. +10 +Diagnosis – Nodule Management +We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our blood-based nodule management offering, Nodify Lung Nodule Risk Assessment assists physicians in reclassifying a patient’s risk of lung cancer by incorporating their protein biomarker results with radiographic imaging and clinical characteristics. Nodify Lung consists of the Nodify CDT and Nodify XL2 proteomic tests, which can be ordered separately or together from a single blood draw to help reclassify risk of cancer to aid physicians in stratifying patients into distinct nodule management pathways: intervention or surveillance. +The Nodify CDT test is used to help identify lung nodules that are likely malignant and the Nodify XL2 test helps identify lung nodules that are likely benign. Nodify Lung is available for patients 40 years or older, with nodules between 8 and 30mm, and less than 65% pre-test risk of lung cancer. The testing strategy starts with the Nodify CDT test to determine if a nodule is likely malignant or at a higher risk of lung cancer. The Nodify CDT test helps physicians identify cancer more quickly by prioritizing patients with a higher risk of malignancy for a diagnostic procedure, such as biopsy or surgery. If the nodule is not identified as having a high risk of malignancy by the Nodify CDT test, then the Nodify XL2 test is performed to help determine if the patient’s nodule is likely benign or has a reduced risk of lung cancer and may be a candidate for CT imaging surveillance. The Nodify Lung testing strategy is represented graphically in the image below starting with the patient’s pre-test risk of malignancy and ending with the guideline-recommended diagnostic procedure for each risk category. +We launched the Nodify Lung combined offering of the Nodify CDT and Nodify XL2 tests in March 2020. However, the Nodify XL2 test has been available to all physicians since September 2019 and has been available to a select group of physicians since October 2018. We acquired the Nodify XL2 test from Integrated Diagnostics (Indi) in July 2018 and acquired the Nodify CDT test from Oncimmune USA in October 2019. +Nodify CDT +The Nodify CDT test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely malignant or at a higher risk of being cancerous. Results allow physicians to identify patients who may be better candidates for timely invasive diagnostic procedures such as bronchoscopy, transthoracic needle biopsy, or surgical resection, with the hope of catching cancer earlier. The Nodify CDT test enhances lung nodule risk assessment to facilitate compliance with clinical treatment guidelines such as those of the American College of Chest Physicians (ACCP). The Nodify CDT test is intended for use in patients who are 40 years or older, have nodules between 8 and 30mm, and pre-test risk of lung cancer of less than 65%. +The test measures the levels of seven circulating autoantibodies (P53, NY-ESO-1, CAGE, GBU4-5, SOX2, HuD, and MAGE A4) associated with lung cancer, combined with an algorithm to report out three potential results: High Level, Moderate Level, or No Significant Levels of Antibodies Detected (NSLAD). The seven autoantibodies have shown to be elevated for all types of lung cancer, and from the earliest stage of the disease. +Unlike the tumor antigens themselves, the autoantibody levels can be measured accurately through a blood sample, based upon the signal amplification generated by the immune response to cancer. This mechanism of action likely reflects very early events in a tumor’s evolution; as the immune system initiates a response to the cancer, it can also trigger an expansion of self-reactive antibodies that can be measured in circulation. +11 +In addition to the test result of High Level, Moderate Level, or NSLAD, each test report includes the patient’s pre-test risk of malignancy as calculated by the Solitary Pulmonary Nodule (SPN) Risk Assessment calculator, and their post-test risk of cancer incorporating the result of the test. The SPN Risk Assessment calculator was developed by Stephen Swensen, M.D., of the Mayo Clinic and is designed to provide a risk of malignancy for a patient with a newly discovered incidental nodule. The model incorporates six clinical and radiologic factors into the equation: age, nodule size, smoking status, nodule location, spiculation (nodule edge characteristic), and previous history of lung cancer. Incorporating the autoantibody levels with the risk model provides physicians with a more accurate assessment of risk. The test has been studied in 14 peer reviewed published studies and presentations. +Nodify XL2 +The Nodify XL2 test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely benign or at a reduced risk of being cancerous. Results allow physicians to identify patients who may be better candidates for routine CT surveillance to monitor for growth or shrinkage of the nodule over time instead of an invasive diagnostic procedure. The Nodify XL2 test is used for patients who are 40 years or older, have nodules between 8 and 30mm, and have a pre-test risk of lung cancer of less than or equal to 50%. +The Nodify XL2 test integrates peptides measured by LC-MS with clinical and radiological characteristics that are combined by an algorithm to report out three potential results: Likely Benign, Reduced Risk, or Indeterminate. Specifically, the Nodify XL2 test measures the relative abundance of two peptides (LG3BP and C163A) in circulation in the patient’s blood. The native proteins from which the peptides are derived, have been associated with an inflammatory response to cancer. The clinical factors are patient age and smoking status, and radiological factors are nodule size, location, and edge characteristics. +In addition to the test result of Likely Benign, Reduced Risk, or Indeterminate, each test report includes the patient’s pre-test risk of lung cancer as calculated by the SPN Risk Assessment calculator, and their post-Nodify XL2 risk of malignancy incorporating the result of the test. Incorporating the peptide levels with the risk model provides physicians with a revised assessment of risk incorporating the patient’s biology. +In summary, the inclusion of the Nodify Lung testing strategy into clinical practice helps physicians reclassify risk of malignancy of low to moderate risk lung nodules by incorporating the patient’s own biology into the assessment. The Nodify CDT test helps physicians identify patients with a high-risk lung nodule who may benefit from timely intervention, which can ultimately help identify lung cancer earlier. The Nodify XL2 test helps physicians identify patients with a very low risk lung nodule who may benefit from CT surveillance and could avoid unnecessary invasive procedures. +Blood samples for the Nodify XL2 and Nodify CDT tests can be collected in the physician’s office, laboratory, or at home through use of mobile phlebotomy. Mobile phlebotomy options facilitate testing for patients even if they are not seen in person by the physician and instead are seen through telehealth visits. This benefits the patient as scheduling can be conveniently fit to their needs and can keep them away from a physician’s office or hospital for safety concerns, especially with the evolving coronavirus pandemic. Additionally, mobile phlebotomy benefits the physician as the logistics around a blood draw or tissue sampling are out of their hands. We have a national network of contracted Nurses and Phlebotomists to support at-home or mobile blood collection. +Both tests require a single blood sample shipped at ambient temperature to our certified, high-complexity clinical laboratory in De Soto, Kansas. Nodify CDT testing requires whole blood and Nodify XL2 testing requires either a whole blood tube, or whole blood spotted onto our proprietary Blood Collection Device (BCD). The introduction of the BCD and now the whole blood tube as qualified specimen collection methods for use with the Nodify XL2 test alleviated the need for serum separation processing steps by phlebotomists at blood draw sites such as centrifugation, and cold chain (dry ice) shipments, which has increased the market access to our proteomic-based tests. Results for the Nodify CDT test alone are typically available within one day. If both tests are ordered for the patient and Nodify CDT returns a result of NSLAD, then both test results are typically available within 4 to 5 days. All results are available through a portal, fax, hard copy, or mobile device. +12 +Treatment Guidance and Monitoring +Profiling the tumor through blood-based testing can help identify mutations in genes that may be driving growth of the tumor and may be targets for therapeutics. However, tumors also suppress intrinsic mechanisms that prevent the patient’s immune system from identifying and eliminating the cancer cells. Profiling the immune system can show if the patient’s immune system may have been subverted and therefore, is less likely to be responsive to immunotherapies. Our blood-based IQLung testing strategy consists of the GeneStrat ddPCR and GeneStrat NGS tumor profiling tests and the VeriStrat immune profiling test, which can be ordered together or separately for patients with NSCLC. Together, the tests typically have a 72-hour turnaround time, providing physicians with timely results to facilitate treatment decisions. +GeneStrat ddPCR +The GeneStrat test is a blood-based tumor profiling test that detects the guideline recommended, actionable mutations in lung cancer: EGFR, KRAS, BRAF, EML4-ALK, ROS-1, and RET. Physicians can order one or any combination of the gene tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat test performance and potential clinical utility have been published in 3 peer reviewed studies. +The GeneStrat test results are typically available within 36 hours from our receipt of the sample in our Boulder, Colorado clinical laboratory. In a study at Eastern Carolina University, it was observed that blood-based testing was up to three weeks faster than tissue-based testing, with tissue-based testing taking a median of 26 days from sample collection. With GeneStrat testing, results are typically available in time for the patients first oncology visit, allowing the patient to start front-line treatment as quickly as possible. In the same study, it was observed that only 4% of patients had tissue-based molecular test results prior to start of front-line treatment. Meanwhile, after integrating Biodesix testing at the institution, 72% of patients had molecular test results available. Testing with the GeneStrat test can help physicians identify driver mutations quickly to help speed up time to treatment. +GeneStrat NGS Test +The GeneStrat NGS test is a blood-based 52-gene tumor profiling test panel that detects the guideline recommended, actionable mutations in lung cancer including five gene classes (SNV, INDELS, CNA, fusions, and exon-skipping). Specific variants of relevance to NSCLC include EGFR, KRAS, BRAF, EML4-ALK, ROS-1, RET, MET, NTRK. The GeneStrat NGS test is used for late-stage, metastatic NSCLC and Physicians can order one or any combination of the IQLung tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat NGS test performance and potential clinical utility have been published in two published studies. +GeneStrat NGS test results are typically available within 72 hours from our receipt of the sample in our Boulder, Colorado clinical laboratory. +13 +We believe that rapid, blood-based tumor profiling with the GeneStrat ddPCR and GeneStrat NGS tests can be complementary to both targeted tissue-based testing (including PD-L1) and tissue-based broad genomic sequencing. Testing with GeneStrat ddPCR and GeneStrat NGS tests at diagnosis can help quickly identify patients who are eligible for targeted therapies. Additionally, blood-based testing upfront can help save valuable tissue for diagnostic evaluation, PD-L1 testing and broad genomic profiling for rare mutations to enroll in clinical trials. +VeriStrat +The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. Results help inform physicians whether their patient has a more aggressive cancer and can help with treatment planning. The VeriStrat test profiles the patient’s immune system by measuring eight protein features measured by mass spectrometry and interpreted by a proprietary machine learning-based algorithm to produce either a VeriStrat Good or VeriStrat Poor test result. +The presence of a VeriStrat Poor result indicates the presence of chronic inflammation and a chronic acute phase immune response. A chronic acute phase immune response can trigger the immune system to provide growth factors to the tumor to increase blood flow and tumor growth. The test has been studied in over 85 peer-reviewed and published clinical studies across many different types of therapies such as chemotherapy, targeted therapies, immune therapies, and combinations. The results consistently show the test to be predictive of outcomes, independent of other prognostic factors including PD-L1 expression and performance status. Patients who test as VeriStrat Poor, on average, have an overall survival that is less than half of those who test as VeriStrat Good, independent of treatment type, demonstrating that the test is strongly prognostic. Conversely, patients with a VeriStrat Good test result typically respond better to standard of care treatments than those patients that test as VeriStrat Poor. By using the VeriStrat test for immune profiling, physicians can help identify the patients with an immune status associated with generally poor prognosis who should be treated with alternate therapies or in clinical trials. +GeneStrat ddPCR testing is performed using PCR technology, GeneStrat NGS testing is performed using Next Generation Sequencing technology, and the protein features in VeriStrat are measured using MALDI-ToF mass spectrometry. Results are typically available within 72 hours through a portal, fax, hard copy, or mobile device. +The GeneStrat ddPCR and GeneStrat NGS tests require whole blood specimen collection tubes, and VeriStrat requires a whole blood sample spotted onto our proprietary BCD. Both sample types are shipped at ambient temperature and testing is performed in our certified, high-complexity clinical laboratory in Boulder, Colorado. +COVID-19 +Biodesix WorkSafe COVID-19 Testing Program +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe testing program. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two diagnostic tests for the SARS-CoV-2 virus that causes COVID-19. The first test is the Bio-Rad SARS-CoV-2 ddPCR test, which is a molecular test intended for detecting active SARS-CoV-2 infection. The test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under CLIA to perform high complexity tests. The second test is the Platelia +14 +SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The test was FDA EUA authorized on April 29, 2020. +Within a month of initiating our development collaboration with Bio-Rad, we were able to launch two tests for commercial use. We were able to bring these tests to market as fast as possible due to our scientific diagnostic expertise, technologies and existing commercial infrastructure. In addition to our launch agility, we have been able to rapidly scale our laboratory operations for high-volume testing. We remain committed to delivering rapid test results in 24 to 48 hours on average. +Using the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab tests, we operate and have commercialized the Biodesix WorkSafe testing program. +Prior to using the Bio-Rad tests as part of our testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Post-launch development support for these tests have included improvements in on-boarding new personnel, logistics of sample collection, sample receipt and data reporting, all required to support our testing program. Additional releases of the laboratory data management software are ongoing and planned for the foreseeable future. +In addition, during the three months ended June 30, 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass™ SARS-CoV-2 Neutralizing Antibody testing as a service. The test is the first and only surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the RBD in the spike protein of SARS-CoV-2 that are produced in response to vaccination or previous SARS-CoV-2 infection. +These tests under the Biodesix WorkSafe testing program are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems to assist in their back-to-work or back-to-school strategies, a crucial element of restarting economic activity. We have announced multiple partnerships for COVID-19 testing, and maintain an agreement with the State of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State. Additionally, we have overseen and managed onsite testing and validating testing for the Big Ten Conference athletic competitions through the term of our contract which expired on June 30, 2021. +Bio-Rad SARS-CoV-2 ddPCR test +The Bio-Rad SARS-CoV-2 ddPCR test, also known as a molecular or viral test, is intended for the qualitative detection of nucleic acid from SARS-CoV-2, the virus that causes COVID-19. The test targets detection of the nucleic acid from SARS-CoV-2 (not from any other viruses or pathogens) in respiratory specimens to identify and isolate infected individuals. Recent studies have shown that ddPCR-based testing is more sensitive than qPCR for detecting SARS-CoV-2, specifically in the reduction of false negative results. In one study, the ddPCR test demonstrated 95% accuracy vs. 47% for other “bulk” RT-PCR technologies used in other molecular tests Specimens are shipped at ambient temperature or dry ice depending on the viral transport media (VTM) used, and testing is performed using ddPCR in our certified, high-complexity clinical laboratory in Boulder, Colorado. Results are typically available through fax, hard copy, or encrypted email within 24 to 48 hours on average from receipt of the sample. +Platelia SARS-CoV-2 Total Ab Test +The Platelia SARS-CoV-2 Total Ab test (also known as a serology or antibody test) is intended for use as an aid in identifying individuals who have developed an adaptive immune response to the SARS-CoV-2 virus, indicating recent or prior infection. The test uses whole blood to detect circulating antibodies against the virus. The sensitivity is 98% and specificity is 99% eight days after the onset of symptoms. At this time, it is not known how long antibodies persist following infection and if the presence of antibodies confers protective immunity. The test is intended for the qualitative detection of total anti-SARS-CoV-2 nucleocapsid antibodies (IgG, IgM and IgA) in human serum or plasma specimens. The test requires a 3 mL blood draw, and samples are shipped at ambient temperature. Testing is conducted using semi-automated ELISA technology in our certified, high-complexity clinical laboratory in De Soto, Kansas. Results are typically available within 24 to 48 hours from receipt of the sample through fax, hard copy, or encrypted email. +Biopharmaceutical Diagnostic Discovery, Development and Testing Services Business +We believe our leadership in clinical proteomics and our multi-omic approach to probe the cancer disease state provides our customers with a clear and distinct advantage over other diagnostic service providers who solely focus on either genomics or proteomics. Similar to our commercial clinical testing business, our biopharmaceutical diagnostic discovery, development and testing services business leverages the Diagnostic Cortex to provide an extensively validated and deep learning approach to discovering new biomarkers, which in turn helps drive the clinical development of therapeutics. We recognize each clinical development program is complex, which is why we offer end-to-end diagnostic solutions, ranging from initial biomarker discovery and feasibility projects to commercialization of companion diagnostics. +15 +To address the increasing complexity of disease biology and new drug mechanisms of action, we employ a range of genomic and proteomic technologies to uncover insights about the tumor biology and patient’s immune response to cancer for therapeutics in clinical development. With our broad technology and service offering, including the performance of over 30 assays for research use as part of our laboratory services (see diagram below), we are able to provide the depth and breadth of biomarker tools for our partners for multi-omic analyses across their product development efforts. Although we recognize the importance of a multi-omic, approach in translational research, we are experts in discovering and developing proteomic-based diagnostic tests to help interrogate the immune profile and host disease state of patients on particular therapeutics. Traditionally, oncology biomarkers have been discovered from tumor tissue, but with the increased trend in the number of programs featuring immuno-oncology agents in therapeutic development, we believe there is a clinical unmet need for blood-based tumor markers and host/immune biomarkers to complement information obtained from tissue. +We believe we provide benefit to our biopharmaceutical customers as they integrate strategies for increasing the probability of success for pivotal clinical trials. Specifically, our diagnostic testing services may help enable quicker enrollment rates for patients in prospective clinical trials, ranging from phase 1 to phase 3, and could help identify patient populations who may experience the greatest benefit from new therapeutics. Ultimately, our goal is to help biopharmaceutical customers realize greater efficiency in their clinical development programs. Additionally, we have the ability to access and leverage our large sample and data biobank for our partners’ data mining needs, including new test discovery. +While our biopharmaceutical discovery, diagnostic development and testing revenue continues to grow, it is important to note that we benefit greatly from these partnerships in many ways that expand beyond revenue. We are continuously expanding our knowledge and biological understanding of multiple diseases and the rapidly evolving treatment landscape, while our Diagnostic Cortex continues to be powered through these biomarker analyses. Additionally, our sample and data biobank continue to grow and can be further leveraged for internal test development and external partnering. Importantly, we look to supplement our product development efforts with companion diagnostics as they are developed. +To date, we have over 50 biopharmaceutical customers and academic partners who have utilized our diagnostic tests and services. The following are a few case studies of early-stage biomarker discovery and development with our biopharmaceutical customers. +• +AstraZeneca: We provided services to AstraZeneca to retrospectively analyze samples from the FLAURA clinical trial (NCT02296125). The goal of this analysis was to interpret and establish the clinical utility of blood-based longitudinal monitoring of EGFR sensitizing and resistance mutations by ddPCR in advanced NSCLC patients treated with osimertinib. The data demonstrated that these circulating DNA mutations could be tracked in blood to interpret the patient’s prognosis, and could help AstraZeneca to identify disease progression 3 months (median) in advance of standard imaging. +• +Genentech: We partnered with Genentech to discover a novel proteomic classifier for advanced NSCLC patients treated with atezolizumab. The test was discovered on a small clinical cohort (n=77) and was independently validated on blinded samples (n=270) from the POPLAR clinical trial (NCT01903993). The validation revealed that the proteomic test was predictive of progression free survival and overall survival for atezolizumab versus the control arm docetaxel. Additionally, an analysis compared the correlation between our proteomic classifier with standard of care biomarkers (PD-L1 expression status and tumor mutation burden), which revealed there was no significant correlation. We published additional work on the Genentech +16 +classifier this fall with three posters presented at the society of immunotherapy conference (SITC). This data reinforces that our classifier provides unique and valuable information in the treatment of patients with advanced NSCLC. It is our belief that Genentech could use this strategy to identify patients that could derive a longer progression free survival from atezolizumab. +• +Merck KGaA & Pfizer: We announced the initiation of a clinical phase development program for the anti-PD-L1 checkpoint inhibitor, avelumab with Merck KGaA and Pfizer on February 12, 2020. The new proteomic test was developed through retrospective analysis of the circulating proteome combined with our proprietary AI platform. We have completed initial discovery of the test that identifies likely responders to avelumab and efforts are now focusing on transferring the test into our CLIA lab in Boulder, Colorado for clinical phase test validation. +• +HiberCell: In January 2021, we announced a broad collaboration with HiberCell for companion diagnostic discovery, development and commercialization. The agreement initially focuses on the further development of an ELISA as a companion diagnostic in future registrational trials in breast cancer for Imprime PGG programs. +Our Competitive Advantages +We believe the following are our key competitive advantages: +• +Our proprietary extensively validated deep learning platform, which is tailored to discover diagnostic tests that address clinical unmet needs. Our platform is an extensively validated deep learning platform optimized for discovery of diagnostic tests. By combining our data-driven and multi-omic approach with deep learning techniques, we believe we have overcome many standard machine learning challenges. This has enabled us to develop commercial tests for clinical unmet needs and collaborate with our biopharmaceutical customers and academic partners. +• +Our data-driven approach to precision medicine combined with our biobank, which enables us to accelerate development of new tests. We have over 150,000 samples and data in our biobank, including tumor profiles and immune profiles, used for both internal and external research and development initiatives. Our biobank, clinical trials, commercial testing and other partnerships provide an ongoing source of new data that further enhances our proprietary AI platform. We are continuously identifying and incorporating new market insights and input from our customers, key opinion leaders, and scientific experts to leverage this data in developing our diagnostic tests. +• +Our leadership in clinical proteomics, demonstrated research, development, and scientific expertise, combined with our intellectual property portfolio. Our leadership in clinical proteomics and our multi-omic approach, we believe provides us with a distinct advantage over our competitors, who focus on any single technology, such as genomics or proteomics. Our certified, high-complexity laboratories offer significant advantages in development of commercial tests. +• +Our proprietary technologies and processes are protected by a portfolio of approximately 109 issued patents in the United States and internationally, and 22 uniquely registered United States trademarks. We take efforts to protect our proprietary position using a variety of methods, such as a pursuit of United States and foreign patent applications related to our proprietary technology, use of trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities. +• +Our demonstrated success commercializing diagnostic tests in lung disease as well as unprecedented turnaround times. With eight diagnostic tests launched and three currently in development, our commercial portfolio of blood-based solutions currently addresses clinical unmet needs within diagnosis, treatment and monitoring of lung cancer. Our diagnostic tests provide rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan. For example, t he blood based IQLung strategy for lung cancer patients integrates the GeneStrat targeted test, the GeneStrat NGS test and the VeriStrat test to support treatment decisions across all stages of lung cancer with results in an unprecedented 36-72 hours, expediting time to treatment. We have displayed agility in our R&D and commercial launch efforts and within a month of initiating a development collaboration, launched three diagnostic tests for COVID-19 for commercial use. +• +Our depth and breadth of point of care access to physicians allows us to drive adoption of our diagnostic tests while incorporating real-life feedback to inform new product development. Our commercial team’s primary focus is to articulate the scientific and clinical evidence behind our tests, how they impact clinical care and can ultimately help to improve patient outcomes. Our demonstrated scientific expertise, leadership in clinical proteomics and breadth of data, including peer-reviewed publications, presentations and clinical studies, forms the basis of our relationships with major hospitals and physician networks across the United States. +• +Our commercial infrastructure, which includes our extensive knowledge and experience in sales, marketing, reimbursement and operations, provides us with the ability to launch, scale and drive revenue. We believe our commitment to commercial excellence helps us to leverage insights, operational excellence and proven approaches to deliver +17 +revenue growth and enhance the brand of our company and products. We are able to deploy rapid clinical testing turnaround times and develop commercial tests at scale. Scaling of our test capacity to meet volumes is then achieved by adding instrumentation and qualified personnel to our quality systems. +Our Strategy +We strive to provide swift, comprehensive and actionable insights to improve patient outcomes across lung disease and to help answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. To achieve this, we intend to: +• +Drive increased awareness, adoption, and reimbursement coverage of our diagnostic tests by: +o +continuously educating physicians, key opinion leaders, hospital systems, advocacy groups, patients, payers, academic research organizations, and technology assessment and guideline organizations on the clinical data and benefits of our tests; +o +utilizing our pulmonology- and oncology-focused sales force and commercial reach with targeted awareness campaigns to employ highly targeted sales and marketing tactics in pulmonology clinics specializing in the management of lung nodules and the diagnosis of lung cancer; +o +continuing to invest in the expansion of our sales force and commercial support team; +o +incorporating our testing services into diagnostic pathways and protocols via a top-down strategy that introduces our diagnostic tests to the largest United States health systems; and +o +leveraging our clinical data to gain broad coverage from public and private payers for our tests. +• +Deepen our relationships with current biopharmaceutical customers and establish new customer opportunities by: +o +selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally; +o +leveraging existing projects and relationships to expand sales with our current biopharmaceutical customers; and +o +targeting companies developing novel companion diagnostic strategies and drug development projects best suited to our platform for new test discovery, development and commercialization. +• +Further demonstrate the clinical utility and health economic benefits of our diagnostic tests by: +o +investing in commercial clinical testing, research studies and clinical trials to further demonstrate the clinical utility of our tests; +o +providing rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan; and +o +providing timely and actionable clinical information to help improve overall patient outcomes and lower the overall healthcare cost. +• +Introduce new diagnostic tests in lung disease by: +o +engaging with our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and to identify additional clinical unmet needs; +o +entering strategic partnerships with biopharmaceutical companies, academic research organizations, technology providers, and other diagnostic companies; and +o +developing companion diagnostic tests to support the therapeutics’ regulatory approval and adoption process for our biopharmaceutical customers. +• +Enhance our proprietary AI platform and expand our technology portfolio by: +o +continuing to invest in R&D capabilities to foster innovation in test discovery and development; +o +identifying, acquiring technologies and integrating new data types into our proprietary AI platform; +o +entering strategic partnerships across our commercial product portfolio and product development efforts in order to further our development capabilities, accelerate launch of commercial products, or expand our service offering; and +o +achieving “Explainable AI” by developing and incorporating computational tools that determine how the Diagnostic Cortex makes decisions for patient classification and outcome prediction. +18 +• +Continue to expand and leverage our biobank by: +o +expanding and enhancing the robustness of our samples and the data set, including through our collaborations and partnerships; +o +pursuing commercial opportunities with companies and researchers who are interested in utilizing our biobank for their own discovery and development efforts; and +o +monetizing these commercial opportunities. +Our Diagnostic Tests in Development +With the goal of finding solutions for clinical unmet needs related to diagnosis, treatment and monitoring in lung disease, our diagnostic tests in development include the following: +Early-Stage NSCLC—Risk of Recurrence (ROR) +Currently, surgical resection of the tumor without systemic or radiation therapy is standard of care for stage I NSCLC patients. However, 20 to 40% of surgically treated patients will suffer a recurrence within 5 years after surgery. From market research with pulmonologists, thoracic surgeons, and medical oncologists, we identified a significant clinical unmet need for a blood-based test to help identify stage I NSCLC patients who are at a higher risk of recurrence and may benefit from a more aggressive surgical procedure, or from neoadjuvant or adjuvant systemic treatment. Based on this unmet diagnostic need, we discovered the Risk of Recurrence (ROR) test, which is a pre-surgery blood-based proteomic test, designed with the Diagnostic Cortex to predict whether a stage I NSCLC patient has a higher risk of recurrence post-surgical resection. Knowing this information early and before surgery may change the surgical plan and/or support treatment decisions such as neoadjuvant or adjuvant therapy, which have the potential to reduce tumor volume and address micro-metastatic disease as early as possible. Our ROR test validated in an independent sample set, and we are currently working with major academic institutions across the United States to further validate the test. +Late-Stage NSCLC—Immunotherapy Treatment Guidance (PIR) +In 2015, the first immunotherapy-based treatment regimen was approved by the FDA for use in lung cancer. Currently, there are 9 immune checkpoint inhibitor (ICI) regimens (single agent or combinations) recommended by the NCCN guidelines for treatment of advanced NSCLC patients. For a portion of patients treated, these drugs can result in significant improvement in overall survival compared with platinum-based chemotherapy options. +The combination ICI regimens see some improvement in performance over single agent ICI, but side effect profiles are worse, and costs are higher than for single agent ICI. In addition, recent data have shown that a subset of patients experience more rapid disease progression on ICI compared with chemotherapy. We utilized the Diagnostic Cortex platform to discover our Primary Immune Response (PIR) test. PIR is a blood-based proteomic test designed to profile a potential to mount an immune response to their cancer and predict those patients likely to respond to ICI monotherapy treatment, ICI + chemotherapy combination treatment, or who would be highly resistant to ICI therapy. Our PIR test has been validated in multiple independent sample sets for advanced stage NSCLC patients treated with single agent ICI, and we are currently working with major academic institutions across the United States to further validate the test in a prospective study called BEACON-Lung. +Monitoring – Progression & Resistance +Blood-based monitoring with our ddPCR technology may offer a feasible method to non-invasively evaluate therapeutic mechanism of action, disease progression, and the emergence of resistance mutations in patients treated with targeted therapies. Our internal validation studies have shown the utility of the GeneStrat EGFR ddPCR test in all three of these indications. The test can identify disease progression up to 3 months (median) in advance of standard imaging. Using ddPCR for longitudinal blood-based monitoring of EGFR cell-free DNA mutations is a cost-effective testing method while patients are being treated with targeted therapies. +Clinical Trials +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. We have participated in 27 clinical studies, 5 of which are ongoing, and have published over 300 peer-reviewed publications and presentations. The following are our ongoing clinical studies for our diagnostic testing solutions. +ORACLE Registry Study (NCT03766958) +The ORACLE registry study was designed to develop real-world clinical utility data for Nodify XL2 and is titled “An Observational Registry Study to Evaluate the Performance of the Nodify XL2 Test”. The study objectives are to show a reduction in invasive procedures on patients with benign nodules compared to a historical control obtained from chart review. The first patient enrolled on October 16, 2018. As of May 1, 2020, 423 patients have been enrolled and are undergoing primary endpoint analysis, with 2-year follow-up estimated to be completed by the first half of 2022. +19 +ALTITUDE Clinical Utility Study (NCT04171492) +The ALTITUDE clinical utility study is designed to evaluate the performance of Nodify Lung (Nodify XL2 and Nodify CDT) in a randomized controlled study (RCT). The study is titled “A Multicenter, Randomized Controlled Trial, Prospectively Evaluating the Clinical Utility of the Nodify XL2 Proteomic Test in Incidentally Discovered Low to Moderate Risk Lung Nodules”. We received central investigational review board (IRB) approval in December 2019 and have an enrollment goal of 2,000 patients. The study objectives are to evaluate how the addition of the Nodify Lung test result impacts the clinical decision making for patients with new, incidentally identified solid lung nodules assessed as low to moderate risk of lung cancer. The trial has an adaptive study design with a blinded standard of care arm and 2:1 randomization for open-label results for Nodify XL2. The study launched in December of 2020. Phase 1 of the study with only Nodify XL2 is expected to enroll 500 patients. Phase 2 of the adaptive study design will include an open-label arm for Nodify CDT, which is aligned with our commercial testing algorithm. +INSIGHT Observational Study (NCT03289780) +The INSIGHT observational study is designed to evaluate the real-world clinical utility and performance of the IQLung (GeneStrat ddPCR, GeneStrat NGS and VeriStrat) testing strategy. The title is “Observational Study Assessing the Clinical Effectiveness of VeriStrat and Validating Immunotherapy Tests in Subjects with Non-Small Cell Lung Cancer (INSIGHT)” and the first patient enrolled was on May 11, 2016. To date, we have over 3,500 patients enrolled with a target 5,000 enrollment goal. Final analysis with 3-year follow-up is estimated to be completed by 2024. Results of an interim analysis were presented at ASCO 2020. The study rationale is to guide the adoption of VeriStrat and inform medical decision making, including treatment choice, and enable the validation of additional mass spectrometry-based proteomic tests. The primary study objective is to describe the impact of the VeriStrat test results on treatment decisions, including but not limited to the percentage change in treatment decision, differences in chosen treatments between patients classified as VeriStrat Good and those classified as VeriStrat Poor, and the percentage of patients receiving systemic therapy or supportive therapies only. +BEACON-Lung Clinical Study (Trial in Progress) +In partnership with ALCMI (Addario Lung Cancer Medical Institute), the BEACON-Lung clinical study is intended to evaluate the performance and utility of our proteomic product currently in development, PIR, in advanced stage NSCLC patients who express high PD-L1. The study title is “A Biomarker Analysis in High PD-L1 Expressing NSCLC Patients Treated with An Immune Checkpoint Inhibitor (ICI) With or Without Platinum-Based Chemotherapy.” The study design is an observational, multicenter, open-label study to assess biomarkers (serum, microbiome, radiomics and tissue) as predictive of early progression in 390 treatment-naive patients with advanced stage NSCLC and PD-L1 greater than or equal to 50% treated with two standard of care regimens, triplet therapy (platinum-based chemotherapy plus ICI regimen) and ICI monotherapy (single agent ICI). The objectives are to collect biospecimens and evaluate candidate biomarkers, with a focus on PIR, to detect early progression on ICI monotherapy versus triplet therapy. +DROPLET +Droplet is an exploratory observational study to assess the utility a novel gene linkage phenomenon as measured by the Bio-Rad SARS-CoV-2 ddPCR test, on the correlative immune response in individuals previously infected with the COVID-19 virus. The primary objective of this study (titled “ddPCR Linkage, Viral Load and Immune Response in Individuals Infected with COVID-19”) is to evaluate the correlation between linkage, viral load and the immune responses in individuals who have had a natural infection with SARS-CoV-2. Fifty patients will be enrolled and serially tested for viral load and immune responses for up to 12 months. More recently, the focus of the study has shifted to monitoring vaccine antibody durability and T cell responses. +Commercialization +For our lung cancer and nodule management tests, commercial efforts are focused on the promotion of our testing strategies to healthcare professionals actively involved in the diagnosis and treatment of lung cancer. Primarily focusing on pulmonology and oncology, the commercial team, consisting of specialty sales representatives, medical affairs, marketing and customer care representatives, works to educate and inform the entire patient care group consisting of physicians, nurses, office staff, laboratory personnel, and administration as to the appropriate use and value provided by our testing. The team’s goal is to drive test adoption through articulating the scientific and clinical evidence behind our tests, how they impact the clinical care of a patient, and how the tests can ultimately help to improve patient outcomes. +Patients with pulmonary nodules are concentrated in the pulmonology sub-specialty, where additional resources such as lung cancer screening and nodule management clinics may exist to provide an increased level of care. We are also engaging large hospital systems in a “top-down” approach, with a goal of incorporating our tests into system wide pathways and protocols. +After a physician orders our tests, blood is collected either in the physician office or laboratory, third-party “store front” patient service centers, or it can be collected in the patient’s home or workplace. We have contracted with a network of patient service centers and mobile phlebotomy services to be enable collection of blood samples outside of the physician office, at home or work for patients across the United States. +20 +For our Biodesix WorkSafe testing program, we have a dedicated outreach team that works with the State of Colorado healthcare providers and hospitals, and employers looking to safely return to work across many industries, including food services, oil and gas, biotechnology and pharmaceuticals, sports teams, universities, and many small businesses. We recognize everyone’s COVID-19 situation is unique, which is why we provide end-to-end customized solutions to support testing for our different customers, such as risk assessment tools, physician ordering services, on-site testing, phlebotomy services, shipping logistics, and ongoing client support. +Our business development team is focused on selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally. We currently hold a medical device establishment license in accordance with the Health Canada Medical Devices Regulations of the Food and Drugs Act and successfully passed an international Health Canada inspection in October 2021. Our team consists of customer facing business development associates that work with our biopharmaceutical customers to identify projects, draw up statements of work and negotiate service agreements. Alliance managers help to manage the contractual obligations and scope of the project, whereas our operations team assures the project is managed with adequate resources and delivers on time. We take a two-pronged approach generating business in this segment. Primarily, we leverage existing projects and relationships to expand sales in current accounts. We also actively map ongoing drug development projects in biopharmaceutical companies and target programs best suited to our platform for new test development. +Coverage and Reimbursement +The primary source of reimbursement for our tests in the United States is from third-party payers including government payers, such as Medicare, and commercial payers, such as insurance companies. Reimbursement for laboratory tests in the United States is determined by various payers, including private third-party payers, managed care organizations, and state and federal health care programs, such as Medicare and Medicaid. In Medicare, coverage of an item or service depends on whether it is “reasonable and necessary” under the section 1862(a)(1)(A) of the Social Security Act (SSA). For single-source laboratory tests, this determination is typically made by the Medicare Administrative Contractor (MAC) with jurisdiction over the laboratory where the test is performed. Our Boulder, Colorado laboratory is currently under the jurisdiction of Novitas Solutions, Inc. Our De Soto, Kansas laboratory is under the jurisdiction of Wisconsin Physicians Service Insurance Corporation, which participates in the MolDX program (administered by another MAC, Palmetto GBA) to set coverage policy for molecular diagnostic tests. +Medicare pays for clinical diagnostic laboratory tests (CDLTs), on the Clinical Laboratory Fee Schedule (CLFS). Section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA), added section 1834A to the SSA, which established the current CLFS rate setting processes and coding provisions for CDLTs, and created a new subcategory of CDLTs called Advanced Diagnostic Laboratory Tests (ADLTs), with separate reporting and payment requirements. +Under section 1834A and its implementing regulations, clinical laboratories that receive the majority of their Medicare revenues from payments made under the CLFS and the Physician Fee Schedule report on a triennial basis (or annually for ADLTs), private payer rates and volumes for their tests with specific billing codes based on final payments made during a set data collection period. The payment rate for a test for the ensuing three-year period (or one year for ADLTs) is set at the weighted median of the rates reported under the specific billing code for that test. Newly established codes for CDLTs are priced until the next private payer rate reporting cycle either based on the payment rate of a comparable code on the CLFS, as determined by CMS ("crosswalking") or at the median of rates submitted by the individual MACs based on statutory and regulatory factors ("gapfilling"). New ADLTs are initially priced at “actual list charge” for a nine-month period, after which they are priced based on private payer rates, with a recoupment provision if actual list charge is more than 130% of the weighted median of private payer rates reported. +The various payers in the United States also determine their own billing rules. In December 2020, Medicare revised its billing rules for clinical laboratory tests to require cancer-related protein-based Multianalyte Assays with Algorithmic Analyses to be billed directly to Medicare by the performing laboratory in most cases when performed on a specimen collected from a hospital outpatient. Molecular pathology tests and most ADLTs are also generally required to be billed directly to Medicare by the laboratory under these circumstances. +For our COVID-19 testing program, the primary source of reimbursement is through contracts with hospitals, companies providing wellness testing for their employees, or direct pay from patients. We believe that our lung cancer tests can both improve patient outcomes and help guide cost-effective treatment choices for patients with and at-risk of lung cancer. Achieving broad coverage and adequate reimbursement for each of our tests is a key component of our financial success and will continue to be important over time. +Under the Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief, and Economic Security Act (CARES), Congress has imposed a broad requirement that Medicare fee-for-service, Medicare Advantage, Medicaid, and commercial payers generally cover clinical diagnostic laboratory tests administered during the Public Health Emergency for the detection of SARS-CoV-2 or the diagnosis of the virus that causes COVID-19. Where applicable, the FFCRA and CARES require payers to cover COVID-19 tests without cost sharing or medical management techniques like prior authorization. Medicare fee-for-service does not require cost sharing or prior authorization for any clinical diagnostic laboratory tests. +The Department of Health & Human Services (HHS) has indicated in guidance that the coverage requirements of the FFCRA and CARES can apply both to infection and serological testing, but that they are only applicable to testing that is “diagnostic,” which “may +21 +include testing of individuals with signs or symptoms compatible with COVID-19, as well as asymptomatic individuals with known or suspected recent exposure to SARS-CoV-2.” Testing that is “not primarily intended for individualized diagnosis or treatment of COVID-19 or another health condition,” including “testing conducted to screen for general workplace health and safety,” is beyond the scope of the statutory coverage requirements. We believe these coverage requirements apply to the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test when performed for diagnostic purposes. In some cases, we submit claims to insurance payers for the Bio-Rad SARS-CoV-2 ddPCR test and/or the Platelia SARS-CoV-2 Total Ab test. In these cases, insurance payers may have a different position on the scope of mandatory coverage of our tests under the FFCRA and CARES. More commonly, we enter into arrangements with clients under which the client pays us directly for testing. +Compliance with applicable laws and regulations, as well as internal compliance policies and procedures adds complexity to the billing process. The Centers for Medicare & Medicaid Services (CMS) is responsible for overseeing the establishment of new Healthcare Common Procedure Coding System (HCPCS) codes for billing the Medicare program and other payers. CMS continuously evaluates and implements changes to the Medicare billing, coding, and reimbursement processes. To receive reimbursement from third-party payers, we bill our tests using a variety of HCPCS codes or Current Procedural Terminology (CPT) codes, as defined by the American Medical Association. For some of the tests we conduct, there may not be a specific CPT or HCPCS code, in which case the test may be billed under a miscellaneous code for an unlisted molecular pathology procedure or unlisted multiple analyte test with algorithmic analysis (MAAA) procedure. Because these miscellaneous codes do not describe a specific service, the third-party payer claim may be examined to determine the service provided, whether the service was appropriate and medically necessary and whether payment should be rendered. This process can result in a delay in processing the claim, a lower reimbursement amount, and/or denial of the claim. +Competitors +We primarily face competition from lung cancer diagnostic solutions companies in the United States, Europe and Asia seeking to answer clinical questions in the space, all of whom provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories and other medical facilities. +Diagnosis—Nodule Management +We are not aware of any other company that offers two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. We are aware of efforts by Veracyte, Inc. to develop and validate a test that may be competitive to the Nodify XL2 and/or Nodify CDT tests in the future. Additionally, Veracyte currently markets a test that is used post-bronchoscopy that is not competitive with our pre-bronchoscopy nodule risk assessment tests. +Prognosis, Treatment Guidance and Monitoring—NSCLC +We are unaware of any other diagnostic test available, commercially or in development, that will compete with our VeriStrat immune profiling test. There is substantial interest and activity in tumor profiling through liquid biopsy. Our genomic test offerings, the GeneStrat ddPCR and GeneStrat NGS tests, face competition from academic hospital laboratories, and companies such as Guardant Health and Foundation Medicine. We believe that there are several companies and academic research institutions in the process of developing tests for monitoring patients on or following treatment for recurrence or progression of lung cancer. +COVID-19 Testing +We believe that our competitors include university and state laboratories, national reference laboratories such as Lab Corporation and Quest Diagnostics, in-hospital laboratories, and a number of other diagnostic providers. We are aware that a number of other companies have announced development efforts to develop COVID-19 tests. +Biopharmaceutical Diagnostic Discovery, Development & Testing Services +We are aware of a number of companies who compete with our diagnostic tests and services, including diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. From the perspective of tumor profiling, we believe Guardant Health and Foundation Medicine are our most significant competitors. Conversely, in the immune profiling market, we believe Adaptive Biotechnologies and Personalis are our most significant competitors. +Clinical Laboratory Operations +We perform the VeriStrat, GeneStrat ddPCR, GeneStrat NGS, and COVID-19 ddPCR tests in our Boulder, Colorado high-complexity CLIA certified clinical laboratory. The laboratory is College of American Pathology (CAP) accredited, New York State Department of Health (NYSDOH)—permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified, along with all other states that require licensing: California, Maryland, Pennsylvania, and Rhode Island. All aspects of the testing process from receipt of the test requisition form through to delivery of test results are performed in the Boulder, Colorado facility. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within 3 days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +22 +The Nodify XL2, Nodify CDT, COVID cPASS and COVID-19 total antibody tests are performed in our De Soto, Kansas high-complexity CLIA certified clinical laboratory. This clinical laboratory is also CAP-accredited, NYSDOH—permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified and licensed by California, Maryland, Pennsylvania, and Rhode Island. Receipt of requisitions and testing is performed in our De Soto, Kansas clinical laboratory. Delivery of the test results is performed by personnel from our Boulder, Colorado headquarters. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within 5 days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +Personnel in both facilities are responsible for quality assurance oversight, licensing, and regulation compliance and maintenance to ensure data integrity and consistent, validated processes. +Supply Chain +We rely on third-party suppliers, including in some instances single source suppliers, to provide us with certain components of our diagnostic tests. The number of suppliers feeding into the production of our diagnostic tests is in excess of 65 worldwide. We consider a select few of these suppliers, located in the United States, Europe and China, as critical single source providers of components. Bio-Rad, as described below, is the sole source supplier for our GeneStrat test and COVID-19 and antibody testing program. Oncimmune is also the sole source supplier for our Nodify CDT tests but there are known secondary suppliers for these materials. We have initiated the second source qualification process for the majority of these critical components. +In addition, we purchase supplies through purchase orders without long-term supply agreements with, or guaranteed commitments from, many of our suppliers, including single source suppliers. Additionally, at present, we rely on contract manufacturers for the production of our diagnostic tests. We depend on our suppliers and contract manufacturers to provide us and our customers with materials in a timely manner that meet our and their quality, quantity and cost requirements. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test, but these supplies are able to be supplied by known suppliers. A disruption to this supply would negatively impact our ability to perform the GeneStrat and SARS-CoV-2 tests until alternatives could be validated. +While we have initiated the second source qualification process for the majority of these critical components, we may not be successful in securing second sourcing for all of them at all or on a timely basis. A disruption to this supply would negatively impact our ability to perform these tests until an alternative supplier could be validated. +All materials for our VeriStrat test and Nodify XL2 tests have alternative suppliers readily available, and a disruption in any single supplier would not materially impact our ability to deliver the test. +The COVID-19 pandemic has allowed us to pressure-test our supply chain and logistics processes as we purchased additional manufacturing capacity above our normal run rates to ensure that supply to execute on tests for the foreseeable future was available in-stock and in-house. Our suppliers have been able to allocate sufficient capacity to meet this increased demand with reasonable lead times and therefore we believe sufficient capacity exists for the expected volumes of all tests for the next 12 months. +Intellectual Property +Our success depends, in part, on our ability to obtain and maintain intellectual property and proprietary protection for our products and other know-how, to operate our business without infringing, misappropriating or otherwise violating the intellectual property and proprietary rights of others, and to defend and enforce our intellectual property and proprietary rights. We take efforts to protect our proprietary position using a variety of methods, which include pursuit of United States and foreign patent applications related to our proprietary technology, inventions and improvements that we determine are important to our business. We also may rely on trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities to develop and maintain our proprietary position. For more information regarding risks relating to intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property.” +We have invested heavily in the protection of our key assets, namely the VeriStrat® and GeneStrat® tests, and we acquired a patent portfolio relating to the Nodify XL2® and Nodify CDT® tests in our acquisitions of Indi in June 2018, and of Oncimmune USA in October 2019 from Oncimmune Limited (Oncimmune). We own patents and patent applications as well as trade secrets relating to our products currently in development, a collection device for whole blood, our business strategy, client lists and business methods. Further, we have expanded our access to key intellectual property through license and co-development agreements, including our Non-Exclusive License Agreement with Bio-Rad (the Bio-Rad License), which allows us to use the Droplet Digital PCR™ technology developed by Bio-Rad and which we employ in our GeneStrat test. +23 +Our patent strategy has focused on creating and acquiring protection for our VeriStrat and Nodify XL2 proteomic tests, while utilizing trade secret and some methods patent protection for our genomic test (the GeneStrat ddPCR and GeneStrat NGS™ tests) and ELISA test (the Nodify CDT test). We have entered into a non-exclusive license agreement with Bio-Rad, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. For more information regarding this license and supply agreement, please see “—Material Agreements—Agreements with Bio-Rad.” Bio-Rad owns patents relating to ddPCR and to which we have a non-exclusive license to utilize for the performance of ddPCR in cancer detection testing for third parties as set forth in the Bio- Rad License Agreement. In addition, we have separately been granted permission by Bio-Rad to use the Bio-Rad SARS-CoV-2 ddPCR test and Platelia SARS-CoV-2 Total Ab test for commercial diagnostic services. For more information regarding the permission granted to us by Bio-Rad with respect to such tests, please see “Business—Material Agreements—Agreements with Bio-Rad.” We are unaware of patents owned by Bio-Rad relating to its COVID- 19 antibody test but acknowledge that Bio-Rad has know-how and trade secrets relating to this test. We have patent protection in the United States and other countries around the world for the primary use of the VeriStrat test for profiling of patients with NSCLC, and various other uses of the VeriStrat test, such as breast cancer, prostate cancer, head and neck cancer have received patent protection. We have also received patent protection relating to our core classifier development program, our Diagnostic Cortex® technologies and our approaches to using MALDI-ToF technology (DeepMALDI® techniques). Additionally, our first device patent was issued in 2019 for our internally designed blood collection device. +As of December 31, 2021, our patent portfolio includes approximately 50 issued United States patents, 59 issued foreign patents, which includes 5 European patents that were nationalized in multiple European countries, and 41 pending applications (including 21 foreign patent applications). With regard to our product development efforts, new applications have been filed around developments relating to ARDS and COVID diagnostics, new analytic methodologies using Shapley values and semi-quantitative spectra analysis in MALDI, and national stage applications are now in active prosecution to protect our pipeline ROR and PIR tests. +The patent portfolio can be broken down into 5 major categories: +1) +Issued patents and patent applications relating to the VeriStrat and Nodify tests and uses of these tests; +2) +Issued patents and patent applications relating to methods for developing classifiers, including using the Diagnostic Cortex and DeepMALDI technologies; +3) +Issued patents and patent applications relating to tests currently in development; +4) +Issued patents and patent applications relating to our novel blood collection device; and +5) +Issued patents and patent applications relating to tests developed for our third-party partners. +The patents relating to the VeriStrat test are scheduled to expire between 2026 and 2032. The patents relating to the Nodify XL2 test are scheduled to expire beginning in 2031 (excluding any patent term extension granted by the United States Patent and Trademark Office (USPTO)), and the patents relating to the Nodify CDT test are scheduled to expire in 2027. The patent related to the blood collection device is scheduled to expire in 2039. Should our current patent applications in prosecution in the United States issue, the resulting patents would be scheduled to have expiration dates between 2036 and 2040 (excluding any patent term extension(s) granted by the USPTO). +We currently have one pending Patent Cooperation Treaty (PCT) application. PCT patent applications are not eligible to become issued patents until, among other things, we file such PCT applications as national stage patent application(s) within 30 months in the countries in which we seek patent protection. If we do not timely file any national stage patent applications, we may lose our priority date with respect to any such PCT patent applications and any patent protection on the inventions disclosed in such PCT patent applications. Provisional patent applications are not eligible to become issued patents but can become the basis of PCT foreign stage and United States non-provisional patent applications, if such applications are filed within 12 months of filing the related provisional patent application. If we do not timely file any non-provisional patent applications, we will lose our priority date and any patent protection on the inventions disclosed in any such provisional patent application. +In addition, the term of individual issued patents depends upon the legal term for patents in the countries in which they are obtained. In most countries in which we have filed, including the United States, the patent term is generally 20 years from the earliest filing date of a non-provisional patent application, assuming the patent has not been terminally disclaimed over a commonly-owned patent or a patent naming a common inventor, or over a patent not commonly owned but that was disqualified as prior art as the result of activities undertaken within the scope of a joint research agreement. The life of a patent, and the protection it affords, is therefore limited and once the patent lives of our issued patents have expired, we may face competition, including from other competing technologies. In the United States, the term of a patent may also be eligible for patent term adjustment for delays within the USPTO. The term of a patent that covers a biological product may also be eligible for patent term extension when FDA approval is granted for a portion of the term effectively lost as a result of the FDA regulatory review period, subject to certain limitations and provided statutory and regulatory requirements are met. Any such patent term extension can be for no more than five years, only one patent per approved product can be extended, the extension cannot extend the total patent term beyond 14 years from approval, and only those claims covering the approved biological product, a method for using it or a method for manufacturing it may be extended. We may not receive an extension if we fail +24 +to exercise due diligence during the testing phase or regulatory review process, fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. There can be no assurance that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. +Our ability to maintain and solidify our proprietary and intellectual property position will depend on our success in obtaining effective patent claims and maintaining and enforcing claims that are granted. However, our owned and licensed patents could be invalidated or narrowed or otherwise fail to adequately protect our proprietary and intellectual property position and our pending owned and licensed patent applications, and any patent applications that we may in the future file or license from third parties, may not result in the issuance of patents. +Because branding is as much a part of any intellectual property strategy as patent or trade secret protection we have a number of registered and pending trademarks relating to our company and products. We have received or filed for trademark protection in the United States for our tradename (Biodesix), the names of five of our commercial tests (namely the VeriStrat, GeneStrat ddPCR, GeneStrat NGS, Nodify XL2 and Nodify CDT tests), and a suite of research tests (ImmunoStrat), as well as having trademark protection for our core development and methodological platforms, such as our Diagnostic Cortex and DeepMALDI technologies. In all, as of December 31, 2021, we have 22 uniquely registered United States trademarks, 11 of which (including Biodesix, VeriStrat, and GeneStrat) have received foreign issuances as well, with 3 additional trademarks pending approving from the USPTO. We will continue to pursue protection in the United States and abroad for our branded assets and will continue to use branding to protect products currently in development, key Biodesix developments and non-trade secret methodologies. +We also rely on trade secrets, including know how, confidential information, unpatented technologies and other proprietary information, to strengthen or enhance our competitive position, protect and maintain aspects of our business that are not amenable to, or that we do not presently consider appropriate for, patent protection, and prevent competitors from reverse engineering or copying our technologies. We have decided that some technologies, such as our laboratory methodologies (including sample preparation and assay development), and some information (such as client and billing information) are best kept as trade secrets. However, trade secrets and confidential know-how are difficult to protect. To avoid inadvertent and improper disclosure of trade secrets, and to avoid the risks of former employees using these trade secrets to future employment, it is our policy to require employees, consultants and independent contractors to assign all rights to intellectual property they develop in connection with their employment with or services for the Company to the Company. We also protect our existing and developing intellectual property expressly through confidentiality provisions in agreements with third parties. There can be no assurance, however, that these agreements will be self-executing or otherwise provide meaningful protection for our trade secrets or other intellectual property or proprietary information, or adequate remedies in the event of unauthorized use or disclosure of such trade secrets or other intellectual property or proprietary information. +We also seek to preserve the integrity and confidentiality of our trade secrets and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in the measures we take to protect and preserve our trade secrets, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. +We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives, which may include objectives within and outside the United States. Despite our efforts to protect our intellectual property rights, and despite the breadth of protection that has issued around our key assets, these rights may not be respected in the future or may be circumvented or challenged (and potentially invalidated) in a legal proceeding in any jurisdiction where we have intellectual property rights. In addition, the laws of various foreign countries where we have received intellectual property protection and where we may eventually distribute our products may not afford the same protections or assurances to the same extent as the laws in the United States. See “Risk Factors—Risks Related to Our Intellectual Property” for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on us. +Government Regulations +Clinical laboratory tests like our diagnostic tests are regulated under CLIA and State law. The FDA regulates medical devices pursuant to the FDCA, including many diagnostic test kits, such as in vitro diagnostic tests (IVDs). However, most Laboratory Developed Tests (LDTs) are not currently subject to the FDA’s regulation (although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to such regulation) because the FDA has historically exercised enforcement discretion over LDTs. LDTs are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. FDA’s authority to regulate LDTs has been contested for many years, and there have been several legislative and administrative proposals regarding LDT regulation seeking to end or limit enforcement discretion and to bring LDTs under new or existing FDA regulatory frameworks: +• +On July 9, 2012, Congress passed legislation in the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA) requiring the agency to notify the Committee on Health, Education, Labor, and Pensions and the House Committee +25 +on Energy and Commerce of its intent to regulate LDTs. This law, though enacted, had a 5-year sunset provision, meaning that FDA is no longer subject to this notification requirement. +• +In October 2014, the FDA issued two draft guidance documents: Framework for Regulatory Oversight of Laboratory Developed Tests , which provided an overview of how the FDA would regulate LDTs through a risk-based approach, and FDA Notification and Medical Device Reporting for Laboratory Developed Tests , which provided guidance on how the FDA intended to collect information on existing LDTs, including adverse event reports. In the Framework for Regulatory Oversight draft guidance, the FDA asserted that LDT manufacturers would be subject to medical device premarket submission, registration, listing, and adverse event reporting requirements phased in over several years based on which tests posed the highest risk to public health. +• +On November 18, 2016, however, the FDA announced that it would not release the final guidance and would instead continue to work with stakeholders, the new administration, and Congress to determine the right approach. +• +On January 13, 2017, the FDA released a discussion paper on possible approaches to regulate LDTs in which it described a policy wherein previously marketed LDTs would not be expected to comply with most or all FDA oversight requirements, except for adverse event and malfunction reporting. In addition, certain new and significantly modified LDTs would not be expected to comply with pre-market review unless the agency determines certain tests could lead to patient harm. +• +In March 2017, the draft Diagnostic Accuracy and Innovation Act (DAIA) was introduced and outlined a risk-based regulatory approach for in vitro clinical tests (IVCT), i.e., all IVDs regardless of whether they are commercially distributed diagnostic kits or LDTs. +• +In April 2017, the FDA issued a document describing 20 case studies of LDTs that raised concerns about the safety and efficacy of this category of tests. +• +In August 2018, the FDA responded to the DAIA draft with its own proposal for IVCTs, including PMA, provisional approval, and precertification, in addition to authority to revoke approval, request raw data, and take corrective action against test developers to protect public health. +• +On October 31, 2018, the FDA issued its Safety Communication entitled “The FDA Warns Against the Use of Many Genetic Tests with Unapproved Claims to Predict Patient Response to Specific Medications” alleging that the agency was “aware” of healthcare providers making “inappropriate changes to a patient’s antidepressant medication based on the results from genetic tests.” Following this Safety Alert, the FDA contacted several laboratories that offered tests that made claims regarding drug responses for specific medications. While most laboratories addressed the FDA’s concerns by removing specific medication names from their labeling, the FDA issued an enforcement letter against a laboratory for making such claims without first undergoing the FDA premarket review. +• +In December 2018, a new draft bill which revised the DAIA and incorporated feedback from the FDA was released. The Verifying Accurate, Leading-edge, IVCT Development (VALID) Act creates a risk-based regulatory framework for IVCT regulation. Under the VALID Act framework, premarket review would be required for certain higher risk tests, while lower risk tests would be subject to a precertification pathway. +• +On April 4, 2019, the FDA issued a warning letter to Inova Genomics Laboratory for its pharmacogenomics tests, i.e., tests that predict medication response, among other things. In this letter, the FDA rebutted Inova’s argument that it believed it was operating within the scope of FDA’s LDT exemption and not subject to the FDA’s premarket review or labeling requirements by noting that the FDA has not created a legal “carve-out” or exemption for LDTs and that it ultimately retains discretion to take action when appropriate. +• +On March 5, 2020, identical versions of the VALID Act were introduced in both chambers of Congress. The same day, the House bill was referred to the House Committee on Energy and Commerce. +• +On August 19, 2020, HHS announced a new policy determining that FDA must engage in notice-and-comment rulemaking before requiring premarket review of LDTs. +• +On November 16, 2020, HHS directed FDA to review voluntarily submitted EUAs for LDTs; if FDA’s review time exceeds 14 days, the submission would be referred to the National Institute of Health National Cancer Institute and also to other scientific government agencies, or to outside technical contractors if FDA remains unable to conduct the reviews. +• +On June 24, 2021, an updated version of the VALID Act was reintroduced in both chambers of Congress. +• +On November 15, 2021, HHS formally rescinded its August 19, 2020 policy statement regarding FDA’s ability to require premarket review of LDTs absent notice-and-comment rulemaking. That same day, FDA revised its policy with respect to COVID-19 diagnostic tests, announcing that developers of LDTs for SARS-CoV-2 were expected to either submit an EUA request or cease marketing and offering their tests within 60 calendar days. +26 +We currently market our GeneStrat, VeriStrat, Nodify XL2 and Nodify CDT tests as LDTs in the United States. As a result, we believe our diagnostic services are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDCA provisions. If the FDA disagrees with the LDT status of any of our tests, the FDA may consider the test to be an unapproved medical device and may subject us to FDA enforcement action, including, without limitation, requiring us to seek clearance, authorization or approval for the laboratory test. If the FDA were to begin enforcement with respect to our LDTs, we could incur substantial costs and delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market requirements. +To date, the FDA has not engaged in notice-and-comment rulemaking or released broad-sweeping guidance over LDTs, but it could choose to do so in the future and if pre-market review is required, our business could be negatively impacted as a result of commercial delay that may be caused by the new requirements. The cost of conducting clinical trials and otherwise developing data and information to support pre-market applications may be significant. If we are required to submit applications for our currently marketed tests, we may be required to conduct additional studies, which may be time-consuming, costly and could result in our currently-marketed tests being withdrawn from the market. Continued compliance with the FDA’s regulations would increase the cost of conducting our business, and subject us to heightened regulation by the FDA including penalties for failure to comply with these requirements. Failure to comply with applicable regulatory requirements could result in an enforcement action by the FDA, such as fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal sanctions. There are other regulatory and legislative proposals that would increase general FDA oversight of clinical laboratories and LDTs. Until the FDA finalizes its regulatory position regarding LDTs, or the VALID Act or other legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval. The outcome and ultimate impact of such proposals on the business is difficult to predict at this time and we are monitoring developments and anticipate that our products will be able to comply with requirements that may be imposed by the FDA. In the meantime, we maintain our CLIA accreditation, which permits the use of LDTs for diagnostics purposes. +FDA Emergency Use Authorization +Section 564 of the FDCA allows the FDA to authorize the shipment of drugs, biological products, or medical devices that either lack required approval, licensure, or clearance (unapproved products), or are approved but are to be used for unapproved ways to diagnose, treat, or prevent serious diseases or conditions in the event of an emergency declaration by the HHS Secretary. 21 U.S.C. § 360bbb-3(a)(1)-(2). +On January 31, 2020, HHS Secretary Alex M. Azar II declared a public health emergency for COVID-19, under 21 U.S.C. § 360bbb-3(b)(1), justifying the authorization of emergency use of IVDs for detection and/or diagnosis of COVID-19. This determination was published in the Federal Register on February 7, 2020. 85 Fed. Reg. 7316 (Feb. 7, 2020). The public health emergency has been extended several times and remains in effect. +While this emergency declaration is effective, the FDA may authorize the use of an unapproved product or an unapproved use of an approved product if it concludes that: +• +an agent referred to in the emergency declaration could cause a serious or life-threatening disease or condition; +• +it is reasonable to believe that the authorized product may be effective in diagnosing, treating, or preventing that disease or condition or a serious or life-threatening disease or condition caused by an approved product or a product marketed under an EUA; +• +the known and potential benefits of the authorized product, when used for that disease or condition, outweigh known and potential risks, taking into consideration the material threat of agents identified in the emergency declaration; +• +there is no adequate, approved, and available alternative to the authorized product for diagnosing, preventing, or treating the relevant disease or condition; +• +any other criteria prescribed by the FDA is satisfied. Id. § 360bbb-3(c). +Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. +The Bio-Rad SARS-CoV-2 ddPCR test, the cPASS neutralization antibody test kit, and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. We have completed all required performance verification studies to validate the use of the tests in our laboratories in accordance with the FDA Policy for Coronavirus Disease-2019 Tests During the Public Health Emergency, CAP and New York State Clinical Laboratory Standards of Practice (NYS CLEP) requirements. The FDA Policy for COVID-19 tests is a guidance document that explains the FDA’s current thinking on the topic, is subject to change, and does +27 +not establish any legally enforceable responsibilities. The FDA does not expect a separate notification or EUA request from high complexity CLIA laboratories that are performing testing for SARS-CoV-2 using only EUA-authorized test kits purchased from commercial manufacturers or their distributors. According to previous versions of the FDA's Policy for COVID-19 tests, a laboratory may make certain modifications to an EUA-authorized test if the modified test is validated using a bridging study without submitting an EUA amendment or formal notification. According to the current FDA Policy for COVID-19 tests (Nov. 15, 2021), a laboratory that modified an EUA authorized test pursuant to the previous policy for use of a new specimen through a bridging study when the new specimen type had been previously authorized for another test of the same technology may continue to offer the modified test without submitting an EUA amendment or formal notification. +Federal and State Laboratory Licensing Requirements +The Biodesix Boulder, Colorado clinical laboratory is a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, Biodesix’s Quality Management System (QMS) holds an ISO 13485:2016 certificate (recently passed recertification audit in December 2021). The Biodesix Boulder, Colorado clinical laboratory has received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers, and Molecular and Cellular Tumor Markers and Virology as well as holding state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +CLIA regulations establish standards for proficiency testing; facility administration; general laboratory systems; pre-analytic, analytic systems, post- analytic systems; personnel qualifications and responsibilities; quality control, quality assessment; and specific provisions for laboratories performing moderate to high complexity tests. Our Boulder, Colorado clinical laboratory is inspected biennially as part of its ongoing certification under CLIA certificate of accreditation by CAP. The Boulder, Colorado clinical laboratory most recently passed its CAP inspection in April 2021. +Under CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of or assessment of health. CLIA requires that a laboratory hold a certificate applicable to the type of laboratory examinations it performs and that it complies with, among other things, standards covering operations, personnel, facilities administration, quality systems and proficiency testing, which are intended to ensure, among other things, that clinical laboratory testing services are accurate, reliable and timely. +The Biodesix De Soto, Kansas clinical laboratory is a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, the De Soto, Kansas clinical laboratory most recently passed its first CAP inspection in June 2021. Biodesix’s QMS holds an ISO 13485:2016 certificate (recently passed surveillance audit in December 2021). The De Soto, Kansas clinical laboratory has received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers and Diagnostic Immunology as well as holding state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +The International Organization for Standardization (ISO) is an independent, non-governmental international organization that defines world-class specifications for products, services and systems, to ensure quality, safety and efficiency. ISO 13485:2016 is a harmonized, international regulatory benchmark for quality management systems that addresses most or all of the QMS requirements in markets including the United States, European Union, Australia, Japan and Canada. The ISO 13485:2016 certificate confirms that an organization operates a QMS that conforms to the standards established by ISO. The FDA has proposed a rule to harmonize and modernize its QSR, which would supplant the existing requirements with ISO 13485:2016. Although this rule has been delayed several times since spring 2018, the Office of Management and Budget (OMB) updated its website (January 2022) to indicate that the FDA’s proposed rule to harmonize the agency’s medical device Quality System Regulation with the ISO 13485 standard has been finished and is now under review by OMB. +To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Laboratories such as ours, which are performing high complexity testing, are required to meet more stringent CLIA requirements than laboratories performing less complex tests, and therefore our laboratories are also subject to random, unannounced survey and inspection at any time. In addition, a laboratory that is certified as “high complexity” under CLIA may develop, manufacture, validate and use proprietary LDTs. CLIA requires analytical validation including accuracy, precision, specificity, sensitivity and establishment of a reference range for any LDT used in clinical testing. The regulatory and compliance standards applicable to the testing we perform may change over time and any such changes could have a material effect on our business. +CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that out-of-state laboratories maintain an in-state laboratory license to perform tests on samples from patients who reside in that state. As a condition of licensure, certain states may require that laboratory personnel meet qualifications, quality control procedures, facility requirements, record maintenance requirements or other state-specific requirements. +Because our Boulder, Colorado clinical laboratory is located in the State of Colorado, we do not need a specific State of Colorado laboratory license, however, we maintain licenses to conduct testing in other states where nonresident laboratories are required to obtain +28 +state laboratory licenses. We maintain licenses for our Boulder, Colorado and De Soto, Kansas laboratories with the NYSDOH. We also hold licenses in other states in which we operate, including California, Maryland, Pennsylvania and Rhode Island, that require licensing of out-of-state laboratories under certain circumstances. Other states may currently have or adopt similar licensure requirements in the future, which may require us to modify, delay or stop its operations in those states until such requirements are met. +Failure to comply with CLIA certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate or license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions, and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. +CLIA and state laws and regulations, operating together, sometimes limit the ability of laboratories to offer consumer-initiated testing, also known as direct access testing. We do not offer direct access testing and instead require that our tests be ordered by licensed healthcare providers. +Our Boulder, Colorado and De Soto, Kansas laboratories are certified and adhere to the NYS CLEP, based on New York State Public Health Law, Article 5 Title 5. NYS CLEP is exempt from CLIA and establishes their own method of laboratory certification and test validation approval. To process New York State patient specimens a laboratory must submit a robust analytical and clinical validation package to demonstrate clinical utility of the test and receive approval prior to offering the test in the state of New York. All of our tests have obtained NYS CLEP approval including GeneStrat ddPCR, GeneStrat NGS, VeriStrat, Nodify XL2 and Nodify CDT tests. NYS CLEP requires semi-annual inspections to ensure the laboratory meets all general and specialty standards. Both Biodesix laboratories passed NYS CLEP inspections in May 2019. Due to the pandemic, routine re-inspections have been delayed by NYS CLEP. +Regulatory framework for medical devices in the United States +Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, which are defined to include, among other things, IVDs. The FDA regulates the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. It is possible that one of our current, or future, tests will be subject to FDA authority and oversight as either an IVD or a CDx pursuant to the FDA’s authority to regulate medical devices under the FDCA. +Medical devices are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +product design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the European Economic Area (EEA), a medical device must meet the Medical Devices Directive’s (MDD)/In Vitro Medical Devices Directive’s (IVDD) Essential Requirements or, applicable on May 26, 2021, the Medical Devices Regulation’s (MDR) / applicable on May 26, 2022, In Vitro Medical Devices Regulation’s (IVDR) General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design +29 +and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a clinical evaluation report (CER) the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk- ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia, of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia, that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. However, the CE mark will be accepted in the UK until July 1, 2023. +Device classification +Under the FDCA, medical devices are classified into one of three classes: Class I, Class II or Class III, depending on the degree of risk to patients that is associated with each medical device and the amount of oversight needed to provide reasonable assurances with respect to safety and effectiveness of the medical device. +Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to a set of FDA regulations, referred to as the General Controls for Medical Devices, which require compliance with the applicable portions of the FDA’s QSR, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements. +Class II devices are subject to the General Controls as well as any special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, patient registries, FDA guidance documents and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process, although some Class II devices are exempt from the 510(k) requirements. +Class III devices include devices deemed by the FDA to pose the greatest risk: such as life-supporting or life-sustaining devices, implantable devices, or those deemed novel and not substantially equivalent to a predicate device following the 510(k) process. CDx tests are regularly considered Class III devices. +Premarket submission process +Unless a statutory or regulatory exemption or enforcement discretion policy applies, before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, the manufacturer must obtain the FDA’s: (1) permission for commercial distribution under section 510(k) of the FDCA (510(k) clearance); or (2) approval of a PMA; or (3) de novo classification and authorization. These processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees. +Under the 510(k)-clearance process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and therefore a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Premarket notifications typically include bench, analytical, and preclinical data. Clinical data is sometimes required to support substantial equivalence. If a manufacturer obtains a 510(k) clearance for its device and then makes a modification that could significantly affect the device’s safety or effectiveness or constitutes a major change or modification in the intended use of the device, a new clearance, authorization or approval may be required. +By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. If the FDA determines that the device is not “substantially equivalent” to a predicate +30 +device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous, costly, and time-consuming PMA approval process or seek reclassification of the device through the de novo process. +To obtain a PMA, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling, and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use. +Once filed as a PMA, the FDA has 180 days to review the filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. +Prior to approval of a PMA, the FDA may conduct inspections of any clinical trial data and clinical trial sites, as well as inspections of any manufacturing facility and processes. The FDA can delay, limit or deny approval of a PMA application for many reasons, including (1) the device may not be shown safe or effective to the FDA’s satisfaction; (2) the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval; (3) the manufacturing process or facilities may not meet applicable requirements; and (4) changes in FDA approval policies or adoption of new regulations may require additional data. +If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when data is available. The PMA process can be expensive, uncertain and lengthy. A number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing. New PMA applications or PMA supplements are required for any modifications to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, materials or design of a device that has been approved through the PMA process. +As a condition of PMA application approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer-term safety and effectiveness data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. +Alternatively, the FDA also allows the submission of a direct de novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of FDASIA, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. +The 510(k), de novo or PMA processes can be expensive, lengthy and unpredictable. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k)-clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device. +Companion Diagnostics and the Premarket Process +We believe that one of our future product candidates may include a companion diagnostic or complementary diagnostic (collectively CDx). CDx’s can identify patients who are most likely to benefit from a particular therapeutic product; identify patients likely to be at increased risk for serious side effects as a result of treatment with a particular therapeutic product; or monitor response to treatment with a particular therapeutic product for the purpose of adjusting treatment to achieve improved safety or effectiveness. The use of the CDx will be stipulated in the labeling of both the CDx and the therapeutic product. The FDA may require an application for the CDx to be separate from the drug approval process, and this could potentially delay the approval of any new drug application or the CDx, or +31 +complicate the review process. CDx’s are generally regulated as Class III medical devices by the FDA and are therefore most often subject to the PMA approval process. +The FDA issued guidance in July 2016 for the co-development of CDx tests with a therapeutic product and issued another draft guidance in December 2018 specific to oncology CDx tests. The FDA finalized this draft guidance in April 2020 in “Developing and Labeling In vitro Companion Diagnostic Devices for a Specific Group of Oncology Therapeutic Products.” The guidance is meant to guide the development of CDx products, which are defined as IVDs that provide information that is essential for the safe and effective use of the therapeutic product. A CDx is often developed and approved or cleared contemporaneously with the therapeutic, and the use of the CDx is stipulated in the labeling of both the CDx and the corresponding therapeutic product. While it supports contemporaneous marketing authorizations, if there are any deficiencies in the submissions, the FDA may place a PMA review of a CDx on hold or request additional testing, which could potentially delay the approval of the corresponding new drug application or the marketing authorization of the CDx, or otherwise complicate the review process. Some oncology CDx tests can be developed in a way that results in labeling for a specific group of oncology therapeutic products, rather than a single therapeutic product. +Post-Market FDA Regulation +Even if regulatory clearance, authorization or approval of a device is granted, the FDA may impose limitations on the uses and indications for which the device may be labeled and promoted, and the device remains subject to significant regulatory requirements. Medical devices may be marketed only for the uses and indications for which they are cleared, authorized or approved. After a device, including a device exempt from FDA premarket review, is placed on the market, numerous post-market regulatory requirements apply, and the FDA has broad authority to enforce these requirements. Medical device manufacturers are subject to unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of any suppliers. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions such as: warning letters, fines, injunctions, consent decrees and civil penalties; unanticipated expenditures, including requirements to repair, replace, and/or refund the cost of the devices, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; the FDA’s refusal of our requests for 510(k) clearance, de novo classification, or PMA of new products, new intended uses or modifications to existing products; the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries; and withdrawing 510(k) clearance or PMAs that have already been granted and criminal prosecution. In the event that a supplier fails to maintain compliance with the FDA’s or our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. +Federal and State Fraud and Abuse Laws +We are subject to federal fraud and abuse laws such as the federal Anti-Kickback Statute (AKS), the federal prohibition against physician self- referral (Stark Law), the Eliminating Kickbacks in Recovery Act (EKRA), and the federal False Claims Act (FCA). We are also subject to similar state and foreign fraud and abuse laws. +The AKS (Social Security Act § 1128B(b)) prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing or ordering, any item or service that may be reimbursable, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. There are a number of statutory exceptions and regulatory safe harbors to the AKS that provide protection from AKS liability to arrangements that fully satisfy the applicable requirements. +EKRA (18 USC § 220) prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program. The term “health care benefit program” is broadly defined such that EKRA extends to referrals reimbursed by both governmental and commercial third-party payers. EKRA includes a number of statutory exceptions that provide protection from EKRA liability if the applicable requirements are met. +The Stark Law (Social Security Act § 1877) generally prohibits, among other things, clinical laboratories and other so-called “designated health services” entities from billing Medicare for any designated health services when the physician ordering the service, or any member of such physician’s immediate family, has a financial relationship, such as a direct or indirect investment interest in or compensation arrangement with the billing entity, unless the arrangement meets an exception to the prohibition. The Stark Law also prohibits physicians from making such referrals to a designated health services entity. There are also similar state laws that apply where Medicaid and/or commercial payers are billed. +The FCA (31 USC § 3729) imposes civil penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment to the government that are false or fraudulent, or knowingly making, using or causing to be made or used a false record or statement material to such a false or fraudulent claim, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. This statute also permits a private individual acting as a “qui tam” whistleblower to bring actions on behalf of the federal government alleging violations of the FCA and +32 +to share in any monetary recovery. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $11,803 to $23,607 per false claim or statement for penalties assessed after December 13, 2021, with respect to violations occurring after November 2, 2015. +Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payer knows or should know is likely to influence the beneficiary to order or receive a reimbursable item or service from a particular provider, practitioner, or supplier, and contracting with an individual or entity that the person knows or should know is excluded from participation in a federal health care program. In addition, federal criminal statutes created by HIPAA prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services. +In addition to these federal laws, there are often similar state anti-kickback and false claims laws that typically apply to arrangements involving reimbursement by a state-funded Medicaid or other health care program. Often, these laws closely follow the language of their federal law counterparts, although they do not always have the same exceptions or safe harbors. In some states, these anti-kickback laws apply with respect to all payers, including commercial payers. +A number of states have enacted laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and other healthcare providers, and, in some states, marketing expenditures. In addition, some state statutes impose outright bans on certain manufacturer gifts to physicians or other health care professionals. Some of these laws, referred to as “aggregate spend” or “gift” laws, carry substantial fines if they are violated. +Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs and extensive annual trainings for all of our employees and contractors. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from participation in government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Anti-Corruption +The Foreign Corrupt Practices Act of 1977 (FCPA) and similar international bribery laws make it unlawful for persons or entities to make payments to foreign government officials to assist in obtaining and maintaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any offer, payment, promise to pay, or authorizing the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to do or omit to do an act in violation of his or her duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business, to any person. In addition to the anti-bribery provisions of the FCPA, the statute also contains accounting requirements designed to operate in tandem with the anti-bribery provisions. Covered companies are required to make and keep books and records that accurately and fairly reflect the transactions of the company and devise and maintain an adequate system of internal accounting controls. With our international operations through our third-party partnerships, we could incur significant fines and penalties, as well as criminal liability, if we fail to comply with either the anti-bribery or accounting requirements of the FCPA, or similar international bribery laws. Even an unsuccessful challenge of our compliance with these laws could cause us to incur adverse publicity and significant legal and related costs. We successfully passed our first FCPA compliance review in 2021 with no findings. +Privacy and Data Protection Laws +Numerous federal and state laws and regulations, including HIPAA, as amended by the HITECH Act, govern the collection, dissemination, security, use and confidentiality of protected health information (PHI) and personal information. In the course of performing our business we obtain personal information, including PHI. Laws and regulations relating to privacy, data protection, and consumer protection are evolving and, in some cases, particularly with regard to newer laws, may be subject to potentially differing interpretations. Under HIPAA and HITECH, the HHS issues regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of PHI, used or disclosed by covered entities (CEs) and their authorized business associates (BAs). Because we are a health care provider that electronically transmits health care information, and we also provide certain services to CEs and receive PHI from them, we are at times either a CE or a BA, as defined +33 +by HIPAA. Our subcontractors that create, receive, maintain, transmit or otherwise process PHI on our behalf are HIPAA BAs and must also comply with HIPAA, as applicable. +HIPAA and HITECH include the privacy and security rules, breach notification requirements and electronic transaction standards. The privacy rule governs the use and disclosure of PHI, generally prohibits the use or disclosure of PHI except as permitted under the rule, and mandates certain safeguards to protect the privacy of PHI. The privacy rule also sets forth individual rights, such as the right to access or amend certain records containing such individual’s PHI, or to request restrictions on the use or disclosure of such individual’s PHI. The security rule requires CEs and BAs to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI (also referred to as ePHI) by implementing administrative, physical and technical safeguards. Under HIPPAA’s breach notification rule, a CE must notify individuals, the Secretary of HHS, and in some circumstances, the media of certain breaches of unsecured PHI or ePHI, and similar breach notification provisions apply to certain BAs under the HITECH Act. +Penalties for failure to comply with a requirement of HIPAA and HITECH vary depending on the number and nature of the violations and any history of prior violations, but can be significant and include civil monetary or criminal penalties. HIPAA is enforced by the Department of Health and Human Services, Office for Civil Rights, and HIPAA also authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in improper use, access to or disclosure of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA CEs, such as us, and their BAs for compliance with the HIPAA privacy and security standards and breach notification rules. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator. +In addition, we may be subject to state privacy, cybersecurity, and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information Act, which, in addition to HIPAA and HITECH, sets forth standards with which all California health care providers must abide. Colorado has enacted the Colorado Privacy Act, and Virginia has enacted the Consumer Data Protection Act, both of which also have standards that must be complied with that supplement Federal data protection requirements, State laws may be more stringent, broader in scope or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other in regards to personal information treatment, which may complicate compliance efforts. For instance, the California Consumer Privacy Act (CCPA) became effective on January 1, 2020 and was amended by the passage of the California Privacy Rights Act (CPRA) in November of 2020. The CCPA, among other things, gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA has been amended from time to time, and it remains unclear what, if any, further modifications will be made to this legislation or how it will be interpreted. Although there are certain exemptions for PHI and clinical trial data, the CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future and the CCPA may increase our compliance costs and potential liability. Additionally, the CPRA will impose additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It would also create a new California data protection agency specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. Similar laws have been proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that could continue to make compliance challenging and costly. +Additionally, the Federal Trade Commission (FTC) and state attorneys general enforce consumer protection laws that prohibit unfair and deceptive acts and practices, including Section 5 of the FTC Act, which creates standards for the collection, use, dissemination and security of health-related and other personal information. Claims of unfair or deceptive trade practices regarding privacy and security can lead to significant liabilities and consequences, including regulatory investigations, penalties, fines and orders as well as civil claims, which could impact our data practices and operations or cause reputational damage. +We may also be subject to laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may add additional compliance burden and complexity. For example, in the EEA, the collection and use of personal data is governed by the European Union's General Data Protection Regulation (GDPR). In the United Kingdom, the GDPR has been adopted in substantially the same form, however the UK may potentially make revisions in the coming years. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze, store, transfer and otherwise process personal data. European and United Kingdom data protection authorities may interpret the GDPR and national laws differently and impose additional requirements, which adds to the complexity of processing personal data in or from the EEA or United Kingdom. Guidance on implementation and compliance practices are often updated or otherwise revised. GDPR applies extra-territorially under certain circumstances and imposes stringent requirements on controllers and processors of personal data, including, for example, requirements to ensure a legal bases to process personal information, provide robust disclosures to individuals, facilitate data subject rights, provide +34 +data security breach notifications within 72 hours after discovering a breach in certain circumstances, limit retention of personal information and apply enhanced protections to health data and other categories of sensitive personal information. The GDPR also has requirements around international transfers of personal data. Requirements around transfers to the United States and other jurisdictions have increased since a July 2020 decision by the Court of Justice of the European Union invalidated the Privacy Shield as a basis to transfer personal data from Europe to the United States, and added requirements for reliance on Standard Contractual Clauses. Regulatory guidance on requirements for international transfers, and other GDPR compliance matters, continues to evolve. Failure to comply with the requirements of the GDPR may result in fines of up to €20 million or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. To comply with the GDPR and other applicable international data protection laws and regulations, we may be required to put in place additional mechanisms ensuring compliance, which may result in other substantial expenditures. +Cybersecurity +Our business relies on secure and continuous processing of information and the availability of our IT networks and IT resources, as well as critical IT vendors that support our technology, research and other data processing operations. While we take steps to protect our systems and data, security incidents, data breaches, computer malware and computer hacking attacks have become more prevalent across industries, including the life sciences sector, and may occur on our systems or those of our third-party service providers. Unauthorized persons may in the future be able to exploit weaknesses in the security systems of our (or our third-party service providers) IT networks and gain access to PHI and other personal information, or sensitive trade secrets or other proprietary information. Any wrongful use or disclosure of PHI, other personal information, trade secrets or other proprietary information by us or our third-party service providers could subject us to regulatory fines or penalties, third-party claims or otherwise could adversely affect our business and results of operations. Although HIPAA and the regulations promulgated thereunder do not provide for a private right of action, failures to adequately protect PHI or our IT systems could be viewed as violations of the HIPAA security rule or violations of other applicable information security laws, regulations, contractual obligations or industry standards, and could further result in costly data breach notification obligations that negatively impact our reputation. +Moreover, data security incidents or data breaches, as well as attacks on our IT systems, could result in operational disruptions or data loss or corruption that could adversely impact our business and operations, result in substantial investment of resources to investigate, recover and remediate and subject us to heightened regulatory scrutiny. +International Regulations +Many countries in which we may offer any of our diagnostic tests in the future have anti-kickback regulations prohibiting providers from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable under any national health care program. In situations involving physicians employed by state-funded institutions or national health care agencies, violation of the local anti-kickback law may also constitute a violation of the FCPA. +The FCPA prohibits any United States individual, business entity or employee of a United States business entity to offer or provide, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether or not such conduct violates local laws. In addition, it is illegal for a company that reports to the SEC to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls. We will also be required to maintain accurate information and control over sales and distributors’ activities that may fall within the purview of the FCPA, its books and records provisions and its anti-bribery provisions. +The standard of intent and knowledge in anti-bribery cases is minimal. Intent and knowledge are usually inferred from that fact that bribery took place. The accounting provisions do not require intent. Violations of the FCPA’s anti-bribery provisions for corporations and other business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Other countries, including the United Kingdom and other OECD Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United Kingdom Anti-Bribery Act. +When marketing our diagnostic tests outside of the United States, we may be subject to foreign regulatory requirements governing human clinical testing, prohibitions on the import of tissue necessary for us to perform our diagnostic tests or restrictions on the export of tissue imposed by countries outside of the United States or the import of tissue into the United States, and marketing approval. These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required. +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the EEA, a medical device must meet MDDs/IVDD Essential Requirements or, applicable on May 26, 2021, the MDR applicable on May 26, 2022, IVDR General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use +35 +or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a CER the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk- ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia , of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia , that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. However, the CE mark will be accepted in the UK until July 1, 2023. +Healthcare Reform +In March 2010, the Patient Protection and Affordable Care Act (ACA) was enacted in the United States. The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private insurers. For example, the ACA requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices. The medical device tax was permanently repealed at the end of 2019. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters, and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict. +Beginning in 2017, the Trump administration sought to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. The Trump administration issued three executive orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. For example, on December 20, 2019, President Trump signed appropriations legislation for fiscal year 2020 that repealed certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high-cost employer-sponsored insurance plans, for tax years beginning after December 31, 2019; the annual fee imposed on certain health insurance providers based on market share, for calendar years beginning December 31, 2020; and the medical device excise tax on non-exempt medical devices, for sales after December 31, 2019. While Congress did not pass comprehensive legislation that would repeal all or part of the ACA, two bills affecting the implementation of certain taxes under the ACA have been signed into law. Specifically, the Tax Cuts and Jobs Act of 2017 (TCJA), among other things, included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment, or penalty, imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Beginning in 2021, the Biden administration has signaled its intent to pursue policies strengthening the ACA. +Other legislative changes have been proposed and adopted in the United States since the ACA was enacted to reduce healthcare expenditures. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions of Medicare payments to providers of up to 2% per fiscal year that started in 2013 and, due to subsequent statutory amendments, will remain in effect through 2030 unless additional Congressional action is taken. In 2020, the CARES Act temporarily suspended the 2% cut in Medicare payments from May 1, 2020 through December 31, 2020, and it extended the sequestration reductions through FY 2030 to offset the cost of such temporary suspension. The Consolidated Appropriations Act, 2021 further extended the temporary suspension through March 31, 2021. On April 14, 2021, Congress enacted legislation that further extended the suspension through December 31, 2021. On December 10, 2021, further legislation was enacted to extend the suspension through March 31, 2022. +The American Taxpayer Relief Act of 2012 made other changes, including reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. If federal spending is reduced, anticipated budgetary shortfalls may also impact the ability of relevant agencies, such as the FDA or the National Institutes of Health to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve R&D, manufacturing, and marketing activities, which may delay our ability to develop, market and sell any products we may develop. Additionally, the Biden administration has already indicated a shift in direction from Trump administration policies by issuing orders and other documents rolling back regulations and Executive Orders from the Trump administration, and as noted, indicating that it will pursue policies strengthening the ACA. The recent change in presidential administration could materially impact our business in ways that are difficult to predict. +36 +In December 2020, in its enactment of the Consolidated Appropriations Act, Congress enacted the No Surprises Act. This law, which took effect January 1, 2022, bars an out-of-network providers from billing patients in excess of the in-network cost sharing for services furnished with respect to a visit at certain in-network health care facilities. The law establishes an independent dispute resolution process between the provider and the payer to determine the appropriate payment rate to the provider. As written, the No Surprises Act may apply to laboratory tests furnished by an independent laboratory with respect to a hospital visit. The law establishes a notice and consent exception that generally does not apply to laboratory tests, although it allows HHS to apply this exception to certain advanced tests. Regulations and subregulatory guidance were issued by HHS, the Department of Labor, and the Department of the Treasury in 2021, with the first set of regulations was issued as an Interim Final Rule on July 1, 2021, and the second set issued as an Interim Final Rule on September 30, 2021. These regulations and subregulatory guidance have provided additional information on the applicability of the No Surprises Act, the rules governing the independent dispute resolution process, and specific provider requirements (including the obligation to furnish a “good faith estimates” of “expected charges” to uninsured or self-pay patients), as well as areas of temporary enforcement discretion. +Environmental, Health and Safety Regulations +We are subject to various federal, state, local, and foreign environmental, health and safety laws and regulations and permitting and licensing requirements. Such laws include those governing laboratory practices, the generation, storage, use, manufacture, handling, transportation, treatment, remediation, release and disposal of, and exposure to, hazardous materials and wastes and worker health and safety. Our operations involve the generation, use, storage and disposal of hazardous materials, and the risk of injury, contamination or non-compliance with environmental, health and safety laws and regulations or permitting or licensing requirements cannot be eliminated. In particular, the introduction of our Bio-Rad SARS-CoV-2 ddPCR and Platelia SARS-CoV-2 Total Ab tests requires that we maintain compliance with applicable and evolving federal and state laws and regulations relating to COVID-19, including the generation, use, storage, and disposal of testing materials and agents. Compliance with environmental laws and regulations has not had a material effect on our capital expenditures, earning or competitive position. Most recently, the Boulder, Colorado clinical laboratory passed an on-site inspection from the CDC in June 2021. +Corporate Information +We were incorporated in Delaware in 2005 as Elston Technologies, Inc. Our principal executive offices are located at 2970 Wilderness Place, Suite 100, Boulder, Colorado 80301, and our telephone number is (303) 417-0500. On June 20, 2006, we changed our name to Biodesix, Inc. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of our IPO. +Additionally, we are a “smaller reporting company ” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million +37 +as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +For certain risks related to our status as an emerging growth company, see “Risk Factors—Risks Related to our Common Stock—We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.” +Human Capital Resources +Our culture is underpinned by our cultural beliefs including an unwavering commitment to inclusion and diversity. We are committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent offering opportunities for our team members to grow and develop in their careers, supported by strong compensation, benefits and health and wellness programs. We regularly engage our team members in monthly all-hands meetings to align and focus on the current state of affairs of our business, our partnerships, new products, clinical trials, and other pertinent information about our business. We engage our team members in programs such as peer recognition, recruitment and our newly introduced Diversity, Equity and Inclusion Council that focus on recognizing outstanding individual contributions to company performance, cultural fit of new team members and acknowledging the diversity of our team to ensure our team members feel valued and can do their best work. We have a national annual community service initiative, “Biodesix Gives Back” that allows each team member to invest ten hours of paid community service to organizations of their choosing. +As of December 31, 2021, we had approximately 218 full-time and part-time employees, all of which are located in the United States. Of our 218 full-time and part-time team members, the majority of our team member base is located in proximity to our corporate office and testing facilities located in Boulder, Colorado and our laboratory in De Soto, Kansas. +Diversity, Equity and Inclusion +We believe that a diverse employee population, including cultural background, gender, ethnicity, sexual orientation and lived experiences, is critical to our success. Our employees are encouraged to leverage their personal strengths and experiences to continually innovate and contribute to the development of new ideas and process improvements that drive better experiences for our partners. +Employee Engagement +Our company culture emphasizes the satisfaction and well-being of our team members and a diverse, engaged workforce. We solicit the opinion and views of our team members through surveys and peer focus groups. We have an established and valued Peer Recognition Culture. Teammates recognize other teammates publicly for their support and contributions fostering collaboration, engagement and retention. We regularly review feedback we receive on our current cultural beliefs to determine if any modifications are needed. During the year ended December 31, 2021, we updated our cultural beliefs to align with our core values that reflect our current focus on Teamwork, Innovation, Making an Impact and Excel. Additionally, the Company annually celebrates our top sales performers through our President’s Club and other top company performers as nominated by fellow team members through our four (4) Performance Excellence Awards that recognize creativity and innovation, an entrepreneurial spirit, a strategic impact on the success of the Company and lastly, embodying the Biodesix cultural beliefs and goes “above and beyond” daily. +Training and Development +We invest in our team members career growth and provide team members with a wide range of development opportunities, including face-to-face, virtual, and self-directed learning, mentoring, coaching, and external development. +Health, Safety and Wellness +The physical health, financial stability, life balance and mental health of each of our team members is vital to our success. We sponsor several cancer awareness activities in our local communities to bring engagement and awareness of health, safety and wellness to positively impact lives. We provide an Employee Assistance Program through our professional employer organization (PEO) to enhance physical, financial, and mental well-being for all our team members. Since the onset of the COVID-19 pandemic, we have successfully transitioned a significant portion of our workforce to a remote working environment and implemented strict safety and social distancing measures in our sites to protect the health and safety of our team members. We also have provided extraordinary safety protocols and standards for all of “essential” team members who work in our Laboratories and our field sales organization including regularly scheduled serial testing for COVID-19. We also have an active “Friends and Family” COVID-19 testing program for our team members, their families and close friends. +Pay Equity +The main objective of our compensation program is to provide a compensation package that will attract, retain, motivate, and reward superior team members who operate in a highly competitive and technologically challenging environment. We emphasize overall Company performance and provide equity incentives for all team members to align their financial interests with the interests of shareholders. In addition, we offer an employee stock purchase plan to all employees in which participants are eligible to purchase shares at a discount to market. We think like customers and act like owners. +38 +Biodesix seeks fairness in total compensation. We benchmark with external comparisons, internal comparisons and look at the relationship between team member roles within the organization. We also review our compensation practices, both in terms of our overall workforce and individual team members, to ensure our pay is fair and equitable. We currently have no pay disparities based on gender, race, or ethnicity. +Available Information +We file with, or furnish to, the SEC reports including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available free of charge on our corporate website (www.biodesix.com) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov. The foregoing website addresses are provided as inactive textual references only. The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this Annual Report on Form 10-K. \ No newline at end of file diff --git a/raw/filings/0001439725/2021/0000950170-22-003495/item13.txt b/raw/filings/0001439725/2021/0000950170-22-003495/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..d6f2be492dd2a60f069696c3335ea53156fc9054 --- /dev/null +++ b/raw/filings/0001439725/2021/0000950170-22-003495/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this item is incorporated by reference from the information under the caption "Board and Corporate Governance Matters—Certain Relationships and Related Party Transactions" and "—Director Independence" contained in the Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001439725/2021/0000950170-22-003495/item9a.txt b/raw/filings/0001439725/2021/0000950170-22-003495/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..702a87163889964d2dff5a72090bb30727504be7 --- /dev/null +++ b/raw/filings/0001439725/2021/0000950170-22-003495/item9a.txt @@ -0,0 +1,9 @@ +Item 9A. Controls and Procedures. +Evaluation of Disclosure Controls and Procedures +We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. +Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the criteria established in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), using the 2013 framework. Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021 , the Company's internal control over financial reporting was effective based on the criteria set forth by COSO. +This annual report does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2021 , there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001439725/2021/0000950170-22-003495/rp_note.txt b/raw/filings/0001439725/2021/0000950170-22-003495/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001439725/2021/0000950170-22-003495/rpt_disclosure.txt b/raw/filings/0001439725/2021/0000950170-22-003495/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..855cb7cbf5abd7e4207afbf0c3015725cbcae094 --- /dev/null +++ b/raw/filings/0001439725/2021/0000950170-22-003495/rpt_disclosure.txt @@ -0,0 +1,147 @@ +reviewing related-party transactions; +• +approving, or as permitted, pre-approving, audit and permissible non-audit services to be performed by our independent registered public accounting firm; and +• +reviewing and assessing, at least annually, the performance of the audit committee and adequacy of its charter. +Compensation Committee +Our compensation committee consists of Messrs. Massarany and Patience and Drs. Kayyem and Watts, and the chair of our compensation committee +is Mr. Massarany. Our board of directors has determined that each of Messrs. Massarany and Patience and Drs. Kayyem and Watts is independent under the Nasdaq listing rules and is a “non-employee +director” as defined in Rule 16b-3 promulgated under the Exchange Act. The functions of this committee include: +• +reviewing, modifying and overseeing overall compensation strategy and policies; +• +reviewing and approving the compensation arrangements and other terms of employment of our chief executive +officer, other executive officers and senior management, as appropriate; +• +reviewing and recommending to the full board of directors the compensation of our directors; +2023 Proxy Statement +14 +Table of Contents +• +appointing and overseeing the work of compensation consultants, legal counsel or any other advisors and +consultants engaged for the purpose of advising the compensation committee; +• +reviewing, recommending to the full board of directors, as appropriate, and administering equity award plans, +compensation plans and similar programs, as well as modification or termination of plans and programs; +• +establishing policies with respect to equity compensation arrangements; +• +reviewing and evaluating with the chief executive officer and the full board of directors the succession plans +for our executive officers; and +• +reviewing and assessing, at least annually, the performance of the compensation committee and the adequacy of its +charter. +Compensation Committee Interlocks and Insider Participation +None of the members of the compensation committee is currently, or has been at any time during 2022, one of our officers or +employees. None of our executive officers currently serve, or has served during 2022, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors +or compensation committee. +Nominating and Corporate Governance Committee +Our nominating and corporate governance committee consists of Ms. Franchi, Dr. Strobeck and Mr. Schuler, and the chair of our +nominating and corporate governance committee is Dr. Strobeck. Our board of directors has determined that Ms. Franchi, Dr. Strobeck and Mr. Schuler are independent under the applicable listing standards. The functions of this +committee include: +• +reviewing periodically and evaluating director performance of our board of directors and its applicable +committees, and recommending to our board of directors and management areas for improvement; +• +identifying, evaluating, nominating and recommending individuals for membership on our board of directors; +• +reviewing with our chief executive officer the plans for succession to the offices of our executive officers and +make recommendations to our board of directors with respect to the selection of appropriate individuals to succeed to these positions; +• +reviewing and recommending to our board of directors any amendments to our corporate governance policies; and +• +reviewing and assessing, at least annually, the performance of the nominating and corporate governance committee +and the adequacy of its charter. +Director Nomination Process +Selection and Nomination Process +Our board of directors is responsible for nominating members for election to our board of directors by our stockholders at our annual meetings +of stockholders. Whenever a vacancy occurs on our board of directors, +2023 Proxy Statement +15 +Table of Contents +whether due to a newly created director position or the death, resignation, removal or retirement of an existing director, our board of directors is authorized to select a person to fill the +vacancy to serve as a director until the annual meeting of stockholders at which the director’s term expires and until the election and qualification of his or her successor or, if sooner, his or her death, resignation or removal. Any increase +or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. +Criteria for Board Membership +The board of directors and the nominating and corporate governance committee will determine the appropriate characteristics, skills and +experience for the board of directors as a whole and for its individual members. The board of directors and the nominating and corporate governance committee will consider the minimum general criteria set forth below, and may add any specific +additional criteria with respect to specific searches, in selecting candidates and existing directors for service on the board of directors. An acceptable candidate may not fully satisfy all of the criteria, but is expected to satisfy nearly all of +them. While the nominating and corporate governance committee does not have a formal policy in this regard, the diversity of the board of the directors is a consideration in evaluating candidates for director positions, among others. +The board of directors and the nominating and corporate governance committee believe that candidates for director should have certain minimum +qualifications, including being able to read and understand basic financial statements, being over 21 years of age and having the highest personal integrity and ethics. In considering candidates, the board of directors and the nominating and +corporate governance committee intend to consider such factors as possessing relevant expertise upon which to be able to offer advice and guidance to management, having sufficient time to devote to the affairs of the Company, demonstrated excellence +in his or her field, having the ability to exercise sound business judgment and having the commitment to rigorously represent the long-term interests of our stockholders. +The board of directors and the nominating and corporate governance committee review candidates for director nomination in the context of the +current composition of the board of directors, the operating requirements of the Company and the long-term interests of our stockholders. In conducting this assessment, the board of directors and the nominating and corporate governance committee +consider diversity, age, skills, and such other factors as it deems appropriate given the current needs of the board of directors and the Company to maintain a balance of knowledge, experience and capability. In the case of incumbent directors whose +terms of office are set to expire, the board of directors and the nominating and corporate governance committee review such directors’ overall service to the Company during their term, including the number of meetings attended, level of +participation, quality of performance, and any other relationships and transactions that might impair such directors’ independence. In the case of new director candidates, the board of directors and the nominating and corporate governance +committee also determine whether the nominee must be independent for purposes of any stock exchange on which any of the Company’s capital stock is listed. +Stockholder Recommendations and Nominations +Stockholders who wish to recommend candidates may contact the nominating and corporate governance committee in the manner described below +under “Board and Corporate Governance Matters—Stockholder Communications with our Board of Directors.” Stockholder nominations must be made according to the procedures required under our bylaws and described in this proxy statement +under the heading “Additional Information—Stockholder Proposals and Nominations for Next Year’s Annual Meeting of Stockholders.” Stockholder-recommended candidates and stockholder nominees whose nominations comply with these +procedures will be evaluated by our nominating and corporate governance committee in the same manner as other nominees. +2023 Proxy Statement +16 +Table of Contents +Board Diversity Matrix +The table below provides certain highlights of the composition of our board of directors members and nominees as of March 24, 2023. +Nasdaq listing requirements require each listed company to have, or explain why it does not have, two diverse directors on the board, including at least one diverse director who self-identifies as female and at least one diverse director who +self-identifies as an underrepresented minority or LGBTQ+, or for smaller reporting companies, two female directors. Companies listed on the Nasdaq Global Market must have at least one diverse director by December 31, 2023 and two diverse +directors by December 31, 2025. As of March 24, 2023, our board of directors has one diverse director, and we intend to be fully compliant with Nasdaq’s diversity requirement by December 31, 2025. Each of the categories listed in +the below table has the meaning as it is used in Nasdaq Listing Rule 5605(f). +Board Diversity Matrix as of March 24, 2023 +Total Number of Directors +9 +Female +Male +Non-Binary +Did Not Disclose Gender +Part I: Gender Identity +1 +8 +- +- +Directors +Part II: Demographic Background +African American or Black +- +- +- +- +Alaskan Native or Native American +- +- +- +- +Asian +- +- +- +- +Hispanic or Latinx +- +- +- +- +Native Hawaiian or Pacific Islander +- +- +- +- +White +1 +8 +- +- +Two or More Races or Ethnicities +- +- +- +- +LGBTQ+ +- +Did Not Disclose Demographic Background +- +Directors who Identify as Middle Eastern: 1 \ No newline at end of file diff --git a/raw/filings/0001439725/2022/0000950170-23-006092/filing.txt b/raw/filings/0001439725/2022/0000950170-23-006092/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..c24d3d0686ff185042b8936d747dc9d5c6857fc3 --- /dev/null +++ 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us-gaap:FairValueMeasurementsRecurringMember 2021-12-31 0001439725 bdsx:PerceptiveTermLoanMember 2022-11-21 0001439725 us-gaap:FairValueInputsLevel2Member us-gaap:EstimateOfFairValueFairValueDisclosureMember us-gaap:FairValueMeasurementsRecurringMember 2022-12-31 0001439725 srt:MinimumMember us-gaap:CustomerConcentrationRiskMember us-gaap:AccountsReceivableMember bdsx:MedicareMember 2022-01-01 2022-12-31 0001439725 bdsx:TwoThousandSixPlanMember 2016-02-29 bdsx:Test xbrli:pure utr:sqft xbrli:shares bdsx:Segment bdsx:Facility iso4217:USD iso4217:USD xbrli:shares bdsx:Installment bdsx:RenewalOption +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2022 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO +Commission File Number 001-39659 +Biodesix, Inc. +(Exact name of Registrant as specified in its Charter) +Delaware +20-3986492 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer +Identification No.) +2970 Wilderness Place , Suite 100 +Boulder , CO +80301 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: ( 303 ) 417-0500 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading +Symbol(s) +Name of each exchange on which registered +Common Stock, par value $0.001 per share +BDSX +The NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☒ No ☐ +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☐ +Accelerated filer +☐ +Non-accelerated filer +☒ +Smaller reporting company +☒ +Emerging growth company +☒ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ +As of June 30, 2022, the aggregate market value of common stock held by non-affiliates of the Registrant wa s $ 34.1 million, based on the closing price of the common stock as reported on the NASDAQ Global Market for that date. +The number of shares of Registrant’s Common Stock outstanding as of March 2, 2023 was 77,974,861 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for its 2023 Annual Meeting of Shareholders are to be incorporated by reference into Part III, as specifically set forth in Part III.) +Table of Contents +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +37 +Item 1B. +Unresolved Staff Comments +81 +Item 2. +Properties +81 +Item 3. +Legal Proceedings +81 +Item 4. +Mine Safety Disclosures +81 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +82 +Item 6. +[Reserved] +82 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +83 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +97 +Item 8. +Financial Statements and Supplementary Data +97 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +97 +Item 9A. +Controls and Procedures +97 +Item 9B. +Other Information +98 +Item 9C. +Disclosures Regarding Foreign Jurisdictions that Prevent Inspections +98 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +99 +Item 11. +Executive Compensation +99 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +99 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +99 +Item 14. +Principal Accountant Fees and Services +99 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +100 +Item 16 +Form 10-K Summary +100 +i +SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future financial condition, results of operations, business strategy and plans, and objectives of management for future operations, as well as statements regarding industry trends, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions. +We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, factors, and assumptions described under the section titled “Risk Factors” and elsewhere in this annual Report on Form 10-K, regarding, among other things: +• +our inability to achieve or sustain profitability; +• +our audited financial statements include a statement that there is a substantial doubt about our ability to continue as a going concern and a continuation of negative financial trends could result in our inability to continue as a going concern. +• +our ability to attain significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies for our diagnostic tests; +• +difficulties managing our growth, which could disrupt our operations; +• +failure to retain sales and marketing personnel, and failure to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests to generate revenue growth; +• +failure to maintain our current relationships, or enter into new relationships, with biopharmaceutical companies; +• +significant fluctuation in our operating results, causing our operating results to fall below expectations or any guidance we provide; +• +the demand for our COVID-19 and antibody testing program and our ability to meet such demand; +• +product performance and reliability to maintain and grow our business; +• +third-party suppliers, including courier services, contract manufacturers and single source suppliers; making us vulnerable to supply problems and price fluctuations; +• +the impact of a pandemic, epidemic, or outbreak of an infectious disease in the United States (U.S.) or worldwide, including the COVID-19 pandemic on our business; +• +natural or man-made disasters and other similar events negatively impacting our business, financial condition, and results of operations; +• +failure to offer high-quality support for our diagnostic tests, which may adversely affect our relationships with providers and negatively impact our reputation among patients and providers; +• +our inability to continue to innovate and improve our diagnostic tests and services we offer; +• +security or data privacy breaches or other unauthorized or improper access; +• +significant disruptions in our information technology systems; +• +the incurrence of substantial liabilities and limiting or halting the marketing and sale of our diagnostic tests due to product liability lawsuits; +• +our inability to compete successfully with competition from many sources, including larger companies; +• +performance issues, service interruptions or price increases by our shipping carriers and warehousing providers; +• +cost-containment efforts of our customers, purchasing groups and integrated delivery networks having a material adverse effect on our sales and profitability; +• +potential effects of litigation and other proceedings; +• +general economic and financial market conditions; +• +our ability to attract and retain key personnel; +• +current and future debt financing placing restrictions on our operating and financial flexibility; +1 +• +our need to raise additional capital to fund our existing operations, develop our platform, commercialize new diagnostic tests, or expand our operations; +• +the acquisition of other businesses, which could require significant management attention; +• +the uncertainty of the insurance coverage and reimbursement status of newly approved diagnostic tests; +• +future healthcare reform measures that could hinder or prevent the commercial success of our diagnostic tests; +• +compliance with anti-corruption, anti-bribery, anti-money laundering and similar laws; +• +compliance with healthcare fraud and abuse laws; +• +our ability to develop, receive regulatory clearance or approval or certification for, and introduce new diagnostic tests or enhancements to existing diagnostic tests that will be accepted by the market in a timely manner; +• +failure to comply with ongoing FDA or other domestic and foreign regulatory authority requirements, or unanticipated problems with our diagnostic tests, causing them to be subject to restrictions or withdrawal from the market; +• +future product recalls; +• +legal proceedings initiated by third parties alleging that we are infringing, misappropriating, or otherwise violating their intellectual property rights, the outcome of which would be uncertain; +• +the volatility of the trading price of our common stock; +• +inaccurate estimates or judgments relating to our critical accounting policies, which could cause our operating results to fall below the expectations of securities analysts and investors; and +• +other risks, uncertainties and factors, including those set forth under Risk Factors. +These risks are not exhaustive. Other sections of this Annual Report on Form 10-K may include additional factors that could harm our business and financial performance. New risk factors may emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. +You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K or to conform these statements to actual results or to changes in our expectations. +In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. +You should read this Annual Report on Form 10-K and the documents that we reference and have filed as exhibits with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. +2 +PART I +Item 1. B usiness. +Our mission is to unite biopharma, physicians, and patients to transform the standard of care and improve outcomes with personalized diagnostics. +Our vision is a world where all critical diseases are diagnosed early and treated quickly with the guidance of personalized diagnostic solutions, so humanity can thrive without the burden of disease. +Business Overview +Biodesix, Inc. (“Biodesix”, “we,” “us,” “our” or the “Company”) is a leading data-driven diagnostic solutions company leveraging state of the art technologies with our proprietary artificial intelligence (AI) platform to discover, develop, and commercialize testing solutions for clinical unmet needs, with a primary focus in lung disease. By combining a multi-omic approach with a holistic view of the patient’s disease state, we believe our testing solutions provide physicians with greater insights to help personalize their patient’s care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe improves overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic Cortex®, to discover innovative diagnostic tests for clinical use. Because of this approach, we believe we are unique in the diagnostics market as this approach allows for a broader and more holistic understanding of each patient’s disease state. Our data-driven and multi-omic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, patients, researchers, and biopharmaceutical companies. +We operate in a single segment and derive our revenue from two sources: (i) providing diagnostic testing services associated with (a) blood-based lung tests and (b) Coronavirus Disease 2019 (COVID-19) tests (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics (Services). We derived 90% of our total revenues for fiscal 2022 and 2021 from our diagnostic testing business. +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. Since our inception, we have performed over 550,000 tests and continue to generate a large and growing body of clinical evidence. We have participated in 27 clinical studies, four of which are ongoing, and have published over 300 clinical and scientific peer-reviewed publications, presentations, and abstracts. We have a variety of samples with associated data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development initiatives. +We have commercialized eight diagnostic tests which are currently on market and we perform over 30 assays for research use as part of our laboratory services that have been used by over 60 biopharmaceutical customers and academic partners. +Blood-Based Lung Tests +We have five diagnostic blood-based tests across the lung cancer continuum of care, which generated $29.3 million and $18.7 million in revenue for fiscal 2022 and 2021, respectively, an annual growth rate of 57%. +Diagnosis +• +Nodify XL2® and Nodify CDT ® tests, together marketed as part of our Nodify Lung ® Nodule Risk Assessment testing strategy, assess a suspicious lung nodule's risk of lung cancer to help identify the most appropriate treatment pathway. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +Treatment & Monitoring +• +GeneStrat® ddPCR and VeriStrat® tests, marketed as part of our IQLung™ testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to establish the patient’s prognosis and help guide treatment decisions. The GeneStrat ddPCR tumor profiling test and the VeriStrat immune profiling test have a turnaround time of two business days, providing physicians with timely results to facilitate treatment decisions. +3 +• +GeneStrat NGS™ (NGS) test, also marketed as part of our IQLung testing strategy, is our blood-based NGS test with results in three business days. The NGS test was launched in November 2021 to a select group of physicians, with national launch in January 2022. The 52-gene panel includes guideline recommended mutations to help physicians treating advanced-stage lung cancer patients identify targeted therapy mutations in genes, such as EGFR, ALK, KRAS, MET, NTRK, ERBB2, and others, and delivers them in an expedited timeframe so patient treatment can begin sooner. +COVID-19 Tests +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe™ testing program. We generated $5.2 million and $30.2 million in revenue from COVID-19 testing during fiscal 2022 and 2021, respectively. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two United States Food and Drug Administration (FDA) Emergency Use Authorization (EUA)-authorized tests, a part of our customizable WorkSafe program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. +The Bio-Rad SARS-CoV-2 Droplet Digital™ polymerase chain reaction (ddPCR) test and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. The Bio-Rad SARS-CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under the Clinical Laboratory Improvement Amendments (CLIA) to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Prior to using the Bio-Rad SARS-CoV-2 tests as part of our testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Beginning in second quarter 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass ™ SARS-CoV-2 Neutralizing Antibody testing as a service. The test is the first surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the receptor binding domain (RBD) in the spike protein of SARS-CoV-2 that are produced in response to a previous SARS-CoV-2 infection. +Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety. The EUA declaration under Section 564 of the FDCA is distinct from and independent of the declaration by the Secretary of HHS of a public health emergency under Section 319 of the Public Health Service Act (the PHS Act). On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. Because the EUA declaration from the FDA is distinct from the declaration under Section 319 of the PHS Act, the FDA EUA may remain in effect beyond the duration of the Section 319 declaration. We cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. +We announced multiple partnerships for COVID-19 testing, and maintained an agreement with the State of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State which expired on August 31, 2022. Additionally, we oversaw and managed onsite testing and validating testing for the Big Ten Conference athletic competitions through the term of our contract which expired on June 30, 2021. +COVID-19 Pandemic +The COVID-19 pandemic has disrupted, and may continue to disrupt, our lung diagnostic testing operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States of Colorado and Kansas’ public health orders and the guidance from the Centers for Disease Control and Prevention (CDC). Employees who can perform their duties remotely have the option to work from home. Our sales, marketing and business development efforts may be constrained by our operational response to future COVID-19 variant outbreaks. We will continue to adjust our operational norms, as needed, to help slow the spread of COVID-19, including complying with government directives and guidelines as they are modified and supplemented. +The COVID-19 pandemic and the surge associated with multiple variants have negatively affected our lung diagnostic testing-related revenue and our clinical studies. Beginning in the third quarter 2020, the Company’s COVID-19 testing services began to experience rapid growth with a peak in the first quarter 2021; however, subsequent to this peak, we experienced a rapid decline in COVID-19 testing revenue primarily as a result of a few significant contracts that expired as well as the ongoing increase in COVID-19 vaccination rates across the U.S. and the adoption and availability of at-home testing. We do not anticipate the need for COVID-19 testing to be commensurate with the peak demand experienced during the first quarter 2021 and instead expect the demand to substantially decline +4 +as our society adapts to a post-pandemic era. There is no assurance that our COVID-19 testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain and the need for COVID-19 testing may vary, which could have a significant effect on our results of operations and profitability. As a result, increases in revenue, if any, due to any increase in demand for these diagnostic tests may not be indicative of our future revenue. +See “Risk Factors” for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations. +Full Year Results for 2022 +For the year ended December 31, 2022, compared to the prior year: +• +Total Revenue was $38.2 million, a decrease of 30% primarily driven by the expected decline in COVID-19 diagnostic testing; +o +Lung Diagnostic Revenue of $29.3 million, an increase of 57% +o +Services Revenue of $3.7 million, a decrease of 34% +o +COVID-19 Revenue of $5.2 million, a decrease of 83% +• +Gross Margin was $24.1 million resulting in a 63% overall gross margin percentage as compared to 44% in the prior year; +• +Operating Expenses, excluding Direct costs and expenses, were $74.6 million, an increase of 15% and including non-cash share-based compensation expense of $6.0 million as compared to $4.9 million in the prior year; +• +Net Loss was $65.4 million, an increase of 52%, which includes approximately $7.0 million of loss on debt extinguishment in 2022 as compared to a gain on debt modification of $2.3 million in the prior year; +• +Basic and Diluted Net Loss Per Common Share was $1.55; +• +Net Cash Used by Operating Activities was $45.0 million, compared to $28.2 million used in the prior year; and +• +Cash and Cash Equivalents was $43.1 million as of December 31, 2022. +Our Market Opportunity +Diagnostic Testing Market Size and Opportunity +Despite significant advances over the last decade, lung cancer is still the deadliest type of cancer in both men and women in the United States. While diagnostic testing has become routinely used at certain points in the lung cancer continuum of care (diagnosis, treatment and monitoring), we believe there is substantial need for novel, advanced testing to improve on the current standard of care. We estimate that in the United States, the lung cancer continuum of care currently represents over 10 million annual testing opportunities and is over a $27 billion market annually for testing alone. +Over the last two decades, the use of biomarker testing in clinical trials has increased, with 15% of oncology trials involving the use of biomarker testing in 2000, compared to 55% in 2018. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their research and development pipelines and increase chances of drug development success. We estimate that biopharmaceutical partnering and research opportunities represents over a $2 billion market annually. +5 +Lung Cancer Continuum of Care – Clinical Unmet Needs +Standards of care in lung cancer have evolved rapidly over the past decade, along with our understanding of the disease. With the introduction of numerous treatment options, physicians need an ever-increasing amount of information in order to select the best treatment plan for each individual patient. We believe that the lung cancer continuum of care has a variety of clinical unmet needs ranging from initial diagnosis of lung cancer after discovery of a lung nodule to treatment guidance for early and advanced stage disease, and monitoring for disease progression. +• +Diagnosis : We estimate approximately 1.6 million new incidental lung nodules and potentially 4 million lung nodules from the adoption of screening could be identified annually in the United States. Following initial discovery of a nodule, patients are typically evaluated by a pulmonologist for risk of lung cancer before an invasive procedure is carried out to obtain a tissue sample to confirm diagnosis. This risk assessment is based on clinical factors such as the patient’s smoking history and age, and radiological features such as the size and location of the nodule, obtained from a computed tomography (CT) scan. On initial assessment, we estimate that approximately 80% of patients are identified as low to moderate risk (5-65%) where guideline recommendations for their care plan are unclear, often resulting in either overtreatment of patients with benign nodules or undertreatment in patients with cancer. An estimated 17% of patients with malignant nodules are initially sent to watchful waiting, where a follow-up CT scan is scheduled in three to six months, potentially delaying their diagnosis. Conversely, we estimate that 62% of biopsies and 35% of surgeries performed on lung nodules find benign disease, representing a significant overtreatment that incurs both risk and cost to the patient and their providers. We therefore believe that there is a clear clinical need for blood-based diagnostic testing to help improve the initial risk assessment of pulmonary nodules, helping direct patients to the relevant treatment pathway, and ultimately improving patient outcomes and saving costs to the system. +• +Treatment Guidance – Early Stage : We estimate that there are over 700,000 testing opportunities annually in the United States in early-stage lung cancer to assess a patient’s risk of recurrence following curative-intent surgery, and to detect potential target mutations for therapeutics. Depending on a patient’s risk of recurrence, they may also receive chemotherapy, radiotherapy or chemoradiation post-surgery. The assessment of risk of recurrence is primarily based on the stage of cancer at diagnosis, with stage I patients typically receiving no additional treatment beyond surgery. However, 20 to 40% of patients with stage I disease do still recur within five years following surgery, representing a sub-group of patients who may have benefited from more intensive treatment protocol. We believe there is a clear clinical need for blood-based diagnostic testing prior to surgery to identify stage I patients who may benefit from a more intensive treatment protocol and we also believe there is the need for identifying stage II and IIIA patients where low risk patients may benefit from a less intensive treatment protocol. There have also been recent advances in the use of targeted therapies in early-stage lung disease. These therapies typically target specific genomic mutations or alterations found in some tumors. We believe there is therefore an emerging need for testing designed specifically for mutation detection in early-stage disease. +• +Treatment Guidance – Advanced Stage: We estimate that there are over three million diagnostic testing opportunities annually in the United States to guide advanced stage lung cancer treatment decisions. With nearly 50 FDA-approved systemic treatment regimens listed in national treatment guidelines for non-small cell lung cancer (NSCLC), there is an elevated need for personalized biomarkers to help physicians identify the right patient for the right treatment. Multiple tissue-based diagnostic tests have been approved to identify patients eligible for targeted therapies and immunotherapy; however, about 50% of patients do not have sufficient tissue collected following diagnosis to facilitate testing. To compound the issue, different molecular tests take varying amounts of time (days versus weeks) to report results back to the ordering physician, which often leads to treatment decisions being made on incomplete information. Therefore, we believe there is an imminent need for a blood-based testing solution that measures tumor mutations and the patient’s immune profile, to provide physicians with more comprehensive and timely information to assess the overall prognosis of the patient and personalize treatment. +• +Monitoring : We estimate that there are over 800,000 testing opportunities in the United States for blood-based tumor and immune profiling to monitor for disease recurrence and progression in NSCLC patients. Unfortunately, advanced stage lung cancer is often terminal, so repeat tissue biopsy to assess the evolution of resistance mutations or to detect disease progression is not feasible from either a cost or risk perspective to the patient, which we believe demonstrates an important need for blood-based testing to help routinely monitor these patients. As a patient progresses through therapies, changes in their immune system occur and blood-based immune profiling could help physicians identify these changes prior to subsequent therapy selection. +Current Limitations in Biomarker Discovery and Companion Diagnostics +We estimate that the biopharmaceutical biomarker testing and companion diagnostic market opportunity represents a $2 billion market annually . Over the last two decades, the use of biomarker testing in clinical trials has increased, with 15% of oncology trials involving the use of biomarker testing in 2000 compared to 55% in 2018. From 2005 to 2015, a study identified that incorporating biomarkers into clinical development programs increased their probability of therapeutic success rate from phase 1 to FDA-approval by 570%, representing an increase from 1.6% without biomarkers to 10.7% with biomarkers. We believe the field of biomarker discovery and +6 +companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their product development efforts and increase chances of drug development success. However, we believe as the market continues to advance, inherent limitations of both biomarker discovery and companion diagnostic development have become more apparent. +Biomarker Discovery : There are many limitations with biomarker discovery in biopharmaceutical drug development, including: +• +Biomarkers with clinical utility are difficult to discover and validate in independent datasets. +• +Classical statistical approaches to biomarker discovery are limited. Single-omic tests fail to see the whole biological picture. +• +Tissue biopsies are limited by the amount of a sample that can be collected: longitudinal testing is difficult and the biology is only from the profile of the tumor (host response is not accounted for). +• +Clinical trials are expensive and take a long period of time. It is often difficult to meet enrollment goals for clinical trials with slow diagnostic testing turnaround times. +Companion Diagnostics (CDx): While developing companion diagnostics is critical to precision medicine, the promise of companion diagnostics has not been fully realized and there are multiple limitations that still need resolution. The path to co-develop a successful companion diagnostic with a corresponding drug has several challenges, including: +• +Traditional companion diagnostic agreements may fail to realize the full value of a testing opportunity, leading to difficulty in funding appropriate commercialization. +• +Drug development is a lengthy, complex and costly process. There can be a financial impact to a pharmaceutical company to have a drug selected by a test. +• +Current diagnostic reimbursement policies may not always support the coverage and payment of new companion diagnostics. +• +Regulatory agencies continue to work on defining the co-development process, but the environment is continually changing. +The Diagnostic Cortex - Our Proprietary Artificial Intelligence (AI) Platform +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic Cortex, to discover innovative diagnostic tests for clinical use. We focus on developing technologies that are capable of single and multi-omic research and development. +The Diagnostic Cortex is an extensively validated deep learning platform optimized for the discovery of clinical diagnostic tests, which we believe overcomes standard machine learning challenges faced in life sciences research. Researchers commonly encounter issues with machine learning-based biological discoveries that cannot be repeated or validated when assessed in additional specimen cohorts. This challenge, commonly referred to as overfitting, occurs when the machine identifies a perfect pattern in an initial training dataset but is unable to identify the same pattern in a new dataset. For over 15 years we have focused on developing our platform to overcome this challenge through proprietary computational techniques to ensure each diagnostic test that is discovered can be further developed to perform consistently in the clinical testing environment. +We are able to combine blood-based biological information related to the tumor, immune system, and host-status with clinical and radiomic data through our proprietary AI platform, which enables us to interpret the holistic disease state of each patient or clinical dataset we encounter. +We continuously evolve and improve the Diagnostic Cortex platform. These improvements range from basic code optimization to complex improvements such as the incorporation of novel computational methods for the optimization of multi-omic diagnostic tests. Any AI platform is inherently limited without the highest quality data inputs. Therefore, all of the technologies that we employ have been chosen and developed to provide high-quality data to enable our Diagnostic Cortex platform. We feel that this level of data integrity is crucial for the development of diagnostic tests that require the advanced pattern matching abilities of deep learning algorithms. +We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and learn about biological discoveries that are clinically meaningful. Additionally, we incorporate clinical and molecular profiling data aggregated through our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or academic partnerships, into our platform. We have a variety of samples with associated data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development initiatives. With our data-driven and multi-omic approach as data inputs into the Diagnostic Cortex, we are able to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +7 +The following is a diagram outlining our innovative diagnostic test discovery, development and commercialization infrastructure as outlined in the text above. +We employ multiple technologies, as illustrated below, including genomics, proteomics, transcriptomics, and radiomics, generated by different assay techniques, including ddPCR, NGS, LC-MS, ELISA, and our proprietary DeepMALDI mass spectrometry platform for the blood-based molecular analysis of the tumor, immune system, and host-status of each patient and/or clinical dataset. Through our learning loop, we continuously revisit our technology strategy and roadmap to integrate new technologies into our evolving platform, which ultimately support the addition of new service and product revenue offerings. We focus on developing technologies that are capable of single and multi-omic research and development. +Most diagnostic companies focus their strategy on using a single technology to discover biomarkers for a broad range of clinical questions. We believe that no single technology can interrogate the complexity of the human disease state to help solve all clinical questions. For that reason, we employ a multi-omic approach to solving diagnostic challenges leveraging our proprietary transparent AI +8 +platform, the Diagnostic Cortex. Because of this approach, we believe we are unique in the diagnostics market, allowing for a broader and more holistic understanding of each patient’s disease state. +We are experts in many technologies, but we are a true market leader with over 15 years of experience in the field of clinical proteomics. For over 10 years, we have been discovering and developing proteomic-based diagnostic tests and have a deep understanding of how to incorporate technologies that can be applied to blood samples in order to extract important protein-based biological information in the form of diagnostic tests, which can aid clinicians and scientists in understanding the dynamic biology of their system of interest, such as a patient with cancer. +Our suite of technologies that assist us in discovery, development and commercialization of novel diagnostic tests includes: +DeepMALDI Mass Spectrometry +We have developed DeepMALDI, a proprietary high-density matrix-assisted laser desorption/ionization time-of-flight (MALDI-ToF) mass spectrometry (MS) technology, to produce blood-based proteomic data for disease diagnosis, personalized health care, precision medicine for direct treatment options, and disease screening in lung and other disease states. DeepMALDI overcomes the limitations of conventional MALDI and other mass spectrometry methods to produce highly sensitive, stable, and reproducible data by: (1) utilizing optimized signal-to-noise reduction and signal processing algorithms; and (2) novel batch correction methods and spectral alignment methods. The combination of these improvements yields substantially higher quality data content and is thereby much better suited for the discovery of biomarkers with clinical utility. +Our current DeepMALDI methods allow us to achieve finer mass resolution, greater sensitivity, and 20-times faster imaging speeds than other instruments. Additionally, we believe recent enhancements to our DeepMALDI methods and MALDI-ToF technology evolution now allows us to measure more than 2,000 proteins, an improvement from the previously estimated 900 proteins. We intend to maintain our leadership role in the discovery of proteomics-based diagnostic tests. We utilize our DeepMALDI and MALDI-ToF technologies in our discovery and development efforts and as part of our collaborations with our biopharmaceutical customers and academic partners. +Liquid Chromatography Mass Spectrometry MS +We use Multiple Reaction Monitoring (MRM) MS with triple quadrupole mass spectrometers and up-front liquid chromatography (LC) sample injection in the Nodify XL2 test. This mass spectrometry method offers highly sensitive, specific, and cost-effective analysis for simultaneous quantitation of hundreds to several thousands of targeted peptides in a single experiment. We have since included the MRM technologies as part of our services for discovery and development with our biopharmaceutical customers and academic partners. +Enzyme-Linked Immunosorbent Assay (ELISA) +ELISA is the most widely used ligand binding assay platform within and outside the pharmaceutical industry. Formats include direct, indirect and sandwich assays and are typically run in manually or semi-automated modes. We use a semi-automated implementation of ELISA in clinical testing for the Nodify CDT test and the Platelia SARS-CoV-2 Total Ab test, and the cPASS neutralizing antibody test for COVID-19. The acquisition of Oncimmune USA in 2019 expanded our ability to conduct very high throughput and cost-effective ELISAs in our clinical testing laboratory. We have now included the ELISA technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +Droplet Digital Polymerase Chain Reaction Technology (ddPCR) +We use the ddPCR technology for multiplexed, semi-automated nucleic acid detection. This allows high sensitivity, fast turn-around times, flexibility in our laboratory workflows, rapid scaling from low to moderate anolyte complexity, and high-volume scalability. ddPCR is an absolute quantitation method based on the partitioning of circulating nucleic acids into up to 20,000 droplets per reaction and is used for the GeneStrat ddPCR test and Bio-Rad SARS-CoV-2 ddPCR test for COVID-19. We have included the ddPCR technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +Next Generation Sequencing Technology (NGS) +We use an NGS technology for broad genomic sequencing of clinical specimens. Our strategy with NGS relies on a menu of off-the-shelf and custom research use assays, which we develop and make available as a part of our commercial pipeline and biopharmaceutical test services. The NGS technology integrates automated systems to yield high sensitivity results with a rapid turnaround time. Since adoption of this technology, we have included the NGS technologies for research and product development both internally and externally with our biopharmaceutical customers and academic partners. +Our Solutions and Products +To help address the current limitations with standard of care in lung cancer diagnosis, treatment, and monitoring, we use combinations of tumor, immune and host profiling, radiological imaging, patient clinical profiling, and our proprietary AI platform to provide a holistic view of each patient’s dynamic disease state. +9 +We have five blood-based diagnostic tests across the lung cancer continuum of care to help address clinical unmet needs by physicians. +• +Diagnosis : We believe there is a clinical need to help physicians reclassify risk of malignancy in patients presenting with suspicious lung nodules. We offer the blood-based Nodify Lung Nodule Risk Assessment testing strategy to aid physicians in stratifying patients into distinct nodule management treatment pathways: diagnostic procedure or imaging surveillance. Nodify Lung consists of two blood-based proteomic tests: the Nodify CDT test helps identify patients with lung nodules that are likely malignant and the Nodify XL2 test conversely helps identify those that are likely benign. +• +Treatment Guidance : We believe there is an imminent need for a blood-based testing solution that measures tumor-specific mutations and the patient’s immune profile to provide physicians with more comprehensive information to assess the overall prognosis of the patient and personalize treatment plans. We offer the blood-based IQLung testing strategy, which consists of the GeneStrat ddPCR and GeneStrat NGS tumor profiling tests and the VeriStrat immune profiling test for patients diagnosed with NSCLC. With an average turnaround time of three business days, we are able to quickly provide critical diagnostic information to physicians to facilitate personalized treatment decisions for their patients. +• +Monitoring : We believe longitudinally monitoring advanced NSCLC patients for the dynamic evolution of their tumor and immune profile while on treatment can provide an earlier indication of treatment resistance and/or disease progression. We offer the IQLung testing strategy as a blood-based monitoring tool for physicians to track their patients’ disease evolution. +Diagnosis – Nodule Management +We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our blood-based nodule management offering, Nodify Lung Nodule Risk Assessment assists physicians in reclassifying a patient’s risk of lung cancer by incorporating their protein biomarker results with radiographic imaging and clinical characteristics. Nodify Lung consists of the Nodify CDT and Nodify XL2 proteomic tests, which can be ordered separately or together from a single blood draw to help reclassify risk of cancer to aid physicians in stratifying patients into distinct nodule management pathways: intervention or surveillance. +The Nodify CDT test is used to help identify lung nodules that are likely malignant and the Nodify XL2 test helps identify lung nodules that are likely benign. Nodify Lung is available for patients 40 years or older, with nodules between 8 and 30mm, and less than 65% pre-test risk of lung cancer. The testing strategy starts with the Nodify CDT test to determine if a nodule is likely malignant or at a higher risk of lung cancer. The Nodify CDT test helps physicians identify cancer more quickly by prioritizing patients with a higher risk of malignancy for a diagnostic procedure, such as biopsy or surgery. If the nodule is not identified as having a high risk of malignancy by the Nodify CDT test, then the Nodify XL2 test is performed to help determine if the patient’s nodule is likely benign or has a reduced risk of lung cancer and may be a candidate for CT imaging surveillance. The Nodify Lung testing strategy is represented graphically in the image below starting with the patient’s pre-test risk of malignancy and ending with the guideline-recommended diagnostic procedure for each risk category. +10 +We launched the Nodify Lung combined offering of the Nodify CDT and Nodify XL2 tests in March 2020. However, the Nodify XL2 test has been available to all physicians since September 2019 and has been available to a select group of physicians since October 2018. We acquired the Nodify XL2 test from Integrated Diagnostics (Indi) in July 2018 and acquired the Nodify CDT test from Oncimmune USA in October 2019. +Nodify CDT +The Nodify CDT test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely malignant or at a higher risk of being cancerous. Results allow physicians to identify patients who may be better candidates for timely invasive diagnostic procedures such as bronchoscopy, transthoracic needle biopsy, or surgical resection, with the hope of catching cancer earlier. The Nodify CDT test enhances lung nodule risk assessment to facilitate compliance with clinical treatment guidelines such as those of the American College of Chest Physicians (ACCP). The Nodify CDT test is intended for use in patients who are 40 years or older, have nodules between 8 and 30mm, and pre-test risk of lung cancer of less than 65%. +The test measures the levels of seven circulating autoantibodies (P53, NY-ESO-1, CAGE, GBU4-5, SOX2, HuD, and MAGE A4) associated with lung cancer, combined with an algorithm to report out three potential results: High Level, Moderate Level, or No Significant Levels of Antibodies Detected (NSLAD). The seven autoantibodies have shown to be elevated for all types of lung cancer, and from the earliest stage of the disease. +Unlike the tumor antigens themselves, the autoantibody levels can be measured accurately through a blood sample, based upon the signal amplification generated by the immune response to cancer. This mechanism of action likely reflects very early events in a tumor’s evolution; as the immune system initiates a response to the cancer, it can also trigger an expansion of self-reactive antibodies that can be measured in circulation. +In addition to the test result of High Level, Moderate Level, or NSLAD, each test report includes the patient’s pre-test risk of malignancy as calculated by the Solitary Pulmonary Nodule (SPN) Risk Assessment calculator, and their post-test risk of cancer incorporating the result of the test. The SPN Risk Assessment calculator was developed by Stephen Swensen, M.D., of the Mayo Clinic and is designed to provide a risk of malignancy for a patient with a newly discovered incidental nodule. The model incorporates six clinical and radiologic factors into the equation: age, nodule size, smoking status, nodule location, spiculation (nodule edge characteristic), and previous history of lung cancer. Incorporating the autoantibody levels with the risk model provides physicians with a more accurate assessment of risk. The test has been studied in 14 peer reviewed published studies and presentations. +Nodify XL2 +The Nodify XL2 test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely benign or at a reduced risk of being cancerous. Results allow physicians to identify patients who may be better candidates for routine CT surveillance to monitor for growth or shrinkage of the nodule over time instead of an invasive diagnostic procedure. The Nodify XL2 test is used for patients who are 40 years or older, have nodules between 8 and 30mm, and have a pre-test risk of lung cancer of less than or equal to 50%. +The Nodify XL2 test integrates peptides measured by LC-MS with clinical and radiological characteristics that are combined by an algorithm to report out three potential results: Likely Benign, Reduced Risk, or Indeterminate. Specifically, the Nodify XL2 test measures the relative abundance of two peptides (LG3BP and C163A) in circulation in the patient’s blood. The native proteins from +11 +which the peptides are derived have been associated with an inflammatory response to cancer. The clinical factors are patient age and smoking status, and radiological factors are nodule size, location, and edge characteristics. +In addition to the test result of Likely Benign, Reduced Risk, or Indeterminate, each test report includes the patient’s pre-test risk of lung cancer as calculated by the SPN Risk Assessment calculator, and their post-Nodify XL2 risk of malignancy incorporating the result of the test. Incorporating the peptide levels with the risk model provides physicians with a revised assessment of risk incorporating the patient’s biology. +In summary, the inclusion of the Nodify Lung testing strategy into clinical practice helps physicians reclassify risk of malignancy of low to moderate risk lung nodules by incorporating the patient’s own biology into the assessment. The Nodify CDT test helps physicians identify patients with a high-risk lung nodule who may benefit from timely intervention, which can ultimately help identify lung cancer earlier. The Nodify XL2 test helps physicians identify patients with a very low risk lung nodule who may benefit from CT surveillance and could avoid unnecessary invasive procedures. +Blood samples for the Nodify XL2 and Nodify CDT tests can be collected in the physician’s office, laboratory, or at home through use of mobile phlebotomy. Mobile phlebotomy options facilitate testing for patients even if they are not seen in person by the physician and instead are seen through telehealth visits. This benefits the patient as scheduling can be conveniently fit to their needs and can keep them away from a physician’s office or hospital for safety concerns. Additionally, mobile phlebotomy benefits the physician as the logistics around a blood draw or tissue sampling are out of their hands. We have a national network of contracted Nurses and Phlebotomists to support at-home or mobile blood collection. +Both tests require a single blood sample shipped at ambient temperature to our certified, high-complexity clinical laboratory in De Soto, Kansas. Nodify CDT testing requires whole blood and Nodify XL2 testing requires either a whole blood K2EDTA tube, or whole blood spotted onto our proprietary Blood Collection Device (BCD). The introduction of the BCD and now the stand-alone whole blood tube as qualified specimen collection methods for use with the Nodify XL2 test alleviated the need for serum separation processing steps by phlebotomists at blood draw sites such as centrifugation, and cold chain (dry ice) shipments, which has increased the market access to our proteomic-based tests. Results for the Nodify CDT test alone are typically available within one day. If both tests are ordered for the patient and Nodify CDT returns a result of NSLAD, then both test results are typically available within four to five business days. All results are available through secure communication methods, including a portal, fax, hard copy, or mobile device. +Treatment Guidance and Monitoring +Profiling the tumor through blood-based testing can help identify mutations in genes that may be driving growth of the tumor and may be targets for therapeutics. However, tumors also suppress intrinsic mechanisms that prevent the patient’s immune system from identifying and eliminating the cancer cells. Profiling the immune system can show if the patient’s immune system may have been subverted and therefore, is less likely to be responsive to immunotherapies. Our blood-based IQLung testing strategy consists of the GeneStrat ddPCR and GeneStrat NGS tumor profiling tests and the VeriStrat immune profiling test, which can be ordered together or separately for patients with NSCLC. Together, the tests typically have an average turnaround time of three business days, providing physicians with timely results to facilitate treatment decisions. +GeneStrat ddPCR +The GeneStrat test is a blood-based tumor profiling test that detects the guideline recommended, actionable mutations in lung cancer: EGFR, KRAS, BRAF, EML4-ALK, ROS-1, and RET. Physicians can order one or any combination of the gene tests, whichever they +12 +deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat test performance and potential clinical utility have been published in three peer reviewed studies. +The GeneStrat test results are typically available within two business days from our receipt of the sample in our Boulder, Colorado clinical laboratory. In a study at Eastern Carolina University, it was observed that blood-based testing was up to three weeks faster than tissue-based testing, with tissue-based testing taking a median of 26 days from sample collection. With GeneStrat testing, results are typically available in time for the patients first oncology visit, allowing the patient to start front-line treatment as quickly as possible. In the same study, it was observed that only 4% of patients had tissue-based molecular test results prior to start of front-line treatment. Meanwhile, after integrating Biodesix testing at the institution, 72% of patients had molecular test results available. Testing with the GeneStrat test can help physicians identify driver mutations quickly to help speed up time to treatment. +GeneStrat NGS Test +The GeneStrat NGS test is a blood-based 52-gene tumor profiling test panel that detects the guideline recommended, actionable mutations in lung cancer including five gene classes (SNV, INDELS, CNA, fusions, and exon-skipping). Specific variants of relevance to NSCLC include EGFR, KRAS, BRAF, EML4-ALK, ROS-1, RET, MET, NTRK. The GeneStrat NGS test is used for late-stage, metastatic NSCLC and Physicians can order one or any combination of the IQLung tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat NGS test performance and potential clinical utility have been published in two published studies. +GeneStrat NGS test results are typically available within three business days from the start of processing of the sample in our Boulder, Colorado clinical laboratory. +We believe that rapid, blood-based tumor profiling with the GeneStrat ddPCR and GeneStrat NGS tests can be complementary to both targeted tissue-based testing (including PD-L1) and tissue-based broad genomic sequencing. Testing with GeneStrat ddPCR and GeneStrat NGS tests at diagnosis can help quickly identify patients who are eligible for targeted therapies. Additionally, blood-based testing upfront can help save valuable tissue for diagnostic evaluation, PD-L1 testing and broad genomic profiling for rare mutations to enroll in clinical trials. +VeriStrat +The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. Results help inform physicians whether their patient has a more aggressive cancer and can help with treatment planning. The VeriStrat test profiles the patient’s immune system by measuring eight protein features measured by mass spectrometry and interpreted by a proprietary machine learning-based algorithm to produce either a VeriStrat Good or VeriStrat Poor test result. +The presence of a VeriStrat Poor result indicates the presence of chronic inflammation and a chronic acute phase immune response. A chronic acute phase immune response can trigger the immune system to provide growth factors to the tumor to increase blood flow and tumor growth. The test has been studied in over 85 peer-reviewed and published clinical studies across many different types of therapies such as chemotherapy, targeted therapies, immune therapies, and combinations. The results consistently show the test to be predictive of outcomes, independent of other prognostic factors including PD-L1 expression and performance status. Patients who test as VeriStrat +13 +Poor, on average, have an overall survival that is less than half of those who test as VeriStrat Good, independent of treatment type, demonstrating that the test is strongly prognostic. Conversely, patients with a VeriStrat Good test result typically respond better to standard of care treatments than those patients that test as VeriStrat Poor. By using the VeriStrat test for immune profiling, physicians can help identify the patients with an immune status associated with generally poor prognosis who should be treated with alternate therapies or in clinical trials. +GeneStrat ddPCR testing is performed using PCR technology, GeneStrat NGS testing is performed using NGS technology, and the protein features in VeriStrat are measured using MALDI-ToF mass spectrometry. Results are typically available within three business days through secure communication methods, including a portal, fax, hard copy, or mobile device. +The GeneStrat ddPCR and GeneStrat NGS tests require whole blood specimen collection tubes, and VeriStrat requires a whole blood sample spotted onto our proprietary BCD. Both sample types are shipped at ambient temperature and testing is performed in our certified, high-complexity clinical laboratory in Boulder, Colorado. +COVID-19 +Biodesix WorkSafe COVID-19 Testing Program +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe testing program. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two FDA EUA authorized tests, a part of our customizable program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. The Bio-Rad SARS-CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under CLIA to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Prior to using the Bio-Rad SARS-CoV-2 tests as part of our testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Beginning in second quarter 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass SARS-CoV-2 Neutralizing Antibody testing as a service. The test is the first surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the RBD in the spike protein of SARS-CoV-2 that are produced in response to a previous SARS-CoV-2 infection. +Bio-Rad SARS-CoV-2 ddPCR Test +The Bio-Rad SARS-CoV-2 ddPCR test, also known as a molecular or viral test, is intended for the qualitative detection of nucleic acid from SARS-CoV-2, the virus that causes COVID-19. The test targets detection of the nucleic acid from SARS-CoV-2 (not from any other viruses or pathogens) in respiratory specimens to identify and isolate infected individuals. Recent studies have shown that ddPCR-based testing is more sensitive than qPCR for detecting SARS-CoV-2, specifically in the reduction of false negative results. In one study, the ddPCR test demonstrated 95% accuracy vs. 47% for other “bulk” RT-PCR technologies used in other molecular tests. Specimens are shipped at ambient temperature or dry ice depending on the viral transport media (VTM) used, and testing is performed using ddPCR in our certified, high-complexity clinical laboratory in Boulder, Colorado. Results are typically available through secure communication methods, including fax, hard copy, or encrypted email within 24 to 48 hours on average from receipt of the sample. +Platelia SARS-CoV-2 Total Ab Test +The Platelia SARS-CoV-2 Total Ab test (also known as a serology or antibody test) is intended for use as an aid in identifying individuals who have developed an adaptive immune response to the SARS-CoV-2 virus, indicating recent or prior infection. The test uses whole blood to detect circulating antibodies against the virus. The sensitivity is 98% and specificity is 99% eight days after the onset of symptoms. At this time, it is not known how long antibodies persist following infection and if the presence of antibodies confers protective immunity. The test is intended for the qualitative detection of total anti-SARS-CoV-2 nucleocapsid antibodies (IgG, IgM and IgA) in human serum or plasma specimens. The test requires a 3 mL blood draw, and samples are shipped at ambient temperature. Testing is conducted using semi-automated ELISA technology in our certified, high-complexity clinical laboratory in De Soto, Kansas. Results are typically available within 24 to 48 hours from receipt of the sample through secure communication methods, including fax, hard copy, or encrypted email. +cPass SARS-CoV-2 Neutralization Antibody Test +The cPass SARS-CoV-2 Neutralization Antibody Test is the first blood-based surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the RBD in the spike protein of SARS-CoV-2 that are produced in response to a previous SARS-CoV-2 infection. This test was commercially introduced in partnership with GenScript Biotech Corporation. +14 +Biopharmaceutical Diagnostic Discovery, Development and Testing Services Business +We believe our leadership in clinical proteomics and our multi-omic approach to probe the cancer disease state provides our customers with a clear and distinct advantage over other diagnostic service providers who solely focus on either genomics or proteomics. Similar to our commercial clinical testing business, our biopharmaceutical diagnostic discovery, development and testing services business leverages the Diagnostic Cortex to provide an extensively validated and deep learning approach to discovering new biomarkers, which in turn helps drive the clinical development of therapeutics. We recognize each clinical development program is complex, which is why we offer end-to-end diagnostic solutions, ranging from initial biomarker discovery and feasibility projects to commercialization of companion diagnostics. +To address the increasing complexity of disease biology and new drug mechanisms of action, we employ a range of genomic and proteomic technologies to uncover insights about the tumor biology and patient’s immune response to cancer for therapeutics in clinical development. With our broad technology and service offering, including the performance of over 30 assays for research use as part of our laboratory services (see diagram below), we are able to provide the depth and breadth of biomarker tools for our partners for multi-omic analyses across their product development efforts. Although we recognize the importance of a multi-omic, approach in translational research, we are experts in discovering and developing proteomic-based diagnostic tests to help interrogate the immune profile and host disease state of patients on particular therapeutics. Traditionally, oncology biomarkers have been discovered from tumor tissue, but with the increased trend in the number of programs featuring immuno-oncology agents in therapeutic development, we believe there is a clinical unmet need for blood-based tumor markers and host/immune biomarkers to complement information obtained from tissue. +We believe we provide benefit to our biopharmaceutical customers as they integrate strategies for increasing the probability of success for pivotal clinical trials. Specifically, our diagnostic testing services may help enable quicker enrollment rates for patients in prospective clinical trials, ranging from phase 1 to phase 3, and could help identify patient populations who may experience the greatest benefit from new therapeutics. Ultimately, our goal is to help biopharmaceutical customers realize greater efficiency in their clinical development programs. Additionally, we have the ability to access and leverage our large sample and data biobank for our partners’ data mining needs, including new test discovery. +While our biopharmaceutical discovery, diagnostic development and testing revenue continues to grow, it is important to note that we benefit greatly from these partnerships in many ways that expand beyond revenue. We are continuously expanding our knowledge and biological understanding of multiple diseases and the rapidly evolving treatment landscape, while our Diagnostic Cortex continues to be powered through these biomarker analyses. Additionally, our sample and data biobank continue to grow and can be further leveraged for internal test development and external partnering. Importantly, we look to supplement our product development efforts with companion diagnostics as they are developed. +To date, we have over 60 biopharmaceutical customers and academic partners who have utilized our diagnostic tests and services. The following are a few case studies of early-stage biomarker discovery and development with our biopharmaceutical customers. +• +AstraZeneca: We provided services to AstraZeneca to retrospectively analyze samples from the FLAURA clinical trial (NCT02296125). The goal of this analysis was to interpret and establish the clinical utility of blood-based longitudinal monitoring of EGFR sensitizing and resistance mutations by ddPCR in advanced NSCLC patients treated with osimertinib. The data demonstrated that these circulating DNA mutations could be tracked in blood to interpret the patient’s prognosis, and could help AstraZeneca to identify disease progression three months (median) in advance of standard imaging. We have used our ddPCR assay to monitor EGFR sensitizing and resistance mutations in clinical trial samples from seven different clinical trials for Tagrisso. +15 +• +Genentech: We partnered with Genentech to discover a novel proteomic classifier for advanced NSCLC patients treated with atezolizumab. The test was discovered on a small clinical cohort (n=77) and was independently validated on blinded samples (n=270) from the POPLAR clinical trial (NCT01903993). The validation revealed that the proteomic test was predictive of progression free survival and overall survival for atezolizumab versus the control arm docetaxel. Additionally, an analysis compared the correlation between our proteomic classifier with standard of care biomarkers (PD-L1 expression status and tumor mutation burden), which revealed there was no significant correlation. We published additional work on the Genentech classifier with three posters presented at the society of immunotherapy conference (SITC). This data reinforces that our classifier provides unique and valuable information in the treatment of patients with advanced NSCLC. It is our belief that Genentech could use this strategy to identify patients that could derive a longer progression free survival from atezolizumab. +• +HiberCell: In January 2021, we announced a broad collaboration with HiberCell for companion diagnostic discovery, development and commercialization. The agreement initially focuses on the further development of an ELISA as a companion diagnostic in future registrational trials for Imprime PGG programs. +Our Competitive Advantages +We believe the following are our key competitive advantages: +• +Our proprietary extensively validated deep learning platform, which is tailored to discover diagnostic tests that address clinical unmet needs. Our platform is an extensively validated deep learning platform optimized for discovery of diagnostic tests. By combining our data-driven and multi-omic approach with deep learning techniques, we believe we have overcome many standard machine learning challenges. This has enabled us to develop commercial tests for clinical unmet needs and collaborate with our biopharmaceutical customers and academic partners. +• +Our data-driven approach to precision medicine combined with our biobank, which enables us to accelerate development of new tests. We have a variety of samples with associated data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development initiatives. Our biobank, clinical trials, commercial testing and other partnerships provide an ongoing source of new data that further enhances our proprietary AI platform. We are continuously identifying and incorporating new market insights and input from our customers, key opinion leaders, and scientific experts to leverage this data in developing our diagnostic tests. +• +Our leadership in clinical proteomics, demonstrated research, development, and scientific expertise, combined with our intellectual property portfolio. Our leadership in clinical proteomics and our multi-omic approach, we believe provides us with a distinct advantage over our competitors, who focus on any single technology, such as genomics or proteomics. Our certified, high-complexity laboratories offer significant advantages in development of commercial tests. +• +Our proprietary technologies and processes are protected by a portfolio of approximately 122 issued patents in the United States and internationally, and 22 uniquely registered United States trademarks. We take efforts to protect our proprietary position using a variety of methods, such as a pursuit of United States and foreign patent applications related to our proprietary technology, use of trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities. +• +Our demonstrated success commercializing diagnostic tests in lung disease as well as unprecedented turnaround times. With eight diagnostic tests launched and three currently in development, our commercial portfolio of blood-based solutions currently addresses clinical unmet needs within diagnosis, treatment and monitoring of lung cancer. Our diagnostic tests provide rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan. For example, the blood based IQLung strategy for lung cancer patients integrates the GeneStrat ddPCR test, the GeneStrat NGS test and the VeriStrat test to support treatment decisions across all stages of lung cancer with results in an unprecedented two to three business days, expediting time to treatment. We have displayed agility in our R&D and commercial launch efforts and within a month of initiating a development collaboration, launched three diagnostic tests for COVID-19 for commercial use. +• +Our depth and breadth of point of care access to physicians allows us to drive adoption of our diagnostic tests while incorporating real-life feedback to inform new product development. Our commercial team’s primary focus is to articulate the scientific and clinical evidence behind our tests, how they impact clinical care and can ultimately help to improve patient outcomes. Our demonstrated scientific expertise, leadership in clinical proteomics and breadth of data, including peer-reviewed publications, presentations and clinical studies, forms the basis of our relationships with major hospitals and physician networks across the United States. +• +Our commercial infrastructure, which includes our extensive knowledge and experience in sales, marketing, reimbursement and operations, provides us with the ability to launch, scale and drive revenue. We believe our commitment to commercial excellence helps us to leverage insights, operational excellence and proven approaches to deliver revenue growth and enhance the brand of our company and products. We are able to deploy rapid clinical testing turnaround +16 +times and develop commercial tests at scale. Scaling of our test capacity to meet volumes is then achieved by adding instrumentation and qualified personnel to our quality systems. +Our Strategy +We strive to provide swift, comprehensive and actionable insights to improve patient outcomes across lung disease and to help answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. To achieve this, we intend to: +• +Drive increased awareness, adoption, and reimbursement coverage of our diagnostic tests by: +o +continuously educating physicians, key opinion leaders, hospital systems, advocacy groups, patients, payers, academic research organizations, and technology assessment and guideline organizations on the clinical data and benefits of our tests; +o +utilizing our pulmonology- and oncology-focused sales force and commercial reach with targeted awareness campaigns to employ highly targeted sales and marketing tactics in pulmonology clinics specializing in the management of lung nodules and the diagnosis of lung cancer; +o +continuing to invest in the expansion of our sales force and commercial support team; +o +incorporating our testing services into diagnostic pathways and protocols via a top-down strategy that introduces our diagnostic tests to the largest United States health systems; and +o +leveraging our clinical data to gain broad coverage from public and private payers for our tests. +• +Deepen our relationships with current biopharmaceutical customers and establish new customer opportunities by: +o +selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally; +o +leveraging existing projects and relationships to expand sales with our current biopharmaceutical customers; and +o +targeting companies developing novel companion diagnostic strategies and drug development projects best suited to our platform for new test discovery, development and commercialization. +• +Further demonstrate the clinical utility and health economic benefits of our diagnostic tests by: +o +investing in commercial clinical testing, research studies and clinical trials to further demonstrate the clinical utility of our tests; +o +providing rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan; and +o +providing timely and actionable clinical information to help improve overall patient outcomes and lower the overall healthcare cost. +• +Introduce new diagnostic tests in lung disease by: +o +engaging with our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and to identify additional clinical unmet needs; +o +entering strategic partnerships with biopharmaceutical companies, academic research organizations, technology providers, and other diagnostic companies; and +o +developing companion diagnostic tests to support the therapeutics’ regulatory approval and adoption process for our biopharmaceutical customers. +• +Enhance our proprietary AI platform and expand our technology portfolio by: +o +continuing to invest in R&D capabilities to foster innovation in test discovery and development; +o +identifying, acquiring technologies and integrating new data types into our proprietary AI platform; +o +entering strategic partnerships across our commercial product portfolio and product development efforts in order to further our development capabilities, accelerate launch of commercial products, or expand our service offering; and +o +achieving “Explainable AI” by developing and incorporating computational tools that determine how the Diagnostic Cortex makes decisions for patient classification and outcome prediction. +17 +• +Continue to expand and leverage our biobank by: +o +expanding and enhancing the robustness of our samples and the data set, including through our collaborations and partnerships; +o +pursuing commercial opportunities with companies and researchers who are interested in utilizing our biobank for their own discovery and development efforts; and +o +monetizing these commercial opportunities. +Our Diagnostic Tests in Development +With the goal of finding solutions for clinical unmet needs related to diagnosis, treatment and monitoring in lung disease, our diagnostic tests in development include the following: +Early-Stage NSCLC—Risk of Recurrence (ROR) +Currently, surgical resection of the tumor without systemic or radiation therapy is standard of care for stage I NSCLC patients. However, 20 to 40% of surgically treated patients will suffer a recurrence within five years after surgery. From market research with pulmonologists, thoracic surgeons, and medical oncologists, we identified a significant clinical unmet need for a blood-based test to help identify stage I NSCLC patients who are at a higher risk of recurrence and may benefit from a more aggressive surgical procedure, or from neoadjuvant or adjuvant systemic treatment. Based on this unmet diagnostic need, we discovered the Risk of Recurrence (ROR) test, which is a pre-surgery blood-based proteomic test, designed with the Diagnostic Cortex to predict whether a stage I NSCLC patient has a higher risk of recurrence post-surgical resection. Knowing this information early and before surgery may change the surgical plan and/or support treatment decisions such as neoadjuvant or adjuvant therapy, which have the potential to reduce tumor volume and address micro-metastatic disease as early as possible. Our ROR test validated in an independent sample set, and we are currently working with major academic institutions across the United States to further validate the test. +Late-Stage NSCLC—Immunotherapy Treatment Guidance (PIR) +In 2015, the first immunotherapy-based treatment regimen was approved by the FDA for use in lung cancer. Currently, there are 9 immune checkpoint inhibitor (ICI) regimens (single agent or combinations) recommended by the NCCN guidelines for treatment of advanced NSCLC patients. For a portion of patients treated, these drugs can result in significant improvement in overall survival compared with platinum-based chemotherapy options. +The combination ICI regimens see some improvement in performance over single agent ICI, but side effect profiles are worse, and costs are higher than for single agent ICI. In addition, recent data have shown that a subset of patients experience more rapid disease progression on ICI compared with chemotherapy. We utilized the Diagnostic Cortex platform to discover our Primary Immune Response (PIR) test. PIR is a blood-based proteomic test designed to profile a patient's potential to mount an immune response to their cancer and predict those patients likely to respond to ICI monotherapy treatment, ICI + chemotherapy combination treatment, or who would be highly resistant to ICI therapy. Our PIR test has been validated in multiple independent sample sets for advanced stage NSCLC patients treated with single agent ICI, and we are currently working with major academic institutions across the United States to further validate the test in a prospective study called BEACON-Lung. +Monitoring – Progression & Resistance +Blood-based monitoring with our ddPCR technology may offer a feasible method to non-invasively evaluate therapeutic mechanism of action, disease progression, and the emergence of resistance mutations in patients treated with targeted therapies. Our internal validation studies have shown the utility of the GeneStrat EGFR ddPCR test as an example in all three of these indications. The test can identify disease progression up to three months (median) in advance of standard imaging. Using ddPCR for longitudinal blood-based monitoring of EGFR cell-free DNA mutations is a cost-effective testing method while patients are being treated with targeted therapies. +Clinical Trials +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. We have participated in 27 clinical studies, four of which are ongoing, and have published over 300 peer-reviewed publications and presentations. The following are our ongoing clinical studies for our diagnostic testing solutions. +ORACLE Registry Study (NCT03766958) +The ORACLE registry study was designed to develop real-world clinical utility data for Nodify XL2 and is titled “An Observational Registry Study to Evaluate the Performance of the Nodify XL2 Test”. The study objectives are to show a reduction in invasive procedures on patients with benign nodules compared to a historical control obtained from chart review. The first patient enrolled on October 16, 2018. Study enrollment was closed on May 12, 2022, with 494 prospective registry patients enrolled and 348 retrospective chart review patients accrued. As of February 9, 2023, 21 subjects remain in 2-year follow-up. +18 +ALTITUDE Clinical Utility Study (NCT04171492) +The ALTITUDE clinical utility study is designed to evaluate the performance of Nodify Lung (Nodify XL2 and Nodify CDT) in a randomized controlled study (RCT). The study is titled “A Multicenter, Randomized Controlled Trial, Prospectively Evaluating the Clinical Utility of the Nodify XL2 Proteomic Test in Incidentally Discovered Low to Moderate Risk Lung Nodules”. We received central investigational review board (IRB) approval in December 2019 and have an enrollment goal of 2,000 patients. The study objectives are to evaluate how the addition of the Nodify Lung test result impacts the clinical decision making for patients with new, incidentally identified solid lung nodules assessed as low to moderate risk of lung cancer. The trial has an adaptive study design with a blinded standard of care arm and 2:1 randomization for open-label results for Nodify XL2. The study launched in December of 2020. Phase 1 of the study with only Nodify XL2 is expected to enroll 500 patients. Phase 2 of the adaptive study design will include an open-label arm for Nodify CDT, which is aligned with our commercial testing algorithm. +INSIGHT Observational Study (NCT03289780) +The INSIGHT observational study is designed to evaluate the real-world clinical utility and performance of the IQLung (GeneStrat ddPCR, GeneStrat NGS and VeriStrat) testing strategy. The title is “Observational Study Assessing the Clinical Effectiveness of VeriStrat and Validating Immunotherapy Tests in Subjects with Non-Small Cell Lung Cancer (INSIGHT)” and the first patient enrolled on May 11, 2016. To date, we have over 4,700 patients enrolled with a target 5,000 enrollment goal. Final analysis with 3-year follow-up is estimated to be completed by 2026. Results of an interim analysis were presented most recently at AACR 2021. Additionally data on the first 2,000 patients with 1-year follow-up data was published in the Journal for ImmunoTherapy of Cancer in September 2021. The study rationale is to guide the adoption of VeriStrat and inform medical decision making, including treatment choice, and enable the validation of additional mass spectrometry-based proteomic tests. The primary study objective is to describe the impact of the VeriStrat test results on treatment decisions, including but not limited to the percentage change in treatment decision, differences in chosen treatments between patients classified as VeriStrat Good and those classified as VeriStrat Poor, and the percentage of patients receiving systemic therapy or supportive therapies only. +BEACON-Lung Clinical Study (NCT04676386 - Suspended) +In partnership with ALCMI (Addario Lung Cancer Medical Institute), the BEACON-Lung clinical study is intended to evaluate the performance and utility of our proteomic product currently in development, PIR, in advanced stage NSCLC patients who express high PD-L1. The study title is “A Biomarker Analysis in High PD-L1 Expressing NSCLC Patients Treated with An Immune Checkpoint Inhibitor (ICI) With or Without Platinum-Based Chemotherapy.” The study design is an observational, multicenter, open-label study to assess biomarkers (serum, microbiome, radiomics and tissue) as predictive of early progression in 390 treatment-naive patients with advanced stage NSCLC and PD-L1 greater than or equal to 50% treated with two standard of care regimens, triplet therapy (platinum-based chemotherapy plus ICI regimen) and ICI monotherapy (single agent ICI). The objectives are to collect biospecimens and evaluate candidate biomarkers, with a focus on PIR, to detect early progression on ICI monotherapy versus triplet therapy. +Commercialization +For our lung cancer and nodule management tests, commercial efforts are focused on the promotion of our testing strategies to healthcare professionals actively involved in the diagnosis and treatment of lung cancer. Primarily focusing on pulmonology and oncology, the commercial team, consisting of specialty sales representatives, medical affairs, marketing and customer care representatives, works to educate and inform the entire patient care group consisting of physicians, nurses, office staff, laboratory personnel, and administration as to the appropriate use and value provided by our testing. The team’s goal is to drive test adoption through articulating the scientific and clinical evidence behind our tests, how they impact the clinical care of a patient, and how the tests can ultimately help to improve patient outcomes. +Patients with pulmonary nodules are concentrated in the pulmonology sub-specialty, where additional resources such as lung cancer screening and nodule management clinics may exist to provide an increased level of care. We are also engaging large hospital systems in a “top-down” approach, with a goal of incorporating our tests into system wide pathways and protocols. +After a physician orders our tests, blood is collected either in the physician office or laboratory, third-party “store front” patient service centers, or it can be collected in the patient’s home or workplace. We have contracted with a network of patient service centers and mobile phlebotomy services to be enable collection of blood samples outside of the physician office, at home or work for patients across the United States. +For our Biodesix WorkSafe testing program, we have a dedicated outreach team that works with the State of Colorado healthcare providers and hospitals, and employers looking to safely return to work across many industries, including food services, oil and gas, biotechnology and pharmaceuticals, sports teams, universities, and many small businesses. We recognize everyone’s COVID-19 situation is unique, which is why we provide end-to-end customized solutions to support testing for our different customers, such as risk assessment tools, physician ordering services, on-site testing, phlebotomy services, shipping logistics, and ongoing client support. +Our business development team is focused on selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally. We currently hold a medical device establishment license in accordance with the Health Canada +19 +Medical Devices Regulations of the Food and Drugs Act and successfully passed an international Health Canada inspection in October 2021. Our team consists of customer facing business development associates that work with our biopharmaceutical customers to identify projects, draw up statements of work and negotiate service agreements. Alliance managers help to manage the contractual obligations and scope of the project, whereas our operations team assures the project is managed with adequate resources and delivers on time. We take a two-pronged approach generating business in this segment. Primarily, we leverage existing projects and relationships to expand sales in current accounts. We also actively map ongoing drug development projects in biopharmaceutical companies and target programs best suited to our platform for new test development. +Coverage and Reimbursement +The primary source of reimbursement for our tests in the United States is from third-party payers including government payers, such as Medicare, and commercial payers, such as insurance companies. Reimbursement for laboratory tests in the United States is determined by various payers, including private third-party payers, managed care organizations, and state and federal health care programs, such as Medicare and Medicaid. In Medicare, coverage of an item or service depends on whether it is “reasonable and necessary” under the section 1862(a)(1)(A) of the Social Security Act (SSA). For single-source laboratory tests, this determination is typically made by the Medicare Administrative Contractor (MAC) with jurisdiction over the laboratory where the test is performed. Our Boulder, Colorado laboratory is currently under the jurisdiction of Novitas Solutions, Inc. Our De Soto, Kansas laboratory is under the jurisdiction of Wisconsin Physicians Service Insurance Corporation (WPS), which participates in the MolDX program (administered by another MAC, Palmetto GBA) to set coverage policy for molecular diagnostic tests. +Medicare pays for clinical diagnostic laboratory tests (CDLTs), on the Clinical Laboratory Fee Schedule (CLFS). Section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA) added section 1834A to the SSA, which established the current CLFS rate setting processes and coding provisions for CDLTs, and created a new subcategory of CDLTs called Advanced Diagnostic Laboratory Tests (ADLTs), with separate reporting and payment requirements. +Under section 1834A and its implementing regulations, clinical laboratories that receive the majority of their Medicare revenues from payments made under the CLFS and the Physician Fee Schedule report on a triennial basis (or annually for ADLTs), private payer rates and volumes for their tests with specific billing codes based on final payments made during a set data collection period. The payment rate for a test for the ensuing three-year period (or one year for ADLTs) is set at the weighted median of the rates reported under the specific billing code for that test. Newly established codes for CDLTs are priced until the next private payer rate reporting cycle either based on the payment rate of a comparable code on the CLFS, as determined by CMS ("crosswalking") or at the median of rates submitted by the individual MACs based on statutory and regulatory factors ("gapfilling"). New ADLTs are initially priced at “actual list charge” for a nine-month period, after which they are priced based on private payer rates, with a recoupment provision if actual list charge is more than 130% of the weighted median of private payer rates reported. +The various payers in the United States also determine their own billing rules. In December 2020, Medicare revised its billing rules for clinical laboratory tests to require cancer-related protein-based Multianalyte Assays with Algorithmic Analyses to be billed directly to Medicare by the performing laboratory in most cases when performed on a specimen collected from a hospital outpatient. Molecular pathology tests and most ADLTs are also generally required to be billed directly to Medicare by the laboratory under these circumstances. +For our COVID-19 testing program, the primary source of reimbursement is through contracts with hospitals, companies providing wellness testing for their employees, or direct pay from patients. We believe that our lung cancer tests can both improve patient outcomes and help guide cost-effective treatment choices for patients with and at-risk of lung cancer. Achieving broad coverage and adequate reimbursement for each of our tests is a key component of our financial success and will continue to be important over time. +Under the Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief, and Economic Security Act (CARES), Congress has imposed a broad requirement that Medicare fee-for-service, Medicare Advantage, Medicaid, and commercial payers generally cover clinical diagnostic laboratory tests administered during the Public Health Emergency for the detection of SARS-CoV-2 or the diagnosis of the virus that causes COVID-19. Where applicable, the FFCRA and CARES require payers to cover COVID-19 tests without cost sharing or medical management techniques like prior authorization. Medicare fee-for-service does not require cost sharing or prior authorization for any clinical diagnostic laboratory tests. +The Department of Health & Human Services (HHS) has indicated in guidance that the coverage requirements of the FFCRA and CARES can apply both to infection and serological testing, but that they are only applicable to testing that is “diagnostic,” which “may include testing of individuals with signs or symptoms compatible with COVID-19, as well as asymptomatic individuals with known or suspected recent exposure to SARS-CoV-2.” Testing that is “not primarily intended for individualized diagnosis or treatment of COVID-19 or another health condition,” including “testing conducted to screen for general workplace health and safety,” is beyond the scope of the statutory coverage requirements. We believe these coverage requirements apply to the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test when performed for diagnostic purposes. In some cases, we submit claims to insurance payers for the Bio-Rad SARS-CoV-2 ddPCR test and/or the Platelia SARS-CoV-2 Total Ab test. In these cases, insurance payers may have a +20 +different position on the scope of mandatory coverage of our tests under the FFCRA and CARES. More commonly, we enter into arrangements with clients under which the client pays us directly for testing. +Compliance with applicable laws and regulations, as well as internal compliance policies and procedures adds complexity to the billing process. The Centers for Medicare & Medicaid Services (CMS) is responsible for overseeing the establishment of new Healthcare Common Procedure Coding System (HCPCS) codes for billing the Medicare program and other payers. CMS continuously evaluates and implements changes to the Medicare billing, coding, and reimbursement processes. To receive reimbursement from third-party payers, we bill our tests using a variety of HCPCS codes or Current Procedural Terminology (CPT) codes, as defined by the American Medical Association. For some of the tests we conduct, there may not be a specific CPT or HCPCS code, in which case the test may be billed under a miscellaneous code for an unlisted molecular pathology procedure or unlisted multiple anolyte test with algorithmic analysis (MAAA) procedure. Because these miscellaneous codes do not describe a specific service, the third-party payer claim may be examined to determine the service provided, whether the service was appropriate and medically necessary and whether payment should be rendered. This process can result in a delay in processing the claim, a lower reimbursement amount, and/or denial of the claim. +Competitors +We primarily face competition from lung cancer diagnostic solutions companies in the United States, Europe and Asia seeking to answer clinical questions in the space, all of whom provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories and other medical facilities. +Diagnosis—Nodule Management +We are not aware of any other company that offers two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. We are aware of efforts by Veracyte, Inc. to develop and validate a test that may be competitive to the Nodify XL2 and/or Nodify CDT tests in the future. Additionally, Veracyte currently markets a test that is used post-bronchoscopy that is not competitive with our pre-bronchoscopy nodule risk assessment tests. +Prognosis, Treatment Guidance and Monitoring—NSCLC +We are unaware of any other diagnostic test available, commercially or in development, that will compete with our VeriStrat immune profiling test. There is substantial interest and activity in tumor profiling through liquid biopsy. Our genomic test offerings, the GeneStrat ddPCR and GeneStrat NGS tests, face competition from academic hospital laboratories, and companies such as Guardant Health and Foundation Medicine. We believe that there are several companies and academic research institutions in the process of developing tests for monitoring patients on or following treatment for recurrence or progression of lung cancer. +Biopharmaceutical Diagnostic Discovery, Development & Testing Services +We are aware of a number of companies who compete with our diagnostic tests and services, including diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. From the perspective of tumor profiling, we believe Guardant Health and Foundation Medicine are our most significant competitors. Conversely, in the immune profiling market, we believe Adaptive Biotechnologies and Personalis are our most significant competitors. +Clinical Laboratory Operations +We perform the VeriStrat, GeneStrat ddPCR, GeneStrat NGS, and COVID-19 ddPCR tests in our Boulder, Colorado high-complexity CLIA certified clinical laboratory. The laboratory is College of American Pathology (CAP) accredited, New York State Department of Health (NYSDOH)—permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified, along with all other states that require licensing: California, Maryland, Pennsylvania, and Rhode Island. All aspects of the testing process from receipt of the test requisition form through to delivery of test results are performed in the Boulder, Colorado facility. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within three days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +The Nodify XL2, Nodify CDT, COVID cPASS and COVID-19 total antibody tests are performed in our De Soto, Kansas high-complexity CLIA certified clinical laboratory. This clinical laboratory is also CAP-accredited, NYSDOH—permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified and licensed by California, Maryland, Pennsylvania, and Rhode Island. Receipt of requisitions and testing is performed in our De Soto, Kansas clinical laboratory. Delivery of the test results is performed by personnel from our Boulder, Colorado headquarters. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within five days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +Personnel in both facilities are responsible for quality assurance oversight, licensing, and regulation compliance and maintenance to ensure data integrity and consistent, validated processes. +21 +Supply Chain +We rely on third-party suppliers, including in some instances single source suppliers, to provide us with certain components of our diagnostic tests. The number of suppliers feeding into the production of our diagnostic tests is in excess of 65 worldwide. We consider a select few of these suppliers, located in the United States, Europe and China, as critical single source providers of components. Bio-Rad, as described below, is the sole source supplier for our GeneStrat test, COVID-19, and antibody testing program. Oncimmune is also the sole source supplier for our Nodify CDT tests but there are known secondary suppliers for these materials. We have initiated the second source qualification process for the majority of these critical components. +In addition, we purchase supplies through purchase orders without long-term supply agreements with, or guaranteed commitments from, many of our suppliers, including single source suppliers. Additionally, at present, we have a limited contract with a contract manufacturer for the production of certain of our diagnostic testing kits; however, during 2022 we transitioned the majority of kitting performed outside of the Company to our internal operations team for cost savings and risk management. We depend on our suppliers and contract manufacturers to provide us and our customers with materials in a timely manner that meet our and their quality, quantity and cost requirements. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test, but these supplies are able to be supplied by known suppliers. A disruption to this supply would negatively impact our ability to perform the GeneStrat tests until alternatives could be validated. +While we have initiated the second source qualification process for the majority of these critical components, we may not be successful in securing second sourcing for all of them at all or on a timely basis. A disruption to this supply would negatively impact our ability to perform these tests until an alternative supplier could be validated. +All materials for our VeriStrat test and Nodify XL2 tests have alternative suppliers readily available, and a disruption in any single supplier would not materially impact our ability to deliver the test. +Intellectual Property +Our success depends, in part, on our ability to obtain and maintain intellectual property and proprietary protection for our products and other know-how, to operate our business without infringing, misappropriating or otherwise violating the intellectual property and proprietary rights of others, and to defend and enforce our intellectual property and proprietary rights. We take efforts to protect our proprietary position using a variety of methods, which include pursuit of United States and foreign patent applications related to our proprietary technology, inventions and improvements that we determine are important to our business. We also may rely on trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities to develop and maintain our proprietary position. For more information regarding risks relating to intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property.” +We have invested heavily in the protection of our key assets, namely the VeriStrat® and GeneStrat® tests, and we acquired a patent portfolio relating to the Nodify XL2® and Nodify CDT® tests in our acquisitions of Indi in June 2018, and of Oncimmune USA in October 2019 from Oncimmune Limited (Oncimmune). We own patents and patent applications as well as trade secrets relating to our products currently in development, a collection device for whole blood, our business strategy, client lists and business methods. Further, we have expanded our access to key intellectual property through license and co-development agreements, including our Non-Exclusive License Agreement with Bio-Rad (the Bio-Rad License), which allows us to use the Droplet Digital PCR™ technology developed by Bio-Rad and which we employ in our GeneStrat test. +Our patent strategy has focused on creating and acquiring protection for our VeriStrat and Nodify XL2 proteomic tests, while utilizing trade secret and some methods patent protection for our genomic test (the GeneStrat ddPCR and GeneStrat NGS™ tests) and ELISA test (the Nodify CDT test). We have entered into a non-exclusive license agreement with Bio-Rad, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. Bio-Rad owns patents relating to ddPCR and to which we have a non-exclusive license to utilize for the performance of ddPCR in cancer detection testing for third parties as set forth in the Bio-Rad License Agreement. In addition, we have separately been granted permission by Bio-Rad to use the Bio-Rad SARS-CoV-2 ddPCR test and Platelia SARS-CoV-2 Total Ab test for commercial diagnostic services. We are unaware of patents owned by Bio-Rad relating to its COVID-19 antibody test but acknowledge that Bio-Rad has know-how and trade secrets relating to this test. We have patent protection in the United States and other countries around the world for the primary use of the VeriStrat test for profiling of patients with NSCLC, and various other uses of the VeriStrat test, such as breast cancer, prostate cancer, head and neck cancer have received patent protection. We have also received patent protection relating to our core classifier development program, our Diagnostic Cortex® technologies and our approaches to using MALDI-ToF technology (DeepMALDI® techniques). Additionally, our first device patent was issued in 2019 for our internally designed blood collection device. +22 +As of December 31, 2022, our patent portfolio includes 53 issued United States patents, 69 issued foreign patents, which includes five European patents that were nationalized in multiple European countries, and 51 pending applications (including 29 foreign patent applications). With regard to our product development efforts, new applications have been filed around developments relating to ARDS and COVID diagnostics, new analytic methodologies using Shapley values and semi-quantitative spectra analysis in MALDI, and national stage applications are now in active prosecution to protect our pipeline ROR and PIR tests. +The patent portfolio can be broken down into five major categories: +1) +Issued patents and patent applications relating to the VeriStrat and Nodify tests and uses of these tests; +2) +Issued patents and patent applications relating to methods for developing classifiers, including using the Diagnostic Cortex and DeepMALDI technologies; +3) +Issued patents and patent applications relating to tests currently in development; +4) +Issued patents and patent applications relating to our novel blood collection device; and +5) +Issued patents and patent applications relating to tests developed for our third-party partners. +The patents relating to the VeriStrat test are scheduled to expire between 2026 and 2032. The patents relating to the Nodify XL2 test are scheduled to expire beginning in 2031 (excluding any patent term extension granted by the United States Patent and Trademark Office (USPTO)), and the patents relating to the Nodify CDT test are scheduled to expire in 2027. The patent related to the blood collection device is scheduled to expire in 2039. Should our current patent applications in prosecution in the United States issue, the resulting patents would be scheduled to have expiration dates between 2036 and 2040 (excluding any patent term extension(s) granted by the USPTO). +We currently have one pending Patent Cooperation Treaty (PCT) application. PCT patent applications are not eligible to become issued patents until, among other things, we file such PCT applications as national stage patent application(s) within 30 months in the countries in which we seek patent protection. If we do not timely file any national stage patent applications, we may lose our priority date with respect to any such PCT patent applications and any patent protection on the inventions disclosed in such PCT patent applications. Provisional patent applications are not eligible to become issued patents but can become the basis of PCT foreign stage and United States non-provisional patent applications, if such applications are filed within 12 months of filing the related provisional patent application. If we do not timely file any non-provisional patent applications, we will lose our priority date and any patent protection on the inventions disclosed in any such provisional patent application. +In addition, the term of individual issued patents depends upon the legal term for patents in the countries in which they are obtained. In most countries in which we have filed, including the United States, the patent term is generally 20 years from the earliest filing date of a non-provisional patent application, assuming the patent has not been terminally disclaimed over a commonly-owned patent or a patent naming a common inventor, or over a patent not commonly owned but that was disqualified as prior art as the result of activities undertaken within the scope of a joint research agreement. The life of a patent, and the protection it affords, is therefore limited and once the patent lives of our issued patents have expired, we may face competition, including from other competing technologies. In the United States, the term of a patent may also be eligible for patent term adjustment for delays within the USPTO. The term of a patent that covers a biological product may also be eligible for patent term extension when FDA approval is granted for a portion of the term effectively lost as a result of the FDA regulatory review period, subject to certain limitations and provided statutory and regulatory requirements are met. Any such patent term extension can be for no more than five years, only one patent per approved product can be extended, the extension cannot extend the total patent term beyond 14 years from approval, and only those claims covering the approved biological product, a method for using it or a method for manufacturing it may be extended. We may not receive an extension if we fail to exercise due diligence during the testing phase or regulatory review process, fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. There can be no assurance that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. +Our ability to maintain and solidify our proprietary and intellectual property position will depend on our success in obtaining effective patent claims and maintaining and enforcing claims that are granted. However, our owned and licensed patents could be invalidated or narrowed or otherwise fail to adequately protect our proprietary and intellectual property position and our pending owned and licensed patent applications, and any patent applications that we may in the future file or license from third parties, may not result in the issuance of patents. +Because branding is as much a part of any intellectual property strategy as patent or trade secret protection we have a number of registered and pending trademarks relating to our company and products. We have received or filed for trademark protection in the United States for our tradename (Biodesix), the names of five of our commercial tests (namely the VeriStrat, GeneStrat ddPCR, GeneStrat NGS, Nodify XL2 and Nodify CDT tests), and a suite of research tests (ImmunoStrat), as well as having trademark protection for our core development and methodological platforms, such as our Diagnostic Cortex and DeepMALDI technologies. In all, as of +23 +December 31, 2022, we have 22 uniquely registered United States trademarks, 11 of which (including Biodesix, VeriStrat, and GeneStrat) have received foreign issuances as well, with three trademarks pending approval from the USPTO. We will continue to pursue protection in the United States and abroad for our branded assets and will continue to use branding to protect products currently in development, key Biodesix developments and non-trade secret methodologies. +We also rely on trade secrets, including know-how, confidential information, unpatented technologies and other proprietary information, to strengthen or enhance our competitive position, protect and maintain aspects of our business that are not amenable to, or that we do not presently consider appropriate for, patent protection, and prevent competitors from reverse engineering or copying our technologies. We have decided that some technologies, such as our laboratory methodologies (including sample preparation and assay development), and some information (such as client and billing information) are best kept as trade secrets. However, trade secrets and confidential know-how are difficult to protect. To avoid inadvertent and improper disclosure of trade secrets, and to avoid the risks of former employees using these trade secrets to future employment, it is our policy to require employees, consultants and independent contractors to assign all rights to intellectual property they develop in connection with their employment with or services for the Company to the Company. We also protect our existing and developing intellectual property expressly through confidentiality provisions in agreements with third parties. There can be no assurance, however, that these agreements will be self-executing or otherwise provide meaningful protection for our trade secrets or other intellectual property or proprietary information, or adequate remedies in the event of unauthorized use or disclosure of such trade secrets or other intellectual property or proprietary information. +We also seek to preserve the integrity and confidentiality of our trade secrets and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in the measures we take to protect and preserve our trade secrets, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. +We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives, which may include objectives within and outside the United States. Despite our efforts to protect our intellectual property rights, and despite the breadth of protection that has issued around our key assets, these rights may not be respected in the future or may be circumvented or challenged (and potentially invalidated) in a legal proceeding in any jurisdiction where we have intellectual property rights. In addition, the laws of various foreign countries where we have received intellectual property protection and where we may eventually distribute our products may not afford the same protections or assurances to the same extent as the laws in the United States. See “Risk Factors—Risks Related to Our Intellectual Property” for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on us. +Government Regulations +Clinical laboratory tests like our diagnostic tests are regulated under CLIA and State law. The FDA regulates medical devices pursuant to the FDCA, including many diagnostic test kits, such as in vitro diagnostic tests (IVDs). However, most Laboratory Developed Tests (LDTs) are not currently subject to the FDA’s regulation (although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to such regulation) because the FDA has historically exercised enforcement discretion over LDTs. LDTs are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. FDA’s authority to regulate LDTs has been contested for many years, and there have been several legislative and administrative proposals regarding LDT regulation seeking to end or limit enforcement discretion and to bring LDTs under new or existing FDA regulatory frameworks. +We cannot predict the likelihood that Congress will pass legislation or the extent to which such legislation may affect the FDA’s plans to regulate certain LDTs as medical devices or pursuant to a new framework. Until legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval. It is also unclear at this time when or if, the FDA will finalize its plans to end enforcement discretion in the absence of legislation, via notice and comment rulemaking or otherwise. Even if a new framework is not established via legislative or administrative action, the FDA may attempt to regulate and enforce against certain LDTs on a case-by-case basis at any time. +We currently market our GeneStrat, VeriStrat, Nodify XL2 and Nodify CDT tests as LDTs in the United States. As a result, we believe our diagnostic services are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDCA provisions. If the FDA disagrees with the LDT status of any of our tests, the FDA may consider the test to be an unapproved medical device and may subject us to FDA enforcement action, including, without limitation, requiring us to seek clearance, authorization or approval for the laboratory test. If the FDA were to begin enforcement with respect to our LDTs, we could incur substantial costs and delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market requirements. +To date, the FDA has not engaged in notice-and-comment rulemaking or released broad-sweeping guidance over LDTs, but it could choose to do so in the future and if pre-market review is required, our business could be negatively impacted as a result of commercial delay that may be caused by the new requirements. The cost of conducting clinical trials and otherwise developing data and information +24 +to support pre-market applications may be significant. If we are required to submit applications for our currently marketed tests, we may be required to conduct additional studies, which may be time-consuming, costly and could result in our currently-marketed tests being withdrawn from the market. Continued compliance with the FDA’s regulations would increase the cost of conducting our business, and subject us to heightened regulation by the FDA including penalties for failure to comply with these requirements. Failure to comply with applicable regulatory requirements could result in an enforcement action by the FDA, such as fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal sanctions. There are other regulatory and legislative proposals that would increase general FDA oversight of clinical laboratories and LDTs. Until the FDA finalizes its regulatory position regarding LDTs, or the VALID Act or other legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval. The outcome and ultimate impact of such proposals on the business is difficult to predict at this time and we are monitoring developments and anticipate that our products will be able to comply with requirements that may be imposed by the FDA. In the meantime, we maintain our CLIA accreditation, which permits the use of LDTs for diagnostics purposes. +FDA Emergency Use Authorization +Section 564 of the FDCA allows the FDA to authorize the shipment of drugs, biological products, or medical devices that either lack required approval, licensure, or clearance (unapproved products), or are approved but are to be used for unapproved ways to diagnose, treat, or prevent serious diseases or conditions in the event of an emergency declaration by the HHS Secretary. 21 U.S.C. § 360bbb-3(a)(1)-(2). +On January 31, 2020, HHS Secretary Alex M. Azar II declared a public health emergency for COVID-19, under 21 U.S.C. § 360bbb-3(b)(1), justifying the authorization of emergency use of IVDs for detection and/or diagnosis of COVID-19. This determination was published in the Federal Register on February 7, 2020. 85 Fed. Reg. 7316 (Feb. 7, 2020). The EUA declaration under Section 564 of the FDCA is distinct from and independent of the declaration by the Secretary of HHS of a public health emergency under Section 319 of the Public Health Service Act. On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. Because the EUA declaration under Section 564 of the FDCA is distinct from the declaration under Section 319 of the PHS Act, an EUA may remain in effect beyond the duration of the Section 319 declaration. Before HHS terminates an EUA declaration, it will publish a notice of termination in the Federal Register. +While the emergency declaration for COVID-19 IVDs under Section 564 of the FDCA remains in effect, the FDA may authorize the use of an unapproved product or an unapproved use of an approved product if it concludes that: +• +an agent referred to in the emergency declaration could cause a serious or life-threatening disease or condition; +• +it is reasonable to believe that the authorized product may be effective in diagnosing, treating, or preventing that disease or condition or a serious or life-threatening disease or condition caused by an approved product or a product marketed under an EUA; +• +the known and potential benefits of the authorized product, when used for that disease or condition, outweigh known and potential risks, taking into consideration the material threat of agents identified in the emergency declaration; +• +there is no adequate, approved, and available alternative to the authorized product for diagnosing, preventing, or treating the relevant disease or condition; +• +any other criteria prescribed by the FDA is satisfied. Id. § 360bbb-3(c). +Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. +The Bio-Rad SARS-CoV-2 ddPCR test, the cPASS neutralization antibody test kit, and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. We have completed all required performance verification studies to validate the use of the tests in our laboratories in accordance with the FDA Policy for Coronavirus Disease-2019 Tests During the Public Health Emergency, CAP and New York State Clinical Laboratory Standards of Practice (NYS CLEP) requirements. The FDA Policy for COVID-19 tests is a guidance document that explains the FDA’s current thinking on the topic, is subject to change, and does not establish any legally enforceable responsibilities. The FDA does not expect a separate notification or EUA request from high complexity CLIA laboratories that are performing testing for SARS-CoV-2 using only EUA-authorized test kits purchased from commercial manufacturers or their distributors. According to previous versions of the FDA's Policy for COVID-19 tests, a laboratory may make certain modifications to an EUA-authorized test if the modified test is validated using a bridging study without submitting an EUA amendment or formal notification. According to the current FDA Policy for COVID-19 tests (January 12, 2023), a laboratory +25 +that modified an EUA authorized test pursuant to the previous policy for use of a new specimen through a bridging study when the new specimen type had been previously authorized for another test of the same technology may continue to offer the modified test without submitting an EUA amendment or formal notification. +Federal and State Laboratory Licensing Requirements +The Biodesix Boulder, Colorado clinical laboratory is a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, Biodesix’s Quality Management System (QMS) holds an ISO 13485:2016 certificate (passed recertification audit in December 2021). The Biodesix Boulder, Colorado clinical laboratory has received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers, and Molecular and Cellular Tumor Markers and Virology as well as holding state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +CLIA regulations establish standards for proficiency testing; facility administration; general laboratory systems; pre-analytic, analytic systems, post- analytic systems; personnel qualifications and responsibilities; quality control, quality assessment; and specific provisions for laboratories performing moderate to high complexity tests. Our Boulder, Colorado clinical laboratory is inspected biennially as part of its ongoing certification under CLIA certificate of accreditation by CAP. The Boulder, Colorado clinical laboratory most recently passed its CAP inspection in April 2021. +Under CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of or assessment of health. CLIA requires that a laboratory hold a certificate applicable to the type of laboratory examinations it performs and that it complies with, among other things, standards covering operations, personnel, facilities administration, quality systems and proficiency testing, which are intended to ensure, among other things, that clinical laboratory testing services are accurate, reliable and timely. +The Biodesix De Soto, Kansas clinical laboratory is a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, the De Soto, Kansas clinical laboratory passed its first CAP inspection in June 2021. Biodesix’s QMS holds an ISO 13485:2016 certificate (recently passed surveillance audit in January 2023). The De Soto, Kansas clinical laboratory has received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers and Diagnostic Immunology as well as holding state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +The International Organization for Standardization (ISO) is an independent, non-governmental international organization that defines world-class specifications for products, services and systems, to ensure quality, safety and efficiency. ISO 13485:2016 is a harmonized, international regulatory benchmark for quality management systems that addresses most or all of the QMS requirements in markets including the United States, European Union, Australia, Japan and Canada. The ISO 13485:2016 certificate confirms that an organization operates a QMS that conforms to the standards established by ISO. The FDA has proposed a rule to harmonize and modernize its Quality System Regulation (QSR), which would supplant the existing requirements with ISO 13485:2016. Although this rule has been delayed several times since spring 2018, the Office of Management and Budget (OMB) updated its website (January 2022) to indicate that the FDA’s proposed rule to harmonize the agency’s medical device QSR with the ISO 13485 standard has been finished and is now under review by OMB. +To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Laboratories such as ours, which are performing high complexity testing, are required to meet more stringent CLIA requirements than laboratories performing less complex tests, and therefore our laboratories are also subject to random, unannounced survey and inspection at any time. In addition, a laboratory that is certified as “high complexity” under CLIA may develop, manufacture, validate and use proprietary LDTs. CLIA requires analytical validation including accuracy, precision, specificity, sensitivity and establishment of a reference range for any LDT used in clinical testing. The regulatory and compliance standards applicable to the testing we perform may change over time and any such changes could have a material effect on our business. +CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that out-of-state laboratories maintain an in-state laboratory license to perform tests on samples from patients who reside in that state. As a condition of licensure, certain states may require that laboratory personnel meet qualifications, quality control procedures, facility requirements, record maintenance requirements or other state-specific requirements. +Because our Boulder, Colorado clinical laboratory is located in the State of Colorado, we do not need a specific State of Colorado laboratory license, however, we maintain licenses to conduct testing in other states where nonresident laboratories are required to obtain state laboratory licenses. We maintain licenses for our Boulder, Colorado and De Soto, Kansas laboratories with the NYSDOH. We also hold licenses in other states in which we operate, including California, Maryland, Pennsylvania and Rhode Island, that require licensing of out-of-state laboratories under certain circumstances. Other states may currently have or adopt similar licensure requirements in the future, which may require us to modify, delay or stop its operations in those states until such requirements are met. +26 +Failure to comply with CLIA certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate or license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions, and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. +CLIA and state laws and regulations, operating together, sometimes limit the ability of laboratories to offer consumer-initiated testing, also known as direct access testing. We do not offer direct access testing and instead require that our tests be ordered by licensed healthcare providers. +Our Boulder, Colorado and De Soto, Kansas laboratories are certified and adhere to the NYS CLEP, based on New York State Public Health Law, Article 5 Title 5. NYS CLEP is exempt from CLIA and establishes their own method of laboratory certification and test validation approval. To process New York State patient specimens a laboratory must submit a robust analytical and clinical validation package to demonstrate clinical utility of the test and receive approval prior to offering the test in the state of New York. All of our tests have obtained NYS CLEP approval including GeneStrat ddPCR, GeneStrat NGS, VeriStrat, Nodify XL2 and Nodify CDT tests. NYS CLEP requires semi-annual inspections to ensure the laboratory meets all general and specialty standards. Both Biodesix laboratories passed NYS CLEP inspections in May 2019. Due to the pandemic, routine re-inspections have been delayed by NYS CLEP. +Regulatory framework for medical devices in the United States +Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, which are defined to include, among other things, IVDs. The FDA regulates the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. It is possible that one of our current, or future, tests will be subject to FDA authority and oversight as either an IVD or a CDx pursuant to the FDA’s authority to regulate medical devices under the FDCA. +Medical devices are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +product design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the European Economic Area (EEA), a medical device must meet the Medical Devices Directive’s (MDD)/In Vitro Medical Devices Directive’s (IVDD) Essential Requirements or, applicable on May 26, 2021, the Medical Devices Regulation’s (MDR) / applicable on May 26, 2022, In Vitro Medical Devices Regulation’s (IVDR) General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a clinical evaluation report (CER) the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the +27 +benefit-risk ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia , of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia , that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. However, the CE mark will be accepted in the UK until July 1, 2023. +Device classification +Under the FDCA, medical devices are classified into one of three classes: Class I, Class II or Class III, depending on the degree of risk to patients that is associated with each medical device and the amount of oversight needed to provide reasonable assurances with respect to safety and effectiveness of the medical device. +Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to a set of FDA regulations, referred to as the General Controls for Medical Devices, which require compliance with the applicable portions of the FDA’s QSR, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements. +Class II devices are subject to the General Controls as well as any special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, patient registries, FDA guidance documents and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process, although some Class II devices are exempt from the 510(k) requirements. +Class III devices include devices deemed by the FDA to pose the greatest risk: such as life-supporting or life-sustaining devices, implantable devices, or those deemed novel and not substantially equivalent to a predicate device following the 510(k) process. CDx tests are regularly considered Class III devices. +Premarket submission process +Unless a statutory or regulatory exemption or enforcement discretion policy applies, before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, the manufacturer must obtain the FDA’s: (1) permission for commercial distribution under section 510(k) of the FDCA (510(k) clearance); or (2) approval of a Premarket Approval (PMA); or (3) de novo classification and authorization. These processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees. +Under the 510(k)-clearance process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and therefore a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Premarket notifications typically include bench, analytical, and preclinical data. Clinical data is sometimes required to support substantial equivalence. If a manufacturer obtains a 510(k) clearance for its device and then makes a modification that could significantly affect the device’s safety or effectiveness or constitutes a major change or modification in the intended use of the device, a new clearance, authorization or approval may be required. +By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous, costly, and time-consuming PMA approval process or seek reclassification of the device through the De Novo process. +If a predicate device is not available, the FDA allows the submission of a direct De Novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. A De Novo request includes a description of the device, a discussion of the general controls and any specific controls recommended to +28 +provide reasonable assurance of the safety and effectiveness of the device, a description of the probable benefits of the device when compared to the probable risks when the device is used as intended, non-clinical data including bench performance and animal testing, technical information about the device, and clinical data (if applicable). FDA’s goal is to review a De Novo request within 150 review days after receiving the petition. As with a 510(k) submission or PMA, the length of the review can be prolonged if the FDA requests additional information from the applicant. +To obtain a PMA, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling, and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use. +Once filed as a PMA, the FDA has 180 days to review the filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. +Prior to approval of a PMA, the FDA may conduct inspections of any clinical trial data and clinical trial sites, as well as inspections of any manufacturing facility and processes. The FDA can delay, limit or deny approval of a PMA application for many reasons, including (1) the device may not be shown safe or effective to the FDA’s satisfaction; (2) the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval; (3) the manufacturing process or facilities may not meet applicable requirements; and (4) changes in FDA approval policies or adoption of new regulations may require additional data. +If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when data is available. The PMA process can be expensive, uncertain and lengthy. A number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing. New PMA applications or PMA supplements are required for any modifications to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, materials or design of a device that has been approved through the PMA process. +As a condition of PMA application approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer-term safety and effectiveness data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. +The 510(k), De Novo or PMA processes can be expensive, lengthy and unpredictable. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k)-clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device. +Companion Diagnostics and the Premarket Process +We believe that one of our future product candidates may include a companion diagnostic or complementary diagnostic (collectively CDx). CDx’s can identify patients who are most likely to benefit from a particular therapeutic product; identify patients likely to be at increased risk for serious side effects as a result of treatment with a particular therapeutic product; or monitor response to treatment with a particular therapeutic product for the purpose of adjusting treatment to achieve improved safety or effectiveness. The use of the CDx will be stipulated in the labeling of both the CDx and the therapeutic product. The FDA may require an application for the CDx to be separate from the drug approval process, and this could potentially delay the approval of any new drug application or the CDx, or complicate the review process. CDx’s are generally regulated as Class III medical devices by the FDA and are therefore most often subject to the PMA approval process. +The FDA issued guidance in July 2016 for the co-development of CDx tests with a therapeutic product and issued another draft guidance in December 2018 specific to oncology CDx tests. The FDA finalized this draft guidance in April 2020 in “Developing and Labeling In +29 +vitro Companion Diagnostic Devices for a Specific Group of Oncology Therapeutic Products.” The guidance is meant to guide the development of CDx products, which are defined as IVDs that provide information that is essential for the safe and effective use of the therapeutic product. A CDx is often developed and approved or cleared contemporaneously with the therapeutic, and the use of the CDx is stipulated in the labeling of both the CDx and the corresponding therapeutic product. While it supports contemporaneous marketing authorizations, if there are any deficiencies in the submissions, the FDA may place a PMA review of a CDx on hold or request additional testing, which could potentially delay the approval of the corresponding new drug application or the marketing authorization of the CDx, or otherwise complicate the review process. Some oncology CDx tests can be developed in a way that results in labeling for a specific group of oncology therapeutic products, rather than a single therapeutic product. +Post-Market FDA Regulation +Even if regulatory clearance, authorization or approval of a device is granted, the FDA may impose limitations on the uses and indications for which the device may be labeled and promoted, and the device remains subject to significant regulatory requirements. Medical devices may be marketed only for the uses and indications for which they are cleared, authorized or approved. After a device, including a device exempt from FDA premarket review, is placed on the market, numerous post-market regulatory requirements apply, and the FDA has broad authority to enforce these requirements. Medical device manufacturers are subject to unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of any suppliers. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions such as: warning letters, fines, injunctions, consent decrees and civil penalties; unanticipated expenditures, including requirements to repair, replace, and/or refund the cost of the devices, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; the FDA’s refusal of our requests for 510(k) clearance, De Novo classification, or PMA of new products, new intended uses or modifications to existing products; the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries; and withdrawing 510(k) clearance or PMAs that have already been granted and criminal prosecution. In the event that a supplier fails to maintain compliance with the FDA’s or our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. +Federal and State Fraud and Abuse Laws +We are subject to federal fraud and abuse laws such as the federal Anti-Kickback Statute (AKS), the federal prohibition against physician self-referral (Stark Law), the Eliminating Kickbacks in Recovery Act (EKRA), and the federal False Claims Act (FCA). We are also subject to similar state and foreign fraud and abuse laws. +The AKS (Social Security Act § 1128B(b)) prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing or ordering, any item or service that may be reimbursable, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. There are a number of statutory exceptions and regulatory safe harbors to the AKS that provide protection from AKS liability to arrangements that fully satisfy the applicable requirements. +EKRA (18 USC § 220) prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program. The term “health care benefit program” is broadly defined such that EKRA extends to referrals reimbursed by both governmental and commercial third-party payers. EKRA includes a number of statutory exceptions that provide protection from EKRA liability if the applicable requirements are met. +The Stark Law (Social Security Act § 1877) generally prohibits, among other things, clinical laboratories and other so-called “designated health services” entities from billing Medicare for any designated health services when the physician ordering the service, or any member of such physician’s immediate family, has a financial relationship, such as a direct or indirect investment interest in or compensation arrangement with the billing entity, unless the arrangement meets an exception to the prohibition. The Stark Law also prohibits physicians from making such referrals to a designated health services entity. There are also similar state laws that apply where Medicaid and/or commercial payers are billed. +The FCA (31 USC § 3729) imposes penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment to the government that are false or fraudulent, or knowingly making, using or causing to be made or used a false record or statement material to such a false or fraudulent claim, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. This statute also permits a private individual acting as a “qui tam” whistleblower to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $13,508 to $27,018 per false claim or statement for penalties assessed after January 30, 2023, with respect to violations occurring after November 2, 2015. +30 +Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payer knows or should know is likely to influence the beneficiary to order or receive a reimbursable item or service from a particular provider, practitioner, or supplier, and contracting with an individual or entity that the person knows or should know is excluded from participation in a federal health care program. In addition, federal criminal statutes created by the Health Insurance Portability and Accountability Act (HIPAA) prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services. +In addition to these federal laws, there are often similar state anti-kickback and false claims laws that typically apply to arrangements involving reimbursement by a state-funded Medicaid or other health care program. Often, these laws closely follow the language of their federal law counterparts, although they do not always have the same exceptions or safe harbors. In some states, these anti-kickback laws apply with respect to all payers, including commercial payers. +A number of states have enacted laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and other healthcare providers, and, in some states, marketing expenditures. In addition, some state statutes impose outright bans on certain manufacturer gifts to physicians or other health care professionals. Some of these laws, referred to as “aggregate spend” or “gift” laws, carry substantial fines if they are violated. +Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs and extensive annual trainings for all of our employees and contractors. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from participation in government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Anti-Corruption +The Foreign Corrupt Practices Act of 1977 (FCPA) and similar international bribery laws make it unlawful for persons or entities to make payments to foreign government officials to assist in obtaining and maintaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any offer, payment, promise to pay, or authorizing the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to do or omit to do an act in violation of his or her duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business, to any person. In addition to the anti-bribery provisions of the FCPA, the statute also contains accounting requirements designed to operate in tandem with the anti-bribery provisions. Covered companies are required to make and keep books and records that accurately and fairly reflect the transactions of the company and devise and maintain an adequate system of internal accounting controls. With our international operations through our third-party partnerships, we could incur significant fines and penalties, as well as criminal liability, if we fail to comply with either the anti-bribery or accounting requirements of the FCPA, or similar international bribery laws. Even an unsuccessful challenge of our compliance with these laws could cause us to incur adverse publicity and significant legal and related costs. We successfully passed our first FCPA compliance review in 2021 with no findings. +Privacy and Data Protection Laws +Numerous federal and state laws and regulations, including HIPAA, as amended by the Health Information Technology for Economic and Clinical Health (HITECH) Act, govern the collection, dissemination, security, use and confidentiality of protected health information (PHI) and personal information. In the course of performing our business we obtain personal information, including PHI. Laws and regulations relating to privacy, data protection, and consumer protection are evolving and, in some cases, particularly with regard to newer laws, may be subject to potentially differing interpretations. Under HIPAA and HITECH, the HHS issues regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of PHI, used or disclosed by covered entities (CEs) and their authorized business associates (BAs). Because we are a health care provider that electronically transmits health care information, and we also provide certain services to CEs and receive PHI from them, we are at times either a CE or a BA, as defined by HIPAA. Our subcontractors that create, receive, maintain, transmit or otherwise process PHI on our behalf are HIPAA BAs and must also comply with HIPAA, as applicable. +HIPAA and HITECH include the privacy and security rules, breach notification requirements and electronic transaction standards. The privacy rule governs the use and disclosure of PHI, generally prohibits the use or disclosure of PHI except as permitted under the rule, and mandates certain safeguards to protect the privacy of PHI. The privacy rule also sets forth individual rights, such as the right to +31 +access or amend certain records containing such individual’s PHI, or to request restrictions on the use or disclosure of such individual’s PHI. The security rule requires CEs and BAs to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI (also referred to as ePHI) by implementing administrative, physical and technical safeguards. Under HIPAA’s breach notification rule, a CE must notify individuals, the Secretary of HHS, and in some circumstances, the media of certain breaches of unsecured PHI or ePHI, and similar breach notification provisions apply to certain BAs under the HITECH Act. +Penalties for failure to comply with a requirement of HIPAA and HITECH vary depending on the number and nature of the violations and any history of prior violations, but can be significant and include civil monetary or criminal penalties. HIPAA is enforced by the Department of Health and Human Services, Office for Civil Rights, and HIPAA also authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in improper use, access to or disclosure of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA CEs, such as us, and their BAs for compliance with the HIPAA privacy and security standards and breach notification rules. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator. +In addition, we may be subject to state privacy, cybersecurity, and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information Act, which, in addition to HIPAA and HITECH, sets forth standards with which all California health care providers must abide. Colorado has enacted the Colorado Privacy Act, and Virginia has enacted the Consumer Data Protection Act, both of which also have standards that must be complied with that supplement Federal data protection requirements, State laws may be more stringent, broader in scope or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other in regards to personal information treatment, which may complicate compliance efforts. For instance, the California Consumer Privacy Act (CCPA) became effective on January 1, 2020 and was amended by the passage of the California Privacy Rights Act (CPRA) in November of 2020, which amendments came into force on January 1, 2023. The CCPA, among other things, gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA has been amended from time to time, and it remains unclear what, if any, further modifications will be made to this legislation or how it will be interpreted. Although there are certain exemptions for PHI and clinical trial data, the CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future and the CCPA may increase our compliance costs and potential liability. Additionally, the CPRA imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It also creates a new California data protection agency – the California Privacy Protection Agency – specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. Similar laws have been proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that could continue to make compliance challenging and costly. +Additionally, the Federal Trade Commission (FTC) and state attorneys general enforce consumer protection laws that prohibit unfair and deceptive acts and practices, including Section 5 of the FTC Act, which creates standards for the collection, use, dissemination and security of health-related and other personal information. Claims of unfair or deceptive trade practices regarding privacy and security can lead to significant liabilities and consequences, including regulatory investigations, penalties, fines and orders as well as civil claims, which could impact our data practices and operations or cause reputational damage. +We may also be subject to laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may add additional compliance burden and complexity. For example, in the EEA, the collection and use of personal data is governed by the European Union's General Data Protection Regulation (GDPR). In the United Kingdom, the GDPR has been adopted in substantially the same form, however the UK may potentially make revisions in the coming years. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze, store, transfer and otherwise process personal data. European and United Kingdom data protection authorities may interpret the GDPR and national laws differently and impose additional requirements, which adds to the complexity of processing personal data in or from the EEA or United Kingdom. Guidance on implementation and compliance practices is often updated or otherwise revised. GDPR applies extra-territorially under certain circumstances and imposes stringent requirements on controllers and processors of personal data, including, for example, requirements to ensure a legal bases to process personal information, provide robust disclosures to individuals, facilitate data subject rights, provide data security breach notifications within 72 hours after discovering a breach in certain circumstances, limit retention of personal information and apply enhanced protections to health data and other categories of sensitive personal information. The GDPR also has requirements around international transfers of personal data. Requirements around transfers to the United States and other jurisdictions have increased since a July 2020 decision by the Court of Justice of the European Union invalidated the Privacy Shield as a basis to +32 +transfer personal data from Europe to the United States, and added requirements for reliance on Standard Contractual Clauses. Regulatory guidance on requirements for international transfers, and other GDPR compliance matters, continues to evolve; for example, the European Commission in December 2022 announced that it was beginning the process of drafting a new adequacy decision that would ease regulatory barriers for data transfers to the United States. However, it is widely expected that the new adequacy decision will itself face scrutiny from the Court of Justice, underscoring that GDPR compliance is an ongoing endeavor. Failure to comply with the requirements of the GDPR may result in fines of up to €20 million or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. To comply with the GDPR and other applicable international data protection laws and regulations, we may be required to put in place additional mechanisms ensuring compliance, which may result in other substantial expenditures. +Cybersecurity +Our business relies on secure and continuous processing of information and the availability of our IT networks and IT resources, as well as critical IT vendors that support our technology, research and other data processing operations. While we take steps to protect our systems and data, security incidents, data breaches, computer malware and computer hacking attacks have become more prevalent across industries, including the life sciences sector, and may occur on our systems or those of our third-party service providers. Unauthorized persons may in the future be able to exploit weaknesses in the security systems of our (or our third-party service providers) IT networks and gain access to PHI and other personal information, sensitive trade secrets, or other proprietary information. Any wrongful use or disclosure of PHI, other personal information, trade secrets or other proprietary information by us or our third-party service providers could subject us to regulatory fines or penalties, third-party claims or otherwise could adversely affect our business and results of operations. Although HIPAA and the regulations promulgated thereunder do not provide for a private right of action, failures to adequately protect PHI or our IT systems could be viewed as violations of the HIPAA security rule or violations of other applicable information security laws, regulations, contractual obligations or industry standards, and could further result in costly data breach notification obligations that negatively impact our reputation. +Moreover, data security incidents or data breaches, as well as attacks on our IT systems, could result in operational disruptions or data loss or corruption that could adversely impact our business and operations, resulting in substantial investment of resources to investigate, recover and remediate and subject us to heightened regulatory scrutiny. +International Regulations +Many countries in which we may offer any of our diagnostic tests in the future have anti-kickback regulations prohibiting providers from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable under any national health care program. In situations involving physicians employed by state-funded institutions or national health care agencies, violation of the local anti-kickback law may also constitute a violation of the FCPA. +The FCPA prohibits any United States individual, business entity or employee of a United States business entity to offer or provide, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether or not such conduct violates local laws. In addition, it is illegal for a company that reports to the Securities and Exchange Commission (SEC) to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls. We will also be required to maintain accurate information and control over sales and distributors’ activities that may fall within the purview of the FCPA, its books and records provisions and its anti-bribery provisions. +The standard of intent and knowledge in anti-bribery cases is minimal. Intent and knowledge are usually inferred from that fact that bribery took place. The accounting provisions do not require intent. Violations of the FCPA’s anti-bribery provisions for corporations and other business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Other countries, including the United Kingdom and other OECD Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United Kingdom Anti-Bribery Act. +When marketing our diagnostic tests outside of the United States, we may be subject to foreign regulatory requirements governing human clinical testing, prohibitions on the import of tissue necessary for us to perform our diagnostic tests or restrictions on the export of tissue imposed by countries outside of the United States or the import of tissue into the United States, and marketing approval. These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required. +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the EEA, a medical device must meet MDDs/IVDD Essential Requirements or, applicable on May 26, 2021, the MDR applicable on May 26, 2022, IVDR General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a +33 +medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a CER the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia , of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia , that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. However, the CE mark will be accepted in the UK until July 1, 2023. +Healthcare Reform +In March 2010, the Patient Protection and Affordable Care Act (ACA) was enacted in the United States. The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private insurers. For example, the ACA requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices. The medical device tax was permanently repealed at the end of 2019. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters, and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict. +Beginning in 2017, the Trump administration sought to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. The Trump administration issued three executive orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. For example, on December 20, 2019, President Trump signed appropriations legislation for fiscal year 2020 that repealed certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high-cost employer-sponsored insurance plans, for tax years beginning after December 31, 2019; the annual fee imposed on certain health insurance providers based on market share, for calendar years beginning December 31, 2020; and the medical device excise tax on non-exempt medical devices, for sales after December 31, 2019. While Congress did not pass comprehensive legislation that would repeal all or part of the ACA, two bills affecting the implementation of certain taxes under the ACA have been signed into law. Specifically, the Tax Cuts and Jobs Act of 2017 (TCJA), among other things, included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment, or penalty, imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Beginning in 2021, the Biden administration has signaled its intent to pursue policies strengthening the ACA. +Other legislative changes have been proposed and adopted in the United States since the ACA was enacted to reduce healthcare expenditures. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions of Medicare payments to providers of up to 2% per fiscal year that started in 2013 and, due to subsequent statutory amendments, will remain in effect through 2030 unless additional Congressional action is taken. In 2020, the CARES Act temporarily suspended the 2% cut in Medicare payments from May 1, 2020 through December 31, 2020, and it extended the sequestration reductions through fiscal year 2030 to offset the cost of such temporary suspension. The Consolidated Appropriations Act of 2021 further extended the temporary suspension through March 31, 2021. On April 14, 2021, Congress enacted legislation that further extended the suspension through December 31, 2021. On December 10, 2021, further legislation was enacted to extend the suspension through March 31, 2022, after which a 1.0% sequestration applied for Medicare payments made between April 1, 2022 and June 30, 2022. +The American Taxpayer Relief Act of 2012 made other changes, including reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. If federal spending is reduced, anticipated budgetary shortfalls may also impact the ability of relevant agencies, such as the FDA or the National Institutes of Health to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve R&D, manufacturing, and marketing activities, which may delay our ability to develop, market and sell any products we may develop. Additionally, the Biden administration has already indicated a shift in direction from Trump administration policies by issuing orders and other documents rolling back regulations and Executive Orders from the Trump administration, and as noted, indicating that it will pursue policies strengthening the ACA. +34 +In December 2020, in its enactment of the Consolidated Appropriations Act, Congress enacted the No Surprises Act. This law, which took effect January 1, 2022, bars an out-of-network providers from billing patients in excess of the in-network cost sharing for services furnished with respect to a visit at certain in-network health care facilities. The law establishes an independent dispute resolution process between the provider and the payer to determine the appropriate payment rate to the provider. As written, the No Surprises Act may apply to laboratory tests furnished by an independent laboratory with respect to a hospital visit. The law establishes a notice and consent exception that generally does not apply to laboratory tests, although it allows HHS to apply this exception to certain advanced tests. Regulations and subregulatory guidance were issued by HHS, the Department of Labor, and the Department of the Treasury in 2021 and 2022, with the first set of regulations was issued as an Interim Final Rule on July 1, 2021, a second set issued as an Interim Final Rule on September 30, 2021, and a third set issued as a Final Rule on August 19, 2022. These regulations and subregulatory guidance have provided additional information on the applicability of the No Surprises Act, the rules governing the independent dispute resolution process, and specific provider requirements (including the obligation to furnish a “good faith estimates” of “expected charges” to uninsured or self-pay patients), as well as areas of temporary enforcement discretion. +Environmental, Health and Safety Regulations +We are subject to various federal, state, local, and foreign environmental, health and safety laws and regulations and permitting and licensing requirements. Such laws include those governing laboratory practices, the generation, storage, use, manufacture, handling, transportation, treatment, remediation, release and disposal of, and exposure to, hazardous materials and wastes and worker health and safety. Our operations involve the generation, use, storage and disposal of hazardous materials, and the risk of injury, contamination or non-compliance with environmental, health and safety laws and regulations or permitting or licensing requirements cannot be eliminated. In particular, the introduction of our Bio-Rad SARS-CoV-2 ddPCR and Platelia SARS-CoV-2 Total Ab tests requires that we maintain compliance with applicable and evolving federal and state laws and regulations relating to COVID-19, including the generation, use, storage, and disposal of testing materials and agents. Compliance with environmental laws and regulations has not had a material effect on our capital expenditures, earning or competitive position. Most recently, the Boulder, Colorado clinical laboratory passed an on-site inspection from the CDC in June 2021. +Corporate Information +We were incorporated in Delaware in 2005 as Elston Technologies, Inc. Our principal executive offices are located at 2970 Wilderness Place, Suite 100, Boulder, Colorado 80301, and our telephone number is (303) 417-0500. On June 20, 2006, we changed our name to Biodesix, Inc. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.24 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of our initial public offering (IPO). +Additionally, we are a “smaller reporting company ” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million +35 +as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +For certain risks related to our status as an emerging growth company, see “Risk Factors—General Risk Factors—We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.” +Human Capital Resources +Our culture is underpinned by our cultural beliefs including an unwavering commitment to inclusion and diversity. We are committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent offering opportunities for our team members to grow and develop in their careers, supported by a competitive suite of benefits and health and wellness programs. We regularly engage our team members in monthly all-hands meetings to align and focus on the current state of affairs of our business, our partnerships, new products, clinical trials, and other pertinent information about our business. We engage our team members in programs such as peer recognition and recruitment that focuses on recognizing outstanding individual contributions to company performance, cultural fit of new team members and acknowledging the diversity of our team to ensure our team members feel valued and can do their best work. We have a national annual community service initiative, “Biodesix Gives Back” that allows each team member to invest ten hours of paid community service to organizations of their choosing. +As of December 31, 2022, we had approximately 245 full-time and part-time employees, all of whom are located in the United States. Of our 245 full-time and part-time team members, the majority of our team member base is located in proximity to our corporate office and testing facilities located in Boulder, Colorado and our laboratory in De Soto, Kansas. +Diversity, Equity and Inclusion +We believe that a diverse employee population, including cultural background, gender, ethnicity, sexual orientation and lived experiences, is critical to our success. Our employees are encouraged to leverage their personal strengths and experiences to continually innovate and contribute to the development of new ideas and process improvements that drive better experiences for our partners. +Employee Engagement +Our company culture emphasizes the satisfaction and well-being of our team members and a diverse, engaged workforce. We solicit the opinion and views of our team members through surveys and peer focus groups. We have an established and valued Peer Recognition Culture. Teammates recognize other teammates publicly for their support and contributions fostering collaboration, engagement and retention. We regularly review feedback we receive on our current cultural beliefs to determine if any modifications are needed. During 2021, we updated our cultural beliefs to align with our core values that reflect our current focus on Teamwork, Innovation, Making an Impact and Excel. Additionally, the Company annually celebrates our top sales performers through our President’s Club and other top company performers as nominated by fellow team members through our four (4) Performance Excellence Awards that recognize creativity and innovation, an entrepreneurial spirit, a strategic impact on the success of the Company and lastly, embodying the Biodesix cultural beliefs and goes “above and beyond” daily. +Training and Development +We invest in our team members career growth and provide team members with a wide range of development opportunities, including face-to-face, virtual, and self-directed learning, mentoring, coaching, and external development. +Health, Safety and Wellness +The physical health, financial stability, life balance and mental health of each of our team members is vital to our success. We sponsor several cancer awareness activities in our local communities to bring engagement and awareness of health, safety and wellness to positively impact lives. We provide an Employee Assistance Program to enhance physical, financial, and mental well-being for all our team members. Since the onset of the COVID-19 pandemic, we have successfully transitioned a significant portion of our workforce to a remote working environment and implemented strict safety and social distancing measures in our sites to protect the health and safety of our team members. We also have provided extraordinary safety protocols and standards for all “essential” team members who work in our laboratories and our field sales organization including regularly scheduled serial testing for COVID-19. We also have an active “Friends and Family” COVID-19 testing program for our team members, their families and close friends. +Pay Equity +The main objective of our compensation program is to provide a compensation package that will attract, retain, motivate, and reward superior team members who operate in a highly competitive and technologically challenging environment. We emphasize overall Company performance and provide equity incentives for all team members to align their financial interests with the interests of shareholders. In addition, we offer an employee stock purchase plan to all employees in which participants are eligible to purchase shares at a discount to market. We think like customers and act like owners. +36 +Biodesix seeks fairness in total compensation. We benchmark with external comparisons, internal comparisons and look at the relationship between team member roles within the organization. We also review our compensation practices, both in terms of our overall workforce and individual team members, to ensure our pay is fair and equitable. We currently have no pay disparities based on gender, race, or ethnicity. +Available Information +We file with, or furnish to, the SEC reports including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available free of charge on our corporate website ( www.biodesix.com ) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov . The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this Annual Report on Form 10-K. +Item 1A. Risk Factors. +Risk Factors Summary +The following is a summary of the principal risks that could adversely affect our business, operations and financial results. This summary does not address all of the risk that we face and should be read in conjunction with the entire Risk Factors section below beginning at “Risks Related to Our Business and Industry” within this Item 1A. Risk Factors. +• +We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we achieve profitability, we may not be able to sustain it. +• +Our audited financial statements include a statement that there is a substantial doubt about our ability to continue as a going concern and a continuation of negative financial trends could result in our inability to continue as a going concern. +• +The commercial success of our current and future diagnostic tests and services depends upon attaining significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies. +• +We may encounter difficulties in managing our growth, which could disrupt our operations. +• +If we fail to retain sales and marketing personnel and, as we grow, fail to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests in a cost-effective manner, we may not be able to generate revenue growth. +• +If we cannot maintain our current relationships, or enter into new relationships, with biopharmaceutical companies, our revenue prospects could be reduced. +• +Our commercial success and revenue growth are highly dependent on the demand for, and increased adoption of, our diagnostic tests, including our COVID-19 testing program, which are subject to a number of risks and uncertainty. +• +We need to ensure strong product performance and reliability to maintain and grow our business. +• +We depend upon third-party suppliers, including contract manufacturers and single source suppliers, making us vulnerable to supply problems and price fluctuations. +• +Natural or man-made disasters, pandemics, outbreaks, or other similar events, including a sustained outbreak or future waves of the novel strain of coronavirus disease, COVID-19, could significantly disrupt our business, and negatively impact our business, financial condition and results of operations. +• +Our industry is highly competitive and subject to rapid change, which could make our diagnostic tests and services obsolete. If we are unable to continue to innovate and expand and enhance our diagnostic tests and service offerings, we could lose customers or market share. +• +Any failure to offer high-quality support for our diagnostic tests and services may adversely affect our relationships with providers and negatively impact our reputation among patients and providers, which may adversely affect our business, financial condition and results of operations. +• +We may face additional costs, loss of revenue, significant liabilities, harm to our brand, decreased use of our products or services and business disruption if there are disruptions in our information technology systems, including any security or data privacy breaches or other unauthorized or improper access. +37 +Risk Factors +Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, and results of operations and cash flows. All of the risks described below should be carefully considered together with the other information contained and incorporated by reference in this report. +Risks Related to our Business and Industry +We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we achieve profitability, we may not be able to sustain it. +We have incurred losses since our inception and expect to continue to incur losses for the foreseeable future. We reported net losses of $65.4 million and $43.2 million the years ended December 31, 2022 and 2021, respectively. As a result of these losses, as of December 31, 2022, we had an accumulated deficit of approximately $367.4 million. +We expect that our sales and marketing, research and development, regulatory and other expenses will continue to increase as we expand our marketing efforts for our diagnostic tests and services, expand existing relationships with our customers, obtain regulatory clearances or approvals or certifications for future enhancements to our existing diagnostic tests and services and conduct further clinical trials. In addition, we expect our general and administrative expenses to increase due to the additional costs associated with scaling our business operations and testing capacity as well as being a public company, including due to legal, accounting, insurance, exchange listing and compliance, investor relations and other expenses. As a result, we expect to continue to incur operating losses and may never achieve profitability. We will need to generate significant additional revenue in order to achieve and sustain profitability. Even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. If we do not achieve or sustain profitability, it will be more difficult for us to finance our business and accomplish our strategic objectives, either of which would have a material adverse effect on our business, financial condition and results of operations. +The spread of COVID-19, particularly during 2020 and 2021, and the impact to our business has had, and may continue to have, a material and adverse effect on our ability to generate revenues, maintain compliance with our financial covenants and result in our inability to continue as a going concern. Any such impacts could have a material and adverse effect on the price of our common stock. +Our financial statements as of and for the period ended December 31, 2022 were prepared on the assumption that we would continue as a going concern. These financial statements did not include any adjustments that might result from the outcome of this uncertainty. As of December 31, 2022, we maintained cash and cash equivalents of $43.1 million and we have $30.0 million in principal balance remaining on our Perceptive Term Loan (as defined below). We have incurred significant losses since inception and, as a result, we have funded our operations to date primarily through the sale of common stock in our follow-on underwritten public offering in November 2022, the issuance of notes payable, and from our two primary revenue sources: (i) diagnostic testing, which include lung diagnostic testing and COVID-19 testing, and (ii) providing biopharmaceutical companies with development and testing services. Our ability to meet our obligations as they come due may be impacted by our ability to remain compliant with financial covenants in the Perceptive Term Loan Facility or to obtain waivers or amendments that impact the related covenants. However, due to the continued uncertainty caused by the COVID-19 pandemic and the associated impacts on the recovery of our diagnostic testing and services, significant risks remain with respect to our ability to meet these thresholds and any material adverse effect on our revenues, income and expenses could impact our ability to maintain compliance with these covenants. As a result of the items mentioned above, our management has determined that there is a substantial doubt about our ability to continue as a going concern over the next twelve months from the date these financial statements were issued. Although we have taken steps to improve our liquidity, including through entering into the Perceptive Term Loan Facility and terminating the 2021 Term Loan, and have taken measures to reduce planned capital expenditures and operating expenses, these actions alone may not be sufficient to mitigate our liquidity concerns in the wake of potential impacts to our revenues, operating results and cash flows from the continued uncertainty caused by the COVID-19 pandemic and adjustments to the post-pandemic environment. In addition, if we are not able to improve our operating results, we may need to limit our operations substantially. We will need to raise additional capital in the form of equity or debt to increase our liquidity but there is no assurance that we will be able to secure any such funding in a sufficient amount or on terms that are acceptable to us. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. Furthermore, the reaction of investors to the inclusion of a going concern statement in this report, and our potential inability to continue as a going concern, could materially adversely affect the price of our common stock. +The commercial success of our current and future diagnostic tests and services and our revenue growth depends upon attaining significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies. +Our commercial success depends, in part, on the acceptance of our diagnostic tests and services as being safe and relatively simple for medical personnel to learn and use, clinically flexible, operationally versatile and, with respect to providers and payers, cost effective. +38 +We cannot predict how quickly, if at all, payers, providers, clinics and patients will accept future diagnostic tests and services or, if accepted, how frequently they will be used. These constituents must believe that our diagnostic tests offer benefits over other available alternatives. +The degree of market acceptance of our current and future diagnostic tests and services depends on a number of factors, including: +• +whether there is adequate utilization of our tests by clinicians, biopharmaceutical companies and other target groups based on the potential and perceived advantages of our diagnostic tests over those of our competitors; +• +the convenience and ease of use of our diagnostic tests relative to those currently on the market; +• +the effectiveness of our sales and marketing efforts; +• +our ability to provide incremental data that show the clinical benefits and cost effectiveness, and operational benefits, of our diagnostic tests; +• +the coverage and reimbursement acceptance of our products and services; +• +pricing pressure, including from group purchasing organizations (GPOs), seeking to obtain discounts on our diagnostic tests based on the collective bargaining power of the GPO members; +• +negative publicity regarding our or our competitors’ diagnostic tests resulting from defects or errors; +• +the accuracy of our tests relative to those of our competitors; +• +product labeling or product insert requirements by the FDA or other regulatory authorities or conformity assessment bodies; and +• +limitations or warnings contained in the labeling cleared or approved by the FDA or other regulatory authorities or conformity assessment bodies. +Additionally, even if our diagnostic tests achieve widespread market acceptance, they may not maintain that market acceptance over time if competing diagnostic tests or technologies, which are more cost effective or are received more favorably, are introduced. Failure to achieve or maintain market acceptance and/or market share would limit our ability to generate revenue and would have a material adverse effect on our business, financial condition and results of operations. +There is no assurance that our COVID-19 and antibody testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. If the pandemic were to dissipate, whether due to a significant decrease in new infections, due to the availability of vaccines, or otherwise, the need for a COVID-19 test could decrease significantly and this could have an adverse effect on our results of operation and profitability. +We may encounter difficulties in managing our growth, which could disrupt our operations. +As of December 31, 2022, we had approximately 245 full and part-time employees. Over the next several years, we expect to significantly increase the number of our employees and the scope of our operations, particularly in the areas of sales, marketing and reimbursement, product development, regulatory affairs and other functional areas, including finance, accounting, quality and legal. Additionally, we expect to expand our testing capacity as we commercialize additional diagnostic tests. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational quality and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources, we may not be able to manage the expansion of our operations or recruit and train additional qualified personnel in an effective manner. Any inability to manage growth could delay the execution of our business plans or disrupt our operations and have a material and adverse effect on our prospects. +Since our inception, we have experienced multiple cycles of growth and anticipate further growth in our business operations. This future growth could create strain on our organizational, administrative and operational infrastructure, including laboratory operations, quality control, customer service and sales organization management. We expect to continue to increase headcount and to hire more specialized personnel in the future as we grow our business. We will need to continue to hire, train and manage additional qualified scientists, laboratory personnel, client and account services personnel, and sales and marketing staff and improve and maintain our technology to properly manage our growth. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees or if we are not successful in retaining our existing employees, our business may be harmed. +We may not be able to maintain the quality or expected turnaround times of our diagnostic tests and services, or satisfy customer demand as it grows. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures. The time and resources required to implement these new systems and procedures is uncertain, and failure to complete this in a timely and efficient manner could materially adversely affect our operations. +39 +Additionally, if we are required to reduce expenses substantially to sustain our operations, we may not have the human resources to maintain growth in our business operations. +If we fail to retain sales and marketing personnel and, as we grow, fail to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests in a cost-effective manner, we may not be able to generate revenue growth. +We have limited experience marketing and selling our diagnostic tests. We currently rely on our direct sales force to sell our diagnostic tests in the United States, and any failure to maintain and grow our direct sales force will negatively affect our business, financial condition and results of operations. The members of our direct sales force are highly trained and possess substantial technical expertise, which we believe is critical in increasing adoption of our diagnostic tests. The members of our United States sales force are at-will employees. The loss of these personnel to competitors, or otherwise, will negatively affect our business, financial condition and results of operations. If we are unable to retain our direct sales force personnel or replace them with individuals of equivalent technical expertise and qualifications, or if we are unable to successfully instill such technical expertise in replacement personnel, it may negatively affect our business, financial condition and results of operations. +In order to generate future growth, we plan to continue to expand and leverage our sales and marketing infrastructure. Identifying and recruiting qualified sales and marketing personnel and training them on how to promote our diagnostic tests, on applicable federal and state laws and regulations and on our internal policies and procedures requires significant time, expense and attention. It often takes several months or more before a sales representative is fully trained and productive. Our sales force may subject us to higher fixed costs than those of companies with competing techniques or diagnostic tests that utilize independent third parties, which could place us at a competitive disadvantage. It will negatively affect our business, financial condition and results of operations if our efforts to expand and train our sales force do not generate a corresponding increase in revenue, and our higher fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand for our diagnostic tests. Any failure to hire, develop and retain talented sales personnel, to achieve desired productivity levels in a reasonable period of time, or timely reduce fixed costs, could negatively affect our business, financial condition and results of operations. Our ability to increase our customer base and achieve broader market acceptance of our diagnostic tests will depend to a significant extent on our ability to expand our marketing efforts. We plan to dedicate significant resources to our marketing programs. It will negatively affect our business, financial condition and results of operations if our marketing efforts and expenditures do not generate a corresponding increase in revenue. In addition, we believe that developing and maintaining broad awareness of our diagnostic tests in a cost-effective manner is critical to achieving broad acceptance of our diagnostic tests. Promotion activities may not generate patient or physician awareness or increase revenue, and even if they do, any increase in revenue may not offset the costs and expenses we incur in building our brand. If we fail to successfully promote, maintain and protect our brand, we may fail to attract or retain the physician acceptance necessary to realize a sufficient return on our brand building efforts, or to achieve the level of brand awareness that is critical for broad use of our diagnostic tests, which in turn could have a material adverse effect on our business, financial condition and results of operations. +If we cannot maintain our current relationships, or enter into new relationships, with biopharmaceutical companies, our revenue prospects could be reduced. +We collaborate with biopharmaceutical companies to analyze patient samples for multiple applications primarily to support clinical trials, including patient identification, companion or complementary diagnostics and retrospective testing. The revenue attributable to our biopharmaceutical customers may also fluctuate in the future, which could have a material adverse effect on our financial condition and results of operations. In addition, the termination of these relationships could result in a temporary or permanent loss of revenue. +Our future success depends in part on our ability to maintain these relationships and to establish new relationships. Many factors have the potential to impact such collaborations, including the type of biomarker support required and our ability to deliver it and our biopharmaceutical customers’ satisfaction with our tests or services and other factors that may be beyond our control. Furthermore, our biopharmaceutical customers may decide to decrease or discontinue their use of our tests due to changes in research and product development plans, failures in their clinical trials, financial constraints, or utilization of internal testing resources or tests performed by other parties, or other circumstances outside of our control. In addition to reducing our revenue, the loss of one or more of these relationships may reduce our exposure to research and clinical trials that facilitate the collection and incorporation of new information into our biobank and proprietary AI platform. +We engage in conversations with biopharmaceutical companies regarding potential commercial opportunities on an ongoing basis. There is no assurance that any of these conversations will result in a commercial agreement, or if an agreement is reached, that the resulting relationship will be successful or that clinical or research studies conducted as part of the engagement will produce successful outcomes. Speculation in the industry about our existing or potential relationships with biopharmaceutical companies can also be a catalyst for adverse speculation about us, our tests and our technology, which can adversely affect our reputation and our business. +Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide. +Our quarterly and annual revenue and operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. Our quarterly and annual operating results may fluctuate as a result of a variety of factors, many of which are outside +40 +our control and, as a result, may not fully reflect the underlying performance of our business. These fluctuations may occur due to a variety of factors, including, but not limited to: +• +the level of demand for our diagnostic tests, which may vary significantly; +• +the timing and cost of manufacturing our diagnostic tests, which may vary depending on the quantity of production and the terms of our agreements with third-party suppliers and manufacturers; +• +expenditures that we may incur to acquire, develop, or commercialize additional tests and technologies; +• +unanticipated pricing pressures; +• +the rate at which we grow our sales force and the speed at which newly hired salespeople become effective, and the cost and level of investment therein; +• +the degree of competition in our industry and any change in the competitive landscape of our industry, including consolidation among our competitors or future partners; +• +coverage and reimbursement policies with respect to lung cancer treatment equipment, and potential future diagnostic tests that compete with our diagnostic tests; +• +the timing and success or failure of clinical trials for our diagnostic tests or any enhancements to such tests we develop or competing diagnostic tests; +• +positive or negative coverage, or public perception, of our diagnostic tests or those of our competitors or broader industry trends; +• +the impact, if any, of the spread of COVID-19 and any newly discovered variants, and the resulting effects on the number of patients treated or the demand for our non-COVID-19 tests; +• +the timing and cost of, and level of investment in, research, development, licenses, regulatory approval, conformity certification, commercialization activities, acquisitions and other strategic transactions, or other significant events relating to our diagnostic tests, which may change from time to time; +• +the timing and cost of obtaining regulatory approvals, conformity certifications or clearances for planned or future improvements or enhancements to our diagnostic tests; +• +changes in regulatory requirements or in the status of regulatory approvals or applications or conformity certifications; +• +pricing, discounts, and incentives for our diagnostic tests; +• +future accounting pronouncements or changes in our accounting policies; and +• +general market conditions. +In addition, we can provide no assurances that the demand for our COVID-19 and antibody testing program will be sustained, and even if it is, the period of time for which it would be sustained. As vaccines for COVID-19 become more available and widespread in the future, we have seen the demand for our COVID-19 diagnostic and antibody tests decrease. As a result, the increase in revenue, if any, due to any increase in demand for our COVID-19 and antibody testing program is not indicative of results expected for any future period. +The cumulative effects of these factors has resulted in large fluctuations and unpredictability in our quarterly and annual financial results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Further, our historical results are not necessarily indicative of results expected for any future period, and quarterly results are not necessarily indicative of the results to be expected for the full year or any other period, and accordingly should not be relied upon as indicative of future performance. +This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any guidance we may provide, or if the guidance we provide is below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any publicly stated guidance we may provide, and could in turn negatively impact our business, financial condition and results of operations. +We need to ensure strong product performance and reliability to maintain and grow our business . +We need to maintain and continuously improve the performance and reliability of our diagnostic tests, including our Biodesix WorkSafe testing program, the Nodify XL2 and Nodify CDT tests, and the GeneStrat and VeriStrat tests, to achieve our profitability objectives. Poor product performance and reliability could lead to customer dissatisfaction, adversely affect our reputation and revenues, and increase our service and distribution costs and working capital requirements. Our diagnostic tests may contain errors or defects, and +41 +while we have made efforts to test them extensively, we cannot assure that our current diagnostic tests, or those developed in the future, will not have performance problems. Performance issues with our diagnostic tests will increase our costs in the near-term and accordingly adversely affect our business, financial condition and results of operations. +We depend upon third-party suppliers, including contract manufacturers and single source suppliers, making us vulnerable to supply problems and price fluctuations. +We rely on third-party suppliers, including in some instances single source suppliers, to provide us with certain components of our diagnostic tests. The number of suppliers feeding into the production of our diagnostic tests is in excess of 65 worldwide. We consider a select few of these suppliers, located in the United States, Europe and China, as critical single source providers of components. Bio-Rad Laboratories, as described below, is the sole source supplier for our GeneStrat tests and COVID-19 diagnostic and antibody testing program. Oncimmune is also the sole source supplier for our Nodify CDT tests. While we have initiated the second source qualification process for the majority of these critical components, we may not be successful in securing second sourcing for all of them at all or on a timely basis. +In addition, we may purchase supplies through purchase orders and may not have long-term supply agreements with, or guaranteed commitments from, many of our suppliers, including single source suppliers. Additionally, at present, we have a limited contract with a contract manufacturer for the production of certain of our diagnostic testing kits; however, during 2022 we transitioned the majority of kitting performed outside of the Company to our internal operations team for cost savings and risk management. Many of our suppliers and contract manufacturers are not obligated to perform services or supply diagnostic testing materials for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. We depend on our suppliers and contract manufacturers to provide us and our customers with materials in a timely manner that meet our and their quality, quantity and cost requirements. These suppliers and contract manufacturers may encounter problems during manufacturing for a variety of reasons, any of which could delay or impede their ability to meet our demand. These suppliers and contract manufacturers may cease producing the components we purchase from them or otherwise decide to cease doing business with us. Further, we maintain limited volumes of inventory from most of our suppliers and contract manufacturers. If we inaccurately forecast demand for finished goods, we may be unable to meet customer demand which could harm our competitive position and reputation. In addition, if we fail to effectively manage our relationships with our suppliers and contract manufacturers, we may be required to change suppliers or contract manufacturers. While we believe replacement suppliers exist for all materials, components and services necessary to manufacture our diagnostic tests, establishing additional or replacement suppliers for any of these materials, components or services, if required, could be time-consuming and expensive, may result in interruptions in our operations and product delivery, may affect the performance of our diagnostic tests or could require that we modify their processes. Even if we are able to find replacement suppliers, we will be required to verify that the new supplier maintains facilities, procedures and operations that comply with our quality expectations and applicable regulatory requirements. Any of these events could require that we obtain a new regulatory authority approval before we implement the change, which we may not obtain on a timely basis or at all. +If our third-party suppliers fail to deliver the required commercial quantities of materials on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality on a timely basis, the continued commercialization of our diagnostic tests, the supply of our diagnostic tests to customers and the development of any future diagnostic tests will be delayed, limited or prevented, which could have material adverse effect on our business, financial condition and results of operations. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test. Under the terms of this arrangement, we were granted non-exclusive rights to utilize the intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. We agreed to purchase all of the necessary supplies and reagents for such testing exclusively from Bio-Rad. As further consideration for the non-exclusive license, we agreed to pay a royalty of two and one half percent (2.5%) on net service fees (such fees are defined in the Non-Exclusive License Agreement with Bio-Rad) collected from contracted third parties who receive ddPCR services from us. In addition, we have separately been granted permission by Bio-Rad to use the Bio-Rad SARS-CoV-2 ddPCR test and Platelia SARS-CoV-2 Total Ab test for commercial diagnostic services. On May 24, 2021, we entered into the First Amendment to the Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc. which amended the original agreement such that, effective May 1, 2021, we are not required to pay a royalty of two and one half percent (2.5%) on net service fees. For more information regarding this license and supply agreement and the permission granted to us by Bio-Rad with respect to such tests, please see “Business—Material Agreements—Agreements with Bio-Rad” previously filed with our Form S-1 on October 23, 2020 and “First Amendment to the Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated May 24, 2021” previously filed with our Form 10-Q on August 10, 2021. +This relationship may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. We cannot be certain that, following the realization of this relationship, we will achieve the revenue or specific net income that justifies our entry into it. Any termination of this relationship, or +42 +delays in entering into new strategic partnership agreements with Bio-Rad, could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +We may not be able to sufficiently reduce costs in the performance, manufacturing and production of our diagnostic tests to achieve sustainable gross margins. +We partner with contract manufacturers in the development and production of supplies for our diagnostic tests. While we are undertaking a number of initiatives designed to reduce the cost of performing our diagnostic tests, including reducing the costs of supplies, there is no guarantee that we will be able to achieve planned cost reductions from our various cost savings initiatives. There may also be unforeseen occurrences that increase our costs, such as increased prices of the components of our diagnostic tests, changes to labor costs or less favorable terms with third-party suppliers or contract manufacturing partners. If we are unable to reduce our costs, or if cost reductions are less significant or less timely than projected, we will not be able to achieve sustainable gross margins, which would adversely affect our ability to invest in and grow our business and adversely impact our business, financial condition and results of operations. +A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide, including the outbreak of the novel strain of coronavirus disease, COVID-19, and its variants could adversely affect our business. +If a pandemic, epidemic or outbreak of an infectious disease occurs in the United States or worldwide, our business may be adversely affected. For much of 2020 and 2021, COVID-19 spread throughout the United States and to most countries globally, creating significant uncertainty and economic disruption. Numerous U.S. state and local jurisdictions chose to impose “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. In March 2020, the Governor of Colorado, where our headquarters are located, issued “stay at home” orders limiting non-essential activities, travel and business operations. Disruptions or potential disruptions due to the orders and restrictions have included, and in the future may continue to include, the inability of our suppliers to manufacture components and parts and to deliver these to us on a timely basis, or at all; disruptions in our production schedule and ability to assemble diagnostic tests; inventory shortages or obsolescence; delays in actions of regulatory bodies; diversion of or limitations on employee resources that would otherwise be focused on the operations of our business; delays in growing or reductions in our sales organization, including through delays in hiring, lay-offs, furloughs or other losses of sales representatives; business adjustments or disruptions of certain third parties, including suppliers, medical institutions and clinical investigators with whom we conduct business; and additional government requirements or other incremental mitigation efforts that may further impact our or our suppliers’ capacity to manufacture our diagnostic tests. +The COVID-19 pandemic also has negatively affected our non-COVID-19 testing-related revenue and our clinical studies. For example, cancer patients have had more limited access to hospitals, healthcare providers and medical resources as they took steps to control the spread of COVID-19. Our biopharmaceutical customers have faced, and are continuing to face, challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized. Further, our clinical studies, such as our ongoing INSIGHT study and our recently launched ALTITUDE study, as well as our arrangements with our biopharmaceutical customers, are expected to take longer to complete than what we expected before the outbreak of the COVID-19 pandemic. +The COVID-19 pandemic created an opportunity for our diagnostic tests and we have commercialized three diagnostic tests to test for the presence of COVID-19 and antibodies. However, there is no assurance that our COVID-19 diagnostic and antibody testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or be accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. If the pandemic were to dissipate, whether due to a significant decrease in new infections, due to the availability of vaccines, or otherwise, the need for a COVID-19 test could decrease significantly and this could have an adverse effect on our results of operations and profitability. As a result, the increase in revenue, if any, due to any increase in demand for these diagnostic tests may not be indicative of our future revenue. +The extent to which the COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the resurgence of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. Furthermore, there is no assurance that our diagnostic tests will continue to be effective against the virus in the future. +While the potential economic impact brought by, and the duration of, any pandemic, epidemic or outbreak of an infectious disease, including COVID-19, may be difficult to assess or predict, the widespread COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets and a reduction in our ability to access capital, which could adversely affect our liquidity. In addition, a recession or market correction resulting from the spread of an infectious disease, including COVID-19, could materially affect our business. Such economic recession could have a material adverse effect on our long-term business. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section. +43 +Natural or man-made disasters and other similar events may significantly disrupt our business, and negatively impact our business, financial condition and results of operations. +A significant portion of our employee base, operating facilities and infrastructure are centralized in Boulder, Colorado and we operate a laboratory facility in De Soto, Kansas. Any of our facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, wildfires, floods, nuclear disasters, riots, acts of terrorism or other criminal activities, infectious disease outbreaks or pandemic events power outages and other infrastructure failures, which may render it difficult or impossible for us to operate our business for some period of time. Our facilities would likely be costly to repair or replace, and any such efforts would likely require substantial time. Any disruptions in our operations could adversely affect our business, financial condition and results of operations and harm our reputation. Moreover, although we have disaster recovery plans, they may prove inadequate. We may not carry sufficient business insurance to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on our business, financial condition and results of operations. In addition, the facilities of our suppliers and manufacturers may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or otherwise materially and adversely affect our business. +Any failure to offer high-quality support for our diagnostic tests and services may adversely affect our relationships with providers and negatively impact our reputation among patients and providers, which may adversely affect our business, financial condition and results of operations. +In implementing and using our diagnostic tests and services, providers depend on our support to resolve issues in a timely manner. We may be unable to respond quickly enough to accommodate short-term increases in demand for customer support. Increased customer demand for support could increase costs and adversely affect our business, financial condition and results of operations. Our sales are highly dependent on our reputation and on positive recommendations from our existing patients, care partners, providers and clinics. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could adversely affect our reputation, our ability to sell our diagnostic tests and services, and in turn our business, financial condition and results of operations. +The sizes of the markets for our diagnostic tests and services and any future diagnostic tests and services may be smaller than we estimate and may decline. +Our estimates of the annual total addressable market for our diagnostic tests and services are based on a number of internal and third-party estimates and assumptions, including, without limitation, the assumed prices at which we can sell our diagnostic tests and services in the market. While we believe our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be correct and the conditions supporting our assumptions or estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. +As a result, our estimates of the annual total addressable market for our diagnostic tests and services in different market segments may prove to be incorrect. If the actual number of patients who would benefit from our diagnostic tests, the price at which we can sell them or the annual total addressable market for them is smaller than we have estimated, it may impair our sales growth and negatively affect our business, financial condition and results of operations. +Our industry is subject to rapid change, which could make our solutions and the diagnostic tests we develop and services we offer, obsolete. If we are unable to continue to innovate and improve our diagnostic tests and services we offer, we could lose customers or market share. +Our industry is characterized by rapid changes, including technological and scientific breakthroughs, frequent new product introductions and enhancements and evolving industry standards, all of which could make our current diagnostic tests and others we are developing obsolete. Our future success will depend on our ability to keep pace with the evolving needs of our customers on a timely and cost-effective basis and to pursue new market opportunities that develop as a result of scientific and technological advances. In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. There have also been advances in methods used to analyze very large amounts of molecular information. We must continuously enhance our offerings and develop new and improved diagnostic tests to keep pace with evolving standards of care. If we do not leverage or scale our sample and data biobank to discover new diagnostic tests or applications or update our diagnostic tests to reflect new scientific knowledge, including about lung cancer biology, information about new cancer therapies or relevant clinical trials, our diagnostic tests could become obsolete and sales of our current diagnostic tests and any new tests we develop could decline or fail to grow as expected. This failure to make continuous improvements to our diagnostic tests to keep ahead of those of our competitors could result in the loss of customers or market share that would adversely affect our business, financial condition and results of operations. +We may face additional costs, loss of revenue, significant liabilities, harm to our brand, decreased use of our products or services and business disruption if there are any security or data privacy breaches or other unauthorized or improper access. +In connection with various facets of our business, we collect and use a variety of personal data, such as names, mailing addresses, email addresses, mobile phone numbers, location information, prescription information and other medical information. Any failure to prevent or mitigate security breaches or improper access to, use, disclosure or other misappropriation of our data or consumers’ personal data +44 +could result in significant liability under state, (e.g., state breach notification and privacy laws such as the CCPA) federal (e.g., HIPAA), and the HITECH Act and laws in other jurisdictions (e.g., the GDPR). Such an incident may also cause a material loss of revenue from the potential adverse impact to our reputation and brand, affect our ability to retain or attract new users of our diagnostic tests and services and potentially disrupt our business. +Unauthorized disclosure of sensitive or confidential patient or employee data, including personally identifiable information, whether through a breach of computer systems, systems failure, employee negligence, fraud or misappropriation, or otherwise, or unauthorized access to or through our information systems and networks, whether by our employees or third parties, could result in negative publicity, legal liability and damage to our reputation. Unauthorized disclosure of personally identifiable information could also expose us to sanctions for violations of data privacy laws and regulations around the world. To the extent that any disruption or security breach resulted in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed. For example, the loss of or damage to clinical trial data, such as from completed or ongoing clinical trials, for any of our product candidates would likely result in delays in our marketing approval efforts and significantly increased costs in an effort to recover or reproduce the data. +As we become more dependent on information technologies to conduct our operations, cyber incidents, including deliberate attacks and attempts to gain unauthorized access to computer systems and networks, may increase in frequency and sophistication. These threats pose a risk to the security of our systems and networks, the confidentiality and the availability and integrity of our data and these risks apply both to us, and to third parties on whose systems we rely for the conduct of our business. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we and our partners may be unable to anticipate these techniques or to implement adequate preventative measures. We have in the past experienced, and may in the future, experience security incidents. While no security incidents in the past have had a material adverse effect on our business, financial condition and results of operations, we cannot predict the impact of any such future events. Further, we do not have any control over the operations of the facilities or technology of our cloud and service providers, including any third-party vendors that collect, process and store personal data on our behalf. Our systems, servers and platforms and those of our service providers may be vulnerable to computer viruses or physical or electronic break-ins that our or their security measures may not detect. Individuals able to circumvent such security measures may misappropriate our confidential or proprietary information, disrupt our operations, damage our computers or otherwise impair our reputation and business. We may need to expend significant resources and make significant capital investments to protect against security breaches or to mitigate the impact of any such breaches. In addition, to the extent that our cloud and other service providers, experience security breaches that result in the unauthorized or improper use of confidential data, employee data or personal data, we may not be indemnified for any losses resulting from such breaches. There can be no assurance that we or our third-party providers will be successful in preventing cyber-attacks or successfully mitigating their effects. Recent cyber-attacks purportedly originated by Russian controlled entities have exacerbated in the wake of Russia’s invasion of Ukraine and our systems may be infiltrated by foreign actors. If we are unable to prevent or mitigate the impact of such security breaches, our ability to attract and retain new customers, patients and other partners could be harmed as they may be reluctant to entrust their data to us, and we could be exposed to litigation and governmental investigations, which could lead to a potential disruption to our business or other adverse consequences. +We have significant payer concentration, with a limited number of customers accounting for a substantial portion of our revenues. +For year ended December 31, 2022, Medicare reimbursed 37% of our diagnostic test revenue to us and one customer accounted for 10% of our total revenue. For the year ended December 31, 2021, Medicare reimbursed 18% of our diagnostic test revenue to us and one customer accounted for 40% of our total revenue. There are risks whenever a large percentage of total revenues are concentrated with a limited number of payers and customers. It is not possible for us to predict the level of demand for our diagnostic tests and services that will be generated by any of these customers in the future. In addition, revenues from these larger customers may fluctuate from time to time based on these customers’ business needs, the timing of which may be affected by market conditions or other factors outside of our control. These payers and customers could also potentially pressure us to reduce the prices we charge for our diagnostic tests and services, which could have an adverse effect on our margins and financial position and could negatively affect our revenues and results of operations. If any of our largest payers terminates its relationship with us or our tests are no longer reimbursable by such payer, such termination could negatively affect our revenues and results of operations. +Our results of operations will be materially harmed if we are unable to accurately forecast customer demand for, and utilization of, our diagnostic tests and manage our inventory. +To ensure adequate inventory supply, we must forecast inventory needs and manufacture our diagnostic tests based on our estimates of future demand for our diagnostic tests. Our ability to accurately forecast demand for them could be negatively affected by many factors, including our failure to accurately manage our expansion strategy, product introductions by competitors, an increase or decrease in customer demand for our diagnostic tests or for those of our competitors, our failure to accurately forecast customer acceptance of new diagnostic tests, unanticipated changes in general market conditions or regulatory matters and weakening of economic conditions or consumer confidence in future economic conditions. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs, which would cause our gross margin to be adversely affected and could impair the strength of our brand. Conversely, if we underestimate customer demand for our diagnostic tests, our supply chain, manufacturing partners and/or internal manufacturing +45 +team may not be able to deliver components and diagnostic tests to meet our requirements, and this could result in damage to our reputation, sales growth and customer relationships. In addition, if we experience a significant increase in demand, additional supplies of raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, or suppliers may not be able to allocate sufficient capacity in order to meet our increased requirements, which will adversely affect our business, financial condition and results of operations. +If we experience significant disruptions in our information technology systems, our business may be adversely affected. +We depend on our information technology systems for the efficient functioning of our business, including the performance, distribution and maintenance of our diagnostic tests and services, as well as for accounting, data storage, compliance, purchasing and inventory management. We do not have redundant information technology in all aspects of our systems at this time. Our information technology systems may be subject to computer viruses, ransomware or other malware, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, damage or interruption from fires or other natural disasters, hardware failures, telecommunication failures and user errors, among other malfunctions. We could be subject to an unintentional event that involves a third party gaining unauthorized access to our systems, which could disrupt our operations, corrupt our data or result in release of our confidential information. Technological interruptions would disrupt our operations, including our ability to timely ship and track diagnostic test orders and results, project inventory requirements, manage our supply chain and otherwise adequately service our customers or disrupt our customers’ ability to use our diagnostic tests. In the event we experience significant disruptions, we may be unable to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our business, financial condition and results of operations. +Currently, we carry business interruption coverage to mitigate certain potential losses but this insurance is limited in amount, and we cannot be certain that such potential losses will not exceed our policy limits. The successful assertion of one or more large claims against us that exceed or are not covered by our insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations. We are increasingly dependent on complex information technology to manage our infrastructure. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance our existing systems. Failure to maintain or protect our information systems and data integrity effectively could have a material adverse effect on our business, financial condition and results of operations. +If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit or halt the marketing and sale of our diagnostic tests and services. The expense and potential unavailability of insurance coverage for liabilities resulting from issues with our diagnostic tests and services could harm us and negatively impact sales. +We face an inherent risk of product liability as a result of the marketing and sale of our diagnostic tests and services. For example, we may be sued if our diagnostic tests or services cause or are perceived to cause injury or are found to be otherwise unsuitable during manufacturing, marketing or sale. Any such product liability claim may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. In addition, we may be subject to claims against us even if the apparent injury is due to the actions of others or the pre-existing health of the patient. For example, medical personnel, care partners and patients collect samples for our diagnostic tests. If these medical personnel, care partners or patients are not properly trained, are negligent or use our diagnostic tests incorrectly, the capabilities of such tests may be diminished or the patient may suffer critical injury. We may also be subject to claims that are caused by the activities of our suppliers, such as those who provide us with components and sub-assemblies for our diagnostic tests. +If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or halt the marketing and sale of our diagnostic tests and services. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in: +• +decreased demand for our diagnostic tests and services; +• +harm to our reputation; +• +initiation of investigations by regulators; +• +costs to defend the related litigation; +• +a diversion of management’s time and our resources; +• +substantial monetary awards to trial participants or patients; +• +product recalls, withdrawals, or labeling, marketing, or promotional restrictions; +• +loss of revenue; +• +adverse impact on the market price of our common stock; and +46 +• +exhaustion of any available insurance and our capital resources. +We believe we have adequate product liability insurance, but it may not prove to be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain or obtain insurance at a reasonable cost or in an amount adequate to satisfy any liability that may arise. Our insurance policy contains various exclusions, and we may be subject to a product liability claim for which we have no coverage. The potential inability to obtain sufficient product liability insurance at an acceptable cost to protect against product liability claims could prevent or inhibit the marketing and sale of our diagnostic tests and services. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts, which would have a material adverse effect on our business, financial condition and results of operations. In addition, any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, harm our reputation in the industry, significantly increase our expenses and reduce product sales. +We face competition from many sources, including larger companies, and we may be unable to compete successfully. +There are a number of lung cancer diagnostic solutions companies in the United States, Europe and Asia. Notable competitors in the United States include Veracyte, Inc., Guardant Health, Inc., and Foundation Medicine, Inc. These competitors all provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories and other medical facilities. Many of these organizations are significantly larger with greater financial and personnel resources than us, and enjoy significantly greater market share and have greater resources than we do. As a consequence, they may be able to spend more on product development, marketing, sales and other product initiatives than we can. Some of our competitors have: +• +substantially greater name recognition; +• +broader, deeper, or longer-term relations with healthcare professionals, customers, and third-party payers; +• +more established distribution networks; +• +additional lines of diagnostic tests and the ability to offer rebates or bundle them to offer greater discounts or other incentives to gain a competitive advantage; +• +greater experience in conducting research and development, manufacturing, clinical trials, marketing and obtaining regulatory clearance or approval or certification for diagnostic tests; and +• +greater financial and human resources for product development, sales and marketing and patent litigation. +Our continued success depends on our ability to: +• +further penetrate the lung disease diagnostic solutions market and increase utilization of our diagnostic tests; +• +maintain and widen our technology lead over competitors by continuing to innovate and deliver new product enhancements on a continuous basis; and +• +cost-effectively manufacture our diagnostic tests and their component parts as well as drive down the cost of service. +In addition, competitors with greater financial resources than ours could acquire other companies to gain enhanced name recognition and market share, as well as new technologies or diagnostic tests that could effectively compete with our existing diagnostic tests, which may cause our revenue to decline and would harm our business. +Our competitors also compete with us in recruiting and retaining qualified scientific, management and commercial personnel, as well as in acquiring technologies complementary to, or necessary for, development of our diagnostic tests. Because of the complex and technical nature of diagnostic testing and the dynamic market in which we compete, any failure to attract and retain a sufficient number of qualified employees could materially harm our ability to develop and commercialize our diagnostic tests, which would have a material adverse effect on our business, financial condition and results of operations. +As we attain greater commercial success, our competitors are likely to develop diagnostic tests that offer features and functionality similar to our diagnostic tests that are currently on the market. Improvements in existing competitive diagnostic tests or the introduction of new competitive diagnostic tests may make it more difficult for us to compete for sales, particularly if those competitive diagnostic tests demonstrate better reliability, convenience or effectiveness or are offered at lower prices. +Performance issues, service interruptions or price increases by our shipping carriers and warehousing providers could adversely affect our business and harm our reputation and ability to provide our services on a timely basis. +Expedited, reliable shipping and delivery services and secure warehousing are essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point transport of our diagnostic tests to our customers and for tracking of these shipments, and from time to time require warehousing for our diagnostic tests, sample collection kits and supplies. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any systems, it would be costly to replace such systems in +47 +a timely manner and such occurrences may damage our reputation and lead to decreased demand for our diagnostic tests and increased cost and expense to our business. In addition, any significant increase in shipping or warehousing rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters, civil unrest and disturbances or other service interruptions affecting delivery or warehousing services we use would adversely affect our ability to process orders for our diagnostic tests on a timely basis. +We rely on commercial courier delivery services to transport samples to our laboratory facility in a timely and cost-efficient manner and if these delivery services are disrupted, our business will be harmed. Our business depends on our ability to quickly and reliably deliver test results to our customers. Blood samples are typically received within days from the United States and outside the United States for analysis at our Boulder, Colorado and De Soto, Kansas facilities. Disruptions in delivery service, whether due to labor disruptions, bad weather, natural disaster, civil unrest or disturbances, terrorist acts or threats or for other reasons could adversely affect specimen integrity and our ability to process samples in a timely manner and to service our customers, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected. +Cost-containment efforts of our customers, purchasing groups and governmental purchasing organizations could have a material adverse effect on our sales and profitability. +In an effort to reduce costs, many hospitals in the United States have become members of GPOs and Integrated Delivery Networks (IDNs). GPOs and IDNs negotiate pricing arrangements with medical device companies and distributors on behalf of their members, which may include hospitals and other providers. GPOs and IDNs typically award contracts on a category-by-category basis through a competitive bidding process. Bids are generally solicited from multiple providers with the intention of driving down pricing or reducing the number of vendors. Due to the highly competitive nature of the GPO and IDN contracting processes, we may not be able to obtain new, or maintain existing, contract positions with major GPOs and IDNs. Furthermore, the increasing leverage of organized buying groups may reduce market prices for our diagnostic tests, thereby reducing our revenue and margins. +While having a contract with a GPO or IDN for a given product category can facilitate sales to members of that GPO or IDN, such contract positions can offer no assurance that any level of sales will be achieved, as sales are typically made pursuant to individual purchase orders. Even when a provider is the sole contracted supplier of a GPO or IDN for a certain product category, members of the GPO or IDN are generally free to purchase from other suppliers. Furthermore, GPO and IDN contracts typically are terminable without cause by the GPO or IDN upon 60 to 90 days’ notice. Accordingly, the members of such groups may choose to purchase alternative diagnostic tests due to the price or quality offered by other companies, which could result in a decline in our revenue. +Pricing and reimbursement of medical devices is not harmonized at European level, but is the exclusive competence of the EU Member States. In Europe, pricing and reimbursement decisions are generally made by regional or centralized bodies based on an assessment of the efficacy and clinical effectiveness of the devices or broad device types or procedures. There is a general trend for EU Member States to adopt cost containment measures to control public spend on medical devices. Due to the competitive nature of product offers and prices, we may not be able to obtain new, or maintain existing, contract positions with the EU Member States. +Litigation and other legal proceedings may adversely affect our business. +From time to time, we may become involved in legal proceedings relating to patent and other intellectual property matters, product liability claims, employee claims, tort or contract claims, federal regulatory investigations, securities class action and other legal proceedings or investigations, which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. Litigation is inherently unpredictable and can result in excessive or unanticipated verdicts and/or injunctive relief that affect how we operate our business. We could incur judgments or enter into settlements of claims for monetary damages or for agreements to change the way we operate our business, or both. There may be an increase in the scope of these matters or there may be additional lawsuits, claims, proceedings or investigations in the future, which could have a material adverse effect on our business, financial condition and results of operations. Adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our diagnostic tests and services, even if the regulatory or legal action is unfounded or not material to our operations. +We maintain product and professional liability insurance, but this insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims. Any product liability or professional liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. +General economic and financial market conditions may exacerbate our business risks. +Global macroeconomic conditions and the world’s financial markets remain susceptible to significant stresses, resulting in reductions in available credit and government spending, economic downturn or stagnation, foreign currency fluctuations and volatility in the valuations of securities generally. As a result of uncertainties with respect to financial institutions and the global credit markets and other macroeconomic challenges such as inflationary pressures currently or potentially affecting the economy of the United States and other parts of the world, customers and distributors may experience serious cash flow problems and other financial difficulties, +48 +decreasing demand for our products. Our customers and distributors may respond to such economic pressures by reducing or deferring their capital spending or reducing staff. +In addition, events in the United States or foreign markets, such as the United Kingdom’s exit from the European Union, the worldwide effects from the spread of COVID-19, Russia's invasion of Ukraine and political and social unrest in various countries around the world, can impact the global economy and capital markets. Additionally, if our customers and distributors are not successful in generating sufficient revenue or are precluded from securing financing, their businesses will suffer, which may materially and adversely affect our business, financial condition and results of operations. +We may not realize the benefits or costs of our Co-Development and Collaboration Agreement with AVEO Oncology. +In 2014, we entered into a Co-Development and Collaboration Agreement with AVEO Oncology (formerly known as AVEO Pharmaceuticals, Inc.) (AVEO) whereby the two parties agreed to various terms and conditions necessary for the co-development of AVEO’s compound ficlatuzumab (the Collaboration Agreement). +We were granted a limited legal interest in ficlatuzumab and may not have the right to control the development and exploitation of ficlatuzumab. As consideration for the grant, we agreed to cover the first $15.0 million of ficlatuzumab’s clinical development costs, with both parties then sharing all costs equally after the cap was reached. +In October of 2016, the Collaboration Agreement was amended to eliminate the requirement that we cover all of the initial costs. Under the amended terms, we agreed to allow AVEO to recapture its cost that it otherwise would not have been responsible for said recapture to occur out of any royalties or revenues eventually derived from the Collaboration Agreement. As part of the Collaboration Agreement, unless we or AVEO exercise our right to opt-out of co-development, we equally share in any income received from licensing rights to ficlatuzumab to any third parties. In September 2020, we exercised our opt-out right for the payment of half of the development and regulatory costs for ficlatuzumab. This opt-out was effective as of December 2, 2020 with remaining obligations estimated to be $0.1 million. Following the effective date, we will be entitled to a 10% royalty of net sales of ficlatuzumab and 25% of license income generated from the licensing of ficlatuzumab. Ficlatuzumab is currently being evaluated in squamous cell carcinoma of the head and neck (SCCHN), metastatic pancreatic ductal cancer (PDAC), and acute myeloid leukemia (AML). +Our relationship with AVEO may require us to incur non-recurring and other charges, increase our near and long-term expenditures, or disrupt our management and business. We cannot be certain that, following the realization of this relationship, we will achieve the revenue or specific net income that justifies our entry into it. Any termination of this relationship, or delays in entering into new strategic partnership agreements with AVEO, could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +We are exposed to significant future payments and other obligations associated with our acquisitions of Integrated Diagnostics and Oncimmune, U.S.A., and may not realize the advantages we expect from these acquisitions. +In 2018, we purchased select assets and liabilities from Integrated Diagnostics, Inc. and IND Funding, LLC (collectively, the Seller or Indi) which included the CLIA lab in Seattle, Washington, and all rights to the Nodify XL2 test and intellectual property rights related to that test. The purchase was made for total consideration of $27.6 million, consisting of $8.0 million (10,649,604 shares) of our Series G Preferred Stock and contingent consideration with an initial fair market value of $19.6 million. +The acquisition of Indi included a contingent consideration arrangement that requires additional consideration to be paid by us to the Seller based on the milestone of the attainment of a three consecutive month gross margin target of $2 million within a seven-year period. Under the terms of the original agreement, when the gross margin target was achieved, the Company was required to issue 2,520,108 shares of common stock. For the six months following the achievement of the milestone, Indi had the option to require the Company to redeem the common shares for $37.0 million in cash over eight equal installments. If Indi elected not to exercise this option, we had 12 months to repurchase the common stock in two equal quarterly cash installments totaling $37 million. +In August 2021, the Company entered into an amendment to the original agreement in which all parties agreed to forgo the issuance of common stock and agreed that the Company would instead make six quarterly installments of approximately $4.6 million each, which began in January 2022, and final payment of approximately $9.3 million in July 2023 for a total of $37.0 million (together, the Milestone Payments). The aggregate amount of payments owed by the Company under this amendment is the same as if Indi had exercised the put right or the Company had exercised the call right provided for in the original agreement. +On April 7, 2022, the Company entered into Amendment No. 3 to the Indi APA in which the parties agreed to restructure the Milestone Payments whereby the Company will make five quarterly installments of $2.0 million each beginning in April 2022, three quarterly installments of $3.0 million beginning in July 2023, one installment of $5.0 million in April 2024, and one installment of approximately $8.4 million in July 2024. In addition, the Company agreed to an exit fee of approximately $6.1 million in October 2024. Interest shall accrue on the difference between the payment schedule as agreed in the August 2021 amendment and the April 2022 amended payment schedule, at an aggregate per annum rate equal to 10%, with such interest to be payable quarterly on the following installment payment date. Our ability to make these payments is subject to ongoing compliance under the Perceptive Term Loan and commencing January 1, 2024, consent from Perceptive. +49 +In addition, on October 31, 2019 we completed an acquisition of United Kingdom-based Oncimmune, Ltd.’s (Oncimmune) United States operations including its CLIA lab in De Soto, Kansas and its incidental pulmonary nodule (IPN) malignancy test, then marketed in the United States as the EarlyCDT®-Lung. We renamed the test and relaunched the test on February 28, 2020 as the Nodify CDT test and the De Soto, Kansas lab is the sole United States provider of the Nodify CDT test. +As part of the acquisition, we and Oncimmune entered into several agreements to govern the relationship between the parties and to allow us to provide the Nodify CDT test. The overarching umbrella Purchase and Commercialization Agreement (PCA) defines the general relationship between the parties. Included under the PCA was (a) an APA whereby we acquired all of the United States assets associated with the De Soto, Kansas clinical laboratory, as well as the trademarks and patent application associated with the test; (b) an intellectual property license granting us the rights necessary under Oncimmune’s background intellectual property rights to perform the Nodify CDT test; (c) a supply agreement for supplying us with the necessary materials and reagents needed to run the Nodify CDT test; and (d) a development agreement where Oncimmune agrees to assist us in further developing the Nodify CDT test. +We agreed to a revenue share payment of 8% of recognized revenue for non-screening tests up to an annual minimum volume and 5% thereafter, with an escalating minimum through the first four years of sales. Royalty expenses were $0.9 million and $0.7 million for the years ended December 31, 2022 and 2021, respectively. +Our acquisitions may require us to incur non-recurring and other charges, increase our near and long-term expenditures, or disrupt our management and business. We cannot be certain that, following the realization of these acquisitions, we will achieve the revenue or specific net income that justifies our entry into them. This could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +We are highly dependent on our senior management team and key personnel, and our business could be harmed if we are unable to attract and retain personnel necessary for our success. +We are highly dependent on our senior management and other key personnel. Our success will depend on our ability to retain senior management and to attract and retain qualified personnel in the future, including sales and marketing professionals, scientists, clinical specialists, and other highly skilled personnel and to integrate current and additional personnel in all departments. The loss of members of our senior management, sales and marketing professionals, scientists, clinical and regulatory specialists could result in delays in product development and harm our business. If we are not successful in attracting and retaining highly qualified personnel, it would have a material adverse effect on our business, financial condition and results of operations. +Our research and development programs and laboratory operations depend on our ability to attract and retain highly skilled scientists and technicians. +We may not be able to attract or retain qualified scientists and technicians in the future due to the competition for qualified personnel among life science businesses, particularly near our headquarters in Boulder, Colorado and our laboratory facility in De Soto, Kansas. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. We may have difficulties locating, recruiting, or retaining qualified salespeople. Recruiting and retention difficulties can limit our ability to support our research and development and sales programs. To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have issued and may continue to issue equity awards that vest over time. The value to employees of equity awards that vest over time may be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Our employment arrangements with our employees provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We also do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. +Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture and our business may be harmed. +We believe that our culture has been and will continue to be a critical contributor to our success. We expect to continue to hire aggressively as we expand, and we believe our corporate culture has been crucial in our success and our ability to attract highly skilled personnel. If we do not continue to develop our corporate culture or maintain and preserve our core values as we grow and evolve, we may be unable to foster the innovation, curiosity, creativity, focus on execution, teamwork and the facilitation of critical knowledge transfer and knowledge sharing we believe we need to support our growth. Moreover, liquidity available to our employee securityholders could lead to disparities of wealth among our employees, which could adversely impact relations among employees and our culture in general. Our anticipated headcount growth may result in a change to our corporate culture, which could harm our business. +Our ability to utilize our net operating loss carryforwards and research and development credit may be limited. +In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code) a corporation that undergoes an ownership change, generally defined as a greater than 50% change by value in its equity ownership by certain shareholders over a three-year period, is subject to limitations on its ability to utilize its pre-change net operating losses (NOLs) and its research and development +50 +credit carryforwards to offset future taxable income. The applicable rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning, directly or indirectly, 5% or more of the stock of a company, as well as changes in ownership arising from new issuances of stock by the company. We believe that our NOLs are currently not subject to limitation under these rules. However, if we undergo an ownership change now or in the future, our ability to utilize NOLs and research and development credit carryforwards could be limited by Sections 382 and 383 of the Code. Future changes in stock ownership may be beyond our control. In addition, our ability to deduct net interest expense may be limited if we have insufficient taxable income for the year during which the interest is incurred, and any carryovers of such disallowed interest would be subject to the limitation rules similar to those applicable to NOLs and other attributes. For these reasons, in the event we experience a change of control, we may not be able to utilize a material portion of the NOLs, research and development credit carryforwards or disallowed interest expense carryovers, even if we attain profitability. +The terms of the Perceptive Term Loan Facility require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business. +On November 16, 2022 (Closing Date), we entered into a credit agreement and guaranty (the Credit Agreement) with Perceptive Credit Holdings IV, LP as the lender and administrative agent (the Lender) that provides for a senior secured delayed draw term loan facility with Perceptive Advisors LLC (Perceptive), in an aggregate principal amount of up to $50.0 million (the Perceptive Term Loan Facility) to refinance long-term debt. The initial funding of the Perceptive Term Loan Facility was subject to a capital raise of at least $30.0 million in gross proceeds from an equity offering of our common stock, and provides for an “interest-only” period during the term of the loan with principal due at the maturity date, which will be November 21, 2027. +The Perceptive Term Loan Facility may be prepaid at any time, subject to a prepayment premium equal to 2% to 10% of the aggregate outstanding principal amount being prepaid, depending on the date of prepayment. The Perceptive Term Loan Facility contains customary affirmative and negative covenants for a loan, requires us to comply with a minimum cash requirement covenant, and has a trailing twelve month net revenue requirement. Failure to comply with the covenants and loan requirements may result in an event of default. +The Perceptive Term Loan Facility contains certain covenants limiting our ability to, among other things, engage in certain corporate changes, make certain restricted payments, repay other certain indebtedness or enter into, amend or terminate any other agreements that have the impact of restricting the our ability to make loan repayments. +The Credit Agreement also contains certain customary events of default, the occurrence of which could result in the declaration that all outstanding principal and interest under the Perceptive Term Loan Facility is immediately due and payable in whole or in part, which could have a material adverse effect on our business, financial condition, and results of operations. +We will need to raise additional capital to fund our existing operations, develop our platform, commercialize new diagnostic tests or expand our operations. +We will need to raise additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, including to: +• +increase our sales and marketing efforts to drive market adoption of and address competitive developments; +• +fund development and marketing efforts of our diagnostic tests or any other future diagnostic tests; +• +expand our technologies into other types of cancer management and lung disease detection diagnostic tests; +• +acquire, license, or invest in technologies; +• +acquire or invest in complementary businesses or assets; and +• +finance capital expenditures and general and administrative expenses. +Our present and future funding requirements will depend on many factors, including: +• +our ability to achieve revenue growth; +• +our rate of progress in establishing payer coverage and reimbursement arrangements with domestic and international commercial third-party payers and government payers; +• +the cost of expanding our laboratory operations and offerings, including our sales and marketing efforts; +• +our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of and reimbursement for our diagnostic tests; +51 +• +our rate of progress in, and cost of research and development activities associated with, diagnostic tests in research and early development; +• +the effect of competing technological and market developments; +• +costs related to international expansion; and +• +the potential cost of and delays in product development as a result of any regulatory oversight applicable to our diagnostic tests. +The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, our stockholders could experience dilution. Any preferred equity securities issued also could provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our platform technologies or diagnostic tests, pay a portion of our royalties, or grant licenses on terms that are not favorable to us. +Risks Related to our Governmental Regulation +The insurance coverage and reimbursement status of newly approved diagnostic tests, particularly in a new category of diagnostics and therapeutics, is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for current or future diagnostic tests could limit our ability, and that of our collaborators, to fully commercialize our diagnostic tests and decrease our ability to generate revenue. +The availability and extent of reimbursement by governmental and private payers is essential for most patients to be able to afford the clinical diagnostic tests and cellular therapeutics that we and our collaborators currently or in the future plan to develop and sell. In addition, because our clinical diagnostics and diagnostic tests represent new approaches to the research, diagnosis, detection and treatment of diseases, we cannot accurately estimate how our diagnostic tests, and those jointly created with our collaborators, would be priced, whether reimbursement could be obtained or any potential revenue generated. Sales of our diagnostic tests will depend substantially, both domestically and internationally, on the extent to which the costs of our diagnostic tests are paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payers. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize some of our diagnostic tests or services. Even if coverage is provided, the available reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize an adequate return on our investment in any of our diagnostic tests or services. Changes in the reimbursement landscape may occur, which are outside of our control, and may impact the commercial viability of our diagnostic tests. +There is significant uncertainty related to the insurance coverage and reimbursement of newly launched, cleared, authorized or approved diagnostic tests. In the United States, many significant decisions about reimbursement for new diagnostics and medicines are typically made by the CMS, an agency within the HHS. CMS decides whether and to what extent a new diagnostic or medicine will be covered and reimbursed under Medicare, although it frequently delegates this authority to local Medicare Administrative Contractors (MACs). Private payers tend to follow Medicare to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for novel diagnostic tests such as ours. Additionally, reimbursement authorities or bodies in Europe may be more conservative than CMS. For example, a number of cancer drugs have been approved for reimbursement in the United States and have not been approved for reimbursement, or have been approved under restricted conditions, in certain European countries. +Outside the United States, the reimbursement process and timelines vary significantly. In Europe, pricing and reimbursement of medical devices is the exclusive competence of the European Union (EU) Member States. However, the European Commission is facilitating a voluntary corporation between the EU Member States on health technology assessments (HTA) which consists of a network of the EU Member States’ national authorities and bodies responsible for HTA and a joint action to support cooperation at scientific and technical level between the HTA bodies. We cannot be sure that such prices and reimbursement decisions will be acceptable to us or our collaborators. If the regulatory authorities in these foreign jurisdictions set prices or make reimbursement criteria that are not commercially attractive for us or our collaborators, our revenues and the potential profitability of our products in those countries would be negatively affected. An increasing number of countries are taking initiatives to control the healthcare budget by focusing cost-cutting efforts on medicinal products, and to a lesser extent, medical devices, provided under their state-run healthcare systems. These price control efforts have impacted all regions of the world, but have been most prominent in the EU. Additionally, some countries require approval of the sale price of a product before it can be marketed or mandatory discounts or profit caps may be applied. Further, after the sale price is approved, it remains subject to review during the product lifecycle. In many countries, the pricing review period begins after marketing or product licensing approval is granted or the CE mark is obtained. As a result, we or our collaborators might obtain marketing approval for a product or service in a particular country, but then may experience delays in the reimbursement approval or be subject to price regulations that would delay the commercial launch of our product or service, possibly for lengthy time periods, which could negatively impact the revenues we are able to generate from the sale of that product or service in that particular country. +52 +Moreover, increasing efforts by governmental and third-party payers, in the United States and abroad, to cap or reduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for newly cleared, authorized, certified or approved devices and medicines and, as a result, they may not cover or provide adequate payment for our clinical diagnostics to be sold by us or our collaborators. For example, in May 2018 the United States government released a “blueprint,” or plan, to reduce the cost of drugs. This blueprint contains certain measures that HHS has been working to implement, although it is possible that HHS’s regulatory priorities may change under the Biden administration. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, which are, in some cases, designed to encourage importation from other countries and bulk purchasing. +We expect to experience pricing pressures on our clinical diagnostics sold by us and our collaborators due to the trend toward value-based pricing and coverage, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs, surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new diagnostic tests. +Measures to reduce healthcare costs may hurt our business. +The majority of our customers are healthcare providers who depend upon reimbursement by government and commercial insurance payers for lung cancer diagnostic solutions services. With a majority of United States patients with lung cancer covered by Medicare, the Medicare reimbursement rate is an important factor in a customer’s decision to use our diagnostic tests and limits the prices we may charge for them. Commercial insurance payers may also exert downward pressure on payment rates for lung cancer treatment services. A reduction in reimbursement rates for lung cancer treatments may adversely affect our customers’ businesses and cause them to enact cost reduction measures that may include reducing the scope of their programs, thereby potentially reducing demand for our diagnostic tests. +Healthcare reform measures could hinder or prevent the commercial success of our diagnostic tests. +In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system in ways that may harm our future revenues and profitability and the demand for our diagnostic tests. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. Current and future legislative proposals to further reform healthcare or reduce healthcare costs may limit coverage of or lower reimbursement for the procedures associated with the use of our diagnostic tests. The effect of any healthcare reform initiative implemented in the future could impact our revenue from the sale of our diagnostic tests. For example, the ACA, contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. +There have been judicial challenges to certain aspects of the ACA, as well as efforts by the Trump administration and Congress to repeal, replace or alter the implementation of certain aspects of the ACA. For example, as part of the TCJA, Congress eliminated the tax penalty, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance. The Further Consolidated Appropriations Act of 2020, Pub. L. No. 116-94, signed into law December 20, 2019, fully repealed the ACA’s “Cadillac Tax” on certain high-cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share (repeal effective in 2021), and the medical device excise tax on non-exempt medical devices. +In addition, other legislative changes have been proposed and adopted since the ACA was enacted. For example, the Budget Control Act of 2011, among other things, included reductions to CMS payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030 unless additional Congressional action is taken, with the exception of a temporary suspension of the 2% cut in Medicare payments from May 1, 2020 through March 31, 2022, and a reduction of the cut to 1% from April 1, 2022 through June 30, 2022. Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced CMS payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover Medicare overpayments to providers from three to five years. +The Biden administration and Congress may continue to pursue significant changes to the current healthcare laws, and the Biden administration has indicated its intent to strengthen the ACA and focus on reducing the cost of healthcare. We face uncertainties that might result from modifications or repeal of any of the provisions of the ACA, including as a result of current and future executive orders and legislative actions. The impact of those changes on us and potential effect on the medical device industry as a whole is currently unknown. Any changes to the ACA are likely to have an impact on our results of operations, and may negatively affect our business, financial condition and results of operations. We cannot predict what other healthcare programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the United States on our business, financial condition and results of operations. +53 +The continuing efforts of the government, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce costs of healthcare may harm: +• +our ability to set a price that we believe is fair for our diagnostic tests; +• +our ability to generate revenue and achieve or maintain profitability; and +• +the availability of capital. +The ACA substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacts our industry. Future changes in healthcare policy could increase our costs and subject us to additional regulatory requirements that may interrupt commercialization of our current and future solutions. Future changes in healthcare policy could also decrease our revenue and impact sales of and reimbursement for our current and future diagnostic tests. +We must comply with anti-corruption, anti-bribery, anti-money laundering and similar laws. +We are subject to the FCPA, which generally prohibits companies in the United States from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business and requires companies to maintain accurate books and records and internal controls. We are also subject to requirements under the United States Treasury Department’s Office of Foreign Assets Control, United States domestic bribery laws and other anti-corruption, anti-bribery and anti-money laundering laws. While we have policies and procedures in place designed to promote compliance with such laws, our employees or other agents may nonetheless engage in prohibited conduct under these laws for which we or our executives might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have an adverse effect on our business, financial condition and results of operations. +Furthermore, international customers may currently order our diagnostic tests, either directly from us or through a potential joint venture, and we are subject to the FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non-United States government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent distributors to sell our diagnostic tests internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents and we could be held responsible for their actions. Other United States companies in the medical device and biopharmaceutical field have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including laws promulgated by OECD countries in which we operate, such as Israel. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees and could result in a material adverse effect on our business, prospects, financial condition and results of operations. We could also suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures. +We must comply with healthcare fraud and abuse laws. +Various federal and state laws, as well as the laws of foreign countries, prohibit payments to induce the referral, purchase, order or use of healthcare products or services and require medical device companies to limit prevent, and/or monitor, and report certain payments to third-party payers, health care professionals, and other individuals. These healthcare fraud and abuse, anti-kickback, public reporting and aggregate spend laws affect our sales, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with lung cancer treatment providers, hospitals, physicians or other potential purchasers or users, including patients, of medical devices and services. They also impose additional administrative and compliance burdens on us. In particular, these laws influence, among other things, how we structure our sales offerings, including discount practices, customer support, education and training programs and physician consulting and other service arrangements. These laws prohibit certain marketing initiatives that are commonplace in other industries. If we were to offer or pay inappropriate inducements for the purchase, order or use of our diagnostic tests or our services, or our arrangements are perceived as inappropriate inducements, we could be subject to claims under various healthcare fraud and abuse laws. +Restrictions under applicable United States federal and state healthcare laws and regulations include the following: +• +the federal Anti-Kickback Statute, a criminal law, prohibits, among other things, persons and entities from knowingly and willfully offering, paying, soliciting or receiving any remuneration, directly or indirectly, in cash or in kind, to induce or reward purchasing, leasing, ordering, or arranging for, referring, or recommending the purchase, lease, order of any good or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid; +54 +• +the Eliminating Kickbacks in Recovery Act, which prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program; +• +the Beneficiary Inducement Statute, which prohibits any person, organization, or entity from giving anything of value to a federal health care program beneficiary that is likely to induce or influence the beneficiary’s choice of provider, practitioner, or supplier for covered services; +• +the federal civil False Claims Act, which may be enforced through civil whistleblower or qui tam actions and is often used to enforce the federal Anti-Kickback Statute and other healthcare laws and regulations, imposes civil penalties and potential exclusion from federal healthcare programs, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or for making a false record or statement material to an obligation to pay the federal government or for knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the federal government; +• +federal criminal statutes created by HIPAA impose criminal liability for, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program, including private insurance plans, or, in any matter involving a healthcare benefit program, for knowingly and willfully making materially false, fictitious, or fraudulent statements in connection with the delivery of or payment for health care benefits; and +• +analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers, including private insurers. +Other federal and state laws, as well as the laws of foreign countries, generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payments to government or commercial payers that are false or fraudulent, or for items or services that were not provided as claimed. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of product candidates and medical devices from government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations. Moreover, any investigation into our practices could cause adverse publicity and require a costly and time-consuming response. If any physicians or other healthcare providers or entities with whom we expect to do business are found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Manufacturers can also be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by providing inaccurate billing or coding information to customers, by providing improper financial inducements, or through certain other activities. We attempt to ensure that any billing and coding information we provide for our diagnostic tests emphasizes the need for physicians and other providers to make independent judgments, use accurate and appropriate billing and coding that complies with all applicable payer policies, and document the medical need for their patients as appropriate. Nevertheless, the government may not regard any billing errors that may be made by our customers as inadvertent and may examine our role in providing information to our customers, physicians and patients concerning the benefits and potential coverage of more frequent therapy. +FDA regulation of our industry generally or our tests specifically could be disruptive to our business. +Our operations are subject to extensive federal, state, local and foreign laws and regulations, including FDA laws and regulations, all of which are subject to change. These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. We believe that we are in material compliance with all statutory and regulatory requirements applicable to us, but there is a risk that one or more government agencies could take a contrary position, or that a private party could file suit under the qui tam provisions of the federal False Claims Act or a similar state law. Such occurrences, regardless of their outcome, could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations, and other private third-party payers. +The FDA has recently increased its attention to marketing of pharmacogenetic tests. For example, in late 2018, the FDA issued a safety communication regarding genetic laboratory tests with claims to predict a patient’s response to specific medications that have not been reviewed by the FDA and may not be supported by clinical evidence. Among other tests, the FDA notice cited genetic tests that claim results can be used to help physicians identify which antidepressant medication would have increased effectiveness or side effects compared to other antidepressant medications. As explained by the FDA in its update to this safety communication, the FDA sent notices to several firms marketing such pharmacogenetic tests where the FDA believes the relationship between genetic variations and the +55 +medication’s effects has not been established, including a warning letter sent to a laboratory, in part, for failing to obtain premarket review of its test. +If the FDA were to determine that our tests are not within the enforcement discretion policy for LDTs for any reason, or if FDA issues new rules, policies, or guidance, due to new legislation or on its own accord, our tests may become subject to FDA requirements, including pre-market review. If this were to happen, it may impact our marketing practices relating to the relevant tests, which in turn may have an adverse impact on our business, financial condition and results of operations. +The SARS-CoV-2 tests we perform are currently the subject of EUAs, which permit the use of unapproved medical products or unapproved uses of medical products to be used in an emergency to diagnose, treat, or prevent serious or life-threatening diseases or conditions when there are no adequate, approved, and available alternatives, as provided under section 564 of the FDCA. EUAs are temporary authorizations that are revoked at the end of the public health emergency, when there is an adequate, approved, or available alternative, or when there are performance or safety concerns. These EUAs also set out conditions for laboratories who are authorized to perform the particular test. Because the EUA declaration under Section 564 of the FDCA is distinct from the declaration under Section 319 of the PHS Act, an EUA may remain in effect beyond the duration of the Section 319 declaration. +The EUA for Bio-Rad’s SARS-CoV-2 ddPCR test provides several conditions for authorized laboratories, including that the test result reports will include Fact Sheets that are authorized as part of the EUA, deviations from the authorized procedures, including specimen types, are not permitted, notification of public health authorities of intent to run the test prior to initiating testing, collection and reporting of performance data to the FDA, including false positives, false negatives, and significant deviations from the established performance characteristics, and appropriate training and protective equipment for laboratory staff. This EUA also states that authorized laboratories must maintain records associated with the EUA and be made available to the FDA for inspection upon request. Printed materials, advertising, and promotion related to use of the test must be consistent with the authorized labeling and Fact Sheets, as well as other terms set forth in the EUA and any applicable requirements under the FDCA and its implementing regulations, and conspicuously bear the following statements: +• +This test has not been FDA cleared or approved; +• +This test has been authorized by the FDA under an EUA for use by authorized laboratories; +• +This test has been authorized only for the detection of nucleic acid from SARS-CoV-2, not for any other viruses or pathogens; and +• +This test is only authorized for the duration of the declaration that circumstances exist justifying the authorization of emergency use of in vitro diagnostics for detection and/or diagnosis of COVID-19 under Section 564(b)(1) of the Act, 21 U.S.C. § 360bbb-3(b)(1), unless the authorization is terminated or revoked sooner. +Other statements that appear in advertising and promotional materials must not represent or suggest that this test is safe or effective for the detection of SARS-CoV-2. +The EUA for Bio-Rad’s serological test for the antibodies associated with SARS-CoV-2, also sets out several conditions for authorized laboratories that mirror the conditions for the PCR test described above, except that the printed materials, advertising, and promotion of the test must conspicuously bear the following statements: +• +This test has not been FDA cleared or approved; +• +This test has been authorized by the FDA under an EUA for use by authorized laboratories; +• +This test has been authorized only for the detection of total antibodies, including IgM/IgG/IgA, against SARS-CoV-2, not for any other viruses or pathogens; and +• +This test is only authorized for the duration of the declaration that circumstances exist justifying the authorization of emergency use of in vitro diagnostics for detection and/or diagnosis of COVID-19 under Section 564(b)(1) of the Act, 21 U.S.C. § 360bbb-3(b)(1), unless the authorization is terminated or revoked sooner. +Failure to comply with federal, state and foreign laboratory licensing requirements and the applicable requirements of the FDA or any other regulatory authority, could cause us to lose the ability to perform our tests, experience disruptions to our business, or become subject to administrative or judicial sanctions. +The diagnostic testing industry is subject to extensive laws and regulations, many of which have not been interpreted by the courts, including the application of the FDA’s EUA authority. As noted above, the EUAs for the COVID-19 tests that are part of our Biodesix WorkSafe testing program set out certain conditions for authorized laboratories using the tests, which have not received premarket clearance, approval, or a De Novo authorization from the FDA. If we fail to meet these conditions, the FDA may take enforcement action, such as issuing a warning letter, seeking an injunction, seizure, fines, or criminal penalties. Moreover, if we or others fail to meet applicable conditions, the FDA may revoke the EUAs for the COVID-19 tests that are part of our Biodesix WorkSafe testing program. Laboratory tests that have already received an EUA to detect the COVID-19 virus were “unaffected” by the announcement. Tests without +56 +FDA clearance, approval, or authorization would not be considered covered countermeasures under the Public Readiness and Emergency Preparedness Act (PREP Act), which authorizes HHS to provide limited liability immunity protection to certain individuals and entities against a claim of loss under federal and state law “caused by, arising out of, relating to, or resulting from” the manufacture, distribution, administration, or use of a covered medical countermeasure, except for claims involving willful misconduct. Consequently, any violations of applicable laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees and could result in a material adverse effect on our business, prospects, financial condition and results of operations. +We are also subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA requires virtually all laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification is also a prerequisite to be eligible to bill state and federal health care programs, as well as many private third-party payers, for laboratory testing services. As a condition of CLIA certification, each of our laboratories is subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by CMS, a CMS agent (typically a state agency), or, if the laboratory holds a CLIA certificate of accreditation, a CMS-approved accreditation organization. +Sanctions for failure to comply with CLIA requirements, including proficiency testing violations, may include suspension, revocation, or limitation of a laboratory’s CLIA certificate, which is necessary to conduct our business, as well as the imposition of significant fines or criminal penalties. +Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing licensure, or our failure to renew a CLIA certificate, a state or foreign license, or accreditation, could have a material adverse effect on our business. If the CLIA certificate of any one of our laboratories is revoked, CMS could seek revocation of the CLIA certificates of our other laboratories based on their common ownership or operation, even though they are separately certified. +In addition, we are subject to state laws and regulations governing laboratory licensure. Some states have enacted state licensure laws that are more stringent than CLIA. Although we have obtained licenses from states where we believe we are required to be licensed, we may become aware of other states that require out-of-state laboratories to obtain licensure in order to accept specimens from the state, and it is possible that other states currently have such requirements or will have such requirements in the future. +We may also be subject to regulation in foreign jurisdictions as we seek to expand international utilization of our tests or such jurisdictions adopt new licensure requirements, which may require review of our tests in order to offer them or may have other limitations that may limit our ability to make our tests available outside of the United States. Complying with licensure requirements in new jurisdictions may be expensive, time-consuming and subject us to significant and unanticipated delays. Changes in state or foreign licensure laws that affect our ability to offer and provide diagnostic services across state or foreign country lines could materially and adversely affect our business. In addition, state and foreign requirements for laboratory certification may be costly or difficult to meet and could affect our ability to receive specimens from certain states or foreign countries. +Failure to comply with applicable clinical laboratory licensure requirements may result in a range of enforcement actions, including suspension, limitation or revocation of our CLIA certificate and/or state licenses, imposition of a directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing clinical laboratory licensure or our failure to renew our CLIA certificate, a state or foreign license or accreditation, could have a material adverse effect on our business, financial condition and results of operations. Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so. +Our Boulder, Colorado and De Soto, Kansas laboratories are both CAP-accredited clinical laboratories regulated by CMS pursuant to CLIA. We also have a current CLIA certificate for each facility. To maintain these certificates, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our laboratory from time to time. Furthermore, our diagnostic tests are categorized as LDTs and are not currently subject to FDA regulation, although certain components provided by third parties and used to create and/or administer the test may be. LDTs are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. Failure to adhere to any new FDA regulation would result in fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal penalties. +Our current line of diagnostic tests is covered under CLIA and CMS, however, changes in the way that the FDA regulates tests performed by laboratories like ours could result in delay or additional expense in offering our tests and tests that we may develop in the future. In addition, our COVID testing program and select partnerships we may enter may cause us to be subject to additional FDA requirements. +The laws and regulations governing the marketing of diagnostic products are evolving, extremely complex and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, including in vitro diagnostics and, therefore, potentially our clinical laboratory tests. +57 +Pursuant to the FDCA and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion, and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. Although the FDA has asserted that it has authority to regulate the development and use of LDTs, such as our and many other laboratories’ tests, as medical devices, it has generally exercised enforcement discretion and is currently not otherwise regulating most tests developed and performed within a single high complexity CLIA-certified laboratory. Pursuant to this enforcement discretion policy, FDA does not require laboratories that furnish LDTs to comply with the agency’s requirements for medical devices (e.g., establishment registration, device listing, quality systems regulations, premarket clearance or premarket approval, and post-market controls). In recent years, however, the FDA publicly announced its intention to regulate certain LDTs and has set forth various proposals for a phased-in risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. +FDA’s policies to date have been articulated through guidance documents, compliance manuals, website statements, and other informal issuances. The FDA could, at any time, engage in notice-and-comment rulemaking, or Congress could take action to amend the law to change the current regulatory framework for in vitro diagnostics and LDTs to require premarket review of LDTs, which could result in delay or additional expense in offering our tests and tests that we may develop in the future. +We believe that our tests, as utilized in our clinical laboratory, are and would be considered LDTs and that as a result, the FDA does not require that we obtain regulatory clearances or approvals for our LDTs or their components pursuant to the FDA’s current policies and guidance. Although we believe that our tests and test components are either exempt from FDA medical device regulations or are subject to an enforcement discretion policy, it is possible that the FDA would not agree with our determinations or that the FDA will change its regulations and policies such that our products become regulated as medical devices. +In contrast with our LDTs, the FDA has regulatory jurisdiction over the three FDA EUA-authorized COVID-19 tests which we offer as part of our Biodesix WorkSafe testing program. +Our operations, therefore, are or may become subject to extensive regulation by the FDA in the United States. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +test design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage, and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales, and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export. +The premarket submission process for medical devices can be expensive, lengthy and unpredictable. The FDA can delay, limit, or deny clearance or approval of a device for many reasons, including: +• +our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or conformity assessment body that the diagnostic tests are safe or effective for their proposed intended uses; +• +the disagreement of the FDA with the design or implementation of our clinical trials or the interpretation of data from clinical trials; +• +serious and unexpected adverse device effects experienced by participants in our clinical trials; +• +the data from our clinical trials may be insufficient to support clearance or approval, where required; +• +our inability to demonstrate that the clinical and other benefits of the device outweigh the risks; +• +the manufacturing process or facilities we use may not meet applicable requirements; and +• +the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance or approval. +58 +The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by any such agency, which may include any of the following sanctions: +• +adverse publicity, warning letters, untitled letters, it has come to our attention letters, fines, injunctions, consent decrees and civil penalties; +• +repair, replacement, refunds, recall or seizure of our diagnostic tests; +• +operating restrictions, partial suspension, or total shutdown of production; +• +denial of our requests for regulatory clearance or premarket approval of new diagnostic tests or services, new intended uses, or modifications to existing diagnostic tests or services; +• +withdrawal of regulatory clearance or premarket approvals that have already been granted; or +• +criminal prosecution. +As discussed above, we believe that our current line of diagnostic tests and their components are LDTs, which are subject to state licensing requirements and federal regulation by CMS under CLIA, although our COVID-19 testing program and select partnerships we may enter may cause us to be subject to additional FDA regulations discussed above. +While we believe that we are currently in material compliance with applicable laws and regulations, it is possible that the FDA, or other regulatory agencies, would not agree with our determinations. If our products became become subject to premarket submission and other FDA requirements, we would need to comply with the applicable regulations or face significant civil and criminal penalties. In addition, IVDs and CDx tests are widely considered to be Class III devices, and it is possible that in the future, we may develop tests that fall into this category. CDx tests in particular may require further administrative procedures in the PMA process. Exposure to these additional regulatory requirements would also affect our business, financial condition and results of operations. +Our future success depends on our ability to develop, receive regulatory clearance or approval or certification for, and introduce new diagnostic tests or enhancements to existing diagnostic tests that will be accepted by the market in a timely manner. There is no guarantee that the FDA will grant 510(k) clearance, De Novo authorization, or PMA approval of our future diagnostic tests and failure to obtain necessary clearances or approvals for our future diagnostic tests would adversely affect our ability to grow our business. +It is important to our business that we build a pipeline of diagnostic test offerings that address limitations of current lung disease diagnostic tests. As such, our success will depend in part on our ability to develop and introduce new diagnostic tests. However, we may not be able to successfully develop and obtain regulatory clearance or approval or certification for enhancements to our existing diagnostic tests, or new diagnostic tests for any number of reasons, including due to the cost associated with certain regulatory approval requirements, or these diagnostic tests may not be accepted by physicians or users. +The success of any new diagnostic test or enhancement to an existing diagnostic test will depend on a number of factors, including our ability to, among others: +• +identify and anticipate physician and patient needs properly; +• +develop and introduce new diagnostic tests or enhancements to our existing diagnostic tests in a timely manner; +• +avoid infringing upon, misappropriating, or violating the intellectual property rights of third parties; +• +demonstrate, if required, the safety and efficacy of new diagnostic tests with data from clinical studies; +• +obtain the necessary regulatory clearances or approvals or certifications for new diagnostic tests or enhancements to existing diagnostic tests; +• +comply fully with FDA and foreign regulations on marketing of new diagnostic tests or modified diagnostic tests; and +• +provide adequate training to potential users of our diagnostic tests. +If we do not develop new diagnostic tests or enhancements to our existing diagnostic tests in time to meet market demand or if there is insufficient demand for these diagnostic tests or enhancements, or if our competitors introduce new diagnostic tests with functionalities that are superior to ours, our results of operations will suffer. +Some of our future diagnostic tests may require FDA clearance of a 510(k) submission. Other diagnostic tests may require the approval of a PMA. In addition, some of our future diagnostic tests may require clinical trials to support regulatory approval and we may not successfully complete these clinical trials. The FDA may not approve or clear these diagnostic tests for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance, De Novo authorization, or premarket approval of new diagnostic tests. Failure to receive clearance or approval for our new diagnostic tests would have an adverse effect on our ability to expand our business. +59 +Modifications to our marketed tests may require new 510(k) clearances, De Novo authorizations, or PMA approvals, or may require us to cease marketing or recall the modified tests until clearances or approvals are obtained. +Modifications to our diagnostic tests may require new regulatory approvals or clearances, including 510(k) clearances, De Novo authorizations, or premarket approvals, or require us to recall or cease marketing the modified systems until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new submission is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We have made modifications to our diagnostic tests in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our diagnostic tests as modified, which could require us to redesign our diagnostic tests and harm our operating results. In these circumstances, we may be subject to significant enforcement actions. +Where we determine that modifications to our diagnostic tests require a new premarket submission, we may not be able to obtain the additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. Obtaining clearances and approvals can be a time-consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced diagnostic tests in a timely manner, which in turn would harm our future growth. +If we or our suppliers fail to comply with ongoing FDA or other domestic and foreign regulatory authority or conformity assessment body requirements, or if we experience unanticipated problems with our diagnostic tests, they could be subject to restrictions or withdrawal from the market. +Any medical device that we manufacture, including those for which we obtain regulatory clearance or approval or certification, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such diagnostic test, will be subject to continued regulatory review, oversight, and periodic inspections by the FDA and other domestic and foreign regulatory bodies or conformity assessment bodies. In particular, we and our suppliers may be required to comply with FDA’s QSR (QSR codified at 21 C.F.R. § 820) for medical devices and ISO regulations for the manufacture of our diagnostic tests and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any diagnostic test for which we obtain clearance or approval. Regulatory bodies, such as the FDA, and conformity assessment bodies enforce the QSR and other regulations through periodic inspections and audits. The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies or conformity assessment bodies, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, one or more of the following enforcement actions: +• +untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; +• +unanticipated expenditures to address or defend such actions; +• +customer notifications for repair, replacement, or refunds; +• +recall, detention, or seizure of our diagnostic tests; +• +operating restrictions or partial suspension or total shutdown of production; +• +refusing or delaying our requests for 510(k) clearance, De Novo authorization, or premarket approval of new diagnostic tests or modified versions of current diagnostic tests; +• +operating restrictions; +• +withdrawing 510(k) clearances, De Novo authorization, or PMA approvals that have already been granted; +• +revocation of EUAs that have been authorized previously; +• +refusal to grant export approval for our diagnostic tests; and +• +criminal prosecution. +If any of these actions were to occur it would harm our reputation and cause our diagnostic test sales and profitability to suffer and may prevent us from generating revenue. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements which could result in our failure to produce our diagnostic tests on a timely basis and in the required quantities, if at all. +In addition, we are required to conduct surveillance to monitor the safety or effectiveness of our diagnostic tests, and we must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our diagnostic tests. Later discovery of previously unknown problems with our diagnostic tests, including unanticipated adverse events or adverse events of +60 +unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such diagnostic tests or manufacturing processes, withdrawal of the diagnostic tests from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties which would adversely affect our business, operating results and prospects. +Our diagnostic tests and services may in the future be subject to product recalls that could harm our reputation, business and financial results. +Medical devices can experience performance problems in the field that require review and possible corrective action. The occurrence of component failures, manufacturing errors, software errors, design defects or labeling inadequacies affecting a medical device could lead to a government-mandated or voluntary recall by the device manufacturer, in particular when such deficiencies may endanger health. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our diagnostic tests and services in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. Product recalls may divert management attention and financial resources, expose us to product liability or other claims, harm our reputation with customers and adversely impact our business, financial condition and results of operations. Other jurisdictions have similar recall requirements. +Legislative or regulatory reforms may make it more difficult and costly for us to obtain regulatory clearance or approval or certification of any future diagnostic tests and to manufacture, market and distribute our diagnostic tests after clearance or approval is obtained. +From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. For example, the Verifying Accurate, Leading-edge IVCT Development (VALID) Act recently introduced in Congress would codify into law the term “in vitro clinical test” in order to create a new medical product category separate from medical devices that would include products currently regulated as in vitro diagnostics as well as LDTs. +In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our diagnostic tests. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of planned or future diagnostic tests. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. +Any change in the laws or regulations that govern the clearance and approval processes relating to our current, planned and future diagnostic tests could make it more difficult and costly to obtain clearance or approval for new diagnostic tests or to produce, market and distribute existing diagnostic tests. Significant delays in receiving clearance or approval or the failure to receive clearance or approval for any new diagnostic tests would have an adverse effect on our ability to expand our business. +Clinical trials may be necessary to support future product submissions to FDA. These clinical trials are expensive and will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new diagnostic tests and will adversely affect our business, operating results and prospects. +Initiating and completing clinical trials necessary to support any future PMA applications, De Novo requests, and additional safety and efficacy data beyond that typically required for a 510(k) clearance, for our possible future product candidates, will be time consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical trials may not have favorable results in later clinical trials. +Conducting successful clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our diagnostic tests or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. +Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required and we may not adequately develop such protocols to support clearance and approval. Further, the FDA may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our diagnostic tests or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, the FDA may not consider our data +61 +adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects. +If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval or certification for or commercialize our diagnostic tests and services. +We may not have the ability to independently conduct our pre-clinical and clinical trials for our future diagnostic tests and services and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct such trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our diagnostic tests and services on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control. +Our use, disclosure, and other processing of personally identifiable information, including health information, is subject to HIPAA and other federal, state, and foreign privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our business, operating results and prospects. +We maintain and process, and our third-party vendors, collaborators, contractors and consultants maintain and process on our behalf, a large quantity of sensitive information, including confidential business, personal and patient health information in connection with our clinical studies and our employees, and are subject to data privacy and protection laws and regulations that apply to the collection, transmission, storage and use of personally identifying information, which among other things, impose certain requirements relating to the privacy, security and transmission of personal information. Failure by us or our third-party vendors, collaborators, contractors and consultants to comply with any of these laws and regulations could result in notification obligations or enforcement actions against us, which could result in fines, imprisonment of company officials and public censure, claims for damages by affected individuals, damage to our reputation and loss of goodwill, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects. These laws, rules and regulations evolve frequently and their scope may continually change, through new legislation, amendments to existing legislation and changes in enforcement, and may be inconsistent from one jurisdiction to another. The interpretation and application of consumer, health-related and data protection laws, especially with respect to genetic samples and data, in the United States, the EU and elsewhere, are often uncertain, contradictory and in flux. As a result, implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. +In the United States, numerous federal and state laws and regulations, including federal health information privacy laws, state data breach notification laws, state health information privacy laws and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), that govern the collection, use, disclosure and protection of health-related and other personal information could apply to our operations or the operations of our collaborators. +Domestic laws in this area are complex and developing rapidly. Many state legislatures have adopted legislation relating to privacy, data security and data breaches. Laws in all 50 states require businesses to provide notice to customers whose personally identifiable information has been disclosed as a result of a data breach. The laws are not consistent, and compliance in the event of a widespread data breach is costly. States are also frequently amending existing laws, requiring attention to frequently changing regulatory requirements. For example, California recently enacted the CCPA, which became effective on January 1, 2020. The CCPA, among other things, requires new disclosures to California consumers and affords such consumers new abilities to access and delete their personal information, opt-out of certain sales of personal information and receive detailed information about how their personal information is used. The CCPA provides for fines of up to $7,500 per violation, as well as a private right of action for data breaches that is expected to increase the frequency of data breach litigation. While the CCPA has already been amended multiple times, it is unclear how this legislation will be further modified or how it will be interpreted. Interpretations of the CCPA may continue to evolve with regulatory guidance and the CCPA continue to be amended, including through a ballot initiative, adopted by voters in November 2020, known as the California Privacy Rights Act, or CPRA. The CPRA imposes additional data protection obligations on companies doing business in California, including additional consumer rights, including regarding certain uses of sensitive data. It also creates a new California data protection agency - the California Privacy Protection Agency - specifically tasked to enforce the law, which may likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. The effects of this legislation potentially are far-reaching, however, and may require us to modify our data processing practices and policies and incur substantial compliance-related costs and expenses. The CCPA and other changes in state and federal laws or regulations relating to privacy, data protection and information security, particularly any new or modified laws or regulations that require enhanced protection of certain types of data or new obligations with regard to data retention, transfer or disclosure, could increase the cost of providing our offerings, require significant changes to our operations or even prevent us from providing certain offerings in jurisdictions in which we currently operate and in which we may operate in the future. +62 +Because of the breadth of these data protection laws and the narrowness of their exceptions and safe harbors, it is possible that our business or data protection policies could be subject to challenge under one or more of such laws. The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of heightened regulatory focus on data privacy and security issues. Although we endeavor to comply with our published policies and documentation and ensure their compliance with current laws, rules and regulations, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policy and other documentation that provide promises and assurances about privacy and security can subject us to potential state and federal action in the United States if they are found to be deceptive, unfair, or misrepresentative of our actual practices. Any failure by us or other parties with whom we do business to comply with this documentation or with federal, state, local or international regulations could result in proceedings against us by governmental entities, private parties or others. In many jurisdictions, enforcement actions and consequences for noncompliance are rising. +If our operations are found to be in violation of any of the data protection laws described above or any other laws that apply to us, we may be subject to penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from participation in government healthcare programs, injunctions, private qui tam actions brought by individual whistleblowers in the name of the government, class action litigation and the curtailment or restructuring of our operations, as well as additional reporting obligations and oversight if we become subject to a corrective action plan or other agreement to resolve allegations of non-compliance with these laws, any of which could adversely affect our ability to operate our business and our results of operations. +In addition, numerous state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability, integrity, and other processing of PHI and PII. These laws and regulations include HIPAA. HIPAA establishes a set of national privacy and security standards for the protection of protected health information (as defined in HIPAA, PHI) by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities (CE), and the business associates (BA) with whom such covered entities contract for services. We are a CE under HIPAA when we are conducting our clinical trials. We are a CE with regard to our observational studies and clinical trials, and also a BA under HIPAA for certain other business activities, and we execute BA agreements with our clients. +HIPAA requires CEs and BAs, such as us, to develop and maintain policies with respect to the protection of, use and disclosure of electronic PHI, including the adoption of administrative, physical and technical safeguards to protect such information, and certain notification requirements in the event of a data breach. +HIPAA imposes mandatory penalties for certain violations. Penalties for violations of HIPAA and its implementing regulations start at $119 per violation and are subject to a cap of $1,785,651 for violations of the same standard in a single calendar year. However, a single breach incident can result in violations of multiple standards. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. +In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA CEs and BAs. With regard to BAs, those audits assess the business associate’s compliance with the HIPAA Privacy and Security Standards. Such audits are conducted randomly and after an entity experiences a breach affecting more than 500 individuals’ data. Undergoing an audit can be costly, can result in fines or onerous obligations, and can damage a BAs reputation. +In addition to HIPAA, numerous other federal, state, and foreign laws and regulations protect the confidentiality, privacy, availability, integrity and security of PHI and other types of PII. Some of these laws and regulations may be preempted by HIPAA with respect to PHI, or may exclude PHI from their scope but impose obligations with regard to PII that is not PHI, and in some cases, can impose additional obligations with regard to PHI. These laws and regulations are often uncertain, contradictory, and subject to changing or differing interpretations, and we expect new laws, rules and regulations regarding privacy, data protection, and information security to be proposed and enacted in the future. HHS is also proposing amendments to the HIPAA Privacy Rule to modernize certain data sharing provisions and enhance patient access to their information. This complex, dynamic legal landscape regarding privacy, data protection, and information security creates significant compliance issues for us and our clients and potentially exposes us to additional expense, adverse publicity and liability. While we have implemented data privacy and security measures in an effort to comply with applicable laws and regulations relating to privacy and data protection, some PHI and other PII or confidential information is transmitted to us by third parties, who may not implement adequate security and privacy measures, but it is possible that laws, rules and regulations relating to privacy, data protection, or information security may be interpreted and applied in a manner that is inconsistent with our practices or those of third parties who transmit PHI and other PII or confidential information to us. If we or these third parties are found to have violated such laws, rules or regulations, it could result in government-imposed fines, orders requiring that we or these third parties change our or their practices, or criminal charges, which could adversely affect our business. +Complying with these various laws and regulations could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business. +63 +We may eventually operate in a number of countries outside of the United States whose laws, including data privacy laws, may in some cases be more stringent than the requirements in the United States. For example, EU and UK data privacy laws have specific requirements relating to cross-border transfers of personal data to certain jurisdictions, including to the United States, have strict requirements relating to personal data collection, use or sharing, and have more stringent requirements relating to organizations’ privacy programs and provide stronger individual rights. Moreover, we may also be subject to evolving international privacy and data security regulations which could result in greater compliance costs and in turn lead to penalties, where such compliance programs are not implemented correctly. +Certain of our processing activities are subject to the EU General Data Protection Regulation and the UK General Data Protection Regulation (collectively, the “GDPR”) – including, those involving pseudonymised / key-coded data - as the GDPR applies extra-territorially. The GDPR imposes strict requirements on controllers and processors processing personal data, including, for example, requirements to: (i) identify a legal basis for the processing of personal data, (ii) provide robust disclosures to individuals, (iii) respond to requests from individuals to exercise their data subject rights, (iv) provide personal data breach notifications within 72 hours after discovering the breach, (v) limit the collection and retention of personal data, (vi) impose specific contractual obligations on processors engaged to process personal data on the instructions of the controller, and (vii) apply enhanced protections to health data and other special categories of personal data. +The EU GDPR also provides that EU Member States may make their own further laws and regulations limiting the processing of personal data, including genetic, biometric or health data, which could limit our ability to use and share such personal data and cause our costs to increase and harm our financial condition. +Failure to comply with the requirements of the GDPR may result in fines of up to €20 million (£17.5 million in the case of the UK GDPR) or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. GDPR compliance may require us to put in place additional mechanisms, which may result in compliance costs and other substantial expenditures. This may be onerous and adversely affect our business, financial condition, results of operations and the profitability of our platform of diagnostic tests. Failure to comply with the GDPR and other countries’ privacy or data security-related laws, rules or regulations could result in material penalties imposed by regulators, affect our compliance with contracts entered into with our collaborators and other third-party payers, and have an adverse effect on our business and financial condition. Currently, the GDPR is only applicable to us as a processor, but as we continue to expand into the European market, the GDPR will have direct applicability to us as a controller. +The GDPR also prohibits the transfer of personal data from the EEA/UK to a country outside of the EEA/UK (e.g., the United States) unless made to a country deemed to have adequate data privacy laws by the European Commission (or UK Government in case of the UK GDPR) or a data transfer mechanism has been put in place. Until recently, one such data transfer mechanism was the EU-US Privacy Shield. However, in July 2020 the Court of Justice of the European Union (CJEU) declared the Privacy Shield to be invalid. Following an executive order on trans-Atlantic data flows issued by President Biden in October 2022, the European Commission in December 2022 announced that it had initiated the process of drafting a new adequacy decision based on a modified data transfer framework that would replace the Privacy Shield. Though adoption of a new adequacy decision may have the effect of making data transfers to the United States easier, it is widely expected that the updated transfer framework and the adequacy decision will also be reviewed by the CJEU. The CJEU also upheld the validity of standard contractual clauses (SCCs) as a legal mechanism to transfer personal data but companies relying on SCCs will need to carry out a transfer privacy impact assessment, which among other things, assesses laws governing access to personal data in the recipient country and considers whether supplementary measures that provide privacy protections additional to those provided under SCCs will need to be implemented to ensure an essentially equivalent level of data protection to that afforded in the EEA. In turn, the findings of the CJEU will have significant implications for cross-border data flows and may lead to increased transaction, compliance, and technological costs to support international data transfers. +Organizations operating in Canada and covered by the Personal Information Protection and Electronic Documents Act (PIPEDA), or equivalent Canadian provincial laws, must obtain an individual’s consent when they collect, use or disclose that individual’s personal information. Individuals have the right to access and challenge the accuracy of their personal information held by an organization, and personal information may only be used for the purposes for which it was collected. If an organization intends to use personal information for another purpose, it must again obtain that individual’s consent. +We regularly monitor, defend against and respond to attacks to our networks and other information security incidents. Despite our information security efforts, our facilities, systems, and data, as well as those of our third-party service providers, may be vulnerable to privacy and information security incidents such as data breaches, viruses or other malicious code, coordinated attacks, data loss, phishing attacks, ransomware, denial of service attacks, or other security or IT incidents caused by threat actors, technological vulnerabilities or human error. If we, or any of our vendors that support our IT or have access to our data, including any third-party vendors that collect, process and store personal data on our behalf, fail to comply with laws requiring the protection of personal information, or fail to safeguard and defend personal information or other critical data assets or IT systems, we may be subject to regulatory enforcement and fines as well as private civil actions. We may be required to expend significant resources in the response, containment, mitigation of cybersecurity incidents as well as in defense against claims that our information security was unreasonable or otherwise violated applicable laws or contractual obligations. +64 +Our employees, collaborators, independent contractors and consultants may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements. +We are exposed to the risk that our employees, collaborators, independent contractors and consultants may engage in fraudulent or other illegal activity with respect to our business. Misconduct by these employees could include intentional, reckless and/or negligent conduct or unauthorized activity that violates: +• +FDA regulations, including those laws requiring the reporting of true, complete, and accurate information to the FDA authorities; +• +federal and state healthcare fraud and abuse laws and regulations; or +• +laws that require the true, complete and accurate reporting of financial information or data. +In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Misconduct by these parties could also involve individually identifiable information, including, without limitation, the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. Any incidents or any other conduct that leads to an employee, contractor, or other agent, or our company, receiving an FDA debarment or exclusion by the HHS Office of Inspector General (OIG) could result in penalties, a loss of business from third parties, and severe reputational harm. +We have adopted a Code of Business Conduct and Ethics and compliance policies to govern and deter such behaviors, but it is not always possible to identify and deter misconduct by our employees and other agents, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, treble damages, monetary fines, disgorgement, imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and curtailment of our operations. +Clinical development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results. +Our ongoing research and development and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. We are currently conducting pre-and post-market clinical studies of some of our tests. In the future we may conduct clinical trials to support approval of new diagnostic tests and services, or new indications. Clinical studies may need to be conducted in compliance with FDA regulations or the FDA may take enforcement action. The data collected from these clinical studies may ultimately be used to support marketing authorization for these diagnostic tests and services. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims or that the FDA or foreign authorities and conformity assessment bodies will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our tests are safe and effective for the proposed indicated uses, which could cause us to abandon development of our tests and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, may impact our ability to commercialize our tests and generate revenues. +Many of the factors that may cause or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval or certification. The commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial. +We may find it necessary to engage contract research organizations to perform data collection and analysis and other aspects of our clinical trials, which might increase the cost and complexity of our trials. We may also depend on clinical investigators, medical institutions, and contract research organizations to perform the trials, and would control only certain aspects of their activities. Nevertheless, we would be responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on these third parties would not relieve us of our regulatory responsibilities. We and our third-party contractors are required to comply with good clinical practices (GCPs) which are regulations and guidelines enforced by the FDA, and comparable regulations enforced by foreign regulatory authorities for products in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any third-party contractor fails to comply with applicable GCPs, the clinical data generated in clinical trials may be deemed unreliable and the +65 +FDA or comparable foreign regulatory authorities or conformity assessment bodies may require us to perform additional clinical trials before clearing or approving our marketing applications. A failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory clearance or approval or certification process. In addition, if these parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality, completeness or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical trials may have to be extended, delayed or terminated. +Many of these factors could be beyond our control. We may not be able to undertake additional trials, repeat trials or enter into new arrangements with third parties without undue delays or considerable expenditures. If there are delays in testing or clearances or approvals as a result of the failure to perform by third parties, our research and development costs would increase and we may not be able to obtain regulatory clearance or approval or certification for our tests. In addition, we may not be able to establish or maintain relationships with these parties on favorable terms, if at all. Each of these outcomes would harm our ability to market our tests, or to achieve sustained profitability. +The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects. +We cannot be certain that the results of our future clinical trials will support our future product claims or that the FDA or comparable foreign regulatory authorities or conformity assessment bodies will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the future product’s profile. +Our billing, collections and claims processing activities are complex and time-consuming, and any delay in transmitting and collecting claims or failure to comply with applicable billing requirements, could have an adverse effect on our future revenue. +Billing for our tests is complex, time-consuming and expensive. Depending on the billing arrangement and applicable law, we bill various payers, such as government payers, insurance companies and patients, all of which may have different billing requirements. We may face increased risk in our collection efforts, including long collection cycles and the risk that we may never collect at all, either of which could adversely affect our business, financial condition and results of operations. Several factors make the billing process complex, including: +• +differences between the list price for our tests and the reimbursement rates of payers; +• +compliance with complex federal and state regulations related to billing government healthcare programs, including Medicare and Medicaid, to the extent our tests are covered by such programs; +• +differences in coverage among payers and the effect of patient co-payments or co-insurance; +• +differences in information and billing requirements among payers; +• +changes to codes and coding instructions governing our tests; +• +incorrect or missing billing information; and +• +the resources required to manage the billing and claims appeals process. +These billing complexities and the related uncertainty in obtaining payment for our tests could negatively affect our revenue and cash flow, our ability to achieve profitability and the consistency and comparability of our results of operations. In addition, if claims for our tests are not submitted to payers on a timely basis, or if we fail to comply with applicable billing requirements, it could have an adverse effect on our revenue and our business. +Third-party payers require us to identify the test for which we are seeking reimbursement using a Current Procedural Terminology (CPT) code. The CPT code set is maintained by the American Medical Association (AMA). In cases where there is not a specific CPT code to describe a test, such as with GeneStrat NGS, the test may be billed under an unlisted molecular pathology procedure code or through the use of a combination of single gene CPT codes, depending on the payer. The Protecting Access to Medicare Act of 2014 (PAMA) authorized the adoption of new, temporary billing codes and unique test identifiers for FDA-cleared or approved tests as well as advanced diagnostic laboratory tests. The AMA has created a new section of CPT codes, Proprietary Laboratory Analyses codes to facilitate implementation of this section of PAMA. In addition, CMS may assign unique level II Healthcare Common Procedure Coding System codes to tests that are not already described by a unique CPT code. VeriStrat, Nodify XL2, and Nodify CDT have test specific CPT codes, but the GeneStrat NGS test does not at this time. +In the instance where a code used does not describe a specific test, the insurance claim must be examined to determine what test was provided, whether the test was appropriate and medically necessary, and whether payment should be rendered, which may require a +66 +letter of medical necessity from the ordering physician. This process can result in a delay in processing the claim, a lower reimbursement amount or denial of the claim. As a result, obtaining approvals from third-party payers to cover our tests and establishing adequate reimbursement levels is an unpredictable, challenging, time-consuming and costly process and we may never be successful. +We and our third-party manufacturers and suppliers must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do, or interrupt our, business. +Our research and development activities and our third-party manufacturers’ and suppliers’ activities involve the generation, use, storage and disposal of hazardous materials. We work with materials, including chemicals, biological agents and compounds and samples that could be hazardous to human health and safety or the environment. Our operations also produce hazardous and biological waste products. Accordingly, we and our third-party manufacturers and suppliers are subject to federal, state, local and foreign environmental, health and safety laws and regulations, and permitting and licensing requirements, including those governing the generation, use, manufacture, storage, handling, transportation, release and disposal of, and exposure to, these materials, and worker health and safety. +We cannot eliminate the risk of contamination or injury resulting from such hazardous materials. We also cannot guarantee that the procedures utilized by our third-party manufacturers for handling and disposing of hazardous materials and wastes comply with all applicable environmental, health and safety laws and regulations. As a result, we may be held liable for any resulting damages, costs or liabilities, including cleanup costs and liabilities, which could be significant, or our commercialization, research and development efforts and business operations may be restricted or interrupted. +Environmental, health and safety laws and regulations are complex, change frequently and have tended to become more stringent. Compliance with such laws and regulations is expensive, and current or future environmental, health and safety laws and regulations may restrict our operations. If we do not comply with applicable environmental health and safety laws and regulations, and permitting and licensing requirements, we may be subject to fines, penalties, a suspension of our business or other sanctions. +Risks Related to our Intellectual Property +Our success may be impaired if we are unable to obtain, maintain and protect our intellectual property rights. +Our commercial success will depend in part on our ability to obtain and maintain patent and other intellectual property protection in the United States and other countries with respect to our diagnostic tests, products and services and technology. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, to protect our proprietary technology and prevent others from duplicating our suite of diagnostic tests and products. However, these means may afford only limited protection and may not: +• +prevent our competitors from duplicating our diagnostic tests and products, including our COVID-19 testing program and Nodify XL2, Nodify CDT, GeneStrat and VeriStrat tests; +• +prevent our competitors from gaining access to our proprietary information and technology, including the Diagnostic Cortex platform, tech platforms such as the DeepMALDI analysis and intellectual property covering technologies that allow us to develop “test algorithms”; or +• +allow us to gain or maintain a competitive advantage. +Any of our patents, including those we may license, may be challenged, invalidated, rendered unenforceable or circumvented. Consequently, we do not know whether any of our diagnostic tests, products and services will be protectable or remain protected by valid and enforceable patents. We may not prevail if our patents are challenged by competitors or other third parties. The United States federal courts or equivalent national courts or patent offices elsewhere may invalidate our patents, find them unenforceable, or narrow their scope. Furthermore, competitors may be able to design around our patents by developing similar or alternative technologies or products in a non-infringing manner, or obtain patent protection for more effective technologies, designs or methods, including for treating lung cancer. If these developments were to occur, our diagnostic tests and products may become less competitive and sales may decline. +We have filed numerous patent applications seeking protection of diagnostic tests and other inventions originating from our research and development. Our patent applications may not result in issued patents, and any patents that are issued may not provide meaningful protection against competitors or competitive technologies. Further, the examination process may require us to narrow the claims for our pending patent applications, which may limit the scope of patent protection that may be obtained if these applications issue. The scope of a patent may also be reinterpreted and significantly reduced after issuance. Even if patent applications we license or own currently or in the future issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with the protection or competitive advantages we are seeking. +Moreover, some of our owned and in-licensed patents and patent applications are, and may in the future be, co-owned with third parties. If we are unable to obtain or maintain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products and technology. In addition, we may need the cooperation of any such co-owners of our patents in +67 +order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects. +The patent position of biotechnology companies generally is highly uncertain, involves complex legal and factual questions, and has been the subject of much litigation in recent years. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the determination of patent rights with respect to pharmaceutical compounds and technologies commonly involves complex legal and factual questions, which has in recent years been the subject of much litigation. Various courts, including the United States Supreme Court have rendered decisions that affect the scope of patentability of certain inventions or discoveries relating to biotechnology. These decisions state, among other things, that a patent claim that recites an abstract idea, natural phenomenon, or law of nature (for example, the relationship between particular genetic variants and cancer) are not themselves patentable. Precisely what constitutes a law of nature or abstract idea is uncertain, and it is possible that certain aspects of our technology could be considered unpatentable under applicable law. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. Depending on decisions by the United States Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our and our licensors’ ability to obtain new patents or to enforce our existing owned or in-licensed patents and patents that we might obtain or in-license in the future. Additionally, our pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. The scope of patent protection outside of the United States is also uncertain. Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain, and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property rights or narrow the scope of our owned and licensed patents. +If we are unable to obtain and maintain patent protection for our technology, or if the scope of the patent protection obtained is not sufficient, our competitors could develop and commercialize diagnostic tests, products and services similar or superior to ours, and our competitive position may be adversely affected. It is also possible that we will fail to identify patentable aspects of inventions made in the course of our development and commercialization activities before it is too late to obtain patent protection on them. Therefore, we may miss potential opportunities to strengthen our patent position. In addition, the patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. +Additionally, while software and other of our proprietary works may be protected under copyright law, we have chosen not to register any copyrights in these works, and instead, primarily rely on protecting our software as a trade secret. In order to bring a copyright infringement lawsuit in the United States, the copyright must be registered. Accordingly, the remedies and damages available to us for unauthorized use of our copyrights may be limited. +If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed. +In addition to seeking patent protection for the patents underlying our diagnostic tests, products and services, we also rely upon unpatented trade secrets, know-how and continuing technological innovation to develop and maintain a competitive position. Trade secrets and know-how can be difficult to protect. We seek to protect such proprietary information, in part, through confidentiality agreements with our employees, collaborators, contractors, advisors, consultants and other third parties and invention assignment agreements with our employees. We also have agreements with some of our consultants that require them to assign to us any inventions created as a result of their working with us. The confidentiality agreements are designed to protect our proprietary information and, in the case of agreements or clauses containing invention assignment, to grant us ownership of technologies that are developed through a relationship with employees or third parties. +We cannot guarantee that we have entered into such agreements with each party that has or may have had access to our trade secrets or proprietary information. Additionally, despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to, or independently developed by, a competitor or other third party, our competitive position would be materially and adversely harmed. Furthermore, we expect these trade secrets, know-how and proprietary information to over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology and the movement of personnel from academic to industry scientific positions. Consequently, we may be unable to prevent our proprietary technology from being exploited in the United States and abroad, which could affect our ability to expand in domestic and international markets or require costly efforts to protect our technology. +68 +We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known, or be independently discovered by, competitors. To the extent that our employees, consultants, contractors or collaborators use intellectual property rights owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions, which could have a material adverse effect on our business, financial condition and results of operations. +We may be subject to claims that we or our employees have misappropriated the intellectual property rights of a third party, including trade secrets or know-how, or are in breach of non-competition or non-solicitation agreements with our competitors, and third parties may claim an ownership interest in intellectual property we regard as our own. +Many of our employees and consultants were previously employed at or engaged by universities or other medical device, diagnostic, biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees, consultants and contractors, may have executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees, consultants and independent contractors do not use the intellectual property rights, proprietary information, know-how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, used, infringed, misappropriated or otherwise violated the intellectual property rights or disclosed the alleged trade secrets or other proprietary information, of these former employers, competitors or other third parties, or to claims that we have improperly used or obtained such trade secrets. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Any litigation or the threat of litigation may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize potential diagnostic tests, products and services, which could harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management and other employees. +Additionally, we may be subject to claims from third parties challenging our ownership interest in intellectual property rights we regard as our own, based on claims that our employees or consultants have breached an obligation to assign inventions to another employer, to a former employer, or to another person or entity. Litigation may be necessary to defend against any other claims, and it may be necessary or we may desire to enter into a license to settle any such claim; however, there can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our diagnostic tests or products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. +An inability to incorporate technologies or features that are important or essential to our diagnostic tests or products could have a material adverse effect on our business, financial condition and results of operations, and may prevent us from selling our rights to our COVID-19 testing program, either of the Nodify XL2 and Nodify CDT tests, or the VeriStrat and GeneStrat tests. +In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property rights to execute agreements assigning such intellectual property rights to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property rights that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property rights. Such claims could have a material adverse effect on our business, financial condition, results of operations, and prospects. +Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future diagnostic tests, products and services. +Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. In 2011, the Leahy-Smith America Invents Act (Leahy-Smith Act) was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and also may affect patent litigation. These also include provisions that switched the United States from a first-to-invent system to a first-inventor-to-file system, allow third-party submission of prior art to the USPTO during patent prosecution and set forth additional procedures to attack the validity of a patent by the USPTO administered post grant proceedings, including post-grant review, inter partes review and derivation proceedings. Under a first-inventor-to-file system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor was the first to invent the claimed invention. The USPTO recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective in 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. The Leahy-Smith Act and its implementation could increase the +69 +uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition and results of operations. +In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the United States Supreme Court and the United States Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Recent United States Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents, once obtained. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by United States and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future. +If our trademarks and tradenames are not adequately protected, then we may not be able to build name recognition in our markets and our business may be adversely affected. +Our trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be violating or infringing on other marks. We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these trademarks or trade names, which we need to build name recognition among potential partners and customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement or dilution claims brought by owners of other trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. +We have not yet registered certain of our trademarks in all of our potential markets, although we have registered several connected to our diagnostic tests, products and services in the United States. If we apply to register these and trademarks in the United States and other countries, our applications may not be allowed for registration in a timely fashion or at all, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademark applications and registrations, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would. +Our efforts to enforce or protect our rights related to trademarks, trade secrets, domain names or other intellectual property rights may be ineffective, could result in substantial costs and diversion of resources and could adversely affect our business, financial condition and results of operations. +We may become involved in lawsuits to protect or enforce our patents, the patents of our licensors or other intellectual property rights, which could be expensive, time consuming and unsuccessful. +Competitors or other third parties may infringe, misappropriate or otherwise violate our patents, the patents of our licensors or other intellectual property rights, or we may be required to defend against claims of infringement, misappropriation or other violations. In addition, our patents also may become involved in inventorship, priority or validity disputes. To counter or defend against such claims can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke those parties to assert counterclaims against us alleging that we infringe their patents or other intellectual property. In any such proceeding, a court or other administrative body may decide that a patent or other intellectual property right owned by us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover such technology. Grounds for a validity challenge could include an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, written description, non-enablement or failure to claim patent-eligible subject matter. Grounds for an unenforceability assertion could include an allegation that someone connected with prosecution of the patent withheld information material to patentability from the USPTO, or made a misleading statement, during prosecution. Third parties also may raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include reexamination, post-grant review, inter partes review, interference proceedings, derivation proceedings and equivalent proceedings in foreign jurisdictions, including opposition proceedings. Such proceedings could result in the revocation or cancellation of or amendment to our patents in such a way that they no longer cover our diagnostic tests, products and services or prevent third parties from competing with our diagnostic tests, products and services. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which the patent examiner and we or our licensing partners were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we could lose at least part, and perhaps all, of the patent protection on our diagnostic tests, products and services. An adverse result in any litigation or other proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the +70 +substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. +Moreover, some of our owned and in-licensed patents and patent applications are, and may in the future be, co-owned with third parties. If we are unable to obtain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing diagnostic tests, products, services or technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations. +Even if resolved in our favor, litigation or other proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our management and other personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on our common stock price. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations. +Third parties may initiate legal proceedings alleging that we are infringing, misappropriating, or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business. +The intellectual property landscape in the field of precision oncology is in flux, and it may remain uncertain for the coming years. There may be significant intellectual property related litigation and proceedings relating to our owned and in-licensed, and other third party, intellectual property and proprietary rights in the future. As we move into new markets and applications for our diagnostic tests, products or services, incumbent participants in such markets may assert their patents and other intellectual property rights against us as a means of slowing our entry into such markets or as a means to extract substantial license and royalty payments from us. Our competitors and others may now and, in the future, have significantly larger and more mature patent portfolios than we currently have. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product or service revenue and against whom our own patents may provide little or no deterrence or protection. Therefore, our commercial success depends in part on our non-infringement of the patents or other intellectual property rights of third parties. +However, we may in the future be subject to claims that we, or other parties we have agreed to indemnify, infringe, misappropriate or otherwise violate patents or other intellectual property rights owned or controlled by third parties. Because patent applications are published sometime after filing, and because applications can take several years to issue, there may be additional currently pending third-party patent applications that are unknown to us, which may later result in issued patents. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. We may not have sufficient resources to bring these actions to a successful conclusion. +There is a substantial amount of litigation and other patent challenges, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology industry, including patent infringement lawsuits, interferences, oppositions and inter partes review proceedings before the USPTO, and corresponding foreign patent offices. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, including our competitors, exist in the fields in which we are developing diagnostic tests and in which we may develop future diagnostic tests, products and services. As the precision oncology industry expands and more patents are issued, the risk increases that our diagnostic tests may be subject to claims of infringement of the patent rights of third parties. Numerous significant intellectual property issues have been litigated, are being litigated and will likely continue to be litigated, between existing and new participants in our existing and targeted markets, and competitors have and may assert that our diagnostic tests or services infringe their intellectual property rights as part of a business strategy to impede our successful entry into or growth in those markets. +We could incur substantial costs and divert the attention of our management and technical personnel in defending against any of these claims. Parties making claims against us may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. +Because of the inevitable uncertainty in intellectual property litigation, we could lose a patent infringement or other action asserted against us regardless of our perception of the merits of the case. There is no assurance that a court would find in our favor on questions of infringement, validity, enforceability, or priority. A court of competent jurisdiction could hold that these third-party patents are valid, enforceable, and infringed, which could materially and adversely affect our ability to commercialize any product candidates we may develop and any other product candidates or technologies covered by the asserted third-party patents. In order to successfully challenge the validity of any such United States patent in federal court, we would need to overcome a presumption of validity. As this burden is a +71 +high one requiring us to present clear and convincing evidence as to the invalidity of any such United States patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such United States patent. +Parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell diagnostic tests, products or services, and could result in the award of substantial damages against us, including treble damages, attorney’s fees, costs, and expenses if we are found to have willfully infringed. In the event of a successful claim of infringement against us, we may be required to pay damages and ongoing royalties, which could be significant, and obtain one or more licenses from third parties, or be prohibited from selling certain diagnostic tests, products or services. We may not be able to obtain these licenses on acceptable or commercially reasonable terms, if at all, or these licenses may be non-exclusive, which could result in our competitors gaining access to the same intellectual property. In addition, we could encounter delays in diagnostic test introductions while we attempt to develop alternative diagnostic tests, products or services to avoid infringing third-party patents or intellectual property rights. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing diagnostic tests, products or services, and the prohibition of sale of any of our diagnostic tests, products or services could materially affect our business and our ability to gain market acceptance for our diagnostic tests, products and services. +Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. +In addition, our agreements with some of our customers, suppliers or other entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims, including the types of claims described above. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results or financial condition. +We may be subject to claims challenging the priority or inventorship of our patents and other intellectual property rights. +We or our licensors may be subject to claims that former employees, collaborators or other third parties have an interest in our owned or in-licensed patents, trade secrets or other intellectual property rights as an inventor or co-inventor. For example, we or our licensors may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or our or our licensors’ ownership of our owned or in-licensed patents, trade secrets or other intellectual property rights. If we or our licensors fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property rights that are important to our product candidates. +If we or our licensors are unsuccessful in any interference proceeding or other priority or inventorship dispute, we may be required to obtain and maintain licenses from third parties, including parties involved in any such interference proceedings or other priority or inventorship disputes. Such licenses may not be available on commercially reasonable terms or at all, or may be non-exclusive. If we are unable to obtain and maintain such licenses, we may need to cease the development, manufacture, and commercialization of one or more of our diagnostic tests, products or services. The loss of exclusivity or the narrowing of our owned and licensed patent claims could limit our ability to stop others from using or commercializing similar or identical technology and products. Any of the foregoing could result in a material adverse effect on our business, financial condition, results of operations, or prospects. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. +Obtaining and maintaining our patent protection depends on compliance with various required procedures, document submissions, fee payments and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. +Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States at several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees due to non-United States patent agencies. We are also dependent on our licensors to take the necessary action to comply with these requirements with respect to our licensed intellectual property rights. The USPTO and various non-US governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors may be able to enter the market without infringing our patents and this circumstance would have a material adverse effect on our business. +72 +Issued patents covering our diagnostic tests and any other or future diagnostic tests, products or services could be found invalid or unenforceable if challenged. +The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability and some of our patents or patent applications, including licensed patents, may be challenged, in courts or patent offices in the United States and abroad, in opposition, derivation, reexamination, inter partes review, post-grant review or interference. Additionally, if we and our licensing partners initiate or become involved in legal proceedings against a third party to enforce a patent covering one of our diagnostic tests, products, services or technologies, the defendant could counterclaim that the patent covering our diagnostic tests, products or services is invalid or unenforceable. In patent litigation in the United States, counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including patent eligible subject matter, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement during prosecution. In addition, the United States now awards patent priority to the first party to file a patent application, and others may submit patent claims covering our inventions prior to us. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our diagnostic tests or any diagnostic tests, products and services that we may develop. +A successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights, which could have a material adverse impact on our business. Furthermore, if the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the outcome, it could dissuade companies from collaborating with us to license, develop or commercialize current or future diagnostic tests, products or services. +We may not be aware of all third-party intellectual property rights potentially relating to our current or future diagnostic tests, products or services. +Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until approximately 18 months after filing or, in some cases, not until such patent applications issue as patents. We, or our current or future license partners or collaborators, might not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings, derivation proceedings or other post-grant proceedings declared by the USPTO. The outcome of such proceedings is uncertain, and other patent applications may have priority over our patent applications. Such proceedings could also result in substantial costs to us and divert our management’s attention and resources. +We rely on licenses from third parties in relation to certain diagnostic tests, products and services and if we lose these licenses then we may be subjected to future litigation. +We are a party to license agreements that grant us rights to use certain intellectual property rights, including patents and patent applications, typically in certain specified fields of use, in connection with our diagnostic tests, products and services. Some of those licensed rights could provide us with freedom to operate for aspects of our diagnostic tests, products and services. We may need to obtain additional licenses from others to advance our research, development and commercialization activities. +The in-licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to in-license or acquire third-party intellectual property rights that we may consider attractive or necessary. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. +Furthermore, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. In addition, we expect that competition for the in-licensing or acquisition of third-party intellectual property rights for product candidates that are attractive to us may increase in the future, which may mean fewer suitable opportunities for us as well as higher acquisition or licensing costs. We may be unable to in-license or acquire the third-party intellectual property rights for product candidates on terms that would allow us to make an appropriate return on our investment. If we are unable to successfully obtain rights to suitable product candidates, our business, financial condition, results of operations and prospects for growth could suffer. +Our existing license agreements impose, and we expect that our future license agreements will impose, various diligence, royalty payment, milestone payment, insurance and other obligations on us. If we fail to comply with these obligations or other obligations in our license agreements, our licensors may have the right to terminate these agreements, in which event we may not be able to develop and market any product or use any technology that is covered by these agreements. If our license agreements terminate, or we experience a reduction or elimination of licensed rights under these agreements, we may have to negotiate new or reinstated licenses with less +73 +favorable terms or we may not have sufficient intellectual property rights to operate our business. The occurrence of such events could materially harm our business. +Our success may depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for our licensed intellectual property rights. Our licensors may not successfully prosecute the patent applications we license. Even if patents issue in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents or may pursue such litigation less aggressively than we would. Without protection for the intellectual property rights we license, other companies might be able to offer substantially identical diagnostic tests for sale, which could adversely affect our competitive business position and harm our business prospects. +Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations and prospects. +Moreover, disputes may also arise between us and our current or future licensors regarding intellectual property rights subject to a license agreement, including those relating to: +• +the scope of rights granted under the license agreement and other interpretation-related issues; +• +whether, and the extent to which, our diagnostic tests, products, services, technology, and processes infringe on intellectual property rights of the licensor that is not subject to the licensing agreement; +• +whether our licensor or its licensor had the right to grant the license agreement; +• +whether third parties are entitled to compensation or equitable relief, such as an injunction, for our use of the intellectual property rights without their authorization; +• +our involvement in the prosecution of licensed patents and our licensors’ overall patent enforcement strategy; +• +the amounts of royalties, milestones, or other payments due under the license agreement; +• +our right to sublicense patent and other rights to third parties under collaborative development relationships; +• +our diligence obligations under the license agreement and what activities satisfy those diligence obligations; +• +the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property rights by our licensors and us and our collaborators; and +• +the priority of invention of patented technology. +If we do not prevail in such disputes, we may lose any or all of our rights under such license agreements. +In addition, the agreements under which we currently license intellectual property rights or technology from third parties are complex and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property rights or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Moreover, if disputes over intellectual property rights that we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, or are insufficient to provide us the necessary rights to use the intellectual property rights, we may be unable to successfully develop and commercialize any affected diagnostic tests, products or services, which could have a material adverse effect on our business, financial conditions, results of operations and prospects. +Absent the license agreements, we may infringe patents subject to those agreements, and if the license agreements are terminated, we may be subject to litigation by the licensor. Litigation could result in substantial costs to us and distract our management. If we do not prevail, we may be required to pay damages, including treble damages, attorneys’ fees, costs and expenses and royalties or be enjoined from selling our diagnostic tests, products or services, which could adversely affect our ability to offer diagnostic tests, products or services, our ability to continue operations and our financial condition. +Some intellectual property that we in-license may have been developed through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements and a preference for companies based in the United States. Compliance with such regulations may limit our exclusive rights, and limit our ability to contract with manufacturers that are not based in the United States. +Certain of the intellectual property that we license may have been developed through the use of United States government funding and therefore may be subject to certain federal regulations. As a result, the United States government may have certain rights to intellectual property embodied in our diagnostic tests, products and services pursuant to the Bayh-Dole Act of 1980 (Bayh-Dole Act). These United States government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the United States government has the right +74 +to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). To date, none of our commercialized products are subject to march-in rights. The United States government also has the right to take title to these inventions if we, or the applicable licensor, fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us or the applicable licensor to expend substantial resources. In addition, the United States government requires that any products of the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for United States manufacturers may limit our ability to contract with product manufacturers outside of the United States for products covered by such intellectual property. To the extent any of our current or future owned or licensed intellectual property is generated through the use of United States government funding, the provisions of the Bayh-Dole Act may similarly apply. Any failure by us to comply with federal regulations regarding intellectual property rights that were developed through the use of United States government funding could have a material adverse effect on our business, financial condition, results of operations, and prospects. +Patent terms may be inadequate to protect our competitive position on our diagnostic tests, products and services for an adequate amount of time. +Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest United States non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. +Even if patents covering our diagnostic tests, products and services are obtained, once the patent life has expired, we may be open to competition from competitive diagnostic tests, products and services. Given the amount of time required for the development, testing and regulatory review of potential new diagnostic tests, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing diagnostic tests, products or services similar or identical to ours. +We may not be able to protect our intellectual property rights throughout the world. +Third parties may attempt to commercialize competitive diagnostic tests, products or services in foreign countries where we do not have any patents or patent applications and/or where legal recourse may be limited. This may have a significant commercial impact on our foreign business operations. +Filing, prosecuting and defending patents on our diagnostic tests, products and services in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing diagnostic tests or products made using our inventions in and into the United States or other jurisdictions. Competitors may use our diagnostic tests, products, services and technologies in jurisdictions where we have not obtained patent protection to develop their own diagnostic tests and, further, may export otherwise infringing diagnostic tests or products to territories where we have patent protection but enforcement is not as strong as that in the United States. These diagnostic tests and products may compete with our diagnostic tests, products or services and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. +Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing diagnostic tests, products and services in violation of our intellectual property rights generally. Proceedings to enforce our intellectual property rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license. +Many countries, including India, China, and certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our current or future licensors are forced to grant a license to third parties with respect to any +75 +patents relevant to our business, our competitive position may be impaired, and our business, financial condition and results of operations may be adversely affected. +Intellectual property rights do not necessarily address all potential threats. +The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example: +• +others may be able to make diagnostic tests or products that are similar to our Nodify XL2, Nodify CDT, GeneStrat or VeriStrat tests or the COVID-19 tests that we use in our COVID-19 testing program or utilize similar technology that is not covered by the claims of our patents or that incorporates certain technology in our Nodify XL2, Nodify CDT, GeneStrat or VeriStrat tests or such COVID-19 tests that is in the public domain; +• +we, or our current or future licensors or collaborators, might not have been the first to make the inventions covered by the applicable issued patent or pending patent application that we own or license now or may own or license in the future; +• +we, or our current or future licensors or collaborators, might not have been the first to file patent applications covering certain of our or their inventions; +• +others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights; +• +it is possible that our current or future pending patent applications will not lead to issued patents; +• +issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties; +• +our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive diagnostic tests, products and services for sale in our major commercial markets; +• +we may not develop additional proprietary technologies that are patentable; +• +the patents of others may harm our business; and +• +we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property rights. +Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. +General Risk Factors +We expect that the price of our common stock will fluctuate substantially and you may not be able to sell your shares at or above the price you paid for them. +The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including: +• +volume and customer mix for our COVID-19, Nodify XL2, Nodify CDT, GeneStrat ddPCR, GeneStrat NGS, and VeriStrat testing; +• +the introduction of new diagnostic tests or enhancements to such tests by us or others in our industry; +• +disputes or other developments with respect to our or others’ intellectual property rights; +• +our ability to develop, obtain regulatory clearance or approval or certification for, and market new and enhanced diagnostic tests on a timely basis; +• +product liability claims or other litigation; +• +quarterly variations in our results of operations or those of others in our industry; +• +media exposure of our diagnostic tests or of those of others in our industry; +• +changes in governmental regulations or in the status of our regulatory approvals or applications; +• +changes in earnings estimates or recommendations by securities analysts; and +• +general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors. +76 +In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may significantly affect the market price of our common stock, regardless of our actual operating performance, and you may not realize any return on your investment in us and may lose some or all of your investment. +In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert management’s attention and resources from our business. +Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline. +If a trading market for our common stock develops, the trading market will be influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a small reporting company and emerging growth company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with us, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. +We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors. +We are an “emerging growth company,” as defined in the JOBS Act. We may take advantage of certain exemptions and relief from various public reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act. We will be exempt from any rules that could be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements; we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved. +Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.24 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of our IPO. +We are also a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our common shares held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common shares held by nonaffiliates exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +Investors may find our common stock less attractive to the extent we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline or become more volatile. +77 +If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. +The preparation of financial statements in conformity with generally accepted accounting principals (GAAP) requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. It is possible that interpretation, industry practice and guidance may evolve over time. If our assumptions change or if actual circumstances differ from our assumptions, our operating results may be adversely affected and could fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. +Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders. +Our officers, directors and principal stockholders each holding more than 5% of our common stock collectively control approximately 61.0% of our outstanding common stock as of December 31, 2022. As a result, these stockholders, if they act together, will be able to control the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change of control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of our other stockholders. +Operating as a public company requires us to incur substantial costs and requires substantial management attention. +As a public company, we have incurred and will continue to incur costs associated with corporate governance requirements that are applicable to us as a public company, including rules and regulations of the SEC, under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Securities Exchange Act of 1934, as amended (the Exchange Act), as well as the rules of NASDAQ. Compliance with these rules and regulations have significantly increased our accounting, legal and financial compliance costs and make some activities more time-consuming. These rules and regulations could make it more expensive for us to maintain directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers. Accordingly, increases in costs incurred as a result of becoming a publicly traded company may adversely affect our business, financial condition and results of operations. +If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock. +As a result of becoming a public company, we are required, under Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis. +During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. The effectiveness of our controls and procedures may be limited by a variety of factors, including: +• +faulty human judgment and simple errors, omissions, or mistakes; +• +fraudulent action of an individual or collusion of two or more people; +• +inappropriate management override of procedures; and +• +the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial control. +When we cease to be an “emerging growth company” under the federal securities laws, our auditors will be required to express an opinion on the effectiveness of our internal controls. If we are unable to confirm that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline. +Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud. +We are subject to the periodic reporting requirements of the Exchange Act. We have designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and +78 +communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected. +Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management. +Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. +Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. +Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees. +Our amended and restated certificate of incorporation specifies that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders. Notwithstanding the foregoing, the exclusive forum provision will not apply to any claim to enforce any liability or duty created by the Exchange Act or the Securities Act and for which the federal courts have exclusive jurisdiction. We believe this exclusive forum provision benefits us by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in such action. +Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us. +Our amended and restated articles of incorporation provide that we will indemnify our directors and officers to the fullest extent permitted by Section 145 of the Delaware General Corporate Law. +In addition, as permitted by the Delaware General Corporate Law, our amended and restated articles of incorporation and our indemnification agreements that we have entered into with our directors and officers provide that: +• +we will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by applicable law. Such law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful; +• +we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law; +• +we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification; +• +the rights conferred in our amended and restated articles of incorporation are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and +79 +• +we may not retroactively amend our amended and restated articles of incorporation provisions to reduce our indemnification obligations to directors, officers, employees and agents. +80 +1B. Unresolved S taff Comments. +None. +Item 2. Pro perties. +Our headquarters is located in Boulder, Colorado, where we lease office and laboratory space, under an operating lease agreement that expires in January 2024. We also lease office and laboratory space located in De Soto, Kansas, under an operating lease agreement that expires in October 2023, however, we are currently in discussions to extend this lease agreement. A portion of our employees are located outside of Colorado and Kansas, and others work from home. In March 2022, the Company entered into a lease agreement (the CVP Lease) with Centennial Valley Properties I, LLC, a Colorado limited liability company for office and laboratory space in Louisville, Colorado. In August 2022, CVP assigned the lease to CVP I Owner LLC, within the terms allowing for the assignment of the lease. The purpose of the CVP Lease is to replace the Company’s current leased premises in Boulder, Colorado. The Company intends to move its corporate headquarters to Louisville, Colorado (the Leased Premises) by mid-2023. +Location +Use +Square Feet +Expiration +Louisville, Colorado +Office and laboratory +79,980 +March 31, 2035 +Boulder, Colorado +Office and laboratory +29,722 +January 14, 2024 +De Soto, Kansas +Office and laboratory +9,066 +October 31, 2023 +Item 3. Legal Proceedings. +From time to time, we may become involved in legal proceedings or investigations which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition, or cash flows. +Item 4. Mine Saf ety Disclosures. +None. +81 +PART II +Item 5. Market for Registrant’s Common Equity, Related Stock holder Matters and Issuer Purchases of Equity Securities. +Market Information +Our common stock is traded on The NASDAQ Global Market under the symbol “BDSX”. The high and low closing prices for our common stock on The NASDAQ Global Market from January 1, 2022 to December 31, 2022 were $5.81 and $0.98, respectively. +Holders of our Common Stock +As of March 2, 2023, there were approximately 241 holders of our common stock. +Dividend Policy +We have never declared or paid dividends on our common stock and do not expect to pay dividends on our common stock for the foreseeable future. We anticipate that all of our liquidity in the foreseeable future will be used for the operation and growth of our business. Any future determination to declare dividends will be subject to the discretion of our Board of Directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects, and any other factors deemed relevant by our Board of Directors. In addition, the terms of our term loan restrict our ability to pay dividends on our common stock, and we may also enter into credit agreements or other borrowing arrangements in the future that will further restrict our ability to declare or pay dividends on our common stock. +Recent Sales of Unregistered Securities and Use of Proceeds +On November 21, 2022, the Company entered into subscription agreements (the November 2022 Subscription Agreements) with certain members of management, including the Company’s Chief Executive Officer and Chief Financial Officer, for the issuance and sale by the Company of an aggregate of 235,056 shares of the Company’s common stock at a purchase price (determined in accordance with NASDAQ rules relating to the “Minimum Value” of the Company’s common stock) of $1.15 per share for an aggregate purchase price of approximately $270,000. The November 2022 Subscription Agreements did not include any registration rights and included lock up restrictions in effect during the period ending 90 days subsequent to November 21, 2022. +The Company used the proceeds to, among other things and in conjunction with a public offering, fund the repayment of the promissory note with Streeterville Capital, LLC (Streeterville), the Loan and Security Agreement with Silicon Valley Bank (SVB), and for general corporate purposes (see – Part II - Item 8, Financial Statements and Supplementary Data). +On April 7, 2022, the Company entered into subscription agreements (the April 2022 Subscription Agreements) with a consortium of investors (the April Investors), including three members of our Board of Directors and other existing shareholders of the Company, for the issuance and sale by the Company of an aggregate of 6,508,376 shares of the Company’s common stock at a purchase price (determined in accordance with NASDAQ rules relating to the “Minimum Value” of the Company’s common stock) of $1.79 per share, which is equal to the closing price of the Company’s common stock on April 7, 2022, generating proceeds of $11.7 million. The three members of our Board of Directors acquired an aggregate of 3,631,284 shares pursuant to the form of the April 2022 Subscription Agreements that did not include any registration rights as they are exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the Securities Act), and Rule 506 promulgated thereunder. The remaining 2,877,092 shares were acquired by others pursuant to the form of a April 2022 Subscription Agreements whereby we agreed to file, subject to certain exceptions, a shelf registration statement with respect to resales of such shares with the SEC no later than 60 days from April 7, 2022, which the Company filed on June 6, 2022. +The Company used the proceeds to, among other things, fund the partial repayment of the 2021 Term Loan and for general corporate purposes (see – Part II - Item 8, Financial Statements and Supplementary Data). +There were no sales of unregistered securities for the year ended December 31, 2021. From January 1, 2020 through December 31, 2020, we granted stock options under our 2016 and 2006 Stock Plans to purchase 0.8 million shares of our common stock at exercise prices ranging from $0.77 to $6.83 per share, and issued an aggregate of 0.4 million shares of common stock pursuant to the exercise of stock options with aggregate proceeds of approximately $1.3 million. These issuances were undertaken in reliance upon an exemption from registration under Rule 701 of the Securities Act of 1933. +Item 6. [ Reserved] +82 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Biodesix, Inc. is referred to throughout this Annual Report on Form 10-K for the period ended December 31, 2022 (Form 10-K) as “we”, “us”, “our” or the “Company.” +The following discussion of our financial condition and results of operations should be read together with our audited financial statements and related notes and other financial information included elsewhere in this Annual Report on Form 10-K. +In addition to historical financial information, this discussion and other parts of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part I, Item 1A above. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ from those anticipated. +These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. +The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), is provided to supplement the audited financial statements and the related notes in Part II - Item 8 of this Annual Report on Form10-K. We intend for this discussion to provide you with information that will assist you in understanding our financial statements, the changes in key items in those financial statements from year to year and the primary factors that accounted for those changes. Data for the years ended December 31, 2022 and 2021 has been derived from our audited financial statements included in this Annual Report on Form 10-K. +Overview +We are a leading data-driven diagnostic solutions company leveraging state of the art technologies with our proprietary AI platform to discover, develop, and commercialize solutions for clinical unmet needs, with a primary focus in lung disease. By combining a technology multi-omic approach with a holistic view of the patient’s disease state, we believe our solutions provide physicians with greater insights to help personalize their patient’s care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe helps improve overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI-based Diagnostic Cortex® platform to discover innovative diagnostic tests for clinical use. The Diagnostic Cortex is an extensively validated deep learning platform optimized for the discovery of diagnostic tests, which we believe overcomes standard machine learning challenges faced in life sciences research. Our data-driven and multi-omic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage with our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic treatment landscape to identify additional clinical unmet needs where a diagnostic test could help improve patient care. Additionally, we incorporate clinical and molecular profiling data from our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or academic partnerships, to continue to advance our platform. We have a variety of samples with associated data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development initiatives. +We have commercialized five diagnostic tests for our core lung diagnostic business, each of which have Medicare coverage, which are currently available for use by physicians. Our Nodify XL2 and Nodify CDT tests, marketed as part of the Nodify Lung Nodule Risk Assessment testing strategy, assess the risk of lung cancer to help identify the most appropriate treatment pathway. The Nodify Lung Risk Assessment testing strategy has resulted in a change in the calculated risk of malignancy in 80-85% of the cases. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our GeneStrat ddPCR, GeneStrat NGS, and VeriStrat tests, marketed as the IQLung testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to establish the patient’s prognosis and help guide treatment decisions. The GeneStrat targeted tumor profiling test and the VeriStrat immune profiling test now have a turnaround time of two business days, down from the previous three business day turnaround time, +83 +providing physicians with timely results to facilitate treatment decisions. The GeneStrat NGS test is our blood-based NGS test with results in three business days, was launched in November 2021 to a select group of physicians, with national launch in January 2022. The 52-gene panel includes guideline recommended mutations to help physicians treating advanced-stage lung cancer patients identify all four major mutation classes and genes, such as EGFR, ALK, KRAS, MET, NTRK, ERBB2, and others, and delivers them in an expedited timeframe so patient treatment can begin sooner. +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe™ testing program, which include three commercialized tests. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two FDA EUA authorized tests, a part of our customizable program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. The Bio-Rad SARS-CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under CLIA to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Prior to using the Bio-Rad SARS-CoV-2 tests as part of our testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Beginning in second quarter 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass SARS-CoV-2 Neutralizing Antibody testing as a service. The test is the first surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the RBD in the spike protein of SARS-CoV-2 that are produced in response to a previous SARS-CoV-2 infection. +Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety. The EUA declaration under Section 564 of the FDCA is distinct from and independent of the declaration by the Secretary of HHS of a public health emergency under Section 319 of the Public Health Service Act (the PHS Act). On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. Because the EUA declaration from the FDA is distinct from the declaration under Section 319 of the PHS Act, the FDA EUA may remain in effect beyond the duration of the Section 319 declaration. We cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. +These tests under the Biodesix WorkSafe testing program are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems. We announced multiple partnerships for COVID-19 testing, and maintained an agreement with the State of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State, which expired on August 31, 2022. Additionally, we oversaw and managed onsite testing and validating testing for the Big Ten Conference athletic competitions through the term of our contract which expired on June 30, 2021. +In addition to the eight diagnostic tests currently on the market, we perform over 30 assays for research use as part of our laboratory services that have been used by over 60 biopharmaceutical companies and academic partners. All of our diagnostic and services testing is performed at one of our two accredited, high-complexity clinical laboratories in Boulder, Colorado and De Soto, Kansas. +Since our inception, we have performed over 550,000 clinical diagnostic tests, and continue to generate a large and growing body of clinical evidence consisting of over 300 clinical and scientific peer-reviewed publications, presentations, and abstracts. Through ongoing study of each of our tests, we continue to grow our depth of understanding of disease biology and the broad utility of each of our tests. We believe we are poised for rapid growth by leveraging our scientific development and laboratory operations expertise along with our commercial infrastructure which includes sales, marketing, reimbursement, and regulatory affairs. +In the United States, we market our tests to clinical customers through our targeted sales organization, which includes sales representatives that are engaged in sales efforts and promotional activities primarily to pulmonologists, oncologists, cancer centers and nodule clinics. We market our tests and services to biopharmaceutical companies globally through our targeted business development team, which promotes the broad utility of our tests and testing capabilities throughout drug development and commercialization which is of value to pharmaceutical companies and their drug-development process. +The Company continues to address our liquidity needs through improvements to our capital structure. During the year ended December 31, 2022, the Company completed various transactions, including: +• +a private placement offering that raised approximately $11.7 million in net equity proceeds in April 2022; +• +the closing of a debt facility with Streeterville in May 2022, raising approximately $12.8 million in net proceeds; +84 +• +a follow-on public equity offering of common stock and a subscription agreement for the issuance of common stock, including to certain members of the Company’s management team and affiliates, raising $37.8 million in net equity proceeds in November 2022; +• +the closing of a term loan facility with Perceptive for up to $50.0 million in November 2022. The initial funding of the Perceptive Term Loan included $30.0 million in gross proceeds ($27.9 million in net proceeds) (the Tranche A Loan) and the issuance of a warrant to purchase stock of up to 5,000,000 shares of common stock (the Perceptive Warrant), of which 3,000,000 warrants were issued with a per share exercise price equal to $1.0648. Two additional tranches of $10.0 million each are available for future borrowing (the Tranche B and Tranche C Loans), each subject to certain terms and conditions, including revenue milestones, with each tranche also subject to the issuance of 1,000,000 warrants at a per share exercise price determined at the time of issuance; +• +approximately $23.9 million of the net proceeds from the November 2022 transactions were used to extinguish outstanding debt with Streeterville and SVB; +• +common stock sales raising $6.8 million in net equity proceeds through our at-the-market (ATM) and Lincoln Park Capital, LLC (LPC) facilities. +Each of these transactions is described in further detail within the notes to our financial statements in Item 8 of this Annual Report on Form 10-K as well as our “Liquidity and Capital Resources” section below. +We have funded our operations to date principally from net proceeds from the issuances of our common stock, the sale of convertible preferred stock, revenue from diagnostic testing and services, and the incurrence of indebtedness. We had cash and cash equivalents of $43.1 million and $32.7 million as of December 31, 2022 and 2021, respectively. +Factors Affecting Our Performance +We believe there are several important factors that have impacted our operating performance and results of operations, including: +• +Testing volume and customer mix. Our revenues and costs are affected by the volume of testing and mix of customers from period to period. We evaluate both the volume of our commercial tests, or the number of tests that we perform for patients on behalf of clinicians, as well as tests for biopharmaceutical companies. Our performance depends on our ability to retain and broaden adoption with existing customers, as well as attract new customers. We believe that the test volume we receive from clinicians and biopharmaceutical companies are indicators of growth in each of these customer verticals. Customer mix for our tests has the potential to significantly impact our results of operations, as the average selling price for biopharmaceutical sample testing is currently significantly greater than our average selling price for clinical tests since we are not a contracted provider for, or our tests are not covered by all clinical patients’ insurance. We evaluate our average selling price for tests that are covered by Medicare, Medicare Advantage and commercial payers to understand the trends in reimbursement and apply those trends to our revenue recognition policies. +• +Reimbursement for clinical diagnostic testing. Our revenue depends on achieving broad coverage and reimbursement for our tests from third-party payers, including both commercial and government payers. On June 7, 2022, we announced that WPS Government Health Administrators, the Medicare Administrative Contractor with jurisdiction for Biodesix’s De Soto, Kansas laboratory, has provided coverage for the Nodify CDT lung nodule test. All five Biodesix blood-based lung diagnostic tests within the Nodify Lung Nodule Risk Assessment testing strategy and IQLung strategy for lung cancer patients are now covered by Medicare. Payment from third-party payers differs depending on whether we have entered into a contract with the payers as a “participating provider” or do not have a contract and are considered a “non-participating provider.” Payers will often reimburse non-participating providers, if at all, at a lower rate than participating providers. +Historically, we have experienced situations where commercial payers proactively reduced the amounts they were willing to reimburse for our tests, and in other situations, commercial payers have determined that the amounts they previously paid were too high and have sought to recover those perceived excess payments by deducting such amounts from payments otherwise being made. When we contract to serve as a participating provider, reimbursements are made pursuant to a negotiated fee schedule and are limited to only covered indications. Becoming a participating provider generally results in higher reimbursement for covered indications and lack of reimbursement for non-covered indications. As a result, the impact of becoming a participating provider with a specific payer will vary. If we are not able to obtain or maintain coverage and adequate reimbursement from third-party payers, we may not be able to effectively increase our testing volume and revenue as expected. Additionally, retrospective reimbursement adjustments can negatively impact our revenue and cause our financial results to fluctuate. +On October, 17, 2022, the Company announced that the U.S. Department of Veterans Affairs (the VA), the largest integrated health care system in the United States, has awarded a Federal Supply Schedule Contract for the Company’s entire portfolio of lung cancer diagnostic tests. The VA provides care at 1,298 health care facilities, including 171 VA Medical Centers and +85 +1,113 outpatient sites of care of varying complexity to over 9 million veterans enrolled in the VA health care program. All of our existing lung diagnostic tests will be payable when performed and partnering with the VA represents a large opportunity for Biodesix to help improve care for our Veterans by integrating our five diagnostic products and testing strategies into our country’s largest health system. +On December 19, 2022, the Company announced the signing of our first four private payer commercial policies covering our Nodify XL2 test. These contracts included three Blue Cross Blue Shield plans in North Carolina, South Carolina, and Kansas City, and a contract with Capital District Physician’s Health Plan in New York. In total these new private pay contracts add approximately 4.5 million covered lives, and are in geographic regions of the country where the incidence of lung cancer is high. +• +Investment in clinical studies and product innovation to support growth. A significant aspect of our business is our investment in research and development, including the development of new products and our investments in clinical utility studies. We have invested heavily in clinical studies for our on market and pipeline products. Our studies focus primarily on the clinical utility of our tests including the ongoing INSIGHT study which seeks to enroll up to 5,000 patients to continue our clinical understanding of the predictive and prognostic value of the VeriStrat test. The ALTITUDE study, launched during the fourth quarter 2020, seeks to further demonstrate the efficacy of the Nodify XL2 and Nodify CDT tests. A secondary focus of our studies is understanding the economic impact of our tests in assisting with decisions related to patient management and the potential impact of our tests in reducing overall healthcare costs. +Our clinical research has resulted in approximately 90 peer-reviewed publications for our tests. In addition to clinical studies, we are collaborating with investigators from multiple academic cancer centers. On June 3, 2022, we announced the intent to develop a new novel molecular minimal residual disease (MRD) test as a part of a master sponsored research agreement (MSRA) with Memorial Sloan Kettering Cancer Center (MSK). In addition, the MSRA between MSK and the Company also includes the potential future development of other diagnostic tests aimed at improving the treatment of cancer. We believe these studies are critical to gaining physician adoption and driving favorable coverage decisions by payers and expect our investments in research and development to increase. Further we also expect to increase our research and development expenses to fund further innovation and develop new clinically relevant tests. +• +Ability to attract new biopharmaceutical customers and maintain and expand relationships with existing customers. Our business development team promotes the broad utility of our products for biopharmaceutical companies in the United States and internationally. Our revenue, business opportunities and growth depend in part on our ability to attract new biopharmaceutical customers and to maintain and expand relationships with existing biopharmaceutical customers. We expect to increase our sales and marketing expenses in furtherance of this as we continue to develop these relationships, we and expect to support a growing number of investigations and clinical trials. If our relationships expand, we believe we may have opportunities to offer our platform for companion diagnostic development, novel target discovery and validation efforts, and to grow into other commercial opportunities. For example, we believe our multi-omic data including genomic and proteomic data, in combination with clinical outcomes or claims data, has revenue-generating potential, including for novel target identification and companion diagnostic discovery and development. +On June 30, 2022, the Company announced an arrangement with Royal Philips, a global leader in health care technology, in which our Nodify Lung blood-based lung nodule risk assessment testing will be incorporated into Philips Lung Cancer Orchestrator lung cancer patient management system. The incorporation of proteomics data – along with the radiologic and patient history data currently used to determine treatment decisions – can help create diagnostic efficiency for cancer care centers in the management of a growing number of lung nodule cases, via the contextual launch of Biodesix Nodify Lung application within Lung Cancer Orchestrator. Philips Lung Cancer Orchestrator solution is designed to enable health systems to operationalize lung cancer screening and lung nodule management programs at scale. +• +Motivating and expanding our field sales force and customer support team. Our field sales force is the primary point of contact in the clinical setting. These representatives of the company must cover expansive geographic regions which limits their time for interaction and education of our products in the clinical setting. We plan to continue investing in the field sales force, increasing the total number of sales representatives to drive continued growth, and thereby reduce the geographic footprint each representative must cover. This investment will allow the larger sales force to maximize their education and selling efforts and achieve greater returns. Additionally, we plan to invest in the Boulder-based marketing and customer support teams to continue to provide the field team with the resources to be successful in the field. +While each of these areas present significant opportunities for us, they also pose significant risks and challenges that we must address. See Part I, Item 1A. “Risk Factors” for more information. +COVID-19 Pandemic +The COVID-19 pandemic has disrupted, and may continue to disrupt, our lung diagnostic testing operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees working on-site, +86 +implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States of Colorado and Kansas’ public health orders and the guidance from the Centers for Disease Control and Prevention (CDC). Employees who can perform their duties remotely have the option to work from home. Our sales, marketing and business development efforts may be constrained by our operational response to future COVID-19 variant outbreaks. We will continue to adjust our operational norms, as needed, to help slow the spread of COVID-19, including complying with government directives and guidelines as they are modified and supplemented. +The COVID-19 pandemic and the surge associated with multiple variants have negatively affected our lung diagnostic testing-related revenue and our clinical studies. Beginning in the third quarter 2020, the Company’s COVID-19 testing services began to experience rapid growth with a peak in the first quarter 2021; however, subsequent to this peak, we experienced a rapid decline in COVID-19 testing revenue primarily as a result of a few significant contracts that expired as well as the ongoing increase in COVID-19 vaccination rates across the U.S. and the adoption and availability of at-home testing. We do not anticipate the need for COVID-19 testing to be commensurate with the peak demand experienced during the first quarter 2021 and instead expect the demand to substantially decline as our society adapts to a post-pandemic era. There is no assurance that our COVID-19 testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain and the need for COVID-19 testing could vary which could have a significant effect on our results of operations and profitability. As a result, increases in revenue, if any, due to any increase in demand for these diagnostic tests may not be indicative of our future revenue. +See Part I, Item 1A. “Risk Factors” for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations. +Fourth Quarter and Full Year 2022 Financial and Operational Highlights +The following were significant developments affecting our business, capital structure and liquidity during the year ended December 31, 2022 as compared to the same period in 2021 unless otherwise noted: +• +Total revenue of $9.6 million and $38.2 million for the fourth quarter and fiscal 2022, respectively, an increase of 33% and decrease of 30%, respectively, with continued growth in core lung diagnostic sales, offset by the expected year-over-year decline in COVID-19 revenue due to the decrease in testing across the year; +• +Core lung diagnostic revenue of $8.2 million and $29.3 million for the fourth quarter and fiscal 2022, respectively, an increase of 51% and 57% driven by the increased adoption of Nodify Lung nodule management tests and the highest total tests delivered in Company history; +• +Biopharmaceutical Services revenue of $1.4 million and $3.7 million for the fourth quarter and fiscal year 2022 respectively, a decrease of 1% and 34%; +• +COVID-19 testing revenue declined to an immaterial amount and $5.2 million for the fourth quarter and fiscal year 2022, respectively, a decrease of 96% and 83% commensurate with the increase in COVID-19 vaccination rates across the U.S. and the adoption and availability of at-home testing, including the expiration of our most significant testing contracts; +• +Gross margin was $6.3 million or 66% and $24.1 million or 63% for the fourth quarter and fiscal 2022, respectively, as a percentage of revenue compared to 65% and 44% primarily driven by the mix shift of sales to higher-margin core lung diagnostics and away from lower-margin COVID-19 testing; +• +Operating expenses (excluding direct costs and expenses) of $20.2 million and $74.6 million for the fourth quarter and fiscal year 2022, an increase of 23% and 15% primarily from year-over-year growth in core lung diagnostic revenue; +• +Net loss of $20.3 million and $65.4 million for the fourth quarter and fiscal year 2022, respectively, an increase of 53% and 52%; +• +Cash and cash equivalents of $43.1 million, inclusive of $65.7 million of net proceeds during the fourth quarter 2022 through debt and equity offerings and the utilization of $23.9 million to extinguish outstanding debt. +Components of Operating Results +Revenues +We derive our revenue from two primary sources: (i) providing diagnostic testing in the clinical setting (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, clinical trial testing, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics (Services). +87 +Diagnostic Tests +Diagnostic test revenue is generated from delivery of results from our diagnostic tests. In the United States, we performed tests as both an in-network and out-of-network service provider depending on the test performed and the contracted status of the insurer. We provide diagnostic tests in two primary categories: (i) core lung diagnostics testing and (ii) COVID-19 testing. +We consider diagnostic testing to be completed upon the delivery of test results to our customer, either the prescribing physician or third-party to which we contracted for services to be performed, which is considered the performance obligation. The fees for such services are billed either to a third party such as Medicare, medical facilities, commercial insurance payers, or to the patient. We determine the transaction price related to our contracts by considering the nature of the payer, the historical amount of time until payment by a payer and historical price concessions granted to groups of customers. +Services +Services revenue is generated from the delivery of our on-market tests, pipeline tests, custom diagnostic testing, and other scientific services for a purpose as defined by any individual customer. At times we collaborate with large biopharmaceutical companies in an attempt to discover biomarkers that would be helpful in their drug development or marketing. The performance obligations and related revenue for these sales is defined by a written agreement between us and our customer. These services are generally completed upon the delivery of testing results, or other contractually defined milestone(s), to the customer, which is considered the performance obligation. Customers for these services are typically large pharmaceutical companies where collectability is reasonably assured and therefore revenue is accrued upon completion of the performance obligations. Revenue derived from services is often unpredictable and can cause dramatic swings in our overall net revenue line from quarter to quarter. +Operating Expenses +Direct costs and expenses +Cost of diagnostic testing generally consists of cost of materials, direct labor, including bonuses, employee benefits, share-based compensation, equipment and infrastructure expenses associated with acquiring and processing test samples, including sample accessioning, test performance, quality control analyses, charges to collect and transport samples; curation of test results for physicians; and in some cases, license or royalty fees due to third parties. Costs associated with performing our tests are recorded as the tests are processed regardless of whether revenue was recognized with respect to the tests. Infrastructure expenses include depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs. Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents. While we do not believe the technologies underlying these licenses are necessary to permit us to provide our tests, we do believe these technologies are potentially valuable and of possible strategic importance to us or our competitors. Under these license agreements, we are obligated to pay aggregate royalties ranging from 1% to 8% of sales in which the patents or know-how are used in the product or service sold, sometimes subject to minimum annual royalties or fees in certain agreements. +We expect the aggregate cost of diagnostic testing to increase in line with the increase in the number of tests we perform, but the cost per test to decrease modestly over time due to the efficiencies we may gain as test volume increases, and from automation and other cost reductions. Cost of services includes costs incurred for the performance of development services requested by our customers. Costs of development services will vary depending on the nature, timing and scope of customer projects. +Research and development +Research and development expenses consist of costs incurred to develop technology and include salaries, share-based compensation and benefits, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services, clinical studies, other outside costs and costs to develop our technology capabilities. Research and development expenses account for a significant portion of our operating expenses and consist primarily of external and internal costs incurred in connection with the discovery and development of our product candidates. +External expenses include: (i) payments to third parties in connection with the clinical development of our product candidates, including contract research organizations and consultants; (ii) the cost of manufacturing products for use in our preclinical studies and clinical trials, including payments to contract manufacturing organizations (CMOs) and consultants; (iii) scientific development services, consulting research fees and for sponsored research arrangements with third parties; (iv) laboratory supplies; and (v) allocated facilities, depreciation and other expenses, which include direct or allocated expenses for IT, rent and maintenance of facilities. External expenses are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers or our estimate of the level of service that has been performed at each reporting date. We track external costs by the stage of program, clinical or preclinical. +88 +Internal expenses include employee-related costs, including salaries, share-based compensation and related benefits for employees engaged in research and development functions. We do not track internal costs by product candidate because these costs are deployed across multiple programs and, as such, are not separately classified. +Research and development costs are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or services are rendered. Costs to develop our technology capabilities are recorded as research and development. +We expect our research and development expenses to increase as we continue to innovate and develop additional products and expand our data management resources. As our services revenue grows, an increasing portion of research and development dollars are expected to be allocated to cost of services for biopharmaceutical service contracts. This expense, though expected to increase in dollars, is expected to decrease as a percentage of revenue in the long term, though it may fluctuate as a percentage of our revenues from period to period due to the timing and extent of these expenses. +Sales, marketing, general and administrative +Our sales and marketing expenses are expensed as incurred and include costs associated with our sales organization, including our direct sales force and sales management, client services, marketing and reimbursement, as well as business development personnel who are focused on our biopharmaceutical customers. These expenses consist primarily of salaries, commissions, bonuses, employee benefits, share-based compensation, and travel, as well as marketing and educational activities and allocated overhead expenses. We expect our sales and marketing expenses to increase in dollars as we expand our sales force, increase our presence within the United States, and increase our marketing activities to drive further awareness and adoption of our tests and our future products. These expenses, though expected to increase in dollars, are expected to decrease as a percentage of revenue in the long term, though they may fluctuate as a percentage of our revenues from period to period due to the timing and extent of these expenses. +Our general and administrative expenses include costs for our executive, accounting, finance, legal and human resources functions. These expenses consist principally of salaries, bonuses, employee benefits, share-based compensation, and travel, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. We expect that our general and administrative expenses will continue to increase in dollars, primarily due to increased headcount and costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, maintaining compliance with exchange listing and requirements of the SEC, director and officer insurance premiums and investor relations. These expenses, though expected to increase in dollars, are expected to decrease as a percentage of revenue in the long term, though they may fluctuate as a percentage from period to period due to the timing and extent of these expenses. +Change in Fair Value of Contingent Consideration +In connection with the purchase transaction of Indi, we recorded contingent consideration pertaining to the amounts potentially payable to Indi shareholder pursuant to the terms of the asset purchase agreement. The fair value of contingent consideration was assessed at each balance sheet date and changes, if any, to the fair value were recognized as operating expenses within the statement of operations. The Company achieved the gross margin target of $2.0 million for three consecutive months during the three months ended June 30, 2021. Subsequent changes to the contingent consideration following the achievement of the gross margin target are recorded as ‘Interest expense’ in the statements of operations resulting from the passage of time and fixed payment schedule. The significant unobservable inputs used in the measurement of fair value included the probability of successful achievement of the specified product gross margin targets, the period in which the targets were expected to be achieved, and discount rates which ranged from 11% to 16%. As a result of the achievement of the gross margin target, the only significant unobservable input used in the measurement of fair value includes the discount rate since all other inputs became fixed and determinable. During the period ended June 30, 2022, the Company increased the discount rate to reflect current market and Company specific conditions. +On April 7, 2022, the Company entered into Amendment No. 3 to the Indi APA in which the parties agreed to restructure the milestone payments whereby the Company will make five quarterly installments of $2.0 million each beginning in April 2022, three quarterly installments of $3.0 million beginning in July 2023, one installment of $5.0 million in April 2024, and one installment of approximately $8.4 million in July 2024. In addition, the Company agreed to an exit fee of approximately $6.1 million in October 2024. Interest shall accrue on the difference between the payment schedule as agreed in the August 2021 amendment and the April 2022 amended payment schedule, at an aggregate per annum rate equal to 10%, with such interest to be payable quarterly on the following installment payment date. +Non-Operating Expenses +Interest Expense and Interest Income +For the year ended December 31, 2022, interest expense consists of cash and non-cash interest from the secured promissory note (Promissory Note One) with Streeterville, the 2021 Term Loan with SVB, changes in the value of our contingent consideration associated with the passage of time subsequent to the achievement of the gross margin target in the second quarter 2021, and the Perceptive Term Loan. For the year ended December 31, 2021, interest expense primarily consists of cash and non-cash interest from our 2021 Term +89 +Loan, the 2018 Innovatus Term Loan, Paycheck Protection Program loan, and changes in the value of our contingent consideration associated with the passage of time subsequent to the achievement of the contingency in the second quarter 2021. Interest income, which is included in ‘Other income, net’ in the statements of operations consists of income earned on our cash and cash equivalents. +Results of Operations +The following table sets forth the significant components of our results of operations for the periods presented (in thousands, except percentages): +Year Ended December 31, +Change +2022 +2021 +$ +% +Revenues +$ +38,212 +$ +54,506 +$ +(16,294 +) +(30 +)% +Operating expenses +Direct costs and expenses +14,154 +30,518 +(16,364 +) +(54 +)% +Research and development +13,102 +12,789 +313 +2 +% +Sales, marketing, general and administrative +61,462 +50,517 +10,945 +22 +% +Change in fair value of contingent consideration +— +1,622 +(1,622 +) +(100 +)% +Impairment loss on intangible assets +81 +— +81 +100 +% +Total operating expenses +88,799 +95,446 +(6,647 +) +(7 +)% +Loss from operations +(50,587 +) +(40,940 +) +(9,647 +) +(24 +)% +Other (expense) income +Interest expense +(8,072 +) +(4,508 +) +3,564 +79 +% +(Loss) gain on extinguishment of liabilities, net +(6,981 +) +2,298 +(9,279 +) +404 +% +Change in fair value of warrant liability +84 +— +84 +100 +% +Other income (loss), net +109 +(9 +) +(118 +) +1,311 +% +Total other expense +(14,860 +) +(2,219 +) +12,641 +570 +% +Net loss +$ +(65,447 +) +$ +(43,159 +) +$ +(22,288 +) +(52 +)% +Share-based compensation (1) +$ +5,961 +$ +4,944 +$ +(1,017 +) +21 +% +(1) Amounts represent share-based compensation expense reported in the Company’s results of operations above. +Revenues +We generate revenue by providing laboratory testing of our diagnostic tests and services. Our revenues for the periods indicated were as follows (in thousands, except percentages): +Year Ended December 31, +Change +2022 +2021 +$ +% +Revenues +COVID-19 +$ +5,240 +$ +30,227 +$ +(24,987 +) +(83 +)% +Lung Diagnostic +29,298 +18,710 +10,588 +57 +% +Diagnostic testing revenue +34,538 +48,937 +(14,399 +) +(29 +)% +Services revenue +3,674 +5,569 +(1,895 +) +(34 +)% +Total revenues +$ +38,212 +$ +54,506 +$ +(16,294 +) +(30 +)% +Total revenue decreased $16.3 million or 30% for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily as a result of our expected decline in COVID-19 testing demand. +Diagnostic test revenue decreased $14.4 million or 29% for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease for the year ended December 31, 2022 compared to the same period in 2021 is due to a $25.0 million reduction in COVID-19 revenue resulting from an increase in COVID-19 vaccination rates across the U.S. and the adoption and availability of at-home testing, including the expiration of significant testing contracts. The reduction in COVID-19 revenue was partially offset by an increase in our core lung diagnostic revenue of $10.6 million driven primarily from an increase in our Nodify Lung and GeneStrat NGS tests delivered. The Company’s core lung diagnostic sales efforts continued to gain momentum throughout the year ended December 31, 2022 with our fourth quarter core lung diagnostic business delivering our highest number of tests in Company history as the COVID-19 pandemic receded and as health care practitioners, including pulmonologists, increasingly returned to pre-pandemic related care. +Services revenue decreased $1.9 million or 34% for the year ended December 31, 2022 compared to the same period in 2021 due to lower testing volumes driven by sample shipping logistics impacting timelines for existing and new agreements. In addition to delayed receipts in samples, service revenue can fluctuate due to several factors including contract timing, which can be long under normal circumstances, and currently reflects the slower pace of overall prospective clinical trial enrollment recovering from disruptions put forth by COVID-19. +90 +Operating Expenses +Direct costs and expenses +Direct costs and expenses related to revenue decreased $16.4 million or 54% for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease in costs for the year ended December 31, 2022 was driven primarily by the overall decline in COVID-19 testing revenue, as vaccinations increased as well as broader adoption and availability of at-home testing, partially offset by an increase in direct costs and expenses associated with increased lung diagnostic revenue. +Research and development +Research and development expenses increased $0.3 million or 2% for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in cost was due primarily to an increase in clinical trial costs, partially offset by a decrease in other laboratory costs. +The following table summarizes our external and internal costs for the years ended December 31, 2022 and 2021 (in thousands, except percentages): +Year Ended December 31, +Change +2022 +2021 +$ +% +External expenses: +Clinical trials and associated costs +$ +2,551 +$ +2,061 +$ +490 +24 +% +Other external costs +3,625 +3,810 +(185 +) +(5 +)% +Total external costs +6,176 +5,871 +305 +5 +% +Internal expenses +6,926 +6,918 +8 +0 +% +Total research and development expenses +$ +13,102 +$ +12,789 +$ +313 +2 +% +Sales, marketing, general and administrative +Sales, marketing, general and administrative expenses increased $10.9 million or 22% for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase was driven primarily by increases in employee compensation and benefits associated with an increase in sales team headcount and variable compensation during 2022 as compared to 2021. This is also the result of increases in non-employee costs associated with increased spending on various sales meetings, training, and campaigns resulting from supporting the growth in our core lung diagnostic business. +Change in fair value of contingent consideration +Change in fair value of contingent consideration decreased $1.6 million or 100% for the year ended December 31, 2022 compared to the year ended December 31, 2021. Changes in the fair value of contingent consideration subsequent to the achievement of the gross margin target are recorded as ‘Interest expense’ in the statements of operations resulting from the passage of time and fixed payment schedule (see ‘ Interest expense’ below). +Non-Operating Expenses +Interest expense +Interest expense increased $3.6 million or 79% for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase is primarily related to increased interest associated with the contingent consideration of $1.1 million subsequent to the achievement of the gross margin target (see ‘Change in fair value of contingent consideration’ above), Promissory Note One with Streeterville of $1.8 million, interest associated with the 2021 Term Loan (including the accelerated accretion of the 2021 Term Loan final payment of $0.7 million), and interest associated with the Perceptive Term Loan of $0.5 million. This increase is partially offset by interest associated with the Innovatus Term Loan in 2021 that is not present in 2022. +(Loss) gain on extinguishment of liabilities, net +The Company recorded a loss on extinguishment of liabilities of $7.0 million for the year ended December 31, 2022. On April 7, 2022, the Company entered into Amendment No. 3 to the Indi APA in which all parties agreed to restructure the milestone payments. During the three months ended June 30, 2022, the Company evaluated Amendment No. 3 to the Indi APA in accordance with applicable accounting standards under U.S. GAAP which resulted in the extinguishment of the original instrument due to the substantially different terms. As a result, during the three months ended June 30, 2022, we recorded a loss on the extinguishment of $2.9 million. Additionally, as a result of the extinguishment of Promissory Note One and the 2021 Term Loan, the Company recorded a loss on debt extinguishment of $3.6 million and $0.5 million, respectively, associated with the prepayment premium and the write-off of unamortized original issue discount (OID) and debt issuance costs. +During the year ended December 31, 2021, we recognized a $2.3 million net gain on debt extinguishment. The Company recorded a gain on debt extinguishment of $3.1 million related to the legal release and forgiveness of the Paycheck Protection Program Loan in +91 +full. The gain was partially offset by losses on debt extinguishment of $0.7 million and $0.1 million resulting from the repayment and termination of our 2018 secured promissory note with Innovatus and the write-off of debt issuance costs associated with a $20 million prepayment of our 2021 Term Loan, respectively. +Change in fair value of warrant liability +On November 21, 2022, as consideration for the Perceptive Term Loan, the Company issued the Perceptive Warrant, with warrants exercisable into 3,000,000 shares of the Company’s common stock issued on the funding date of the Tranche A Loan which are equity classified (the Initial Warrants). In addition to the Initial Warrants and to the extent the Company exercises its right to borrow the remaining availability under the Perceptive Term Loan, additional warrants will become exercisable into 1,000,000 shares of common stock concurrently with the borrowing of the Tranche B Loan, and additional warrants will become exercisable into 1,000,000 shares of common stock concurrently with the borrowing of the Tranche C Loan (together, the Additional Warrants). The Company accounts for the Additional Warrants as liabilities as the Additional Warrants do not meet the criteria for equity classification. The Company determined the initial fair value of the Additional Warrants to be $0.1 million and during the year ended December 31, 2022, the Company recorded $0.1 million as a change in fair value through the statement of operations due to changes in unobservable inputs. +Liquidity and Capital Resources +We are an emerging growth company and, as such, have yet to generate positive cash flows from operations. We have funded our operations to date principally from net proceeds from the sale of our common stock, the sale of convertible preferred stock, revenue from diagnostic testing and services, and the incurrence of indebtedness. +As a result of the pandemic, the Company diversified its diagnostic testing beyond lung diagnostic testing to include the critical service of COVID-19 diagnostic testing. Beginning in the third quarter 2020, the Company’s COVID-19 testing services began to experience rapid growth with a peak in the first quarter 2021; however, subsequent to this peak, we experienced a rapid decline in COVID-19 testing revenue primarily as a result of a few significant contracts that expired as well as the ongoing increase in COVID-19 vaccination rates across the U.S. and the adoption and availability of at-home testing. In addition, the COVID-19 pandemic negatively affected our lung diagnostic testing-related revenue and our clinical studies. We began to see recovery during the fourth quarter 2020 in our core lung diagnostic testing as our delivered tests exceeded first quarter 2020 delivered tests and have continued to grow thereafter. The Company’s sales efforts continued to be impacted by the COVID-19 pandemic due to surges associated with variants, which have negatively affected the growth rate of our core lung diagnostic testing-related revenue and our clinical studies. While we have seen recovery in delivered tests during 2022 in lung diagnostic testing as health care practitioners, including pulmonologists, increasingly returned to pre-pandemic related care, we have experienced more variability as compared to pre-pandemic levels as physician practices are adjusting to post-pandemic levels of care. As a result, the items identified above have had an adverse effect on our revenue, results of operations and cash flows. +In March 2021, we completed the closing of our 2021 Term Loan with SVB for a principal amount of $30 million and extinguished our prior 2018 term loan for $25.9 million. During the quarter ending June 30, 2021, we achieved the gross margin target associated with the purchase transaction with Indi, giving rise to the previously disclosed contingent obligations of $37.0 million in the aggregate, payable through the issuance of our shares of common stock subject to a fixed price put option. We entered into an amendment in August 2021 to the original agreement in which all parties agreed to forgo the issuance of our shares of common stock that would otherwise be issued, and we would instead make six quarterly installment payments of $4.6 million beginning in January 2022 and a final payment of approximately $9.3 million in July 2023 for a total of $37.0 million (the Milestone Payments and each individually a Milestone Payment). The aggregate amount of payments owed by us under this amendment is the same as if Indi had exercised the put right or we had exercised the call right provided for in the original agreement. +On September 30, 2021, we entered into the Consent and First Amendment to Loan and Security Agreement (the 2021 Term Loan Amendment) to, among other things, amend our 2021 Term Loan to eliminate the revenue covenant for the period ended September 30, 2021 and modify the revenue covenant threshold for the three month period ended December 31, 2021. In addition, we agreed to establish a restricted cash collateral account for $15 million for the benefit of SVB if the balance of our cash and cash equivalents declined below $40 million. +On December 30, 2021, we raised approximately $16.3 million in gross proceeds from the sale of 3,756,994 common shares at a public offering price of $4.35 per share in an at-the-market offering. We received net proceeds of $15.7 million after deducting underwriting discounts and commissions and offering expenses payable by us. +On December 31, 2021, we entered into the Consent and Second Amendment to Loan and Security Agreement (the 2021 Term Loan Second Amendment) to, among other things, amend our 2021 Term Loan and First Amendment to obtain consent for the $4.6 million January 2022 milestone payment under the Indi APA, repay $20 million in outstanding principal on December 31, 2021, waive the $600,000 prepayment fee on the $20 million Term Loan repayment, and waive the minimum revenue covenant as of December 31, 2021 and modify the minimum revenue requirement for the three months ended March 31, 2022. SVB agreed to apply the full amount of funds previously established within the restricted cash collateral account to partially prepay the $20 million in outstanding principal, thereby eliminating the restricted cash collateral account. +92 +On March 7, 2022 (the Effective Date), we entered into a purchase agreement with Lincoln Park, pursuant to which Lincoln Park has committed to purchase up to $50.0 million of our common stock (the Purchase Agreement). Under the terms and subject to the conditions of the Purchase Agreement, we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $50.0 million of our common stock. Such sales of common stock by us, if any, will be subject to certain limitations, and may occur from time to time, at our sole discretion, over the 36-month period commencing on the Effective Date. As consideration for Lincoln Park's irrevocable commitment to purchase our common stock upon the terms of and subject to satisfaction of the conditions set forth in the purchase agreement, on the Effective Date, we issued 184,275 shares of common stock to Lincoln Park as a commitment fee valued at $600,000 for which no consideration was received. +On April 7, 2022, we entered into subscription agreements with a consortium of investors, including three members of our Board of Directors and other existing shareholders of the Company, for the issuance and sale by the Company of an aggregate of 6,508,376 shares of our common stock in an offering for an aggregate purchase price of approximately $11.7 million. +On April 7, 2022, we entered into the Consent and Third Amendment to Loan and Security Agreement (the 2021 Term Loan Third Amendment) whereby subject to the terms and conditions of the Third Amendment, certain waivers and consents were provided. Under the terms of the Third Amendment to our 2021 Term Loan, we agreed to the repayment of $3.0 million in outstanding principal in April 2022 with an additional $2.0 million to be paid no later than September 30, 2022, in exchange for the following: +• +Consent for a $2.0 million April 2022 mutually agreed upon Milestone Payment under the Indi APA, as amended; +• +Waiver of minimum revenue requirement for the three months ended March 31, 2022 and adjustment of remaining revenue milestones for 2022; and +• +Waiver and elimination of the prepayment fee on the $3.0 million 2021 Term Loan partial repayment in April 2022 and subsequent $2.0 million principal repayment. +The Company further amended the Indi APA agreement in April 2022 in which all parties agreed to restructure the Milestone Payments whereby the Company will make five quarterly installments of $2.0 million each beginning in April 2022, three quarterly installments of $3.0 million beginning in July 2023, one installment of $5.0 million in April 2024, and one installment of approximately $8.4 million in July 2024. In addition, the Company agreed to an exit fee of approximately $6.1 million in October 2024. Interest shall accrue on the difference between the payment schedule as agreed in the August 2021 amendment and the April 2022 amended payment schedule, at an aggregate per annum rate equal to 10%, with such interest to be payable quarterly on the following installment payment date. Our ability to make these payments is subject to ongoing compliance under the Perceptive Term Loan and commencing January 1, 2024, consent from Perceptive. +On May 9, 2022, the Company entered into a securities purchase agreement with Streeterville (the Lender), pursuant to which, among other things, the Lender: (i) purchased Promissory Note One in the aggregate principal amount totaling $16.0 million in exchange for $15.0 million less certain expenses and (ii) agreed to purchase another secured promissory note at the Company’s election (Promissory Note Two and, together with Promissory Note One, the Promissory Notes), subject to certain conditions precedent in aggregate principal amount totaling $10.3 million in exchange for $10.0 million in cash proceeds. Each of the Promissory Notes may, at the Company's option, be settled in cash or shares of common stock of the Company, upon the terms and subject to the limitations and conditions set forth in the Promissory Notes. On May 9, 2022, the Company closed on the first tranche for gross proceeds of $15.0 million (approximately $12.8 million, net, after deducting debt issuance costs and OID). +On September 30, 2022, the Company entered into the Consent and Fourth Amendment to Loan and Security Agreement (the 2021 Term Loan Fourth Amendment). Under the terms of the 2021 Term Loan Fourth Amendment, the Company agreed to a repayment of $2.0 million in outstanding principal on the earlier of (a) November 30, 2022, or (b) the date on which our unrestricted cash held with SVB falls below $10.0 million, which could be extended to December 15, 2022, subject to equity fund raising of at least $5 million, in exchange for: (i) consent for the $2.1 million October 2022 milestone and interest payment under the Indi APA, as amended, and (ii) waiver and elimination of the prepayment fee on the subsequent $2.0 million 2021 Term Loan principal repayment. +On November 21, 2022, the Company funded and/or closed various financing transactions, including: (i) a term loan facility for up to $50.0 million, with funding of $30.0 million and the issuance of warrants exercisable into 3,000,000 shares of the Company’s common stock occurring on November 21, 2022, and two additional contingently issuable tranches of $10.0 million each subject to certain terms and conditions, including revenue milestones, (ii) a follow-on equity offering of common stock and (iii) a subscription agreement for the issuance of common stock to certain members of the Company’s management team. Collectively, the Company raised gross proceeds of approximately $70.7 million ($65.7 million after deducting commissions, fees and expenses payable). Approximately $23.9 million of the net proceeds were used to retire outstanding debt of the Company and the remaining proceeds of approximately $42.0 million will be used for commercial expansion of sales, supporting the Company’s product pipeline, research and development and for general corporate purposes. +As mentioned above, the Company maintains two facilities that enable equity financing on an ongoing basis at the Company’s sole discretion, our ATM offering and our common stock purchase agreement with LPC (the LPC facility). During the year ended December 31, 2022, the Company raised approximately $7.3 million ($6.8 million after deducting underwriting discounts and +93 +commissions and offering expenses payable), in gross proceeds from the sale of 3,886,893 common shares at a weighted average price per share of $1.87 under these programs. As of December 31, 2022, the Company had remaining available capacity for share issuances of approximately $29.5 million under the ATM facility and up to $46.9 million under the LPC facility, each subject to the restrictions and limitations of the underlying facilities, as well as volume limitations under applicable SEC rules and regulations that limit their availability as sources of funding. +As of December 31, 2022, we maintained cash and cash equivalents of $43.1 million and we have $30.0 million in outstanding aggregate principal amount on our Perceptive Term Loan. We have incurred significant losses since inception and, as a result, we have funded our operations to date primarily through the sale of common stock, the sale of convertible preferred stock, the issuance of notes payable, and from our two primary revenue sources: (i) diagnostic testing, which includes lung diagnostic testing and COVID-19 testing, and (ii) providing biopharmaceutical companies with development and testing services. In accordance with Accounting Standards Update 2014-15 (ASC Topic 205-40), Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods. In evaluating the Company’s ability to continue as a going concern, management projected its cash flow sources, including the debt and equity funding and amendments to the Indi APA, and evaluated the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements were issued. Management considered the Company’s current projections of future cash flows, current financial condition, sources of liquidity and debt obligations for at least one year from the date of issuance of this Form 10-K in considering whether it has the ability to meet its obligations. +Our ability to meet our obligations as they come due may be impacted by our ability to remain compliant with financial covenants in our loan agreement or to obtain waivers or amendments that impact the related covenants. As of December 31, 2022, the Company was in compliance with all restrictive and financial covenants associated with its borrowing. However, due to the continued uncertainty caused by the COVID-19 pandemic and the associated impacts on the recovery of our diagnostic testing and services, significant risks remain with respect to our ability to meet these thresholds and any material adverse effect on our revenues, income and expenses could impact our ability to maintain compliance with these covenants. +Based on our current operating plan, unless we continue to raise additional capital (debt or equity) or obtain waiver from complying with such financial covenants, we expect that we will be unable to maintain our financial covenants under our existing loan agreement during the next twelve months, which could result in an Event of Default, as defined, causing an acceleration of the outstanding balances. We have taken steps to improve our liquidity through the actions noted above and have also undertaken several proactive measures including, among other things, the reduction of planned capital expenditures and certain operating expenses but we do not expect that these actions alone will be sufficient to maintain our financial covenants. We plan to raise additional funding through the issuance of equity or debt securities and any such financing activities are subject to market conditions. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. There can be no assurance that additional capital will be available to us or, if available, will be available in sufficient amounts or on terms acceptable to us or on a timely basis. If adequate capital resources are not available on a timely basis, we intend to consider limiting our operations substantially. This limitation of operations could include a hiring freeze, reductions in our workforce, reduction in cash compensation, deferring capital expenditures, and reducing other operating costs. +The Company’s revenues, results of operations and cash flows have been materially adversely impacted by the items noted above. We expect to continue to incur operating losses in the near term while we make investments to support our anticipated growth. Our current operating plan, which is in part determined based on our most recent historical actual results and trends, along with the items noted above, raises substantial doubt about the Company’s ability to continue as a going concern for a period beyond one year from when the December 31, 2022 financial statements are issued. Our audited financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments that might be necessary should we be unable to continue as a going concern. +Cash Flows +The following summarizes our cash flows for the periods indicated (in thousands): +Year Ended December 31, +2022 +2021 +Net cash flows provided by (used in): +Operating activities +$ +(44,972 +) +$ +(28,223 +) +Investing activities +(3,534 +) +(2,547 +) +Financing activities +58,882 +1,262 +Net increase (decrease) in cash and cash equivalents and restricted cash +$ +10,376 +$ +(29,508 +) +94 +Our cash flows resulted in a net increase in cash and cash equivalents and restricted cash of $10.4 million during the year ended December 31, 2022 as compared to the net decrease in cash of $29.5 million for the year ended December 31, 2021. For the year ended December 31, 2022, net cash used in operating activities increased by approximately $16.8 million due to a year-over-year increase in net loss from operations of $22.3 million, partially offset by an increase in non-cash expenses of approximately $14.5 million. In addition to the remaining $7.7 million increase in net loss, the Company had unfavorable changes in net working capital of $9.0 million. The unfavorable changes in net working capital are primarily as a result of the $5.0 million transferred as a refundable deposit to secure the performance of the Company’s obligations under the operating lease agreement with Centennial Valley Properties I, LLC (the CVP Lease) and a decrease in cash collections from customers and payments to vendors. Partially offsetting the unfavorable changes in net working capital is $2.5 million in capital expenditures for leasehold improvements related to the CVP Lease pursuant to agreed upon tenant improvement allowances which have been reimbursed from the CVP landlord. +Net cash used in investing activities during the year ended December 31, 2022 totaled $3.5 million, an increase of $1.0 million compared to the same period in 2021. The increase in net cash used in investing activities was primarily due to increases in purchases of property and equipment and capital expenditures for leasehold improvements related to the CVP Lease. These leasehold improvements are tenant improvements and have been reimbursed from the Landlord, as described above in net cash used in operating activities. +Net cash provided by financing activities during the year ended December 31, 2022 totaled $58.9 million, an increase of $57.6 million compared to the same period in 2021. The net cash provided by financing activities for the year ended December 31, 2022 primarily resulted from $56.3 million net proceeds from the issuance of common stock, $41.4 million net proceeds from the issuance of Promissory Note One and the Perceptive Term Loan, and $0.6 million in proceeds from the issuance of common stock under the ESPP and exercise of stock options. These proceeds were partially offset by the repayment of Promissory Note One and the 2021 Term Loan of $28.6 million, and milestone payments to Indi of $10.8 million. The net cash provided by financing activities for the year ended December 31, 2021 primarily resulted from $15.7 million net proceeds from our ATM public offering, net proceeds from our 2021 Term Loan of $29.9 million, and proceeds from the issuance of common stock under the ESPP and exercise of stock options of approximately $1.1 million, primarily offset by the repayment of $25.4 million from our 2018 Term Loan and a $20 million prepayment on our 2021 Term Loan. +Contractual Obligations and Commitments +The following table summarizes our non-cancelable contractual obligations and commitments as of December 31, 2022 (in thousands): +Payments due by period (1) +Total +Less than +1 year +1 to 3 +years +4 to 5 +years +More than +5 years +Borrowings and interest (2) +$ +50,981 +$ +4,295 +$ +8,566 +$ +38,120 +$ +— +Contingent consideration (3) +34,675 +11,272 +23,403 +— +— +Operating lease obligations (4) +48,922 +2,289 +6,329 +8,041 +32,263 +Total +$ +134,578 +$ +17,856 +$ +38,298 +$ +46,161 +$ +32,263 +(1) +Royalty payments that we may owe are not included as the amount and timing of such payments is uncertain. +(2) +Includes the Perceptive Term Loan payments of principal and interest. Interest amounts associated with the Perceptive Term Loan are variable and estimated based on the interest rate in effect at December 31, 2022. +(3) +On April 7, 2022, the Company entered into Amendment No. 3 to the Indi APA in which all parties agreed to restructure the milestone payments associated with the contingent consideration (see Note 4 to our financial statements in Item 8 of this Annual Report on Form 10-K). +(4) +Does not include the remaining contractually agreed upon tenant improvement allowances associated with the CVP Lease of $18.3 million which are expected to be received during fiscal year 2023 (see Note 9 to our financial statements in Item 8 of this Annual Report on Form 10-K). +There have been no other significant changes to our future contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. +Off-Balance Sheet Arrangements +As of December 31, 2022, we have not entered into any off-balance sheet arrangements. +Critical Accounting Policies and Significant Judgments and Estimates +In accordance with accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Certain of these estimates significantly influence the portrayal of our financial condition and results of operations and require us to make difficult, subjective or complex judgments. Our critical accounting policies are described in greater detail below and in Note 2 to our financial statements in Item 8 of this Annual Report on Form 10-K. +95 +Revenue Recognition +We recognize revenue when our customers obtain control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for our goods or services. To determine revenue recognition for our arrangements with our customers, we perform a five-step process, which includes: (i) identifying the contract(s) with a customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations in the contract; and (v) recognizing revenue when (or as) we satisfy our performance obligations. The Company generates revenues from (i) diagnostic tests and (ii) assay development and testing services (services revenue). +The Company recognizes revenues related to blood-based lung diagnostic billings based on estimates of the amounts ultimately expected to be collected from customers on a portfolio approach. In determining the amount to accrue for a delivered test, the Company considers factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. Variable consideration, if any, is estimated based on an analysis of historical experience and adjusted as better estimates become available. These estimates require significant judgment by management. +The Company also provides services to patients with whom the Company does not have contracts as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification 606 (ASC 606). The Company recognizes revenue for these patients when contracts, as defined in ASC 606, are established at the amount of consideration to which it expects to be entitled, or when the Company receives substantially all of the consideration subsequent to satisfaction and delivery of the performance obligations. +Share-based Compensation and Grant Date Fair Value +Share-based compensation related to stock options granted to our employees, directors and non-employees is measured at the grant date based on the fair value of the award. For our service-based awards, the fair value of each award is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. Compensation expense for share-based awards with performance conditions is recognized based upon the probability the performance conditions will be met as defined in the grant. Restricted stock units are measured at their grant date fair value using the closing price of our common stock on the date of grant and recognized to expense on a straight-line basis over the vesting period of each award. We estimate forfeitures and adjust these estimates to actual forfeitures as they occur. +We use the Black-Scholes option-pricing model to estimate the fair value of our share-based option awards, which requires assumptions to be made related to expected term of an award, expected volatility, the risk-free rate and expected dividend yield. The fair value of our common stock is based on our closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded. Changes in these subjective assumptions can materially affect the estimated value of equity grants and the share-based compensation that we record in our financial statements. +Recently Issued Accounting Pronouncements +In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842). This ASU intends to make accounting for leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. In addition to other related amendments, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements , which offers an additional transition method whereby entities may apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings rather than application of the new leases standard at the beginning of the earliest period presented in the financial statements. The Company elected this transition method and adopted ASC 842 on January 1, 2022 and as a result, recorded operating lease right-of-use (ROU) assets of $1.3 million, including offsetting deferred rent of $0.1 million, along with the associated operating lease liabilities of $1.3 million. On January 1, 2022, the Company did not have any finance leases. Additional information and disclosures required by this new standard are contained in Note 3 and Note 9 to our financial statements in Part II of this Annual Report on Form 10-K. +In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (ASC Topic 326). This ASU requires measurement and recognition of expected credit losses for financial assets. This ASU requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for the Company beginning January 1, 2023. The Company evaluated the guidance and determined the overall impact of the adoption will have an immaterial impact on our financial statements. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive +96 +compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.24 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) until December 31, 2025 (the year ended December 31st following the fifth anniversary of our initial public offering). +Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which: (i) the market value of our common shares held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common shares held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. +Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk. +We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. +Interest Rate Risk +We are exposed to market risk for changes in interest rates related primarily to our cash and cash equivalents, marketable securities and our indebtedness, including our outstanding Perceptive Term Loan. As of December 31, 2022, we had $30 million outstanding on the Perceptive Term Loan Facility which has an annual rate equal to the greater of (a) forward-looking one-month term SOFR as posted by CME Group Inc. and (b) 3.0% per annum, plus an applicable margin of 9.0%. Historically, we have not entered into derivative agreements such as interest rate caps and swaps to manage our floating interest rate exposure. +Periodically throughout the year, we have maintained balances in various operating accounts in excess of federally insured limits. Our cash and cash equivalents are funds held in checking and bank savings accounts, primarily at two U.S. financial institutions. We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. We continually monitor our positions with, and the credit quality of, the financial institutions with which we invest. +As of December 31, 2022, a hypothetical 100 basis point increase in interest rates would have an estimated $0.3 million impact per year on our financial position and results of operations, based on the current Perceptive Term Loan principal remaining outstanding through maturity. +Item 8. Financial Statement s and Supplementary Data. +The financial statements and supplementary data are as set forth in the index to the financial statements on page F-1. +Item 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure. +None. +Item 9A. Controls and Procedures. +Evaluation of Disclosure Controls and Procedures +We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing +97 +disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. +Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the criteria established in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), using the 2013 framework. Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2022, the Company's internal control over financial reporting was effective based on the criteria set forth by COSO. +This annual report does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2022, there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information. +None. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. +Not Applicable. +98 +PART III +Item 10. Directors, Executive Off icers and Corporate Governance. +The information required by this item with respect to directors is incorporated by reference from the information under the captions "Board and Corporate Governance Matters—Election of Directors" and "—Director Independence" contained in our Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2022 in connection with the solicitation of proxies for our 2023 Annual Meeting of Stockholders (the Proxy Statement). Certain information required by this item concerning executive officers is set forth in the Proxy Statement under the caption "Executive Compensation—Compensation of Named Executive Officers" and is incorporated herein by reference. +Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16(a) of the Exchange Act. This disclosure is contained in the section entitled "Stock Ownership—Delinquent Section 16(a) Reports" in the Proxy Statement and is incorporated herein by reference. +We have adopted a Code of Business Conduct and Ethics that applies to all of our officers and employees, including our President and Chief Executive Officer, our Chief Financial Officer and other employees who perform financial or accounting functions. The Code of Business Conduct and Ethics sets forth the basic principles that guide the business conduct of our employees. Stockholders may request a free copy of our Code of Business Conduct and Ethics by contacting Biodesix, Inc., Attention: Chief Financial Officer, 2970 Wilderness Place, Suite 100, Boulder, Colorado 80301. +To date, there have been no waivers under our Code of Business Conduct and Ethics. We intend to disclose future amendments to certain provisions of our Code of Business Conduct and Ethics or waivers of such Codes granted to executive officers and directors on our website at http://www.biodesix.com within four business days following the date of such amendment or waiver. +Our Board of Directors has appointed an Audit Committee, comprised of Ms. Jean Franchi, as Chairwoman, Messrs. Hany Massarany, Lawrence T. Kennedy, Jr., and Dr. Matthew Strobeck. The Board of Directors has determined that Ms. Franchi qualifies as an Audit Committee Financial Expert under the definition outlined by the Securities and Exchange Commission. In addition, each of the members of the Audit Committee qualifies as an "independent director" under the current rules of The NASDAQ Stock Market and Securities and Exchange Commission rules and regulations. +Item 11. Executiv e Compensation. +The information required by this item is incorporated by reference from the information under "Executive Compensation" contained in the Proxy Statement and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Own ers and Management and Related Stockholder Matters. +The information required by this item is incorporated by reference from the information under the captions "Stock Ownership—Security Ownership of Certain Beneficial Owners and Management", "Executive Compensation", and "Equity Compensation Plan Information" contained in the Proxy Statement and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this item is incorporated by reference from the information under the caption "Board and Corporate Governance Matters—Certain Relationships and Related-Party Transactions" and "—Director Independence" contained in the Proxy Statement and is incorporated herein by reference. +Item 14. Principal Accoun tant Fees and Services. +The information required by this item is incorporated by reference from the information under the caption "Audit Matters—Principal Accountant Fees and Services" contained in the Proxy Statement and is incorporated herein by reference. +99 +PART IV +Item 15. Exhibits, Financ ial Statement Schedules. +(a) +Documents filed as a part of the report. +1. +Financial Statements +Reference is made to the Index to Financial Statements of Biodesix, Inc. included in Item 8 of Part II hereof. +2. +Financial Statement Schedules +All schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto. +3. +See Item 15(b) below. Each management contract or compensating plan or arrangement required to be filed has been identified. +(b) +Exhibits. +Item 16. Form 10-K Summary. +Not applicable. +100 +Exhibit Index +Exhibit +Number +Description +3.1** +Amended and Restated Certificate of Incorporation of Biodesix, Inc., dated October 30, 2020 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on December 10, 2020). +3.2** +Amended and Restated Bylaws of Biodesix, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on October 12, 2020). +4.1** +Specimen stock certificate evidencing shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 21, 2020). +4.2** +Eleventh Amended and Restated Investor Rights Agreement, by and among Biodesix, Inc. and the investors listed on Exhibit A thereto, dated October 10, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +4.3** +Warrant held by Innovatus Life Sciences Lending Fund I, LP, to Purchase Series G Preferred Stock, dated February 23, 3018 (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +4.4** +Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.5 to the Company's Form 10-K filed with the SEC on March 16, 2021). +4.5** +Form of Note, dated November 21, 2022, issued by the Company to Perceptive Credit Holdings IV, LP. (incorporated by reference to Exhibit 4.1 and Exhibit 10.1 in the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +4.6** +Warrant to Purchase Stock, dated November 21, 2022, issued by the Company to Perceptive Credit Holdings IV, LP. (incorporated by reference to Exhibit 4.2 in the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +10.1+** +Biodesix, Inc. Amended and Restated 2006 Employee, Director and Consultant Stock Plan, as amended to date (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.1+** +Form of Stock Option Grant Notice under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.2+** +Form of Option Agreement under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.3+** +Form of Notice of Exercise under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.3 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.3+** +Biodesix, Inc. 2016 Equity Incentive Plan, as amended to date (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.4.1+** +Form of Stock Option Grant Notice under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.4.2+** +Form of Option Agreement under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.4.3+** +Form of Notice of Exercise under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.3 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.5+** +Biodesix, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 26, 2020). +101 +10.5.1+** +Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5.1 to the Company's Form 10-K filed with the SEC on March 16, 2021). +10.5.2+** +Forms of Restricted Stock Unit Award Grant Notice and Award Agreement under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5.2 to the Company's Form 10-Q filed with the SEC on August 10, 2021). +10.6+** +Biodesix, Inc. 2020 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 26, 2020). +10.7.1+** +Biodesix, Inc., First Amended Bonus-to-Options Program, adopted by the Board of Directors on October 15, 2010 (incorporated by reference to Exhibit 10.5.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.7.2+** +Biodesix, Inc., Second Amended Bonus-to-Options Program, adopted by the Board of Directors on June 21, 2011 (incorporated by reference to Exhibit 10.5.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.7.3+** +Biodesix, Inc., Third Amended Bonus-to-Options Program, adopted by the Board of Directors on December 31, 2015 (incorporated by reference to Exhibit 10.5.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.8.1+** +Biodesix, Inc. 2021 Senior Management Bonus to Equity Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 4, 2022). +10.8.2+** +Amendment No. 1 to the Biodesix, Inc. 2021 Senior Management Bonus to Equity Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 4, 2022). +10.8.3+* +Amendment No. 2 to the Biodesix, Inc. 2021 Senior Management Bonus to Equity Plan +10.9.1+** +Form of Stock Option Grant Notice under the Biodesix, Inc. Bonus-To-Options Program (incorporated by reference to Exhibit 10.6.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.9.2+** +Form of Option Agreement under the Biodesix, Inc. Bonus-To-Options Program (incorporated by reference to Exhibit 10.6.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.10+** +Form of Indemnification Agreement, by and between Biodesix, Inc. and each of its directors and executive officers (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 14, 2020). +10.11.1†+** +Executive Employment Letter, by and between Biodesix, Inc. and Scott Hutton, dated February 16, 2018 (incorporated by reference to Exhibit 10.9.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.11.2†+** +Executive Employment Letter, by and between Biodesix, Inc. and Scott Hutton, dated February 23, 2020 (incorporated by reference to Exhibit 10.9.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.12.1†+** +Employment Letter, by and between Biodesix, Inc. and Robin Harper Cowie, dated March 11, 2011 (incorporated by reference to Exhibit 10.10.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.12.2†+** +Executive Employment Letter, by and between Biodesix, Inc. and Robin Harper Cowie, dated February 23, 2020 (incorporated by reference to Exhibit 10.10.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.13+** +Consulting Agreement, by and between David Brunel and Biodesix, Inc., dated September 19, 2020 (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.14.1†** +Office Lease between Aero-Tech Investments, LLC and Biodesix, Inc., dated October 5, 2011 (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +102 +10.14.2** +Office Lease between Aero-Tech Investments, LLC and Biodesix, Inc., dated January 24, 2022 (incorporated by reference to Exhibit 10.13.2 to the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2022). +10.15†** +Lease Assignment of De Soto Facility, dated November 1, 2019 (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.16.2** +Lease agreement by and between Centennial Valley Properties I, LLC and Biodesix, Inc. dated March 11, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2022). +10.16.2** +First Amendment to Lease Agreement by and between Centennial Valley Properties I, LLC and Biodesix, Inc. dated March 11, 2022 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2022). +10.17** +Patent Assignment between Biodesix, Inc., and Integrated Diagnostics, Inc., dated June 30, 2018 (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.18†** +IP Assignment Agreement between Oncimmune Limited, and Biodesix, Inc., dated October 31, 2019 (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.19†** +IP License Agreement between Oncimmune Limited, and Biodesix, Inc., dated October 31, 2019 (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.20†** +Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated August 1, 2019 (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.21†** +Supply Agreement between Biodesix, Inc., and Oncimmune, dated October 31, 2019 (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.22†** +Supply Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated August 1, 2019 (incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.23†** +Co-Development and Collaboration Agreement between AVEO Pharmaceuticals, Inc., and Biodesix, Inc., dated April 9, 2014, as amended October 14, 2016 (incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.24†** +Asset Purchase Agreement among Biodesix, Inc., Integrated Diagnostics, Inc., and the stockholders of Integrated Diagnostics, Inc., listed therein, dated June 30, 2018 (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.24.1** +Amendment No. 2 to Asset Purchase Agreement and Plan of Reorganization (incorporated by reference to Exhibit 10.38 to the Company's Form 10-Q filed with the SEC on August 10, 2021). +10.24.2** +Amendment No. 3 to Asset Purchase Agreement and Plan of Reorganization (incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q filed with the SEC on May 11, 2022). +10.25†** +Asset Purchase Agreement between Oncimmune Limited and Biodesix, Inc., dated June 27, 2019, as amended to date (incorporated by reference to Exhibit 10.24 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.26†** +Contract Agreement between Biodesix, Inc. and the Colorado Department of Public Health and Environment, dated September 11, 2020 (incorporated by reference to Exhibit 10.29 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.27†** +Material Transfer Agreement by and between Biodesix, Inc. and Bio-Rad Laboratories, Inc., dated March 23, 2020 (incorporated by reference to Exhibit 10.30 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +103 +10.27.1†** +First Amendment to Material Transfer Agreement by and between Biodesix, Inc. and Bio-Rad Laboratories, Inc. dated April 3, 2020 (incorporated by reference to Exhibit 10.31 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.28†** +Material Transfer Agreement by and between Biodesix, Inc. and Bio-Rad Laboratories, Inc., dated April 17, 2020 (incorporated by reference to Exhibit 10.32 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.29†** +Price Agreement by and between Biodesix, Inc. and Bio-Rad Laboratories, Inc., dated May 12, 2020 (incorporated by reference to Exhibit 10.33 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.30** +Letter from Bio-Rad Laboratories, Inc. dated August 7, 2020 (incorporated by reference to Exhibit 10.33 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 21, 2020). +10.31** +Letter from Bio-Rad Laboratories, Inc. dated August 14, 2020 (incorporated by reference to Exhibit 10.34 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 21, 2020). +10.32** +First Amendment to the Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated May 24, 2021 (incorporated by reference to Exhibit 10.37 to the Company's Form 10-Q filed with the SEC on August 10, 2021). +10.33** +Loan and Security Agreement, dated March 19, 2021 (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on March 23, 2021). +10.33.1** +Consent and First Amendment to Loan and Security Agreement, dated September 30, 2021 (incorporated by reference to Exhibit 10.39 to the Company's Form 10-Q filed with the SEC on November 15, 2021). +10.33.2** +Consent and Second Amendment to Loan and Security Agreement, dated December 30, 2021 (incorporated by reference to Exhibit 10.40 to the Company's current report on Form 8-K filed with the SEC on January 4, 2022). +10.33.3** +Consent and Third Amendment to Loan and Security Agreement, dated April 7, 2022 (incorporated by reference to Exhibit 10.3 to the Company's current report on Form 8-K filed with the SEC on April 11, 2022). +10.33.4** +Consent and Fourth Amendment to Loan and Security Agreement, dated September 30, 2022 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on November 3, 2022). +10.34** +Purchase Agreement, dated March 7, 2022, by and between Biodesix, Inc. and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on March 7, 2022). +10.35** +Registration Rights Agreement, dated March 7, 2022, by and between Biodesix, Inc. and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K filed with the SEC on March 7, 2022). +10.36** +Secured Purchase Agreement by and between Streeterville Capital LLC and Biodesix, Inc. dated May 9, 2022 (incorporated by reference to Exhibit 10.7 to the Company's Form 10-Q filed with the SEC on May 11, 2022) . +10.37** +Secured Convertible Promissory Note #1 by and between Streeterville Capital LLC and Biodesix, Inc. dated May 9, 2022 (incorporated by reference to Exhibit 10.8 to the Company's Form 10-Q filed with the SEC on May 11, 2022). +10.38** +Form of Subscription Agreement with resale registration rights provision, dated April 7, 2022 (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on April 11, 2022). +10.39** +Form of Subscription Agreement without registration rights, entered by the three members of our Board of Directors, dated April 7, 2022 (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K filed with the SEC on April 11, 2022). +10.40** +Credit Agreement and Guaranty, dated as of November 16, 2022, by and among the Company and Perceptive Credit Holdings IV, LP. (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +104 +10.41** +Security Agreement, dated as of November 21, 2022, by and among the Company and Perceptive Credit Holdings IV, LP. (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +10.42** +Form of Subscription Agreement, dated November 21, 2022 (incorporated by reference to Exhibit 10.3 to the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +23.1* +Consent of independent registered public accounting firm. +24.1* +Power of Attorney (included on the signature page of this Form 10-K). +31.1* +Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1* +Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2* +Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS* +Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. +101.SCH* +Inline XBRL Taxonomy Extension Schema Document +101.CAL* +Inline XBRL Taxonomy Extension Calculation Linkbase Document +101.DEF* +Inline XBRL Taxonomy Extension Definition Linkbase Document +101.LAB* +Inline XBRL Taxonomy Extension Label Linkbase Document +101.PRE* +Inline XBRL Taxonomy Extension Presentation Linkbase Document +104 +Cover Page Interactive Data File (embedded within the Inline XBRL document) +† Portions of this exhibit have been omitted as the Registrant has determined that the omitted information (i) is not material and (ii) would likely cause competitive harm to the Registrant if publicly disclosed. ++ Indicates management contract or compensatory plan. +* Filed herewith. +**Previously filed. +105 +SIGNAT URES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized . +Biodesix, Inc. +Date: March 6, 2023 +By: +/s/ RYAN H. SIUREK +Ryan H. Siurek +Chief Accounting Officer +POWER OF ATTORNEY +Each person whose signature appears below constitutes and appoints Scott Hutton and Robin Harper Cowie, and each of them, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to file with the Securities and Exchange Commission this Form 10-K and any and all amendments and exhibits thereto, and all documents in connection therewith, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and purposes as he or she might or could do in person, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his or her substitutes may lawfully do or cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. +Name +Title +Date +/s/ SCOTT HUTTON +President, Chief Executive Officer (Principal Executive Officer) +March 6, 2023 +Scott Hutton +/s/ ROBIN HARPER COWIE +Chief Financial Officer, Secretary and Treasurer +March 6, 2023 +Robin Harper Cowie +/s/ JOHN PATIENCE +Chairman and Director +March 6, 2023 +John Patience +/s/ JEAN FRANCHI +Director +March 6, 2023 +Jean Franchi +/s/ JON FAIZ KAYYEM +Director +March 6, 2023 +Jon Faiz Kayyem, Ph.D. +/s/ LAWRENCE T. KENNEDY, JR. +Director +March 6, 2023 +Lawrence T. Kennedy, Jr. +/s/ HANY MASSARANY +Director +March 6, 2023 +Hany Massarany +/s/ JACK SCHULER +Director +March 6, 2023 +Jack Schuler +/s/ MATTHEW STROBECK +Director +March 6, 2023 +Matthew Strobeck, Ph.D. +/s/ CHARLES WATTS +Director +March 6, 2023 +Charles Watts, M.D. +106 +Item 8. Financial Statements and Supplementary Data +BIODESIX, Inc. +INDEX TO FINANCIAL STATEMENTS +Report of Independent Registered Public Accounting Firm ( KPMG LLP , Denver, CO , Auditor Firm ID: 185 ) +F- 2 +Balance Sheets as of December 31, 2022 and 2021 +F- 3 +Statements of Operations for the Years ended December 31, 2022 and 2021 +F- 4 +Statements of Stockholders’ Equity for the Years ended December 31, 2022 and 2021 +F- 5 +Statements of Cash Flows for the Years ended December 31, 2022 and 2021 +F- 6 +Notes to Financial Statements +F- 8 +F- 1 +Report of Independent Regist ered Public Accounting Firm +To the Board of Directors and Stockholders of +Biodesix, Inc.: +Opinion on the Financial Statements +We have audited the accompanying balance sheets of Biodesix, Inc. (the Company) as of December 31, 2022 and 2021, the related statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. +Going Concern +The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and needs to raise additional equity or debt capital to fund its operations. These matters raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. +Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 2016. +Denver, Colorado +March 6, 2023 +F- 2 +BIODESIX, INC. +Balance Sheets +(in thousands, except share data) +As of December 31, +2022 +2021 +Assets +Current assets +Cash and cash equivalents +$ +43,088 +$ +32,712 +Accounts receivable, net of allowance for doubtful accounts of $ 118 and $ 158 +5,065 +3,656 +Other current assets +5,181 +7,245 +Total current assets +53,334 +43,613 +Non‑current assets +Property and equipment, net +5,848 +4,179 +Intangible assets, net +9,797 +11,617 +Operating lease right-of-use assets +2,973 +— +Goodwill +15,031 +15,031 +Other long-term assets +5,923 +1,657 +Total non‑current assets +39,572 +32,484 +Total assets +$ +92,906 +$ +76,097 +Liabilities and Stockholders' Equity +Current liabilities +Accounts payable +$ +1,685 +$ +1,662 +Accrued liabilities +8,218 +7,665 +Deferred revenue +962 +1,850 +Current portion of operating lease liabilities +1,543 +— +Current portion of contingent consideration +10,341 +17,764 +Current portion of notes payable +49 +19 +Other current liabilities +41 +— +Total current liabilities +22,839 +28,960 +Non‑current liabilities +Long‑term notes payable, net of current portion +25,004 +9,993 +Long-term operating lease liabilities +5,254 +— +Contingent consideration +18,645 +16,028 +Other long-term liabilities +558 +1,389 +Total non‑current liabilities +49,461 +27,410 +Total liabilities +72,300 +56,370 +Commitments and contingencies +Stockholders' equity +Preferred stock, $ 0.001 par value, 5,000,000 authorized; +0 (2022 and 2021) issued and outstanding +— +— +Common stock, $ 0.001 par value, 200,000,000 authorized; +77,614,358 (2022) and 30,789,649 (2021) shares issued and outstanding +78 +31 +Additional paid‑in capital +387,948 +321,669 +Accumulated deficit +( 367,420 +) +( 301,973 +) +Total stockholders' equity +20,606 +19,727 +Total liabilities and stockholders' equity +$ +92,906 +$ +76,097 +The accompanying Notes are an integral part of these financial statements. +F- 3 +BIODESIX, INC. +Statements of Operations +(in thousands, except per share data) +Year Ended December 31, +2022 +2021 +Revenues +$ +38,212 +$ +54,506 +Operating expenses: +Direct costs and expenses +14,154 +30,518 +Research and development +13,102 +12,789 +Sales, marketing, general and administrative +61,462 +50,517 +Change in fair value of contingent consideration +— +1,622 +Impairment loss on intangible assets +81 +— +Total operating expenses +88,799 +95,446 +Loss from operations +( 50,587 +) +( 40,940 +) +Other (expense) income: +Interest expense +( 8,072 +) +( 4,508 +) +(Loss) gain on extinguishment of liabilities, net +( 6,981 +) +2,298 +Change in fair value of warrant liability +84 +— +Other income (loss), net +109 +( 9 +) +Total other expense +( 14,860 +) +( 2,219 +) +Net loss +$ +( 65,447 +) +$ +( 43,159 +) +Net loss per share, basic and diluted +$ +( 1.55 +) +$ +( 1.58 +) +Weighted-average shares outstanding, basic and diluted +42,103 +27,365 +The accompanying Notes are an integral part of these financial statements. +F- 4 +BIODESIX, INC. +Statements of Stockholders' Equity +(in thousands) +Common Stock +Additional Paid‑In +Accumulated +Total Stockholders' +Shares +Amount +Capital +Deficit +Equity +Balance ‑ January 1, 2021 +26,562 +$ +27 +$ +299,953 +$ +( 258,814 +) +$ +41,166 +Issuance of common stock, net +3,757 +4 +15,675 +— +15,679 +Issuance of common stock under employee stock purchase plan +43 +— +328 +— +328 +Exercise of stock options +428 +— +769 +— +769 +Share‑based compensation +— +— +4,944 +— +4,944 +Net loss +— +— +— +( 43,159 +) +( 43,159 +) +Balance ‑ December 31, 2021 +30,790 +31 +321,669 +( 301,973 +) +19,727 +Issuance of common stock, net +45,705 +46 +56,189 +— +56,235 +Issuance of common stock under employee stock purchase plan +194 +— +355 +— +355 +Issuance of common stock for deferred offering costs +184 +— +600 +— +600 +Exercise of stock options +384 +1 +268 +— +269 +Release of restricted stock units +357 +— +— +— +— +Issuance of Initial Warrants +— +— +2,906 +— +2,906 +Share‑based compensation +— +— +5,961 +— +5,961 +Net loss +— +— +— +( 65,447 +) +( 65,447 +) +Balance - December 31, 2022 +77,614 +$ +78 +$ +387,948 +$ +( 367,420 +) +$ +20,606 +The accompanying Notes are an integral part of these financial statements. +F- 5 +BIODESIX, INC. +Statements of Cash Flows +(in thousands) +Year Ended December 31, +2022 +2021 +Cash flows from operating activities +Net loss +$ +( 65,447 +) +$ +( 43,159 +) +Adjustments to reconcile net loss to net cash, cash equivalents, and restricted +cash used in operating activities +Depreciation and amortization +3,597 +3,178 +Amortization of lease right-of-use assets +2,247 +— +Loss (gain) on extinguishment of liabilities, net +6,981 +( 2,298 +) +Share‑based compensation expense +5,961 +4,944 +Change in fair value of warrant liability +( 84 +) +— +Change in contingent consideration +— +1,622 +Provision for doubtful accounts +93 +193 +Accrued interest, amortization of debt issuance costs and other +5,037 +2,706 +Inventory excess and obsolescence +906 +— +Impairment loss on intangible assets +81 +— +Changes in operating assets and liabilities: +Accounts receivable +( 1,501 +) +11,454 +Other current assets +1,113 +1,369 +Other long-term assets +( 3,504 +) +875 +Accounts payable and other accrued liabilities +( 773 +) +( 7,425 +) +Deferred revenue +( 1,213 +) +( 1,682 +) +Tenant improvement allowances received +2,471 +— +Current and long-term operating lease liabilities +( 937 +) +— +Net cash and cash equivalents and restricted cash used in operating activities +( 44,972 +) +( 28,223 +) +Cash flows from investing activities +Purchase of property and equipment +( 3,298 +) +( 2,241 +) +Patent costs and intangible asset acquisition, net +( 236 +) +( 306 +) +Net cash and cash equivalents and restricted cash used in investing activities +( 3,534 +) +( 2,547 +) +Cash flows from financing activities +Proceeds from the issuance of common stock +59,538 +16,343 +Proceeds from issuance of common stock under employee stock purchase plan +355 +328 +Proceeds from exercise of stock options +269 +769 +Payment of contingent consideration +( 10,822 +) +— +Proceeds from term loan and notes payable +45,102 +30,078 +Repayment of term loan and notes payable +( 28,604 +) +( 45,428 +) +Payment of debt issuance costs +( 3,725 +) +( 164 +) +Deferred offering costs +( 129 +) +— +Equity financing costs +( 3,069 +) +( 664 +) +Other +( 33 +) +— +Net cash and cash equivalents and restricted cash provided by financing activities +58,882 +1,262 +Net increase (decrease) in cash and cash equivalents and restricted cash +10,376 +( 29,508 +) +Cash, cash equivalents, and restricted cash ‑ beginning of period +32,798 +62,306 +Cash, cash equivalents, and restricted cash ‑ end of period +$ +43,174 +$ +32,798 +The accompanying Notes are an integral part of these financial statements. +F- 6 +BIODESIX, INC. +Statements of Cash Flows +(in thousands) +(Continued from the previous page) +Supplemental cash flow information : +Year Ended December 31, +2022 +2021 +Common stock issued for deferred offering costs +$ +600 +$ +— +Deferred offering costs amortized against Additional paid-in capital +75 +— +Issuance of Perceptive Warrants +3,051 +— +Debt issuance costs included in Accounts payable and other accrued liabilities +631 +15 +Equity financing costs included in Accounts payable and other accrued liabilities +160 +— +Operating lease right-of-use assets obtained in exchange for lease liabilities at adoption of ASC 842 +1,269 +— +Operating lease right-of-use assets obtained in exchange for lease liabilities +3,936 +Finance lease right-of-use assets obtained in exchange for lease liabilities +123 +— +Cash paid for interest +1,009 +1,676 +Cash paid for income taxes +— +— +The accompanying Notes are an integral part of these financial statements. +F- 7 +BIODESIX, INC. +Notes to Financ ial Statements +Note 1 – Organization and Description of Business +Biodesix, Inc. (the “Company”, “Biodesix”, “we” “us” and “our”), formerly Elston Technologies, Inc., was incorporated in Delaware in 2005. The Company’s headquarters are in Colorado and performs its blood-based diagnostic tests in its laboratory facilities, which are located in Boulder, Colorado and De Soto, Kansas. The Company conducts all of its operations within a single legal entity. Biodesix is a leading data-driven diagnostic solutions company leveraging state of the art technologies with its proprietary artificial intelligence platform to discover, develop, and commercialize solutions for clinical unmet needs, with a primary focus in lung disease. The Company develops diagnostic tests addressing important clinical questions by combining multi-omics through the power of artificial intelligence. We derive our revenue from two sources: (i) providing diagnostic testing services associated with (a) blood-based lung tests and (b) Coronavirus Disease 2019 (COVID-19) tests (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics (Services). Biodesix offers five Medicare-covered tests for patients with lung diseases. The blood based Nodify Lung® nodule risk assessment testing strategy, consisting of the Nodify XL2® and the Nodify CDT® tests, evaluates the risk of malignancy in incidental pulmonary nodules, enabling physicians to better triage patients to the most appropriate course of action. The blood based IQLung™ strategy for lung cancer patients integrates the GeneStrat® ddPCR test, the GeneStrat NGS™ test and the VeriStrat® test to support treatment decisions across all stages of lung cancer. +The Company also offers three SARS-CoV-2 tests. The Bio-Rad SARS-CoV-2 ddPCR test, the cPASS ™ neutralization antibody test kit, and the Platelia SARS-CoV-2 Total Ab test have been granted Emergency Use Authorization (EUA) by the Federal Drug Administration (FDA) under Section 564 of the Federal Food, Drug, and Cosmetic Act (FDCA). Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety. The EUA declaration under Section 564 of the FDCA is distinct from and independent of the declaration by the Secretary of HHS of a public health emergency under Section 319 of the Public Health Service Act (the PHS Act). On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. Because the EUA declaration from the FDA is distinct from the declaration under Section 319 of the PHS Act, the FDA EUA may remain in effect beyond the duration of the Section 319 declaration. We cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. +In addition to diagnostic tests, the Company provides biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. The Company leverages the proprietary and advanced Diagnostic Cortex® AI (Artificial Intelligence) platform, to collaborate with many of the world’s leading biotechnology and pharmaceutical companies to solve complex diagnostic challenges in lung disease. +Blood-Based Lung Tests +The Company offers five blood-based lung cancer tests across the lung cancer continuum of care: +Diagnosis +• +Nodify XL2 and Nodify CDT tests, marketed as our Nodify Lung Nodule Risk Assessment testing strategy, assess a suspicious lung nodule's risk of lung cancer to help identify the most appropriate treatment pathway. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +Treatment & Monitoring +• +GeneStrat ddPCR and VeriStrat tests, marketed as part of our IQLung testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to establish the patient’s prognosis and help guide treatment decisions. The GeneStrat ddPCR tumor profiling test and the VeriStrat immune profiling test have a turnaround time of two business days, providing physicians with timely results to facilitate treatment decisions. +• +GeneStrat NGS (NGS) test, also marketed as part of our IQLung testing strategy, is our blood-based NGS test with results in three business days. The NGS test was launched in November 2021 to a select group of physicians, with national launch in January 2022. The 52-gene panel includes guideline recommended mutations to help physicians treating advanced-stage lung cancer patients identify targeted therapy mutations in genes, such as EGFR, ALK, KRAS, MET, NTRK, ERBB2, and others, and delivers them in an expedited timeframe so patient treatment can begin sooner. +F- 8 +COVID-19 Tests +We operate and have commercialized the Biodesix WorkSafe™ testing program, under which the Company offers three SARS-CoV-2 tests: +• +Bio-Rad SARS-CoV-2 ddPCR test, which is FDA EUA authorized to be performed by Clinical Laboratory Institute Amendments (CLIA) authorized laboratories that perform high complexity tests. The ddPCR test is designed to detect the presence of current infection by the SARS-CoV-2 virus. +• +Platelia SARS-CoV-2 Total Ab test, which is an antibody test, FDA EUA authorized by the FDA, intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. +• +cPass SARS-CoV-2 Neutralization Antibody test, which is the first blood-based surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the receptor binding domain (RBD) in the spike protein of SARS-CoV-2 that are produced in response to a previous SARS-CoV-2 infection. This test was commercially introduced in partnership with GenScript Biotech Corporation. +These tests under the Biodesix WorkSafe testing program are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems. +In developing the Company's products, the Company has built or gained access to unique biorepositories, proprietary technology, and bioinformatics methods that it believes are important to the development of new targeted therapies, determining clinical trial eligibility and guiding treatment selection. The Company’s testing services are made available through its clinical laboratories. +Note 2 – Summary of Significant Accounting Policies +Basis of Presentation and Estimates +The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates include: revenue recognition; the estimation of the fair value of goodwill and other intangible assets; fair value of stock options; income tax uncertainties, including a valuation allowance for deferred tax assets; warrant liabilities; and contingencies. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recognized revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions. +As of December 31, 2022, we maintained cash and cash equivalents of $ 43.1 million and we have $ 30.0 million in outstanding aggregate principal amount on our Perceptive Term Loan. We have incurred significant losses since inception and, as a result, we have funded our operations to date primarily through the sale of common stock, the sale of convertible preferred stock, the issuance of notes payable, and from our two primary revenue sources: (i) diagnostic testing, which includes lung diagnostic testing and COVID-19 testing, and (ii) providing biopharmaceutical companies with development and testing services. In accordance with Accounting Standards Update 2014-15 (ASC Topic 205-40), Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods. In evaluating the Company’s ability to continue as a going concern, management projected its cash flow sources, including the debt and equity funding and amendments to the Integrated Diagnostics, Inc. (Indi) Agreement, and evaluated the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements were issued. Management considered the Company’s current projections of future cash flows, current financial condition, sources of liquidity and debt obligations for at least one year from the date of issuance of this Form 10-K in considering whether it has the ability to meet its obligations. +Our ability to meet our obligations as they come due may be impacted by our ability to remain compliant with financial covenants in our loan agreement (see Note 8 – Debt ) or to obtain waivers or amendments that impact the related covenants. Due to the continued uncertainty caused by the COVID-19 pandemic and the associated impacts on the recovery of our diagnostic testing and services, significant risks remain with respect to our ability to meet these thresholds and any material adverse effect on our revenues, income and expenses could impact our ability to maintain compliance with these covenants. +Based on our current operating plan, unless we continue to raise additional capital (debt or equity) or obtain a waiver from complying with such financial covenants, we expect that we will be unable to maintain our financial covenants under our existing loan agreement during the next twelve months, which could result in an Event of Default, as defined, causing an acceleration and repayment of the outstanding balances. We have taken steps to improve our liquidity through raising debt and equity capital during 2022, amendments to our 2021 Term Loan and amended the Indi Agreement to delay near term cash requirements and extend the period of milestone +F- 9 +payments. We have also undertaken several proactive measures including, among other things, the reduction of planned capital expenditures and certain operating expenses but we do not expect that these actions alone will be sufficient to maintain our financial covenants. On November 21, 2022, the Company funded and/or closed various financing transactions, including: (i) a term loan facility for up to $ 50.0 million, with funding of $ 30.0 million and the issuance of warrants exercisable into 3,000,000 shares of the Company’s common stock occurring on November 21, 2022, and two additional contingently issuable tranches of $ 10.0 million each subject to certain terms and conditions, including revenue milestones, (ii) a follow-on equity offering of common stock and (iii) a subscription agreement for the issuance of common stock to certain members of the Company’s management team. Collectively, the Company raised gross proceeds of approximately $ 70.7 million ($ 65.7 million after deducting commissions, fees and expenses payable). Approximately $ 23.9 million of the net proceeds were used to retire outstanding debt of the Company with Streeterville Capital, LLC and Silicon Valley Bank. To maintain an adequate amount of available liquidity and execute our current operating plan, we will need to continue to raise additional funds from external sources, such as through the issuance of equity or debt securities; however, we have not secured such funding at the time of this filing and any such financing activities are subject to market conditions. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. There can be no assurance that additional capital will be available to us or, if available, will be available in sufficient amounts or on terms acceptable to us or on a timely basis. If adequate capital resources are not available on a timely basis, we intend to consider limiting our operations substantially. This limitation of operations could include a hiring freeze, reductions in our workforce, reduction in cash compensation, deferring capital expenditures, and reducing other operating costs. +The Company’s revenues, results of operations and cash flows have been materially adversely impacted by the items noted above. We expect to continue to incur operating losses in the near term while we make investments to support our anticipated growth. Our current operating plan, which is in part determined based on our most recent historical actual results and trends, along with the items noted above, raises substantial doubt about the Company’s ability to continue as a going concern for a period beyond one year after these financial statements are issued. Our audited financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments that might be necessary should we be unable to continue as a going concern. +Segment Reporting +The Company has a single operating segment focused on providing diagnostic testing services to customers. All of the Company’s revenue and long-lived assets were derived or located in the United States for the years ended December 31, 2022 and 2021 . +Revenue Recognition +The Company generates revenues from (i) diagnostic tests and (ii) assay development and testing services (services revenue). +Diagnostic test revenues consist of blood-based lung tests and COVID-19 tests, which are recognized in the amount expected to be received in exchange for diagnostic tests when the diagnostic tests are delivered. The Company determines the transaction price related to its blood-based lung diagnostic test contracts using a portfolio approach by considering the nature of the payer and historical price concessions granted to groups of customers. The transaction price associated with COVID-19 testing arrangements are determined on the basis of the individual contract with each customer. +Services revenue consists of various types of tests or other scientific services for a purpose as defined by any individual customer, which are often larger biopharmaceutical companies, as defined by a written agreement between the Company and the customer. These services are generally completed upon the delivery of testing results, or achievement of contractual milestone(s) as defined in the customer agreements. Revenue for these services is recognized upon delivery of the completed test results, or upon completion of the contractual milestone(s). +The Company recognizes revenues related to blood-based lung diagnostic billings based on estimates of the amounts ultimately expected to be collected from customers on a portfolio approach as discussed above. In determining the amount to accrue for a delivered test, the Company considers factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. Variable consideration, if any, is estimated based on an analysis of historical experience and adjusted as better estimates become available. These estimates require significant judgment by management. +The Company also provides services to patients with whom the Company does not have contracts as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification 606 (ASC 606). The Company recognizes revenue for these patients when contracts, as defined in ASC 606, are established at the amount of consideration to which it expects to be entitled, or when the Company receives substantially all of the consideration subsequent to satisfaction and delivery of the performance obligations. +Deferred revenue consists of payments received for research, development, and testing services fees received prior to the completion of performance of these tests and services. +F- 10 +See Note 11 — Revenue and Accounts Receivable Credit Concentration for additional information. +Direct Costs and Expenses +The components of our cost of diagnostic tests and testing services consist of cost of materials, direct labor, including bonuses, benefit and share-based compensation, depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs associated with acquiring and processing test samples, including sample accessioning, test performance, quality control analyses, charges to collect and transport samples; curation of test results for physicians; and in some cases, license or royalty fees due to third parties. +Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents. Costs associated with performing tests are expensed as the test is processed regardless of whether and when revenue is recognized with respect to that test. +Research and Development Expenses +Research and development expenses include external and internal costs incurred to develop our technology, collect clinical samples, and conduct clinical studies to develop and support our products. External costs consist primarily of payments to clinical trial sites, sample acquisition costs and laboratory supplies purchased in connection with the Company’s discovery and preclinical activities, process development and clinical development activities, infrastructure expenses, including allocated facility occupancy and information technology costs. Internal expenses include employee-related costs, including salaries, share-based compensation, and related benefits for employees engaged in research and development functions. +The Company estimates and accrues its expenses resulting from its obligations under contracts with vendors and consultants in connection with conducting research and development activities. The financial terms of these contracts vary from contract to contract and may result in payments that do not match the periods over which materials or services are provided under such contracts. The Company’s estimates depend on the timeliness and accuracy of the data provided by consultants and vendors regarding the status of each activity. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information received. Research and development costs are expensed as incurred. +Sales, Marketing, General and Administrative Expenses +Selling expenses consist primarily of costs associated with our sales organization, including our direct sales force and sales management, client services, marketing, and reimbursement, as well as business development personnel who are focused on our biopharmaceutical customers. These expenses consist primarily of salaries, commissions, bonuses, employee benefits, travel, and share-based compensation, as well as marketing and educational activities and allocated overhead expenses. +Sales, marketing, general and administrative expenses also include costs for our marketing and sales organizations, and other functions including finance, legal, human resources, and information technology. These expenses consist principally of salaries, bonuses, employee benefits, travel, share-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. +Concentrations of Credit Risk and Other Uncertainties +Substantially all of the Company’s cash and cash equivalents are deposited with two major financial institutions in the United States. The Company continually monitors its positions with, and the credit quality of, the financial institution with which it holds cash. Periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. +Several of the components for certain of the Company's sample collection kits, test reagents, and test systems are obtained from single-source suppliers. If these single-source suppliers fail to satisfy the Company's requirements on a timely basis, the Company could suffer delays in being able to deliver its diagnostic solutions, a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results. +For a discussion of credit risk concentration of accounts receivable as of December 31, 2022 and 2021, see Note 11 – Revenue and Accounts Receivable Credit Concentration . +Cash and Cash Equivalents +Cash equivalents consist of short-term, highly-liquid instruments with an original maturity of three months or less from the date of purchase. +Restricted Cash +Restricted cash consists of deposits related to the Company’s corporate credit card. As of December 31, 2022 and 2021, the Company had $ 0.1 million restricted cash, respectively, which was included in ‘ Other current assets ’ in the accompanying balance sheets. +F- 11 +Accounts Receivable and Allowance for Doubtful Accounts +Accounts receivable are stated at the amount management expects to collect from customers based on their outstanding invoices. Management reviews accounts receivable quarterly to determine if any receivable will potentially be uncollectible and to estimate the amount of allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value based on historical experience, customer creditworthiness, facts, and circumstances specific to outstanding balances, and payment terms. +Inventory +Inventory consists primarily of material supplies, which are consumed in the performance of testing services and charged to ‘Direct c osts and expenses’. Inventory is stated at cost and reported within ‘Other current assets’ in the balance sheet and was $ 1.4 million and $ 2.9 million as of December 31, 2022 and 2021 , respectively. The Company recorded a reserve for excess inventory of $ 0.1 million and zero , primarily associated with the wind down of the COVID-19 testing operation, as of December 31, 2022 and 2021, respectively. During the years ended December 31, 2022 and 2021 , the Company recorded $ 0.9 million and zero , respectively, to the statement of operations for excess and obsolete inventory. +Property and Equipment +Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and five years . Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the statements of operations in the period realized. +Long-lived assets to be held and used are evaluated for impairment when events or circumstances indicate the carrying value of a long-lived asset or asset group is less than the undiscounted cash flows from the use and eventual disposition over its remaining useful life. The Company assesses recoverability by comparing the sum or projected undiscounted cash flows from the use and eventual disposition of the asset or asset group to its carrying value, and records an impairment loss if the carrying value is greater than the undiscounted future cash flows. There were no impairments for th e years ended December 31, 2022 and 2021 . +Intangible Assets +Intangible assets primarily consist of intangible assets acquired as part of business combinations, external costs associated with patent applications that are probable of future economic benefits, and trademark costs. Finite-lived intangibles are stated at cost, net of accumulated amortization. The Company amortizes finite-lived intangible assets using the straight-line method over their estimated useful lives of 9 to 10 years , based on management's estimate of the period over which their economic benefits will be realized, product life and patent life. Trademarks are considered indefinite lived and are not amortized. +Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate a reduction to fair value below their carrying amounts. There was an immaterial impairment during the year ended December 31, 2022 and there were no impairments for th e year ended December 31, 2021 . +Goodwill +Goodwill represents the excess of purchase price over amounts allocated to acquired assets and liabilities assumed in business combinations. The carrying value of goodwill is evaluated for impairment at least annually or more frequently when events or circumstances occur indicate a potential for impairment. The annual impairment test is performed on the last day of our fourth quarter. Prior to performing a quantitative evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of the reporting unit exceeds its carrying value. In the event the Company determines that it is more likely than not the carrying value of our single reporting unit is higher than its estimated fair value, quantitative testing is performed comparing recorded values to estimated fair values. If impairment is present, the impairment loss is measured as the excess of the recorded goodwill over its implied fair value. Through December 31, 2022, there were no accumulated impairment losses. +Other Assets +As of December 31, 2022 , the Company has a $ 5.0 million cash refundable deposit to secure the performance of the Company’s obligations associated with the operating lease agreement with Centennial Valley Properties I, LLC (see Note 9 – Leases ). The $ 5.0 million refundable deposit is reported within 'Other long-term assets' in the balance sheet. +Fair Value of Financial Instruments +U.S. GAAP for fair value establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). We utilize a combination of market and income approaches to value our financial instruments. Our financial assets and liabilities are measured using inputs from the three levels of the +F- 12 +fair value hierarchy. Fair value measurements are categorized within the fair value hierarchy based upon the lowest level of the most significant inputs used to determine fair value. +The three levels of the hierarchy and the related inputs are as follows: +Level +Inputs +1 +Unadjusted quoted prices in active markets for identical assets and liabilities. +2 +Unadjusted quoted prices in active markets for similar assets and liabilities; +Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or +Inputs other than quoted prices that are observable for the asset or liability. +3 +Unobservable inputs for the asset or liability. +The carrying amounts of certain financial instruments including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, other long-term assets, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. +See Note 4 — Fair Value for further discussion related to estimated fair value measurements. +Contingent Consideration +In connection with the purchase transaction with Indi, the Company recorded contingent consideration for amounts potentially payable to Indi’s shareholder upon attainment of a three-consecutive month gross margin target of $ 2.0 million within the seven-year period after the acquisition date. The fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value through the date the gross margin target was achieved is recorded as operating expenses in the statements of operations. Subsequent changes to the contingent consideration following the achievement of the gross margin target are recorded as ‘Interest expense’ in the statements of operations resulting from the passage of time and fixed payment schedule. +Warrant Liability +As consideration for the Perceptive Term Loan Facility (see Note 8 - Debt ), the Company issued a warrant to purchase common stock to the Lender of up to 5,000,000 shares of the Company's common stock (the Perceptive Warrant), with warrants exercisable into 3,000,000 shares of the Company’s common stock issued on the funding date of the Tranche A Loan (the Initial Warrants) as well as up to 2,000,000 additional warrants that are contingent upon the Company’s borrowing the remaining availability under the Perceptive Term Loan Facility (the Additional Warrants). The Initial Warrants are equity classified (see Note 10 - Equity ) while the Additional Warrants are classified as liabilities and subject to fair value measurement (see Note 4 – Fair Value ). +Share‑Based Compensation +Stock Options +The Company grants service condition and performance condition stock options. Stock options are granted with exercise prices equal to the fair market value of our common stock on the date of grant. The grant date fair value of each employee stock option is estimated on the date of grant using the Black-Scholes option-pricing model, which requires the use of assumptions, including the expected term of the option, expected volatility of our stock price, expected dividend yield, and the risk-free interest rate, among others. We estimate forfeitures and adjust these estimates to actual forfeitures as they occur. These assumptions involve inherent uncertainties including market conditions and employee behavior that are generally outside of the Company’s control. Service condition stock options are expensed based on the grant date fair value of the awards using the straight-line method over the requisite service period. Performance-condition stock options vest based on achievement of multiple weighted performance goals, certification of performance achievement by the Compensation Committee of the Board of Directors, and continued service. For performance-condition stock options, compensation expense is updated for our expected performance level against performance goals at the end of each reporting period, which involves judgment as to achievement of certain performance metrics. +Restricted Stock Units (RSUs) +The Company grants service-condition RSUs. The grant date fair values of these RSUs are based on the closing market price of our common stock on the grant date. We estimate forfeitures and adjust these estimates to actual forfeitures as they occur. The service-condition RSUs vest based on continued service with compensation expense recognized on a straight-line basis over the requisite service period. +See Note 12 — Share-Based Compensation for additional information related to share-based compensation. +Income Taxe s +The Company accounts for income taxes in accordance with ASC 740 - Income Taxes , under which deferred income taxes are recognized based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year +F- 13 +to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results, or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. The recorded valuation allowance is based on significant estimates and judgments and if the facts and circumstances change, the valuation allowance could materially change. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. +See Note 14 — Income Taxes for additional information related to income taxes. +Net Loss per Common Share +Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the period, if dilutive, using the treasury stock method. Potentially dilutive securities consisting of options to purchase common stock, warrants to purchase common stock, RSUs and shares subject to purchase under our employee stock purchase plan were excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive for all periods presented. +Note 3 – Recent Issued Accounting Standards +Recently adopted accounting standards +In February 2016, the FASB issued ASU No. 2016-2, Leases (ASC 842). This ASU intends to make accounting for leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases accounted for as operating leases. In addition to other related amendments, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements , which offers an additional transition method whereby entities may apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings rather than application of the new leases standard at the beginning of the earliest period presented in the financial statements. The Company elected this transition method and adopted ASC 842 on January 1, 2022 and as a result, recorded operating lease rig ht-of-use (ROU) assets of $ 1.3 million, including offsetting deferred rent of $ 0.1 million, along with the associated operating lease liabilities of $ 1.3 million. On January 1, 2022, the Company did not have any finance leases. The adoption of ASC 842 did not result in a cumulative effect adjustment to beginn ing retained earnings, and did not materially affect the Company's statement of operations, statement of stockholders' equity or statement of cash flows for the year ended December 31, 2022. +In addition, the Company elected the following practical expedients permitted under the transition guidance within the new standard: +• +Package of practical expedients which allows the Company to carry forward the historical lease classification; +• +Hindsight practical expedient which allows the Company to use hindsight in determining the lease term, in assessing purchase options, and in assessing impairment of ROU assets; +• +Short-term lease practical expedient which allows the Company to capitalize only those leases with an initial term of twelve months or more, and; +• +The practical expedient to account for lease and non-lease components (such as common area maintenance, utilities, insurance and taxes) as a single lease component for all classes of underlying assets. +Management determines if an arrangement is a lease at inception or upon modification of a contract. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the statements of operations. When determining whether a lease is a finance lease or an operating lease, ASC 842 does not specifically define criteria to determine the “major part of remaining economic life of the underlying asset” and “substantially all of the fair value of the underlying asset.” For lease classification determination, Management continues to use (i) 75% or greater to determine whether the lease term is a major part of the remaining economic life of the underlying asset and (ii) 90% or greater to determine whether the present value of the sum of lease payments is substantially all of the fair value of the underlying asset. +ROU assets represent the Company's right to use an underlying asset for the lease term. Lease liabilities represent the Company's obligation to make lease payments under the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses either the rate implicit in the lease or its incremental borrowing rate, as applicable, based on the information available at lease commencement date. The Company applies the estimated incremental borrowing rates on a lease-by-lease level based on the economic environment associated with the lease. The operating lease ROU asset also includes any lease prepayments, net of lease incentives. Certain of the Company's leases include options to extend or terminate the lease. As leases approach maturity, the Company considers +F- 14 +various factors such as market conditions and the terms of any renewal and termination options that may exist to determine whether we will renew or terminate the lease, as such, we generally do not include renewal or termination options in our lease terms for calculating our lease liability, as the options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options at the time of the lease commencement. The Company's lease agreements do not contain any material residual value guarantees or restrictive covenants. Lease expense for lease payments of operating leases is recognized on a straight-line basis over the term of the lease. The Company uses the long-lived assets impairment guidance to determine recognition and measurement of an ROU asset impairment, if any. The Company monitors for events or changes in circumstances that require a reassessment. +Additional information and disclosures required by this new standard are contained in Note 9 — Leases . +Standards Being Evaluated +In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (ASC Topic 326). This ASU requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for the Company beginning January 1, 2023. The Company evaluated the guidance and determined the overall impact of the adoption will have an immaterial impact on our financial statements. +Note 4 - Fair Value +Recurring Fair Value Measurements +Our borrowing instruments are recorded at their carrying values in the balance sheets, which may differ from their respective fair values. The fair value of borrowings as of December 31, 2022 is primarily associated with the Perceptive Term Loan entered into with Perceptive Credit Holdings IV, LP, in November 2022 and was determined using a discounted cash flow analysis, excluding the fair value of Perceptive Warrant issued in conjunction with the transaction. The difference between the carrying value and fair value of outstanding borrowings as of December 31, 2022 is due to the debt issuance costs and the fair value of Perceptive Warrant netted against the Perceptive Term Loan. The carrying value of outstanding borrowings as of December 31, 2021, approximates fair value based on interest rates available at that time for similar borrowings. The table below presents the carrying and fair values of outstanding borrowings, which are classified as Level 2, as of the dates indicated (in thousands): +As of December 31, +2022 +2021 +Carrying Value +Fair Value +Carrying Value +Fair Value +Borrowings +$ +25,053 +$ +26,785 +$ +10,012 +$ +10,012 +The financial liabilities that are measured and recorded at estimated fair value on a recurring basis consist of our contingent consideration associated with our previous acquisition of Indi and the warrant liabilities granted as consideration for the Perceptive Term Loan Facility (see Note 8 - Debt ), which were accounted for as liabilities and remeasured through our statements of operations. +The table below presents the reported fair values of contingent consideration and warrant liabilities, which are classified as Level 3 in the fair value hierarchy, as of the dates indicated (in thousands): +As of December 31, +Description +2022 +2021 +Current portion of contingent consideration +$ +10,341 +$ +17,764 +Contingent consideration +18,645 +16,028 +Total contingent consideration +$ +28,986 +$ +33,792 +Warrant liabilities +$ +61 +$ +— +The following table presents the changes in contingent consideration and warrant liabilities for the dates indicated (in thousands): +For the year ended December 31, 2022 +Level 3 Rollforward +Contingent Consideration +Warrant Liabilities +Beginning balances - January 1, 2022 +$ +33,792 +$ +— +Additions +— +145 +Changes in fair value +— +( 84 +) +Interest expense +3,082 +— +Loss on extinguishment of liabilities +2,934 +— +Payments +( 10,822 +) +— +Ending balances - December 31, 2022 +$ +28,986 +$ +61 +F- 15 +The following table presents the changes in contingent consideration as of the date indicated (in thousands): +Level 3 Rollforward +For the year ended December 31, 2021 +Beginning balances - January 1, 2021 +$ +29,932 +Changes in fair value +1,622 +Interest expense +2,238 +Loss on extinguishment of liabilities +— +Payments of contingent consideration +— +Ending balances - December 31, 2021 +$ +33,792 +Contingent consideration +In connection with the acquisition of Indi in 2018, the Company recorded contingent consideration for amounts contingently payable to Indi's selling shareholders pursuant to the terms of the asset purchase agreement (the Indi APA). The contingent consideration arrangement requires additional consideration to be paid by the Company to such shareholders upon attainment of a three-consecutive month gross margin target of $ 2.0 million within the seven-year period after the acquisition date. Under the terms of the original agreement, when the gross margin target was achieved the Company was required to issue 2,520,108 shares of common stock. For the six months following the achievement of the gross margin target, Indi had the option to require the Company to redeem these common shares for $ 37.0 million in cash over eight equal quarterly installments. If Indi elected to not exercise its option, the Company had 12 months to repurchase the common stock in two equal and consecutive quarterly cash installments totaling $ 37.0 million. +The Company achieved the gross margin target of $ 2.0 million for three consecutive months during the three months ended June 30, 2021. The Company entered into an amendment to the original agreement in August 2021 in which all parties agreed to forgo the issuance of common stock and agreed that the Company will in lieu thereof make six quarterly installments of approximately $ 4.6 million each beginning in January 2022 and a final payment of approximately $ 9.3 million in July 2023 for a total of $ 37.0 million. (the Milestone Payments and each individually a Milestone Payment). The aggregate amount of payments owed by the Company under this amendment is the same as if Indi had exercised the put right or the Company had exercised the call right provided for in the original agreement. +On April 7, 2022, the Company entered into Amendment No. 3 to the Indi APA in which the parties agreed to restructure the Milestone Payments whereby the Company will make five quarterly installments of $ 2.0 million each beginning in April 2022, three quarterly installments of $ 3.0 million beginning in July 2023, one installment of $ 5.0 million in April 2024, and one installment of approximately $ 8.4 million in July 2024. In addition, the Company agreed to an exit fee of approximately $ 6.1 million in October 2024. Interest shall accrue on the difference between the payment schedule as agreed in the August 2021 amendment and the April 2022 amended payment schedule, at an aggregate per annum rate equal to 10 %, with such interest to be payable quarterly on the following installment payment date. Our ability to make these payments is subject to ongoing compliance under the Perceptive Term Loan and commencing January 1, 2024, consent from Perceptive (see Note 8 - Debt ). +The contingent consideration liability is accounted for at fair value and subject to certain unobservable inputs. The significant unobservable inputs used in the measurement of the fair value include the probability of successful achievement of the specified product gross margin targets, the period in which the targets were expected to be achieved, and discount rates which ranged from 11 % to 16 %. As a result of the achievement of the gross margin target, the only remaining significant unobservable input used in the measurement of fair value includes the discount rate since all other inputs became fixed and determinable. Significant increases or decreases in the discount rate could result in a significantly higher or lower fair value measurement. During the three months ended June 30, 2022, the Company recorded $ 1.1 million in interest expense due to the passage of time and fixed payment schedule, partially offset by a reduction to the contingent consideration balance of $ 1.0 million due to an increase in the discount rate to reflect current market and Company specific conditions, resulting in $ 0.1 million, net recorded as ‘ Interest expense ’ in the statements of operations. +The Company evaluated Amendment No. 3 to the Indi APA in accordance with applicable accounting standards under U.S. GAAP which resulted in the extinguishment of the original instrument due to the substantially different terms. As a result, during the three months ended June 30, 2022, we recorded a loss on extinguishment of $ 2.9 million in the statements of operations. +During the years ended December 31, 2022 and 2021, the Company recorde d $ 3.1 million and $ 2.2 million, r espectively, in interest expense due to the passage of time and fixed payment schedule. +Contingent consideration expected to be paid in the next twelve months is recorded in the balance sheets as ‘Current portion of contingent consideration’ while the remaining amount to be paid is recorded as ‘Contingent consideration’ within non-current liabilities. The net change to contingent consideration through the date the gross margin target was achieved is recorded as operating expenses in the statements of operations. Subsequent changes to the contingent consideration following the achievement of the gross margin target are recorded as ‘Interest expense’ in the statements of operations resulting from the passage of time and fixed payment schedule. +F- 16 +Warrant liabilities +On November 21, 2022, as consideration for the Perceptive Term Loan Facility (see Note 8 - Debt ), the Company issued the Perceptive Warrant to purchase up to 5,000,000 shares of the Company's common stock, including Initial Warrants and Additional Warrants. The Initial Warrants are equity classified (see Note 10 - Equity ) while the Additional Warrants are classified as liabilities within 'Other long-term liabilities' and recognized at fair value . The fair value of the Additional Warrants is determined using a Black-Scholes model and subject to certain unobservable inputs. The significant unobservable inputs used in the measurement of the fair value include the fair value of the Company's common stock, risk-free rate, the volatility of common stock which ranged from 78 % to 82 %, and the probability of the expected borrowing. Significant increases or decreases in the unobservable inputs could result in a significantly higher or lower fair value measurement. The Company determined the initial fair value of the Additional Warrants to be $ 0.1 million and during the year ended December 31, 2022 , the Company recorded $ 0.1 million as a change in fair value through the statement of operations due to changes in unobservable inputs. +Note 5 – Property and Equipment +Property and equipment consist of the following (in thousands): +As of December 31, +2022 +2021 +Lab equipment +$ +6,035 +$ +6,784 +Leasehold improvements +2,365 +2,339 +Computer equipment +749 +700 +Furniture and fixtures +349 +391 +Software +324 +600 +Vehicles +97 +97 +Construction in process +2,947 +17 +12,866 +10,928 +Less accumulated depreciation +( 7,018 +) +( 6,749 +) +Total property and equipment, net +$ +5,848 +$ +4,179 +Depreciation expense related to pr operty and equipment was: +Year Ended December 31, +2022 +2021 +Direct costs and expenses +$ +591 +$ +614 +Selling, marketing, general and administrative +1,031 +614 +Total +$ +1,622 +$ +1,228 +Note 6 – Goodwill and Intangible Assets +Intangible assets, excluding goodwill, consist of the following (in thousands): +December 31, 2022 +December 31, 2021 +Cost +Accumulated +Amortization +Net Carrying Value +Cost +Accumulated +Amortization +Net Carrying Value +Intangible assets subject to amortization +Patents +$ +1,880 +$ +( 647 +) +$ +1,233 +$ +1,755 +$ +( 566 +) +$ +1,189 +Purchased technology +16,900 +( 8,450 +) +8,450 +16,900 +( 6,572 +) +10,328 +Intangible assets not subject to +amortization +Trademarks +114 +— +114 +100 +— +100 +Total +$ +18,894 +$ +( 9,097 +) +$ +9,797 +$ +18,755 +$ +( 7,138 +) +$ +11,617 +F- 17 +Amortization expense related to definite-lived intangible assets was (in thousands): +Year Ended December 31, +2022 +2021 +Direct costs and expenses +$ +2 +$ +5 +Sales, marketing, general and administrative +1,973 +1,945 +Total +$ +1,975 +$ +1,950 +Future estimated amortization expense of intangible assets is (in thousands): +As of +December 31, 2022 +2023 +$ +1,972 +2024 +1,963 +2025 +1,957 +2026 +1,943 +2027 +992 +2028 and thereafter +856 +Total +$ +9,683 +Note 7 – Accrued Liabilities +Accrued liabilities consist of the following (in thousands): +As of December 31, +2022 +2021 +Compensation related accruals +$ +4,671 +$ +4,029 +Accrued clinical trial expense +1,232 +870 +Other expenses +2,315 +2,766 +Total accrued liabilities +$ +8,218 +$ +7,665 +Note 8 – Debt +Our long-term debt primarily consists of notes payable associated with our Perceptive Term Loan which is described in further detail below. Long-term notes payable were as follows (in thousands): +As of December 31, +2022 +2021 +Perceptive Term Loan +$ +30,000 +$ +— +2021 Term Loan +— +10,000 +Other +127 +75 +Unamortized debt discount and debt issuance costs +( 5,074 +) +( 63 +) +25,053 +10,012 +Less: current maturities +49 +19 +Long-term notes payable +$ +25,004 +$ +9,993 +Perceptive Term Loan Facility +On November 16, 2022 (the Closing Date), the Company entered into a Credit Agreement and Guaranty (the Credit Agreement) with Perceptive Credit Holdings IV, LP as the lender and administrative agent (the Lender). The Credit Agreement provides for a senior secured delayed draw term loan facility with Perceptive Advisors LLC (Perceptive), in an aggregate principal amount of up to $ 50.0 million (the Perceptive Term Loan Facility). The initial funding of the Perceptive Term Loan Facility was subject to a capital raise of at least $ 30.0 million in gross proceeds from an equity offering of the Company's common stock. On November 21, 2022 (the Funding Date), the Company raised approximately $ 40.6 million in gross proceeds from the sale of common stock (the Public Offering and November 2022 Subscription Agreements, together, "the Equity Offerings", see Note 10 - Equity ). The Tranche A Loan, in an aggregate amount of up to $ 30.0 million (the Tranche A Loan), was funded under the Perceptive Term Loan Facility substantially and concurrently with the closing of the Equity Offerings on the Funding Date. In addition to the Tranche A Loan, the Perceptive Term Loan Facility includes an additional Tranche B Loan, in an aggregate amount of up to $ 10.0 million, and an additional Tranche C Loan, in an aggregate amount of up to $ 10.0 million, which will be accessible by the Company so long as the Company satisfies certain customary conditions precedent, including revenue milestones. The Tranche B and C loans have loan commitments dates through December 31, 2023 and September 30, 2024, respectively. The Perceptive Term Loan Facility has a maturity date of November 21, 2027 (the Maturity Date) +F- 18 +and provides for an interest-only period during the term of the loan with principal due at the Maturity Date. The Company's net proceeds from the Tranche A Loan were approximately $ 27.9 million, after deducting debt issuance costs and expenses. +Interest Rate +The Perceptive Term Loan Facility will accrue interest at an annual rate equal to the greater of (a) forward-looking one-month term SOFR as posted by CME Group Inc. and (b) 3.0 % per annum, plus an applicable margin of 9.0 %. As of December 31, 2022 , the stated interest rate was approximately 13.3 %. +Amortization and Prepayment +On the Maturity Date, the Company is required to pay the Lender the aggregate outstanding principal amount underlying the Loan and any accrued and unpaid interest thereon. Prior to the Maturity Date, there will be no scheduled principal payments under the Perceptive Term Loan Facility. The Perceptive Term Loan Facility may be prepaid at any time, subject to a prepayment premium equal to 2 % to 10 % of the aggregate outstanding principal amount being prepaid, depending on the date of prepayment. +Security Instruments and Warrants +Pursuant to a Security Agreement, dated as of the Funding Date (the Security Agreement), between the Company and the Lender, substantially all of the Company’s obligations under the Credit Agreement are secured by a first lien perfected security interest on all of the Company’s assets, subject to customary exceptions. +As consideration for the Credit Agreement, the Company has issued, on the Funding Date, the Perceptive Warrant of up to 5,000,000 shares of the Company's common stock , including the Initial Warrants which are equity classified at a per share exercise price equal to $ 1.0648 which is equal to the lower of (A) the 10-day volume weighted average price (VWAP) of the Company’s common stock, on the business day immediately prior to the Closing Date of the Tranche A Loan or (B) the public offering price per share of Common Stock of $ 1.15 (see Note 10 - Equity ) . In addition to the Initial Warrants, the Additional Warrants will each become exercisable into 1,000,000 shares of common stock concurrently with the borrowing date of the Tranche B and C Loans, respectively. The per share exercise price for the Additional Warrants will be equal to the lower of (A) the Initial Warrant exercise price or (B) the 10-day VWAP ending on the business day immediately preceding the funding date of the Tranche B Loan or the Tranche C loan, res pectively. Each warrant will be exercisable, in whole or in part, until the 10th anniversary of the applicable date of issuance. If the Tranche B or C loans are not drawn by the respective loan commitment dates, the associated Additional Warrants expire and will not become exercisable. The Company accounts for the Additional Warrants as liabilities as the Additional Warrants do not meet the criteria for equity treatment (see Note 4 - Fair Value ). +Representations, Warranties, Covenants, and Events of Default +The Credit Agreement contains certain representations and warranties, affirmative covenants, negative covenants, financial covenants, and conditions that are customarily required for similar financings. The affirmative covenants, among other things, require the Company to undertake various reporting and notice requirements, maintain insurance and maintain in full force and effect all Regulatory Approvals, Material Agreements, Material Intellectual Property (each as defined in the Credit Agreement) and other rights, interests or assets (whether tangible or intangible) reasonably necessary for the operations of the Company’s business. The negative covenants restrict or limit the ability of the Company to, among other things and subject to certain exceptions contained in the Credit Agreement, incur new indebtedness; create liens on assets; engage in certain fundamental corporate changes, such as mergers or acquisitions, or changes to the Company’s business activities; make certain Investments or Restricted Payments (each as defined in the Credit Agreement); change its fiscal year; pay dividends; repay other certain indebtedness; engage in certain affiliate transactions; or enter into, amend or terminate any other agreements that has the impact of restricting the Company’s ability to make loan repayments under the Credit Agreement. In addition, the Company must (i) at all times prior to the Maturity Date maintain a minimum cash balance of $ 2.5 million; and (ii) as of the last day of each fiscal quarter commencing on the fiscal quarter ending March 31, 2023, receive revenue in amounts agreed to between the Company and Perceptive from time to time. +The Credit Agreement also contains certain customary Events of Default which include, among others, non-payment of principal, interest, or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross- defaults to material contracts, certain regulatory-related events and events constituting a change of control. As of December 31, 2022, the Company was in compliance with all restrictive and financial covenants associated with its borrowings. The occurrence of an Event of Default could result in, among other things, the declaration that all outstanding principal and interest under the Perceptive Term Loan Facility are immediately due and payable in whole or in part. +The Initial Warrants and Additional Warrants were valued at $ 2.9 million and $ 0.1 million, respectively, using the Black-Scholes option-pricing model, estimated settlement probabilities and estimated exercise prices. As a result of the fees paid to Perceptive and the value of the Perceptive Warrant, the Company recognized a discount on the Perceptive Term Loan in the amount of $ 5.2 million. The Company recorded the debt discount as a reduction to the principal amount of the debt and is amortized as interest expense over the life of the debt. +F- 19 +Securities Purchase Agreement +On May 9, 2022 (the First Closing Date), the Company entered into a securities purchase agreement (the SPA) with Streeterville Capital, LLC (Streeterville), pursuan t to which, among other things, Streeterville: (i) purchased a secured promissory note (Promissory Note One) in the aggregate principal amount totaling $ 16.0 million in exchange for $ 15.0 million less certain expenses and (ii) agreed to purchase another secured promissory note at the Company’s election (Promissory Note Two and, together with Promissory Note One, the Promissory Notes), subject to certain conditions precedent in aggregate principal amount totaling $ 10.3 million in exchange for $ 10.0 million in cash proceeds. Each of the Promissory Notes, at the Company's option, could be settled in cash or shares of common stock of the Company, upon the terms and subject to the limitations and conditions set forth in the Promissory Notes. The Company's net proceeds from the issuance of Promissory Note One were approximately $ 12.8 million, after deducting debt issuance costs and original issue discount (OID). +The Promissory Notes had a stated interest rate of 6 % per annum. The maturity date of each Promissory Note was 24 months from the issuance date of such Note. Promissory Note One was issued with an OID of $ 1.0 million while Promissory Note Two, if issued, would have been subject to an OID of $ 0.3 million subject to certain contingencies which could increase the OID by an additional $ 0.5 million. The Promissory Notes were eligible for early payment for cash, at the Company’s election, subject to a prepayment premium of 10 % of the outstanding principal balance. During the year ended December 31, 2022, the Company recorded $ 1.8 million for accrued interest, amortization of the OID and debt issuance costs to interest expense in the accompanying statements of operations. +Substantially and concurrently with the completion of the Equity Offerings, the Company fully repaid all outstanding principal, accrued and unpaid interest, and prepayment and other fees due under the existing SPA with Streeterville in the amount of $ 18.2 million. As a result of the extinguishment of Promissory Note One, t he Company recorded a loss on debt extinguishment of $ 3.6 million during the three months ended December 31, 2022, associated with the prepayment premium and with the write-off of unamortized debt issuance costs and OID. +2021 Term Loan +On March 19, 2021 (Effective Date), the Company entered into a Loan and Security Agreement (the 2021 Term Loan) by and between Silicon Valley Bank, a California corporation (SVB) and the Company, as borrower, whereby subject to the terms and conditions of the 2021 Term Loan, SVB advanced to the Company an original principal amount of $ 30 million. +The 2021 Term Loan provided for an “interest-only” period from the Effective Date through February 28, 2023, with interest due and payable monthly on the first calendar day of each month. However, the Company achieved a revenue milestone of at least $ 65 million on a trailing twelve-month basis during the three months ended March 31, 2021 which automatically extended the interest-only period through February 28, 2024. Beginning on the first calendar day of the month following the end of the interest-only period, the 2021 Term Loan was payable in (i) consecutive equal installments of principal through March 1, 2026, plus (ii) monthly payments of accrued interest. The principal amount outstanding under the 2021 Term Loan accrued interest at a floating per annum rate equal to the greater of (i) 2.00% above the prime rate, or (ii) 5.25%, which interest, in each case, was payable monthly. Changes to the interest rate applicable to the 2021 Term Loan based on changes to the prime rate were effective on the effective date of any change to the prime rate. The Company’s final payment to SVB included a payment of $ 2.7 million and was amortized as interest expense over the term of the 2021 Term Loan. +During the year ended December 31, 2022 and through the Closing Date of the Perceptive Term Loan Facility, the Company repaid $ 7.0 million in outstanding principal on the 2021 Term Loan. Substantially and concurrently with the completion of the Equity Offerings, the Company fully repaid all outstanding principal, accrued and unpaid interest, and other fees due under the existing 2021 Term Loan with SVB in the amount of $ 5.7 million, which included $ 3.0 million in remaining outstanding principal. As a result of the extinguishment of the 2021 Term Loan, t he Company recorded a loss on debt extinguishment of $ 0.4 million during the three months ended December 31, 2022, associated with the final payment and the write-off of unamortized debt issuance costs. +Scheduled principal repayments (maturities) of long-term obligations were as follows (in thousands): +As of +December 31, 2022 +2023 +$ +49 +2024 +50 +2025 +21 +2026 +7 +2027 +30,000 +2028 and thereafter +— +Total +$ +30,127 +F- 20 +Note 9 – Leases +Operating Leases +The Company acts as a lessee under all its lease agreements. The Company leases its headquarters and laboratory facilities in Boulder, Colorado, under a non-cancelable lease agreement for approximately 29,722 square feet that was set to expire in January 2023 . In January 2022, the Company amended the agreement to extend the lease agreement through January 2024 , resulting in an additional $ 1.2 million in ROU assets and lease liabilities recorded during the three months ended March 31, 2022. The Company also leases laboratory and office space in De Soto, Kansas, under a non-cancelable lease agreement for approximately 9,066 square feet that expires in October 2023, however, we are currently in discussions to extend this lease agreement . The Company also holds various copier and storage facility leases under non-cancelable lease agreements that expire in the next one to four years . +Centennial Valley Properties I, LLC Lease Agreement +On March 11, 2022, the Company entered into a Lease Agreement (the Lease) with Centennial Valley Properties I, LLC, a Colorado limited liability company (the Landlord) for office and laboratory space in Louisville, Colorado (the Leased Premises). The purpose of the Lease is to replace the Company’s current leased premises in Boulder, Colorado. The Company intends to move its corporate headquarters to the Leased Premises by mid-2023. +The initial term of the Lease is twelve years (the Initial Term) from the commencement date, which is the earlier of: (i) the Company conducting revenue generating business (as defined in the Lease), or (ii) April 1, 2023 (the Commencement Date), unless earlier terminated in accordance with the Lease. The Company has two renewal options to extend the term of the Lease for an additional seven or ten year terms for each renewal. During the three months ended June 30, 2022, the lease commenced for accounting purposes resulting in $ 2.0 million in ROU assets and lease liabilities being recorded. +Under the Lease, the Company will lease approximately 79,980 square feet at the Leased Premises. The Company will pay base rent over the life of the Lease beginning at approximately $ 227,000 per month and escalating, based on fixed escalation provisions, to approximately $ 326,000 per month, plus certain operating expenses and taxes. The Company's obligation to pay base rent shall be abated, commencing as of the Commencement Date and ending on and including the date that is 12 months after the Commencement Date (the Abated Rent Period). Further, the Company's obligation to pay base rent with respect to a portion of the area of the Lease Premises equal to 19,980 square feet shall be abated (the Partial Abated Rent), commencing as of the day after the end of the Abated Rent Period and ending on and including the date that is 24 months after the Commencement Date (the Partial Abated Rent Period). Pursuant to a work letter entered by the parties in connection with the Lease, the Landlord will contribute an aggregate of $ 18.8 million toward the cost of construction and improvements for the Leased Premises and the Company exercised its option for an additional tenant improvement allowance of $ 2.0 million (the Extra Allowance Amount). The Company will repay the Extra Allowance Amount actually funded by the Landlord in equal monthly payments with an interest rate of 6 % per year over the Initial Term excluding any part of the Abated Rent Period or Partial Abated Rent Period, which shall start to accrue on the date that the Landlord first disburses the Extra Allowance Amount. The Company made an accounting policy election to reduce the right-of-use asset and lease liability at lease commencement because the Lease specifies a maximum level of reimbursement for tenant improvements which are probable of being incurred and within the Company's control. Due to the tenant improvement allowances at the accounting lease commencement date and rent abatement periods described above, the Company expects the lease liability to accrete to approximately $ 25.7 million by March 2024 after receiving $ 20.8 million in lessor reimbursements. As of December 31, 2022, the Company has incurre d $ 2.5 million in capital expenditures for leasehold improvements related to the Leased Premises which are tenant improvements and have been reimbursed from the Landlord during the three months ended December 31, 2022. As of December 31, 2022, the Company had remaining capacity under the tenant improvement allowances of approximately $ 18.3 million. +The Lease includes various covenants, indemnities, defaults, termination rights, and other provisions customary for lease transactions of this nature. During the three months ended September 30, 2022, a $ 5.0 million cash collateralized letter of credit under the operating lease agreement was released and the funds were subsequently transferred to the Landlord as a refundable deposit (subject to contingent reduction over the term of the lease) to secure the performance of the Company’s obligations. The $ 5.0 million refundable deposit is included within ' Other long-term assets ' in the balance sheet as of December 31, 2022. +Operating lease expense for all operating leases was $ 2.6 million and $ 1.2 million and for the year ended December 31, 2022 and 2021, respectively. As of December 31, 2022 , the weighted-average remaining lease term and discount rate associated with our operating leases were 9.0 years and 11.40 %, respe ctively. +F- 21 +Future minimum lease payments associated with our operating leases were as follows (in thousands): +As of +December 31, 2022 +2023 +$ +2,289 +2024 +2,619 +2025 +3,710 +2026 +3,978 +2027 +4,063 +2028 and thereafter +32,263 +Total future minimum lease payments +48,922 +Less amount representing interest +( 23,802 +) +Less amount representing tenant improvement allowances (1) +( 18,323 +) +Total lease liabilities +$ +6,797 +(1) The remaining contractually agreed upon tenant improvement allowances of $ 18.3 million are expected to be received during fiscal year 2023. +Future minimum lease payments, which do not include amounts for common area maintenance, insurance, or taxes, for operating lease obligations in accordance with ASC 840 - Leases were as follows (in thousands): +As of +December 31, 2021 +2022 +$ +775 +2023 +149 +2024 +9 +2025 +3 +2026 +1 +2027 and thereafter +— +Total +$ +937 +Note 10 – Equity +Common Stock +The Company’s Restated Certificate of Incorporation authorizes the Company to issue up to 200,000,000 shares of common stock with a par value of $ 0.001 per share. The holder of each share of common stock is entitled to one vote per share. The common shareholders are entitled to dividends whenever funds and assets are legally available and when and if declared by the Board of Directors. The Company is currently subject to restrictions on the payment of dividends (see Note 8 - Debt ) and no dividends have been declared as of December 31, 2022. +Preferred Stock +The Company’s Restated Certificate of Incorporation authorizes the Company to issue up to 5,000,000 shares of preferred stock with a par value of $ 0.001 per share. As of December 31, 2022 and 2021 , no shares of preferred stock were issued or outstanding. +Equity Financing Programs +The Company maintains two facilities that enable equity financing on an ongoing basis at the Company’s sole discretion, our at-the-market offering and our common stock purchase agreement with Lincoln Park Capital Fund, LLC (the LPC facility). In November 2021, the Company entered into a sales agreement with a financial institution, pursuant to which the Company may issue and sell, from time to time, shares of its common stock having an aggregate offering price of up to $ 50.0 million (the Shares), subject to terms and conditions. The Shares will be offered and sold by the Company pursuant to its previously filed and currently effective registration statement on Form S-3. The Shares may only be offered and sold by means of a prospectus, including a prospectus supplement, forming part of the effective registration statement. Sales of the common stock, if any, will be made at market prices by methods deemed to be an “at-the-market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on The NASDAQ Global Market, or any other existing trading market for our common stock. +On March 7, 2022 (the LPC Effective Date), the Company entered into a purchase agreement with Lincoln Park Capital Fund, LLC (Lincoln Park), pursuant to which Lincoln Park has committed to purchase up to $ 50.0 million of the Company's common stock (the Purchase Agreement). Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $ 50.0 million of the Company’s common stock. Such sales of common stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company’s +F- 22 +sole discretion, over the 36-month period commencing on the LPC Effective Date. The number of shares the Company may sell to Lincoln Park on any single business day in a regular purchase is 50,000 shares, but that amount may be increased up to 100,000 shares, depending upon the market price of the Company’s common stock at the time of sale and subject to a maximum limit of $ 1.5 million per regular purchase. The purchase price per share for each such regular purchase will be based on prevailing market prices of the Company’s common stock immediately preceding the time of sale as computed under the Purchase Agreement. In addition to regular purchases, the Company may also direct Lincoln Park to purchase other amounts as accelerated purchases or as additional accelerated purchases. +Under applicable rules of the NASDAQ Capital Market, in no event may the Company issue or sell to Lincoln Park under the Purchase Agreement more than 19.99% of the shares of the Company’s common stock outstanding immediately prior to the execution of the Purchase Agreement (the Exchange Cap), unless (i) the Company obtains stockholder approval to issue shares of common stock in excess of the Exchange Cap or (ii) the average price of all applicable sales of common stock to Lincoln Park under the Purchase Agreement equals or exceeds $2.20 per share, such that issuances and sales of the common stock to Lincoln Park under the Purchase Agreement would be exempt from the Exchange Cap limitation under applicable NASDAQ rules. +Lincoln Park has no right to require the Company to sell any shares of common stock to Lincoln Park, but Lincoln Park is obligated to make purchases as the Company directs, subject to certain conditions. In all instances, the Company may not sell shares of its common stock to Lincoln Park under the Purchase Agreement if doing so would result in Lincoln Park beneficially owning more than 9.99 % of its common stock. +Actual sales of shares of common stock to Lincoln Park under the Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the common stock and determinations by the Company as to the appropriate sources of funding for the Company and its operations. The net proceeds, if any, under the Purchase Agreement will depend on the frequency and prices at which the Company sells shares of its common stock to Lincoln Park. The Company intends to use any net proceeds from the sale of its common stock to Lincoln Park to advance its growth strategy and for general corporate purposes. On the LPC Effective Date, the Company issued 184,275 shares of common stock to Lincoln Park as a commitment fee (the Initial Commitment Shares) for which the Company did not receive consideration and, upon the available amount being reduced to an amount equal to or less than $ 20.0 million, the Company will be required to issue 61,425 shares (the Additional Commitment Shares and together with the Initial Commitment Shares, collectively, the Commitment Shares). The Initial Commitment Shares issued were valued at $ 600,000 and, together with due diligence expenses and legal fees of $ 129,000 , reflect deferred offering costs of $ 729,000 , which are included on the balance sheet in 'Other long-term assets'. The deferred offering costs will be charged against 'Additional paid-in capital' upon future proceeds from the sale of common stock under the Purchase Agreement. During the year ended December 31, 2022 , $ 75,000 of deferred offering costs were charged against 'Additional paid-in capital'. As of December 31, 2022 , $ 654,000 of deferred offering costs remain. +The Purchase Agreement may be terminated by the Company at any time, at its sole discretion, without any cost or penalty, by giving one business day notice to Lincoln Park to terminate the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the common stock. Although the Company has agreed to reimburse Lincoln Park for a limited portion of the fees it incurred in connection with the Purchase Agreement, the Company did not pay any additional amounts to reimburse or otherwise compensate Lincoln Park in connection with the transaction, other than the issuance of the Commitment Shares. +During the year ended December 31, 2022 , the Company raised approximately $ 7.3 million ($ 6.8 million after deducting underwriting discounts and commissions and offering expenses payable), in gross proceeds from the sale of 3,886,893 common shares at a weighted average price per share of $ 1.87 under these programs. As of December 31, 2022 , the Company had remaining available capacity for share issuances of approximately $ 29.5 million under the at-the-market facility and up to $ 46.9 million under the LPC facility, each subject to the restrictions and limitations of the underlying facilities, as well as volume limitations under applicable SEC rules and regulations that limit their availability as sources of funding. +On December 30, 2021, the Company raised approximately $ 16.3 million in gross proceeds from the sale of 3,756,994 common shares at a public offering price of $ 4.35 per share in an at-the-market offering . The Company received net proceeds of $ 15.7 million, after deducting underwriting discounts and commissions and offering expenses payable of approximately $ 0.7 million. +Public Offering +On November 21, 2022, the Company closed an underwritten public offering (the Public Offering) of 35,075,000 shares of its common stock (the Public Offering Shares), including 4,575,000 shares purchased by the underwriter pursuant to an option to purchase additional shares. The Public Offering Shares were issued and sold pursuant to an underwriting agreement, dated November 16, 2022, by and between the Company and William Blair & Company, L.L.C., as sole underwriter, at a public offering price per share of $ 1.15 . The Company received net proceeds of approximately $ 37.5 million from the Public Offering after deducting underwriting discounts, commissions, and offering expenses payable by the Company. +F- 23 +The Public Offering was made pursuant to the Company’s effective Registration Statement on Form S-3 previously filed with the Securities and Exchange Commission on November 29, 2021 and a prospectus supplement, dated November 16, 2022, relating to the Offering. +Subscription Agreements +On April 7, 2022, the Company entered into subscription agreements (the April 2022 Subscription Agreements) with a consortium of investors (the April 2022 Investors), including three members of our Board of Directors and other existing shareholders of the Company, for the issuance and sale by the Company of 6,508,376 shares of the Company’s common stock in a private placement offering. The three members of our Board of Directors acquired an aggregate of 3,631,284 shares pursuant to the form of a Subscription Agreement that did not include any registration rights. The remaining 2,877,092 shares were acquired by others pursuant to the form of a Subscription Agreement whereby the Company agreed to file, subject to certain exceptions, a shelf registration statement with respect to resales of such shares with the Securities and Exchange Commission no later than 60 days from April 7, 2022, which the Company filed on June 6, 2022. +Pursuant to the April 2022 Subscription Agreements, the April 2022 Investors purchased shares at a purchase price (determined in accordance with NASDAQ rules relating to the “Minimum Value” of the Company’s common stock) of $ 1.79 per share, which is equal to the closing price of the Company's common stock on April 7, 2022, for an aggregate purchase price of approximately $ 11.7 million. The April 2022 Subscription Agreements include customary representations, warranties and covenants by the parties to the agreement. +On November 21, 2022, the Company entered into subscription agreements (the November 2022 Subscription Agreements) with certain members of management (the November 2022 Investors), including the Company’s Chief Executive Officer and Chief Financial Officer, for the issuance and sale by the Company of an aggregate of 235,056 shares of the Company’s common stock in a private placement offering. The November 2022 Subscription Agreement did not include any registration rights and included lock up restrictions that will be in effect during the period ending 90 days subsequent to November 21, 2022. +Pursuant to the November 2022 Subscription Agreements, the November 2022 Investors purchased shares at a purchase price (determined in accordance with NASDAQ rules relating to the “Minimum Value” of the Company’s common stock) of $ 1.15 per share, which is equal to the public offer price in the Public Offering, for an aggregate purchase price of approximately $ 270,000 . The November 2022 Subscription Agreements include customary representations, warranties and covenants by the parties to the agreement. +Warrants +During 2018, the Company issued warrants to purchase shares of convertible preferred stock in conjunction with the sale of certain convertible preferred shares and issuance of debt. The Company issued to the lender a warrant to purchase 613,333 shares of Series G convertible preferred stock, at an exercise price of $ 0.75 per share, subject to adjustment upon specified dilutive issuances. The warrant was immediately exercisable upon issuance and expires on February 23, 2028 . Through the effective date of the Company’s initial public offering (IPO) in October 2020, the Series G warrants were remeasured to an estimate of fair value using a Black-Scholes pricing model. As a result of the Company’s IPO, the preferred stock warrants were automatically converted to warrants to purchase 103,326 shares of common stock with a weighted average exercise price of $ 4.46 and were also transferred to additional paid-in capital. All Series G common stock warrants remain outstanding as of December 31, 2022. +On November 21, 2022, as consideration for the Perceptive Term Loan Facility (see Note 8 - Debt ), the Company issued the Perceptive Warrant to purchase up to 5,000,000 shares of the Company's common stock, including the Initial Warrants. In addition to the Initial Warrants, the Additional Warrants will each become exercisable into 1,000,000 shares of common stock concurrently with the borrowing date of the Tranche B and C Loans, respectively. The Company accounts for the Additional Warrants as liabilities as the Additional Warrants do not meet the criteria for equity treatment (see Note 4 - Fair Value ). The per share exercise price for the Initial Warrants is equal to $ 1.0648 , which is equal to the lower of (A) the 10-day VWAP of the Company’s common stock on the business day immediately prior to the Closing Date of the Tranche A Loan or (B) the public offering price per share of common stock of $ 1.15 . The Initial Warrants are equity classified and were immediately exercisable upon issuance and expire on November 21, 2032 . The Initial Warrants were valued at $ 2.9 million using the Black-Scholes option-pricing model assuming an expected term of 10 years, a volatility of 81.3 %, a dividend yield of 0 % and a risk-free interest rate of 3.67 %. All Initial Warrants remain outstanding as of December 31, 2022 . +Note 11 – Revenue and Accounts Receivable Credit Concentration +We derive our revenue from two primary sources: (i) providing diagnostic testing in the clinical setting (Diagnostic tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, clinical trial testing, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics (Services). +Diagnostic test revenues consist of blood-based lung tests and COVID-19 tests, which are recognized in the amount expected to be received in exchange for diagnostic tests when the diagnostic tests are delivered. The Company conducts diagnostic tests and delivers the completed test results to the prescribing physician or patient, as applicable. The fees for diagnostic tests are billed either to a third party such as Medicare, medical facilities, commercial insurance payers, or to the patient. The Company determines the transaction price +F- 24 +related to its diagnostic test contracts by considering the nature of the payer and historical price concessions granted to groups of customers. For diagnostic test revenue, the Company estimates the transaction price, which is the amount of consideration it expects to be entitled to receive in exchange for providing services based on its historical collection experience, using a portfolio approach. The Company recognizes revenues for diagnostic tests upon delivery of the tests to the physicians requesting the tests or patient, as applicable. +Services revenue consists of on-market tests, pipeline tests, custom diagnostic testing, and other scientific services for a purpose as defined by any individual customer, which is often with biopharmaceutical companies. The performance obligations and related revenue for these sales is defined by a written agreement between the Company and the customer. These services are generally completed upon the delivery of testing results, or other contractually defined milestone(s), to the customer. Revenue for these services is recognized upon delivery of the completed test results, or upon completion of the contractual milestone(s). +Revenues consisted of the following (in thousands): +Year Ended December 31, +2022 +2021 +Diagnostic tests +$ +34,538 +$ +48,937 +Services +3,674 +5,569 +Total revenue +$ +38,212 +$ +54,506 +Deferred Revenue +Deferred revenue consists of cash payments from customers received in advance of delivery. As test results are delivered, the Company recognizes the deferred revenue in ‘Revenues’ in the statements of operations. Of the $ 1.9 million in ‘Deferred revenue’ recorded in the balance sheet as of December 31, 2021, $ 1.2 million was recognized in revenues during the year ended December 31, 2022. In addition, $ 0.7 million was added to ‘Deferred revenue’ for up-front cash payments received for which the revenue recognition criteria have not been met and $ 0.4 million was reclassed to non-current deferred revenue. The ‘Deferred revenue’ of $ 1.0 million re corded in the balance sheet as of December 31, 2022 is expected to be recognized in revenues over the next twelve months as test results are delivered and services are performed. As of December 31, 2022 and 2021 , the Company had $ 0.4 million and $ 0.8 million in non-cu rrent deferred revenue, respectively, recorded within ‘Other long-term liabilities’ in the balance sheets which represent amounts to be recognized in excess of twelve months from the respective balance sheet date. +The Company’s customers in excess of 10% of total revenue both pertain to our COVID-19 diagnostic testing services, and their related revenue as a percentage of total revenue were as follows: +Year Ended December 31, +2022 +2021 +The State of Colorado +10 +% +— +The Big Ten Conference +— +40 +% +In addit ion to the above table, we collect reimbursement on behalf of customers covered by Medicare, which accounted for 37 % and 18 % of the Company’s total revenue for the years ended December 31, 2022 and 2021 , respectively. The Company is subject to credit risk from its accounts receivable related to services provided to its customers. +The Company’s third-party payors and other customers in excess of 10% of accounts receivable, and their related accounts receivable as a percentage of total accounts receivable were as follows: +As of December 31, +2022 +2021 +Medicare +23 +% +30 +% +Astrazeneca UK +18 +% +— +Janssen Research and Development, LLC +— +14 +% +LabCorp DD (formerly Covance) +— +11 +% +Note 12 – Share Based Compensation +Predecessor 2016 and 2006 Equity Incentive Plans +Under the 2006 Equity Incentive Plan (2006 Plan), the Company was authorized to grant incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards and RSUs. No additional awards may be granted under the 2006 Plan. +In February 2016, the Company adopted the 2016 Equity Incentive Plan (2016 Plan) as a successor to and continuation of the prior 2006 Plan. The 2016 Plan provided for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSUs, and other stock awards to directors, employees, and consultant. Awards granted under the 2016 Plan or the 2006 +F- 25 +Plan that were unallocated, expired or otherwise terminated, or were forfeited, cancelled, or repurchased by the Company, became available for future issuance under the 2016 Plan. In addition, shares subject to an award were withheld to satisfy a participant’s tax withholding obligations, or were reacquired by the Company as consideration for the exercise or purchase price of a stock award also became available for future issuance under the 2016 Incentive Plan. No additional awards may be granted under the 2016 Plan. +2020 Equity Incentive Plan +Effective upon the closing of our IPO, the Company’s Board of Directors approved the 2020 Equity Incentive Plan (2020 Plan), which replaced the 2016 Plan. The 2020 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSUs, performance awards and other stock awards. Officers, directors, employees, consultants, agents, and independent contractors who provide services to the Company may receive awards. The terms of all awards are governed by an agreement between the Company and the recipients, as administered and approved by the Compensation Committee of the Board of Directors). Any awards that expire or are forfeited under the 2016 Plan or 2006 Plan become available for issuance under the 2020 Plan. +The number of shares originally reserved for issuance under the 2020 Plan was 1,893,395 . The 2020 Plan includes an annual increase on the first day of each calendar year, beginning with the calendar year ending December 31, 2022, and continuing until, and including, the calendar year ending December 31, 2030. The annual increase will be equal to the lesser of (i) 4 % of the number of shares of our common stock issued and outstanding as of December 31st of the immediately preceding calendar year and (ii) such lesser amount determined by the Board of Directors. +To the extent an equity award granted under the 2020 Plan (other than any substitute award) or granted under any other equity plan maintained by us under which awards are outstanding as of the effective date of the 2020 Plan (the Prior Plans) expires or otherwise terminates without having been exercised or paid in full, or is settled in cash, the shares subject to such award will become available for future grant under the 2020 Plan. In addition, to the extent shares subject to an award are withheld to satisfy a participant’s tax withholding obligation upon the exercise or settlement of such award (other than any substitute award) or to pay the exercise price of a stock option granted under the 2020 Plan or a prior plan, such shares will become available for future grant under the 2020 Plan. The total number of shares available for grant under all plans as of December 31, 2022 was 233,519 . +Employee Stock Purchase Plan +Effective with our IPO in October 2020, the Company’s Board of Directors and its stockholders approved the Company’s Employee Stock Purchase Plan (the ESPP). The number of shares originally reserved for issuance under the ESPP was 338,106 . The maximum number of shares of our common stock available under the ESPP will automatically increase on the first trading day of each calendar year by an amount equal to the lesser of (i) 1 % of the shares of our common stock issued and outstanding on December 31st of the immediately preceding calendar year, and (ii) an amount determined by our Board of Directors. +Subject to any plan limitations, the ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. The price at which common stock is purchased under the ESPP is equal to 85 % of the fair market value of the Company’s common stock on the first or last day of the offering period, whichever is lower. No employee may participate in an offering period if the employee owns 5% or more of the total combined voting power or value of the Company’s stock. The initial offering period was from January 1, 2021 through August 31, 2021. On a go-forward basis, the ESPP provides for successive six-month offering periods beginning on September 1st and March 1st of each year. As of December 31, 2022 , 237,961 shares have been issued under the ESPP leaving 100,145 shares remaining for future issuance. +Description of Awards Granted +The Company has granted incentive stock options, non-statutory stock options, performance-based stock options, and RSUs. +Incentive stock options, which may only be issued to employees, are granted at an exercise price per share equal to the closing market price of the Company’s common stock on the grant date, and vest over time as determined by the Compensation Committee, provided that the term of the options may not exceed ten years from the date of grant. Accelerated vesting may occur in the event of an optionee's death, disability, or other events. +Non-statutory stock options, which may be issued to employees, non-employees and directors, are granted at an exercise price per share equal to the closing market price of the Company’s common stock on the grant date, and vest over time as determined by the Compensation Committee, provided that the term of the options may not exceed ten years from the date of grant. Accelerated vesting may occur in the event of an optionee's death, disability, or other events. +Performance-based stock options are typically granted on an annual basis and consist of a performance-based and service-based component. The performance targets and vesting conditions for performance-condition options are based on achievement of recognized revenue targets. Performance-based options vest in three equal annual installments beginning one year after the grant date , pending certification of performance achievement by the Compensation Committee and continued service. The fair value of performance-condition awards is based on the closing market price of the Company’s common stock on the grant date. There are no performance-based stock options outstanding as of December 31, 2022. +F- 26 +RSUs and the related terms and conditions are awarded at the discretion of the Compensation Committee. RSU holders have a contractual right to receive a share of common stock when vested. RSUs vest over time as determined by the Compensation Committee. RSU agreements may provide for accelerated vesting in the event of a stock unit holder's death, disability, or retirement or other events. +Our Compensation Committee may grant other stock awards that are based on or related to shares of our common stock, such as awards of shares of common stock granted as bonus and not subject to any vesting conditions, deferred stock units, stock purchase rights, and shares of our common stock issued in lieu of our obligations to pay cash under any compensatory plan or arrangement. +Bonus-To-Options Program +The Company also has a Bonus-to-Options Program (the Bonus Option Program) which is separate from previously described plans and was initially adopted by the Board of Directors in 2008, and subsequently amended and restated in 2010, 2011, 2015, and 2022. For fiscal year 2022, the Bonus Option Program is subject to the shares reserved under the 2020 Plan. The Bonus Option Program, which is limited to participation of the Chief Executive Officer, direct reports to the Chief Executive Officer and Vice Presidents of the Company, allows participants who so elect to convert all or a portion of their annual cash bonus into fully vested, non-qualified stock options to purchase shares of common stock (Bonus Options). The exercise price for the options under the Bonus Option Program equals the closing market price of the Company's common stock on the grant date, as disclosed below under “ Fair Value of Common Stock ”. Bonus Options issued must be exercised within a ten-year term. +The Company recorded the following activity related to the Bonus Option Program during the year ended December 31, 2022 (in thousands, excepted weighted average exercise price and weighted average contractual life): +Number of +Options +Weighted Average +Exercise Price +Weighted Average +Contractual +Life (Years) +Aggregate +Intrinsic +Value +Outstanding ‑ January 1, 2022 +373 +$ +17.00 +7.5 +$ +76 +Granted +244 +2.29 +— +— +Forfeited/canceled +( 91 +) +14.03 +— +— +Exercised +— +— +— +— +Outstanding ‑ December 31, 2022 +526 +$ +10.69 +7.6 +$ +2 +Exercisable ‑ December 31, 2022 +526 +$ +10.69 +7.6 +$ +2 +The Company record ed $ 1.1 million and $ 0.8 million du ring the years ended December 31, 2022 and 2021, respectively, associated with the estimate of options to be delivered to eligible participants under the Bonus Option Program and which were granted in the first quarter of 2023 and 2022, respectively, by the Compensation Committee of the Board of Directors. In determining the amount of share-based compensation to recognize under the Bonus Option Program, the Company estimates the bonus attainment for the year and determines the expected number of options to be delivered to eligible participants. A Black-Scholes option pricing model is used to determine the estimated fair value of the expected number of options to be delivered to eligible participants. The key elements in determining the estimated fair value include assumptions for volatility, the risk-free interest rate, expected dividends and strike price, utilizing the measurement date closing stock price until the grants are authorized. +Share-Based Compensation Expense +Share-based compensation expense reported in the Company’s statements of operations was (in thousands): +Year Ended December 31, +2022 +2021 +Direct costs and expenses +$ +65 +$ +49 +Research and development +427 +572 +Sales, marketing, general and administrative +5,469 +4,323 +Total +$ +5,961 +$ +4,944 +The unrecognized remaining share-based compensation expense for options and RSUs was approximately $ 7.1 million as of December 31, 2022 and is expected to be amortized to expense over the next 2.8 years. +F- 27 +Stock Options +Stock option activity during the year ended December 31, 2022, excluding the Bonus Option Program described above, was (in thousands, except weighted average exercise price and weighted average contractual life): +Number of +Options +Weighted Average +Exercise Price +Weighted Average +Contractual +Life (Years) +Aggregate +Intrinsic +Value +Outstanding - January 1, 2022 +2,878 +$ +8.08 +7.7 +$ +6,288 +Granted +380 +2.92 +— +— +Forfeited/canceled +( 333 +) +8.23 +— +— +Exercised +( 384 +) +0.70 +— +— +Outstanding ‑ December 31, 2022 +2,541 +$ +8.40 +7.4 +$ +1,489 +Exercisable ‑ December 31, 2022 +1,525 +$ +7.28 +6.8 +$ +1,067 +Fair Value of Common Stock +The fair value of the Company’s common stock is determined based on its closing market price on the date of grant. The estimated grant date fair value of stock options was calculated using the Black-Scholes option-pricing model, based on the following assumptions: +• +Expected Term : The expected term represents the period that the options granted are expected to be outstanding using the simplified method (based on the mid-point between the vesting date and the end of the contractual term). +• +Expected Volatility : The Company uses an average historical stock price of selected comparable companies over the expected term of the awards as the Company does not have sufficient trading history for its common stock. +• +Risk-Free Interest Rate : The Company uses the risk-free interest rate over the expected term of the options based on the constant maturity rate of U.S. Treasury securities with similar maturities as of the date of the grant. +• +Expected Dividend Yield : The Company is currently subject to restrictions on the payment of dividends (see Note 8 - Debt ) and no dividends have been declared as of December 31, 2022 and 2021. The Company has not paid and does not anticipate paying any dividends in the near future. Therefore, the expected dividend yield was zero. +The fair value of each option grant was estimated on the grant date with the following weighted average assumptions for the years indicated: +Year Ended December 31, +2022 +2021 +Expected term (in years) +5.65 +6.01 +Expected volatility +72.6 +% +68.5 +% +Risk‑free rate +1.32 +% +0.79 +% +Expected dividend yield +— +% +— +% +Restricted Stock Units +Restricted stock unit activity during the year ended December 31, 2022 was (in thousands, except weighted average grant date fair value per share): +Number of Shares +Weighted Average +Grant Date Fair Value Per Share +Outstanding ‑ January 1, 2022 +151 +$ +5.30 +Granted +1,473 +2.75 +Forfeited/canceled +( 56 +) +3.69 +Released +( 357 +) +5.01 +Outstanding ‑ December 31, 2022 +1,211 +$ +2.36 +Note 13 – Net Loss per Common Share +Basic net loss per share excludes dilution and is computed by dividing net loss attributable to the common stockholders by the weighted-average shares outstanding during the period. Diluted net loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, resulting in the issuance of shares of common stock that would then share in the earnings or losses of the Company. +F- 28 +In connection with the acquisition of Indi in 2018, the Company recorded contingent consideration (See Note 4 – Fair Value ) for amounts contingently payable to Indi's selling shareholders pursuant to the terms of the Indi APA. The contingent consideration arrangement requires additional consideration to be paid by the Company to Indi upon attainment of a three-consecutive month gross margin target of $ 2.0 million within the seven-year period after the acquisition date. When the gross margin target was achieved, the Company was required to issue 2,520,108 shares of common stock. The Company achieved the gross margin target of $ 2.0 million for three consecutive months during the three months ended June 30, 2021. As a result of the achievement of the gross margin target, the Company included the 2,520,108 shares of common stock in the calculation of weighted-average shares outstanding used in computing basic and diluted net loss per share for the three and six months ended June 30, 2021. In August 2021, the Company entered into an amendment of the original agreement in which the Company has agreed to forgo the issuance of its common stock. Therefore, these shares are not included in the statements of stockholders' equity or shares issued and outstanding in the balance sheets and are not included in our earnings per share calculation subsequent to August 2021. +Basic and diluted loss per share for the years ended December 31, 2022 and 2021 were (in thousands, except per share amounts): +Year Ended December 31, +2022 +2021 +Numerator +Net loss attributable to common stockholders +$ +( 65,447 +) +$ +( 43,159 +) +Denominator +Weighted-average shares outstanding used +in computing net loss per share, basic and diluted +42,103 +27,365 +Net loss per share, basic and diluted +$ +( 1.55 +) +$ +( 1.58 +) +The potentially dilutive securities as of December 31, 2022 and 2021 primarily represent the shares subject to future issuance under stock options awards, warrants, RSUs, and shares subject to purchase under our employee stock purchase plan, the terms of which are described in further detail in Note 12 – Share Based Compensation . The potentially dilutive securities would be subject to the treasury stock method when dilutive. The following outstanding common stock equivalents were excluded from diluted net loss attributable to common stockholders for the periods presented because inclusion would be anti-dilutive (in thousands): +Year Ended December 31, +2022 +2021 +Options to purchase common stock +3,067 +3,251 +Shares committed under ESPP +80 +30 +Warrants +5,103 +103 +Restricted stock units +1,211 +151 +Total +9,461 +3,535 +Note 14 - Income Taxes +Since inception, the Company has incurred net taxable losses, and accordingly, no current provision for income taxes has been recorded. The effective income tax rate of the provision for income taxes differs from the federal statutory rate as follows: +Year Ended December 31, +2022 +2021 +Federal statutory income tax rate +21 +% +21 +% +State income taxes, net of federal benefit +5 +5 +Research and developments credits +1 +1 +Permanent items +( 4 +) +( 1 +) +Change in valuation allowance +( 23 +) +( 26 +) +Effective income tax rate +— +% +— +% +F- 29 +The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities are as follows (in thousands): +As of December 31, +2022 +2021 +Deferred Tax Assets: +Net operating loss carryforwards +$ +70,822 +$ +61,874 +Research and development tax credits +3,807 +3,372 +Interest expense limitation +3,036 +554 +Property and equipment +234 +215 +Capitalized research costs +2,874 +— +Share-based compensation +1,619 +1,977 +Accruals and reserves +1,932 +1,618 +Total +84,324 +69,610 +Valuation allowance +( 82,552 +) +( 67,457 +) +Total deferred tax assets after valuation allowance +1,772 +2,153 +Deferred Tax Liabilities: +Intangible assets +( 1,772 +) +( 2,153 +) +Total deferred tax liabilities +( 1,772 +) +( 2,153 +) +Net deferred tax assets and liabilities +$ +— +$ +— +At December 31, 2022, the Company ha d $ 299.9 million and $ 4.8 million of federal net operating loss and research and experimentation tax carryforwards, respectively, which are set to expire beginning in 2026 . The Internal Revenue Code contains provisions that may limit the net operating loss carryovers available to be used in any year if certain events occur, including significant changes in ownership interest. +In assessing the realizability of its deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As the Company does not have any historical taxable income, projections of future taxable income over the periods in which the deferred tax assets are deductible, and after consideration of the history of operating losses, the Company does not believe it is more likely than not that it will realize the benefits of net deferred tax assets and, accordingly, has established a valuation allowance equal to 100 % of net deferred tax assets. The valuation allowance increased by $ 15.1 million during 2022 and $ 11.4 million during 2021. +The Company determined that it had uncertain tax positions related to its U.S. research and development credits. As of December 31, 2022 and 2021, there w as no accrued interest related to uncertain tax positions. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change in the next twelve months. A reconciliation of beginning and ending balances for unrecognized tax benefits is as follows (in thousands): +Year Ended December 31, +2022 +2021 +Balance at January 1 +$ +843 +$ +715 +Additions for tax positions related to the current year +109 +128 +Additions for tax positions related to prior years +— +— +Reductions for tax positions related to prior years +— +— +Reductions related to settlements +— +— +Reductions related to a lapse of statute +— +— +Balance at December 31 +$ +952 +$ +843 +The Company monitors proposed and issued tax law, regulations, and cases to determine the potential impact of uncertain income tax positions. At December 31, 2022, the Company had not identified any potential subsequent events that would have a material impact on unrecognized income tax benefits within the next twelve months. +The Company’s federal and state returns for all years will remain open to examination by federal and state tax authorities for three and four years, respectively, from the date of utilization of any net operating loss carryforwards. +F- 30 +Note 15 – Commitments and Contingencies +Co‑Development Agreement +In April 2014 and amended in October 2016, the Company entered into a worldwide agreement with AVEO to develop and commercialize AVEO's hepatocyte growth factor inhibitory antibody ficlatuzumab with the Company's proprietary companion diagnostic test, BDX004, a version of the Company’s serum protein test that is commercially available to help physicians guide treatment decisions for patients with advanced non-small cell lung cancer (NSCLC). Under the terms of the agreement, AVEO will conduct a proof of concept (POC) clinical study of ficlatuzumab for NSCLC in which BDX004 will be used to select clinical trial subjects (the NSCLC POC Trial). Under the agreement, the Company and AVEO would share equally in the costs of the NSCLC POC Trial, and each would be responsible for 50 % of development and regulatory costs associated with all future clinical trials agreed upon by the Company and AVEO. The Company and AVEO continue to conduct POC clinical trials of ficlatuzumab in combination with BDX004. +In September 2020, the Company exercised its opt-out right with AVEO for the payment of 50 % of development and regulatory costs for ficlatuzumab effective December 2, 2020 (the AVEO Effective Date). In September 2021, AVEO announced that the FDA has granted Fast Track Designation (FTD) to ficlatuzumab for the treatment of patients with relapsed or recurrent head and neck squamous cell carcinoma. In November 2021 AVEO also announced plans to initiate a potential registrational Phase 3 clinical trial for ficlatuzumab in the first half of 2023. The Company ha d $ 0.1 million in remaining obligations related to the AVEO agreement as of December 31, 2022 . Following the AVEO Effective Date, the Company is entitled to a 10 % royalty of net sales of ficlatuzumab and 25 % of license income generated from the licensing of ficlatuzumab from AVEO. There were no royalties received or expenses related to this agreement for the years ended December 31, 2022 and 2021. +License Agreement +In August 2019, we entered into a non-exclusive license agreement with Bio-Rad Laboratories, Inc. (Bio-Rad) (the Bio-Rad License). Under the terms of the Bio-Rad License, the Company received a non-exclusive license, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of Droplet Digital PCR™ (ddPCR) in cancer detection testing for third parties in the United States. The Company also agreed to purchase all of the necessary supplies and reagents for such testing exclusively from Bio-Rad, pursuant to a separately executed supply agreement (the Supply Agreement) with Bio-Rad. As further consideration for the non-exclusive license, the Company agreed to pay a royalty of 2.5 % on the net revenue received for the performance of such ddPCR testing collected from third parties. On May 24, 2021, the Company entered into the First Amendment to the Non-Exclusive License Agreement with Bio-Rad which amended the Bio-Rad License such that, effective May 1, 2021, the Company will no longer pay a royalty of 2.5 % on the net revenue received for the performance of such ddPCR testing collected from third parties. The Bio-Rad License expires in August 2024. Either party may terminate for the other’s uncured material breach or bankruptcy events. Bio-Rad may terminate the Bio-Rad License if the Company does not purchase licensed products under the Supply Agreement for a consecutive twelve-month period or for any material breach by us of the Supply Agreement. There wer e no expenses related to this agreement for the year ended December 31, 2022 and were insignificant for the year ended December 31, 2021. +On May 13, 2021 (the CellCarta Effective Date), we reached agreement with CellCarta Biosciences Inc. (formerly “Caprion Biosciences, Inc.”) (the CellCarta License) on a new royalty bearing license agreement for the Nodify XL2 test. The parties agreed to terminate all prior agreements and replace with this new arrangement, which has a 1 % fee on net sales made from the first commercial sale of the Nodify XL2 test to the CellCarta Effective Date as an upfront make-good payment covering past royalties due and a royalty rate of 0.675 % on future Nodify XL2 test net sales worldwide for 15 years from the first commercial sale, ending in 2034 . Royalty expense under the CellCarta License for each of the years ended December 31, 2022 and 2021 wa s $ 0.1 million, respective ly. +As part of the acquisition of the assets of Oncimmune USA, the Company entered into several agreements to govern the relationship between the parties. The Company agreed to a license agreement and royalty payment related to an acquired diagnostic test of 8 % of recognized revenue for non-screening tests up to an annual minimum volume and 5 % thereafter, with an escalating minimum through the first four years of sales . Royalty expenses we re $ 0.9 million and $ 0.7 million f or the years ended December 31, 2022 and 2021, respectively. +Litigation, Claims and Assessments +From time to time, we may become involved in legal proceedings or investigations which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition, or cash flows. +F- 31 \ No newline at end of file diff --git a/raw/filings/0001439725/2022/0000950170-23-006092/filing_metadata.csv b/raw/filings/0001439725/2022/0000950170-23-006092/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..8351ec1c8a11feeeee1cc1032d491cf49f0a04f1 --- /dev/null +++ b/raw/filings/0001439725/2022/0000950170-23-006092/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001439725,BDSX,BIODESIX INC,10-K,2023-03-06,2022-12-31,2023-03-06T11:11:24.000Z,0000950170-23-006092,bdsx-20221231.htm,10-K,16283996,1,1,https://www.sec.gov/Archives/edgar/data/1439725/000095017023006092/bdsx-20221231.htm,https://www.sec.gov/Archives/edgar/data/1439725/000095017023006092/,2022,2022,1 diff --git a/raw/filings/0001439725/2022/0000950170-23-006092/item1.txt b/raw/filings/0001439725/2022/0000950170-23-006092/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..a703cd8f6dea4b3937c1f19a2311e059e211470a --- /dev/null +++ b/raw/filings/0001439725/2022/0000950170-23-006092/item1.txt @@ -0,0 +1,509 @@ +Item 1. B usiness. +Our mission is to unite biopharma, physicians, and patients to transform the standard of care and improve outcomes with personalized diagnostics. +Our vision is a world where all critical diseases are diagnosed early and treated quickly with the guidance of personalized diagnostic solutions, so humanity can thrive without the burden of disease. +Business Overview +Biodesix, Inc. (“Biodesix”, “we,” “us,” “our” or the “Company”) is a leading data-driven diagnostic solutions company leveraging state of the art technologies with our proprietary artificial intelligence (AI) platform to discover, develop, and commercialize testing solutions for clinical unmet needs, with a primary focus in lung disease. By combining a multi-omic approach with a holistic view of the patient’s disease state, we believe our testing solutions provide physicians with greater insights to help personalize their patient’s care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe improves overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic Cortex®, to discover innovative diagnostic tests for clinical use. Because of this approach, we believe we are unique in the diagnostics market as this approach allows for a broader and more holistic understanding of each patient’s disease state. Our data-driven and multi-omic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, patients, researchers, and biopharmaceutical companies. +We operate in a single segment and derive our revenue from two sources: (i) providing diagnostic testing services associated with (a) blood-based lung tests and (b) Coronavirus Disease 2019 (COVID-19) tests (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics (Services). We derived 90% of our total revenues for fiscal 2022 and 2021 from our diagnostic testing business. +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. Since our inception, we have performed over 550,000 tests and continue to generate a large and growing body of clinical evidence. We have participated in 27 clinical studies, four of which are ongoing, and have published over 300 clinical and scientific peer-reviewed publications, presentations, and abstracts. We have a variety of samples with associated data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development initiatives. +We have commercialized eight diagnostic tests which are currently on market and we perform over 30 assays for research use as part of our laboratory services that have been used by over 60 biopharmaceutical customers and academic partners. +Blood-Based Lung Tests +We have five diagnostic blood-based tests across the lung cancer continuum of care, which generated $29.3 million and $18.7 million in revenue for fiscal 2022 and 2021, respectively, an annual growth rate of 57%. +Diagnosis +• +Nodify XL2® and Nodify CDT ® tests, together marketed as part of our Nodify Lung ® Nodule Risk Assessment testing strategy, assess a suspicious lung nodule's risk of lung cancer to help identify the most appropriate treatment pathway. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +Treatment & Monitoring +• +GeneStrat® ddPCR and VeriStrat® tests, marketed as part of our IQLung™ testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in the tumor and the state of the patient’s immune system to establish the patient’s prognosis and help guide treatment decisions. The GeneStrat ddPCR tumor profiling test and the VeriStrat immune profiling test have a turnaround time of two business days, providing physicians with timely results to facilitate treatment decisions. +3 +• +GeneStrat NGS™ (NGS) test, also marketed as part of our IQLung testing strategy, is our blood-based NGS test with results in three business days. The NGS test was launched in November 2021 to a select group of physicians, with national launch in January 2022. The 52-gene panel includes guideline recommended mutations to help physicians treating advanced-stage lung cancer patients identify targeted therapy mutations in genes, such as EGFR, ALK, KRAS, MET, NTRK, ERBB2, and others, and delivers them in an expedited timeframe so patient treatment can begin sooner. +COVID-19 Tests +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe™ testing program. We generated $5.2 million and $30.2 million in revenue from COVID-19 testing during fiscal 2022 and 2021, respectively. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two United States Food and Drug Administration (FDA) Emergency Use Authorization (EUA)-authorized tests, a part of our customizable WorkSafe program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. +The Bio-Rad SARS-CoV-2 Droplet Digital™ polymerase chain reaction (ddPCR) test and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. The Bio-Rad SARS-CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under the Clinical Laboratory Improvement Amendments (CLIA) to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Prior to using the Bio-Rad SARS-CoV-2 tests as part of our testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Beginning in second quarter 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass ™ SARS-CoV-2 Neutralizing Antibody testing as a service. The test is the first surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the receptor binding domain (RBD) in the spike protein of SARS-CoV-2 that are produced in response to a previous SARS-CoV-2 infection. +Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety. The EUA declaration under Section 564 of the FDCA is distinct from and independent of the declaration by the Secretary of HHS of a public health emergency under Section 319 of the Public Health Service Act (the PHS Act). On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. Because the EUA declaration from the FDA is distinct from the declaration under Section 319 of the PHS Act, the FDA EUA may remain in effect beyond the duration of the Section 319 declaration. We cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. +We announced multiple partnerships for COVID-19 testing, and maintained an agreement with the State of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State which expired on August 31, 2022. Additionally, we oversaw and managed onsite testing and validating testing for the Big Ten Conference athletic competitions through the term of our contract which expired on June 30, 2021. +COVID-19 Pandemic +The COVID-19 pandemic has disrupted, and may continue to disrupt, our lung diagnostic testing operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States of Colorado and Kansas’ public health orders and the guidance from the Centers for Disease Control and Prevention (CDC). Employees who can perform their duties remotely have the option to work from home. Our sales, marketing and business development efforts may be constrained by our operational response to future COVID-19 variant outbreaks. We will continue to adjust our operational norms, as needed, to help slow the spread of COVID-19, including complying with government directives and guidelines as they are modified and supplemented. +The COVID-19 pandemic and the surge associated with multiple variants have negatively affected our lung diagnostic testing-related revenue and our clinical studies. Beginning in the third quarter 2020, the Company’s COVID-19 testing services began to experience rapid growth with a peak in the first quarter 2021; however, subsequent to this peak, we experienced a rapid decline in COVID-19 testing revenue primarily as a result of a few significant contracts that expired as well as the ongoing increase in COVID-19 vaccination rates across the U.S. and the adoption and availability of at-home testing. We do not anticipate the need for COVID-19 testing to be commensurate with the peak demand experienced during the first quarter 2021 and instead expect the demand to substantially decline +4 +as our society adapts to a post-pandemic era. There is no assurance that our COVID-19 testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain and the need for COVID-19 testing may vary, which could have a significant effect on our results of operations and profitability. As a result, increases in revenue, if any, due to any increase in demand for these diagnostic tests may not be indicative of our future revenue. +See “Risk Factors” for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations. +Full Year Results for 2022 +For the year ended December 31, 2022, compared to the prior year: +• +Total Revenue was $38.2 million, a decrease of 30% primarily driven by the expected decline in COVID-19 diagnostic testing; +o +Lung Diagnostic Revenue of $29.3 million, an increase of 57% +o +Services Revenue of $3.7 million, a decrease of 34% +o +COVID-19 Revenue of $5.2 million, a decrease of 83% +• +Gross Margin was $24.1 million resulting in a 63% overall gross margin percentage as compared to 44% in the prior year; +• +Operating Expenses, excluding Direct costs and expenses, were $74.6 million, an increase of 15% and including non-cash share-based compensation expense of $6.0 million as compared to $4.9 million in the prior year; +• +Net Loss was $65.4 million, an increase of 52%, which includes approximately $7.0 million of loss on debt extinguishment in 2022 as compared to a gain on debt modification of $2.3 million in the prior year; +• +Basic and Diluted Net Loss Per Common Share was $1.55; +• +Net Cash Used by Operating Activities was $45.0 million, compared to $28.2 million used in the prior year; and +• +Cash and Cash Equivalents was $43.1 million as of December 31, 2022. +Our Market Opportunity +Diagnostic Testing Market Size and Opportunity +Despite significant advances over the last decade, lung cancer is still the deadliest type of cancer in both men and women in the United States. While diagnostic testing has become routinely used at certain points in the lung cancer continuum of care (diagnosis, treatment and monitoring), we believe there is substantial need for novel, advanced testing to improve on the current standard of care. We estimate that in the United States, the lung cancer continuum of care currently represents over 10 million annual testing opportunities and is over a $27 billion market annually for testing alone. +Over the last two decades, the use of biomarker testing in clinical trials has increased, with 15% of oncology trials involving the use of biomarker testing in 2000, compared to 55% in 2018. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their research and development pipelines and increase chances of drug development success. We estimate that biopharmaceutical partnering and research opportunities represents over a $2 billion market annually. +5 +Lung Cancer Continuum of Care – Clinical Unmet Needs +Standards of care in lung cancer have evolved rapidly over the past decade, along with our understanding of the disease. With the introduction of numerous treatment options, physicians need an ever-increasing amount of information in order to select the best treatment plan for each individual patient. We believe that the lung cancer continuum of care has a variety of clinical unmet needs ranging from initial diagnosis of lung cancer after discovery of a lung nodule to treatment guidance for early and advanced stage disease, and monitoring for disease progression. +• +Diagnosis : We estimate approximately 1.6 million new incidental lung nodules and potentially 4 million lung nodules from the adoption of screening could be identified annually in the United States. Following initial discovery of a nodule, patients are typically evaluated by a pulmonologist for risk of lung cancer before an invasive procedure is carried out to obtain a tissue sample to confirm diagnosis. This risk assessment is based on clinical factors such as the patient’s smoking history and age, and radiological features such as the size and location of the nodule, obtained from a computed tomography (CT) scan. On initial assessment, we estimate that approximately 80% of patients are identified as low to moderate risk (5-65%) where guideline recommendations for their care plan are unclear, often resulting in either overtreatment of patients with benign nodules or undertreatment in patients with cancer. An estimated 17% of patients with malignant nodules are initially sent to watchful waiting, where a follow-up CT scan is scheduled in three to six months, potentially delaying their diagnosis. Conversely, we estimate that 62% of biopsies and 35% of surgeries performed on lung nodules find benign disease, representing a significant overtreatment that incurs both risk and cost to the patient and their providers. We therefore believe that there is a clear clinical need for blood-based diagnostic testing to help improve the initial risk assessment of pulmonary nodules, helping direct patients to the relevant treatment pathway, and ultimately improving patient outcomes and saving costs to the system. +• +Treatment Guidance – Early Stage : We estimate that there are over 700,000 testing opportunities annually in the United States in early-stage lung cancer to assess a patient’s risk of recurrence following curative-intent surgery, and to detect potential target mutations for therapeutics. Depending on a patient’s risk of recurrence, they may also receive chemotherapy, radiotherapy or chemoradiation post-surgery. The assessment of risk of recurrence is primarily based on the stage of cancer at diagnosis, with stage I patients typically receiving no additional treatment beyond surgery. However, 20 to 40% of patients with stage I disease do still recur within five years following surgery, representing a sub-group of patients who may have benefited from more intensive treatment protocol. We believe there is a clear clinical need for blood-based diagnostic testing prior to surgery to identify stage I patients who may benefit from a more intensive treatment protocol and we also believe there is the need for identifying stage II and IIIA patients where low risk patients may benefit from a less intensive treatment protocol. There have also been recent advances in the use of targeted therapies in early-stage lung disease. These therapies typically target specific genomic mutations or alterations found in some tumors. We believe there is therefore an emerging need for testing designed specifically for mutation detection in early-stage disease. +• +Treatment Guidance – Advanced Stage: We estimate that there are over three million diagnostic testing opportunities annually in the United States to guide advanced stage lung cancer treatment decisions. With nearly 50 FDA-approved systemic treatment regimens listed in national treatment guidelines for non-small cell lung cancer (NSCLC), there is an elevated need for personalized biomarkers to help physicians identify the right patient for the right treatment. Multiple tissue-based diagnostic tests have been approved to identify patients eligible for targeted therapies and immunotherapy; however, about 50% of patients do not have sufficient tissue collected following diagnosis to facilitate testing. To compound the issue, different molecular tests take varying amounts of time (days versus weeks) to report results back to the ordering physician, which often leads to treatment decisions being made on incomplete information. Therefore, we believe there is an imminent need for a blood-based testing solution that measures tumor mutations and the patient’s immune profile, to provide physicians with more comprehensive and timely information to assess the overall prognosis of the patient and personalize treatment. +• +Monitoring : We estimate that there are over 800,000 testing opportunities in the United States for blood-based tumor and immune profiling to monitor for disease recurrence and progression in NSCLC patients. Unfortunately, advanced stage lung cancer is often terminal, so repeat tissue biopsy to assess the evolution of resistance mutations or to detect disease progression is not feasible from either a cost or risk perspective to the patient, which we believe demonstrates an important need for blood-based testing to help routinely monitor these patients. As a patient progresses through therapies, changes in their immune system occur and blood-based immune profiling could help physicians identify these changes prior to subsequent therapy selection. +Current Limitations in Biomarker Discovery and Companion Diagnostics +We estimate that the biopharmaceutical biomarker testing and companion diagnostic market opportunity represents a $2 billion market annually . Over the last two decades, the use of biomarker testing in clinical trials has increased, with 15% of oncology trials involving the use of biomarker testing in 2000 compared to 55% in 2018. From 2005 to 2015, a study identified that incorporating biomarkers into clinical development programs increased their probability of therapeutic success rate from phase 1 to FDA-approval by 570%, representing an increase from 1.6% without biomarkers to 10.7% with biomarkers. We believe the field of biomarker discovery and +6 +companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their product development efforts and increase chances of drug development success. However, we believe as the market continues to advance, inherent limitations of both biomarker discovery and companion diagnostic development have become more apparent. +Biomarker Discovery : There are many limitations with biomarker discovery in biopharmaceutical drug development, including: +• +Biomarkers with clinical utility are difficult to discover and validate in independent datasets. +• +Classical statistical approaches to biomarker discovery are limited. Single-omic tests fail to see the whole biological picture. +• +Tissue biopsies are limited by the amount of a sample that can be collected: longitudinal testing is difficult and the biology is only from the profile of the tumor (host response is not accounted for). +• +Clinical trials are expensive and take a long period of time. It is often difficult to meet enrollment goals for clinical trials with slow diagnostic testing turnaround times. +Companion Diagnostics (CDx): While developing companion diagnostics is critical to precision medicine, the promise of companion diagnostics has not been fully realized and there are multiple limitations that still need resolution. The path to co-develop a successful companion diagnostic with a corresponding drug has several challenges, including: +• +Traditional companion diagnostic agreements may fail to realize the full value of a testing opportunity, leading to difficulty in funding appropriate commercialization. +• +Drug development is a lengthy, complex and costly process. There can be a financial impact to a pharmaceutical company to have a drug selected by a test. +• +Current diagnostic reimbursement policies may not always support the coverage and payment of new companion diagnostics. +• +Regulatory agencies continue to work on defining the co-development process, but the environment is continually changing. +The Diagnostic Cortex - Our Proprietary Artificial Intelligence (AI) Platform +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic Cortex, to discover innovative diagnostic tests for clinical use. We focus on developing technologies that are capable of single and multi-omic research and development. +The Diagnostic Cortex is an extensively validated deep learning platform optimized for the discovery of clinical diagnostic tests, which we believe overcomes standard machine learning challenges faced in life sciences research. Researchers commonly encounter issues with machine learning-based biological discoveries that cannot be repeated or validated when assessed in additional specimen cohorts. This challenge, commonly referred to as overfitting, occurs when the machine identifies a perfect pattern in an initial training dataset but is unable to identify the same pattern in a new dataset. For over 15 years we have focused on developing our platform to overcome this challenge through proprietary computational techniques to ensure each diagnostic test that is discovered can be further developed to perform consistently in the clinical testing environment. +We are able to combine blood-based biological information related to the tumor, immune system, and host-status with clinical and radiomic data through our proprietary AI platform, which enables us to interpret the holistic disease state of each patient or clinical dataset we encounter. +We continuously evolve and improve the Diagnostic Cortex platform. These improvements range from basic code optimization to complex improvements such as the incorporation of novel computational methods for the optimization of multi-omic diagnostic tests. Any AI platform is inherently limited without the highest quality data inputs. Therefore, all of the technologies that we employ have been chosen and developed to provide high-quality data to enable our Diagnostic Cortex platform. We feel that this level of data integrity is crucial for the development of diagnostic tests that require the advanced pattern matching abilities of deep learning algorithms. +We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and learn about biological discoveries that are clinically meaningful. Additionally, we incorporate clinical and molecular profiling data aggregated through our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or academic partnerships, into our platform. We have a variety of samples with associated data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development initiatives. With our data-driven and multi-omic approach as data inputs into the Diagnostic Cortex, we are able to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +7 +The following is a diagram outlining our innovative diagnostic test discovery, development and commercialization infrastructure as outlined in the text above. +We employ multiple technologies, as illustrated below, including genomics, proteomics, transcriptomics, and radiomics, generated by different assay techniques, including ddPCR, NGS, LC-MS, ELISA, and our proprietary DeepMALDI mass spectrometry platform for the blood-based molecular analysis of the tumor, immune system, and host-status of each patient and/or clinical dataset. Through our learning loop, we continuously revisit our technology strategy and roadmap to integrate new technologies into our evolving platform, which ultimately support the addition of new service and product revenue offerings. We focus on developing technologies that are capable of single and multi-omic research and development. +Most diagnostic companies focus their strategy on using a single technology to discover biomarkers for a broad range of clinical questions. We believe that no single technology can interrogate the complexity of the human disease state to help solve all clinical questions. For that reason, we employ a multi-omic approach to solving diagnostic challenges leveraging our proprietary transparent AI +8 +platform, the Diagnostic Cortex. Because of this approach, we believe we are unique in the diagnostics market, allowing for a broader and more holistic understanding of each patient’s disease state. +We are experts in many technologies, but we are a true market leader with over 15 years of experience in the field of clinical proteomics. For over 10 years, we have been discovering and developing proteomic-based diagnostic tests and have a deep understanding of how to incorporate technologies that can be applied to blood samples in order to extract important protein-based biological information in the form of diagnostic tests, which can aid clinicians and scientists in understanding the dynamic biology of their system of interest, such as a patient with cancer. +Our suite of technologies that assist us in discovery, development and commercialization of novel diagnostic tests includes: +DeepMALDI Mass Spectrometry +We have developed DeepMALDI, a proprietary high-density matrix-assisted laser desorption/ionization time-of-flight (MALDI-ToF) mass spectrometry (MS) technology, to produce blood-based proteomic data for disease diagnosis, personalized health care, precision medicine for direct treatment options, and disease screening in lung and other disease states. DeepMALDI overcomes the limitations of conventional MALDI and other mass spectrometry methods to produce highly sensitive, stable, and reproducible data by: (1) utilizing optimized signal-to-noise reduction and signal processing algorithms; and (2) novel batch correction methods and spectral alignment methods. The combination of these improvements yields substantially higher quality data content and is thereby much better suited for the discovery of biomarkers with clinical utility. +Our current DeepMALDI methods allow us to achieve finer mass resolution, greater sensitivity, and 20-times faster imaging speeds than other instruments. Additionally, we believe recent enhancements to our DeepMALDI methods and MALDI-ToF technology evolution now allows us to measure more than 2,000 proteins, an improvement from the previously estimated 900 proteins. We intend to maintain our leadership role in the discovery of proteomics-based diagnostic tests. We utilize our DeepMALDI and MALDI-ToF technologies in our discovery and development efforts and as part of our collaborations with our biopharmaceutical customers and academic partners. +Liquid Chromatography Mass Spectrometry MS +We use Multiple Reaction Monitoring (MRM) MS with triple quadrupole mass spectrometers and up-front liquid chromatography (LC) sample injection in the Nodify XL2 test. This mass spectrometry method offers highly sensitive, specific, and cost-effective analysis for simultaneous quantitation of hundreds to several thousands of targeted peptides in a single experiment. We have since included the MRM technologies as part of our services for discovery and development with our biopharmaceutical customers and academic partners. +Enzyme-Linked Immunosorbent Assay (ELISA) +ELISA is the most widely used ligand binding assay platform within and outside the pharmaceutical industry. Formats include direct, indirect and sandwich assays and are typically run in manually or semi-automated modes. We use a semi-automated implementation of ELISA in clinical testing for the Nodify CDT test and the Platelia SARS-CoV-2 Total Ab test, and the cPASS neutralizing antibody test for COVID-19. The acquisition of Oncimmune USA in 2019 expanded our ability to conduct very high throughput and cost-effective ELISAs in our clinical testing laboratory. We have now included the ELISA technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +Droplet Digital Polymerase Chain Reaction Technology (ddPCR) +We use the ddPCR technology for multiplexed, semi-automated nucleic acid detection. This allows high sensitivity, fast turn-around times, flexibility in our laboratory workflows, rapid scaling from low to moderate anolyte complexity, and high-volume scalability. ddPCR is an absolute quantitation method based on the partitioning of circulating nucleic acids into up to 20,000 droplets per reaction and is used for the GeneStrat ddPCR test and Bio-Rad SARS-CoV-2 ddPCR test for COVID-19. We have included the ddPCR technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +Next Generation Sequencing Technology (NGS) +We use an NGS technology for broad genomic sequencing of clinical specimens. Our strategy with NGS relies on a menu of off-the-shelf and custom research use assays, which we develop and make available as a part of our commercial pipeline and biopharmaceutical test services. The NGS technology integrates automated systems to yield high sensitivity results with a rapid turnaround time. Since adoption of this technology, we have included the NGS technologies for research and product development both internally and externally with our biopharmaceutical customers and academic partners. +Our Solutions and Products +To help address the current limitations with standard of care in lung cancer diagnosis, treatment, and monitoring, we use combinations of tumor, immune and host profiling, radiological imaging, patient clinical profiling, and our proprietary AI platform to provide a holistic view of each patient’s dynamic disease state. +9 +We have five blood-based diagnostic tests across the lung cancer continuum of care to help address clinical unmet needs by physicians. +• +Diagnosis : We believe there is a clinical need to help physicians reclassify risk of malignancy in patients presenting with suspicious lung nodules. We offer the blood-based Nodify Lung Nodule Risk Assessment testing strategy to aid physicians in stratifying patients into distinct nodule management treatment pathways: diagnostic procedure or imaging surveillance. Nodify Lung consists of two blood-based proteomic tests: the Nodify CDT test helps identify patients with lung nodules that are likely malignant and the Nodify XL2 test conversely helps identify those that are likely benign. +• +Treatment Guidance : We believe there is an imminent need for a blood-based testing solution that measures tumor-specific mutations and the patient’s immune profile to provide physicians with more comprehensive information to assess the overall prognosis of the patient and personalize treatment plans. We offer the blood-based IQLung testing strategy, which consists of the GeneStrat ddPCR and GeneStrat NGS tumor profiling tests and the VeriStrat immune profiling test for patients diagnosed with NSCLC. With an average turnaround time of three business days, we are able to quickly provide critical diagnostic information to physicians to facilitate personalized treatment decisions for their patients. +• +Monitoring : We believe longitudinally monitoring advanced NSCLC patients for the dynamic evolution of their tumor and immune profile while on treatment can provide an earlier indication of treatment resistance and/or disease progression. We offer the IQLung testing strategy as a blood-based monitoring tool for physicians to track their patients’ disease evolution. +Diagnosis – Nodule Management +We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our blood-based nodule management offering, Nodify Lung Nodule Risk Assessment assists physicians in reclassifying a patient’s risk of lung cancer by incorporating their protein biomarker results with radiographic imaging and clinical characteristics. Nodify Lung consists of the Nodify CDT and Nodify XL2 proteomic tests, which can be ordered separately or together from a single blood draw to help reclassify risk of cancer to aid physicians in stratifying patients into distinct nodule management pathways: intervention or surveillance. +The Nodify CDT test is used to help identify lung nodules that are likely malignant and the Nodify XL2 test helps identify lung nodules that are likely benign. Nodify Lung is available for patients 40 years or older, with nodules between 8 and 30mm, and less than 65% pre-test risk of lung cancer. The testing strategy starts with the Nodify CDT test to determine if a nodule is likely malignant or at a higher risk of lung cancer. The Nodify CDT test helps physicians identify cancer more quickly by prioritizing patients with a higher risk of malignancy for a diagnostic procedure, such as biopsy or surgery. If the nodule is not identified as having a high risk of malignancy by the Nodify CDT test, then the Nodify XL2 test is performed to help determine if the patient’s nodule is likely benign or has a reduced risk of lung cancer and may be a candidate for CT imaging surveillance. The Nodify Lung testing strategy is represented graphically in the image below starting with the patient’s pre-test risk of malignancy and ending with the guideline-recommended diagnostic procedure for each risk category. +10 +We launched the Nodify Lung combined offering of the Nodify CDT and Nodify XL2 tests in March 2020. However, the Nodify XL2 test has been available to all physicians since September 2019 and has been available to a select group of physicians since October 2018. We acquired the Nodify XL2 test from Integrated Diagnostics (Indi) in July 2018 and acquired the Nodify CDT test from Oncimmune USA in October 2019. +Nodify CDT +The Nodify CDT test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely malignant or at a higher risk of being cancerous. Results allow physicians to identify patients who may be better candidates for timely invasive diagnostic procedures such as bronchoscopy, transthoracic needle biopsy, or surgical resection, with the hope of catching cancer earlier. The Nodify CDT test enhances lung nodule risk assessment to facilitate compliance with clinical treatment guidelines such as those of the American College of Chest Physicians (ACCP). The Nodify CDT test is intended for use in patients who are 40 years or older, have nodules between 8 and 30mm, and pre-test risk of lung cancer of less than 65%. +The test measures the levels of seven circulating autoantibodies (P53, NY-ESO-1, CAGE, GBU4-5, SOX2, HuD, and MAGE A4) associated with lung cancer, combined with an algorithm to report out three potential results: High Level, Moderate Level, or No Significant Levels of Antibodies Detected (NSLAD). The seven autoantibodies have shown to be elevated for all types of lung cancer, and from the earliest stage of the disease. +Unlike the tumor antigens themselves, the autoantibody levels can be measured accurately through a blood sample, based upon the signal amplification generated by the immune response to cancer. This mechanism of action likely reflects very early events in a tumor’s evolution; as the immune system initiates a response to the cancer, it can also trigger an expansion of self-reactive antibodies that can be measured in circulation. +In addition to the test result of High Level, Moderate Level, or NSLAD, each test report includes the patient’s pre-test risk of malignancy as calculated by the Solitary Pulmonary Nodule (SPN) Risk Assessment calculator, and their post-test risk of cancer incorporating the result of the test. The SPN Risk Assessment calculator was developed by Stephen Swensen, M.D., of the Mayo Clinic and is designed to provide a risk of malignancy for a patient with a newly discovered incidental nodule. The model incorporates six clinical and radiologic factors into the equation: age, nodule size, smoking status, nodule location, spiculation (nodule edge characteristic), and previous history of lung cancer. Incorporating the autoantibody levels with the risk model provides physicians with a more accurate assessment of risk. The test has been studied in 14 peer reviewed published studies and presentations. +Nodify XL2 +The Nodify XL2 test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely benign or at a reduced risk of being cancerous. Results allow physicians to identify patients who may be better candidates for routine CT surveillance to monitor for growth or shrinkage of the nodule over time instead of an invasive diagnostic procedure. The Nodify XL2 test is used for patients who are 40 years or older, have nodules between 8 and 30mm, and have a pre-test risk of lung cancer of less than or equal to 50%. +The Nodify XL2 test integrates peptides measured by LC-MS with clinical and radiological characteristics that are combined by an algorithm to report out three potential results: Likely Benign, Reduced Risk, or Indeterminate. Specifically, the Nodify XL2 test measures the relative abundance of two peptides (LG3BP and C163A) in circulation in the patient’s blood. The native proteins from +11 +which the peptides are derived have been associated with an inflammatory response to cancer. The clinical factors are patient age and smoking status, and radiological factors are nodule size, location, and edge characteristics. +In addition to the test result of Likely Benign, Reduced Risk, or Indeterminate, each test report includes the patient’s pre-test risk of lung cancer as calculated by the SPN Risk Assessment calculator, and their post-Nodify XL2 risk of malignancy incorporating the result of the test. Incorporating the peptide levels with the risk model provides physicians with a revised assessment of risk incorporating the patient’s biology. +In summary, the inclusion of the Nodify Lung testing strategy into clinical practice helps physicians reclassify risk of malignancy of low to moderate risk lung nodules by incorporating the patient’s own biology into the assessment. The Nodify CDT test helps physicians identify patients with a high-risk lung nodule who may benefit from timely intervention, which can ultimately help identify lung cancer earlier. The Nodify XL2 test helps physicians identify patients with a very low risk lung nodule who may benefit from CT surveillance and could avoid unnecessary invasive procedures. +Blood samples for the Nodify XL2 and Nodify CDT tests can be collected in the physician’s office, laboratory, or at home through use of mobile phlebotomy. Mobile phlebotomy options facilitate testing for patients even if they are not seen in person by the physician and instead are seen through telehealth visits. This benefits the patient as scheduling can be conveniently fit to their needs and can keep them away from a physician’s office or hospital for safety concerns. Additionally, mobile phlebotomy benefits the physician as the logistics around a blood draw or tissue sampling are out of their hands. We have a national network of contracted Nurses and Phlebotomists to support at-home or mobile blood collection. +Both tests require a single blood sample shipped at ambient temperature to our certified, high-complexity clinical laboratory in De Soto, Kansas. Nodify CDT testing requires whole blood and Nodify XL2 testing requires either a whole blood K2EDTA tube, or whole blood spotted onto our proprietary Blood Collection Device (BCD). The introduction of the BCD and now the stand-alone whole blood tube as qualified specimen collection methods for use with the Nodify XL2 test alleviated the need for serum separation processing steps by phlebotomists at blood draw sites such as centrifugation, and cold chain (dry ice) shipments, which has increased the market access to our proteomic-based tests. Results for the Nodify CDT test alone are typically available within one day. If both tests are ordered for the patient and Nodify CDT returns a result of NSLAD, then both test results are typically available within four to five business days. All results are available through secure communication methods, including a portal, fax, hard copy, or mobile device. +Treatment Guidance and Monitoring +Profiling the tumor through blood-based testing can help identify mutations in genes that may be driving growth of the tumor and may be targets for therapeutics. However, tumors also suppress intrinsic mechanisms that prevent the patient’s immune system from identifying and eliminating the cancer cells. Profiling the immune system can show if the patient’s immune system may have been subverted and therefore, is less likely to be responsive to immunotherapies. Our blood-based IQLung testing strategy consists of the GeneStrat ddPCR and GeneStrat NGS tumor profiling tests and the VeriStrat immune profiling test, which can be ordered together or separately for patients with NSCLC. Together, the tests typically have an average turnaround time of three business days, providing physicians with timely results to facilitate treatment decisions. +GeneStrat ddPCR +The GeneStrat test is a blood-based tumor profiling test that detects the guideline recommended, actionable mutations in lung cancer: EGFR, KRAS, BRAF, EML4-ALK, ROS-1, and RET. Physicians can order one or any combination of the gene tests, whichever they +12 +deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat test performance and potential clinical utility have been published in three peer reviewed studies. +The GeneStrat test results are typically available within two business days from our receipt of the sample in our Boulder, Colorado clinical laboratory. In a study at Eastern Carolina University, it was observed that blood-based testing was up to three weeks faster than tissue-based testing, with tissue-based testing taking a median of 26 days from sample collection. With GeneStrat testing, results are typically available in time for the patients first oncology visit, allowing the patient to start front-line treatment as quickly as possible. In the same study, it was observed that only 4% of patients had tissue-based molecular test results prior to start of front-line treatment. Meanwhile, after integrating Biodesix testing at the institution, 72% of patients had molecular test results available. Testing with the GeneStrat test can help physicians identify driver mutations quickly to help speed up time to treatment. +GeneStrat NGS Test +The GeneStrat NGS test is a blood-based 52-gene tumor profiling test panel that detects the guideline recommended, actionable mutations in lung cancer including five gene classes (SNV, INDELS, CNA, fusions, and exon-skipping). Specific variants of relevance to NSCLC include EGFR, KRAS, BRAF, EML4-ALK, ROS-1, RET, MET, NTRK. The GeneStrat NGS test is used for late-stage, metastatic NSCLC and Physicians can order one or any combination of the IQLung tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat NGS test performance and potential clinical utility have been published in two published studies. +GeneStrat NGS test results are typically available within three business days from the start of processing of the sample in our Boulder, Colorado clinical laboratory. +We believe that rapid, blood-based tumor profiling with the GeneStrat ddPCR and GeneStrat NGS tests can be complementary to both targeted tissue-based testing (including PD-L1) and tissue-based broad genomic sequencing. Testing with GeneStrat ddPCR and GeneStrat NGS tests at diagnosis can help quickly identify patients who are eligible for targeted therapies. Additionally, blood-based testing upfront can help save valuable tissue for diagnostic evaluation, PD-L1 testing and broad genomic profiling for rare mutations to enroll in clinical trials. +VeriStrat +The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. Results help inform physicians whether their patient has a more aggressive cancer and can help with treatment planning. The VeriStrat test profiles the patient’s immune system by measuring eight protein features measured by mass spectrometry and interpreted by a proprietary machine learning-based algorithm to produce either a VeriStrat Good or VeriStrat Poor test result. +The presence of a VeriStrat Poor result indicates the presence of chronic inflammation and a chronic acute phase immune response. A chronic acute phase immune response can trigger the immune system to provide growth factors to the tumor to increase blood flow and tumor growth. The test has been studied in over 85 peer-reviewed and published clinical studies across many different types of therapies such as chemotherapy, targeted therapies, immune therapies, and combinations. The results consistently show the test to be predictive of outcomes, independent of other prognostic factors including PD-L1 expression and performance status. Patients who test as VeriStrat +13 +Poor, on average, have an overall survival that is less than half of those who test as VeriStrat Good, independent of treatment type, demonstrating that the test is strongly prognostic. Conversely, patients with a VeriStrat Good test result typically respond better to standard of care treatments than those patients that test as VeriStrat Poor. By using the VeriStrat test for immune profiling, physicians can help identify the patients with an immune status associated with generally poor prognosis who should be treated with alternate therapies or in clinical trials. +GeneStrat ddPCR testing is performed using PCR technology, GeneStrat NGS testing is performed using NGS technology, and the protein features in VeriStrat are measured using MALDI-ToF mass spectrometry. Results are typically available within three business days through secure communication methods, including a portal, fax, hard copy, or mobile device. +The GeneStrat ddPCR and GeneStrat NGS tests require whole blood specimen collection tubes, and VeriStrat requires a whole blood sample spotted onto our proprietary BCD. Both sample types are shipped at ambient temperature and testing is performed in our certified, high-complexity clinical laboratory in Boulder, Colorado. +COVID-19 +Biodesix WorkSafe COVID-19 Testing Program +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe testing program. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two FDA EUA authorized tests, a part of our customizable program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. The Bio-Rad SARS-CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under CLIA to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Prior to using the Bio-Rad SARS-CoV-2 tests as part of our testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Beginning in second quarter 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass SARS-CoV-2 Neutralizing Antibody testing as a service. The test is the first surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the RBD in the spike protein of SARS-CoV-2 that are produced in response to a previous SARS-CoV-2 infection. +Bio-Rad SARS-CoV-2 ddPCR Test +The Bio-Rad SARS-CoV-2 ddPCR test, also known as a molecular or viral test, is intended for the qualitative detection of nucleic acid from SARS-CoV-2, the virus that causes COVID-19. The test targets detection of the nucleic acid from SARS-CoV-2 (not from any other viruses or pathogens) in respiratory specimens to identify and isolate infected individuals. Recent studies have shown that ddPCR-based testing is more sensitive than qPCR for detecting SARS-CoV-2, specifically in the reduction of false negative results. In one study, the ddPCR test demonstrated 95% accuracy vs. 47% for other “bulk” RT-PCR technologies used in other molecular tests. Specimens are shipped at ambient temperature or dry ice depending on the viral transport media (VTM) used, and testing is performed using ddPCR in our certified, high-complexity clinical laboratory in Boulder, Colorado. Results are typically available through secure communication methods, including fax, hard copy, or encrypted email within 24 to 48 hours on average from receipt of the sample. +Platelia SARS-CoV-2 Total Ab Test +The Platelia SARS-CoV-2 Total Ab test (also known as a serology or antibody test) is intended for use as an aid in identifying individuals who have developed an adaptive immune response to the SARS-CoV-2 virus, indicating recent or prior infection. The test uses whole blood to detect circulating antibodies against the virus. The sensitivity is 98% and specificity is 99% eight days after the onset of symptoms. At this time, it is not known how long antibodies persist following infection and if the presence of antibodies confers protective immunity. The test is intended for the qualitative detection of total anti-SARS-CoV-2 nucleocapsid antibodies (IgG, IgM and IgA) in human serum or plasma specimens. The test requires a 3 mL blood draw, and samples are shipped at ambient temperature. Testing is conducted using semi-automated ELISA technology in our certified, high-complexity clinical laboratory in De Soto, Kansas. Results are typically available within 24 to 48 hours from receipt of the sample through secure communication methods, including fax, hard copy, or encrypted email. +cPass SARS-CoV-2 Neutralization Antibody Test +The cPass SARS-CoV-2 Neutralization Antibody Test is the first blood-based surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the RBD in the spike protein of SARS-CoV-2 that are produced in response to a previous SARS-CoV-2 infection. This test was commercially introduced in partnership with GenScript Biotech Corporation. +14 +Biopharmaceutical Diagnostic Discovery, Development and Testing Services Business +We believe our leadership in clinical proteomics and our multi-omic approach to probe the cancer disease state provides our customers with a clear and distinct advantage over other diagnostic service providers who solely focus on either genomics or proteomics. Similar to our commercial clinical testing business, our biopharmaceutical diagnostic discovery, development and testing services business leverages the Diagnostic Cortex to provide an extensively validated and deep learning approach to discovering new biomarkers, which in turn helps drive the clinical development of therapeutics. We recognize each clinical development program is complex, which is why we offer end-to-end diagnostic solutions, ranging from initial biomarker discovery and feasibility projects to commercialization of companion diagnostics. +To address the increasing complexity of disease biology and new drug mechanisms of action, we employ a range of genomic and proteomic technologies to uncover insights about the tumor biology and patient’s immune response to cancer for therapeutics in clinical development. With our broad technology and service offering, including the performance of over 30 assays for research use as part of our laboratory services (see diagram below), we are able to provide the depth and breadth of biomarker tools for our partners for multi-omic analyses across their product development efforts. Although we recognize the importance of a multi-omic, approach in translational research, we are experts in discovering and developing proteomic-based diagnostic tests to help interrogate the immune profile and host disease state of patients on particular therapeutics. Traditionally, oncology biomarkers have been discovered from tumor tissue, but with the increased trend in the number of programs featuring immuno-oncology agents in therapeutic development, we believe there is a clinical unmet need for blood-based tumor markers and host/immune biomarkers to complement information obtained from tissue. +We believe we provide benefit to our biopharmaceutical customers as they integrate strategies for increasing the probability of success for pivotal clinical trials. Specifically, our diagnostic testing services may help enable quicker enrollment rates for patients in prospective clinical trials, ranging from phase 1 to phase 3, and could help identify patient populations who may experience the greatest benefit from new therapeutics. Ultimately, our goal is to help biopharmaceutical customers realize greater efficiency in their clinical development programs. Additionally, we have the ability to access and leverage our large sample and data biobank for our partners’ data mining needs, including new test discovery. +While our biopharmaceutical discovery, diagnostic development and testing revenue continues to grow, it is important to note that we benefit greatly from these partnerships in many ways that expand beyond revenue. We are continuously expanding our knowledge and biological understanding of multiple diseases and the rapidly evolving treatment landscape, while our Diagnostic Cortex continues to be powered through these biomarker analyses. Additionally, our sample and data biobank continue to grow and can be further leveraged for internal test development and external partnering. Importantly, we look to supplement our product development efforts with companion diagnostics as they are developed. +To date, we have over 60 biopharmaceutical customers and academic partners who have utilized our diagnostic tests and services. The following are a few case studies of early-stage biomarker discovery and development with our biopharmaceutical customers. +• +AstraZeneca: We provided services to AstraZeneca to retrospectively analyze samples from the FLAURA clinical trial (NCT02296125). The goal of this analysis was to interpret and establish the clinical utility of blood-based longitudinal monitoring of EGFR sensitizing and resistance mutations by ddPCR in advanced NSCLC patients treated with osimertinib. The data demonstrated that these circulating DNA mutations could be tracked in blood to interpret the patient’s prognosis, and could help AstraZeneca to identify disease progression three months (median) in advance of standard imaging. We have used our ddPCR assay to monitor EGFR sensitizing and resistance mutations in clinical trial samples from seven different clinical trials for Tagrisso. +15 +• +Genentech: We partnered with Genentech to discover a novel proteomic classifier for advanced NSCLC patients treated with atezolizumab. The test was discovered on a small clinical cohort (n=77) and was independently validated on blinded samples (n=270) from the POPLAR clinical trial (NCT01903993). The validation revealed that the proteomic test was predictive of progression free survival and overall survival for atezolizumab versus the control arm docetaxel. Additionally, an analysis compared the correlation between our proteomic classifier with standard of care biomarkers (PD-L1 expression status and tumor mutation burden), which revealed there was no significant correlation. We published additional work on the Genentech classifier with three posters presented at the society of immunotherapy conference (SITC). This data reinforces that our classifier provides unique and valuable information in the treatment of patients with advanced NSCLC. It is our belief that Genentech could use this strategy to identify patients that could derive a longer progression free survival from atezolizumab. +• +HiberCell: In January 2021, we announced a broad collaboration with HiberCell for companion diagnostic discovery, development and commercialization. The agreement initially focuses on the further development of an ELISA as a companion diagnostic in future registrational trials for Imprime PGG programs. +Our Competitive Advantages +We believe the following are our key competitive advantages: +• +Our proprietary extensively validated deep learning platform, which is tailored to discover diagnostic tests that address clinical unmet needs. Our platform is an extensively validated deep learning platform optimized for discovery of diagnostic tests. By combining our data-driven and multi-omic approach with deep learning techniques, we believe we have overcome many standard machine learning challenges. This has enabled us to develop commercial tests for clinical unmet needs and collaborate with our biopharmaceutical customers and academic partners. +• +Our data-driven approach to precision medicine combined with our biobank, which enables us to accelerate development of new tests. We have a variety of samples with associated data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development initiatives. Our biobank, clinical trials, commercial testing and other partnerships provide an ongoing source of new data that further enhances our proprietary AI platform. We are continuously identifying and incorporating new market insights and input from our customers, key opinion leaders, and scientific experts to leverage this data in developing our diagnostic tests. +• +Our leadership in clinical proteomics, demonstrated research, development, and scientific expertise, combined with our intellectual property portfolio. Our leadership in clinical proteomics and our multi-omic approach, we believe provides us with a distinct advantage over our competitors, who focus on any single technology, such as genomics or proteomics. Our certified, high-complexity laboratories offer significant advantages in development of commercial tests. +• +Our proprietary technologies and processes are protected by a portfolio of approximately 122 issued patents in the United States and internationally, and 22 uniquely registered United States trademarks. We take efforts to protect our proprietary position using a variety of methods, such as a pursuit of United States and foreign patent applications related to our proprietary technology, use of trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities. +• +Our demonstrated success commercializing diagnostic tests in lung disease as well as unprecedented turnaround times. With eight diagnostic tests launched and three currently in development, our commercial portfolio of blood-based solutions currently addresses clinical unmet needs within diagnosis, treatment and monitoring of lung cancer. Our diagnostic tests provide rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan. For example, the blood based IQLung strategy for lung cancer patients integrates the GeneStrat ddPCR test, the GeneStrat NGS test and the VeriStrat test to support treatment decisions across all stages of lung cancer with results in an unprecedented two to three business days, expediting time to treatment. We have displayed agility in our R&D and commercial launch efforts and within a month of initiating a development collaboration, launched three diagnostic tests for COVID-19 for commercial use. +• +Our depth and breadth of point of care access to physicians allows us to drive adoption of our diagnostic tests while incorporating real-life feedback to inform new product development. Our commercial team’s primary focus is to articulate the scientific and clinical evidence behind our tests, how they impact clinical care and can ultimately help to improve patient outcomes. Our demonstrated scientific expertise, leadership in clinical proteomics and breadth of data, including peer-reviewed publications, presentations and clinical studies, forms the basis of our relationships with major hospitals and physician networks across the United States. +• +Our commercial infrastructure, which includes our extensive knowledge and experience in sales, marketing, reimbursement and operations, provides us with the ability to launch, scale and drive revenue. We believe our commitment to commercial excellence helps us to leverage insights, operational excellence and proven approaches to deliver revenue growth and enhance the brand of our company and products. We are able to deploy rapid clinical testing turnaround +16 +times and develop commercial tests at scale. Scaling of our test capacity to meet volumes is then achieved by adding instrumentation and qualified personnel to our quality systems. +Our Strategy +We strive to provide swift, comprehensive and actionable insights to improve patient outcomes across lung disease and to help answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. To achieve this, we intend to: +• +Drive increased awareness, adoption, and reimbursement coverage of our diagnostic tests by: +o +continuously educating physicians, key opinion leaders, hospital systems, advocacy groups, patients, payers, academic research organizations, and technology assessment and guideline organizations on the clinical data and benefits of our tests; +o +utilizing our pulmonology- and oncology-focused sales force and commercial reach with targeted awareness campaigns to employ highly targeted sales and marketing tactics in pulmonology clinics specializing in the management of lung nodules and the diagnosis of lung cancer; +o +continuing to invest in the expansion of our sales force and commercial support team; +o +incorporating our testing services into diagnostic pathways and protocols via a top-down strategy that introduces our diagnostic tests to the largest United States health systems; and +o +leveraging our clinical data to gain broad coverage from public and private payers for our tests. +• +Deepen our relationships with current biopharmaceutical customers and establish new customer opportunities by: +o +selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally; +o +leveraging existing projects and relationships to expand sales with our current biopharmaceutical customers; and +o +targeting companies developing novel companion diagnostic strategies and drug development projects best suited to our platform for new test discovery, development and commercialization. +• +Further demonstrate the clinical utility and health economic benefits of our diagnostic tests by: +o +investing in commercial clinical testing, research studies and clinical trials to further demonstrate the clinical utility of our tests; +o +providing rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan; and +o +providing timely and actionable clinical information to help improve overall patient outcomes and lower the overall healthcare cost. +• +Introduce new diagnostic tests in lung disease by: +o +engaging with our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and to identify additional clinical unmet needs; +o +entering strategic partnerships with biopharmaceutical companies, academic research organizations, technology providers, and other diagnostic companies; and +o +developing companion diagnostic tests to support the therapeutics’ regulatory approval and adoption process for our biopharmaceutical customers. +• +Enhance our proprietary AI platform and expand our technology portfolio by: +o +continuing to invest in R&D capabilities to foster innovation in test discovery and development; +o +identifying, acquiring technologies and integrating new data types into our proprietary AI platform; +o +entering strategic partnerships across our commercial product portfolio and product development efforts in order to further our development capabilities, accelerate launch of commercial products, or expand our service offering; and +o +achieving “Explainable AI” by developing and incorporating computational tools that determine how the Diagnostic Cortex makes decisions for patient classification and outcome prediction. +17 +• +Continue to expand and leverage our biobank by: +o +expanding and enhancing the robustness of our samples and the data set, including through our collaborations and partnerships; +o +pursuing commercial opportunities with companies and researchers who are interested in utilizing our biobank for their own discovery and development efforts; and +o +monetizing these commercial opportunities. +Our Diagnostic Tests in Development +With the goal of finding solutions for clinical unmet needs related to diagnosis, treatment and monitoring in lung disease, our diagnostic tests in development include the following: +Early-Stage NSCLC—Risk of Recurrence (ROR) +Currently, surgical resection of the tumor without systemic or radiation therapy is standard of care for stage I NSCLC patients. However, 20 to 40% of surgically treated patients will suffer a recurrence within five years after surgery. From market research with pulmonologists, thoracic surgeons, and medical oncologists, we identified a significant clinical unmet need for a blood-based test to help identify stage I NSCLC patients who are at a higher risk of recurrence and may benefit from a more aggressive surgical procedure, or from neoadjuvant or adjuvant systemic treatment. Based on this unmet diagnostic need, we discovered the Risk of Recurrence (ROR) test, which is a pre-surgery blood-based proteomic test, designed with the Diagnostic Cortex to predict whether a stage I NSCLC patient has a higher risk of recurrence post-surgical resection. Knowing this information early and before surgery may change the surgical plan and/or support treatment decisions such as neoadjuvant or adjuvant therapy, which have the potential to reduce tumor volume and address micro-metastatic disease as early as possible. Our ROR test validated in an independent sample set, and we are currently working with major academic institutions across the United States to further validate the test. +Late-Stage NSCLC—Immunotherapy Treatment Guidance (PIR) +In 2015, the first immunotherapy-based treatment regimen was approved by the FDA for use in lung cancer. Currently, there are 9 immune checkpoint inhibitor (ICI) regimens (single agent or combinations) recommended by the NCCN guidelines for treatment of advanced NSCLC patients. For a portion of patients treated, these drugs can result in significant improvement in overall survival compared with platinum-based chemotherapy options. +The combination ICI regimens see some improvement in performance over single agent ICI, but side effect profiles are worse, and costs are higher than for single agent ICI. In addition, recent data have shown that a subset of patients experience more rapid disease progression on ICI compared with chemotherapy. We utilized the Diagnostic Cortex platform to discover our Primary Immune Response (PIR) test. PIR is a blood-based proteomic test designed to profile a patient's potential to mount an immune response to their cancer and predict those patients likely to respond to ICI monotherapy treatment, ICI + chemotherapy combination treatment, or who would be highly resistant to ICI therapy. Our PIR test has been validated in multiple independent sample sets for advanced stage NSCLC patients treated with single agent ICI, and we are currently working with major academic institutions across the United States to further validate the test in a prospective study called BEACON-Lung. +Monitoring – Progression & Resistance +Blood-based monitoring with our ddPCR technology may offer a feasible method to non-invasively evaluate therapeutic mechanism of action, disease progression, and the emergence of resistance mutations in patients treated with targeted therapies. Our internal validation studies have shown the utility of the GeneStrat EGFR ddPCR test as an example in all three of these indications. The test can identify disease progression up to three months (median) in advance of standard imaging. Using ddPCR for longitudinal blood-based monitoring of EGFR cell-free DNA mutations is a cost-effective testing method while patients are being treated with targeted therapies. +Clinical Trials +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. We have participated in 27 clinical studies, four of which are ongoing, and have published over 300 peer-reviewed publications and presentations. The following are our ongoing clinical studies for our diagnostic testing solutions. +ORACLE Registry Study (NCT03766958) +The ORACLE registry study was designed to develop real-world clinical utility data for Nodify XL2 and is titled “An Observational Registry Study to Evaluate the Performance of the Nodify XL2 Test”. The study objectives are to show a reduction in invasive procedures on patients with benign nodules compared to a historical control obtained from chart review. The first patient enrolled on October 16, 2018. Study enrollment was closed on May 12, 2022, with 494 prospective registry patients enrolled and 348 retrospective chart review patients accrued. As of February 9, 2023, 21 subjects remain in 2-year follow-up. +18 +ALTITUDE Clinical Utility Study (NCT04171492) +The ALTITUDE clinical utility study is designed to evaluate the performance of Nodify Lung (Nodify XL2 and Nodify CDT) in a randomized controlled study (RCT). The study is titled “A Multicenter, Randomized Controlled Trial, Prospectively Evaluating the Clinical Utility of the Nodify XL2 Proteomic Test in Incidentally Discovered Low to Moderate Risk Lung Nodules”. We received central investigational review board (IRB) approval in December 2019 and have an enrollment goal of 2,000 patients. The study objectives are to evaluate how the addition of the Nodify Lung test result impacts the clinical decision making for patients with new, incidentally identified solid lung nodules assessed as low to moderate risk of lung cancer. The trial has an adaptive study design with a blinded standard of care arm and 2:1 randomization for open-label results for Nodify XL2. The study launched in December of 2020. Phase 1 of the study with only Nodify XL2 is expected to enroll 500 patients. Phase 2 of the adaptive study design will include an open-label arm for Nodify CDT, which is aligned with our commercial testing algorithm. +INSIGHT Observational Study (NCT03289780) +The INSIGHT observational study is designed to evaluate the real-world clinical utility and performance of the IQLung (GeneStrat ddPCR, GeneStrat NGS and VeriStrat) testing strategy. The title is “Observational Study Assessing the Clinical Effectiveness of VeriStrat and Validating Immunotherapy Tests in Subjects with Non-Small Cell Lung Cancer (INSIGHT)” and the first patient enrolled on May 11, 2016. To date, we have over 4,700 patients enrolled with a target 5,000 enrollment goal. Final analysis with 3-year follow-up is estimated to be completed by 2026. Results of an interim analysis were presented most recently at AACR 2021. Additionally data on the first 2,000 patients with 1-year follow-up data was published in the Journal for ImmunoTherapy of Cancer in September 2021. The study rationale is to guide the adoption of VeriStrat and inform medical decision making, including treatment choice, and enable the validation of additional mass spectrometry-based proteomic tests. The primary study objective is to describe the impact of the VeriStrat test results on treatment decisions, including but not limited to the percentage change in treatment decision, differences in chosen treatments between patients classified as VeriStrat Good and those classified as VeriStrat Poor, and the percentage of patients receiving systemic therapy or supportive therapies only. +BEACON-Lung Clinical Study (NCT04676386 - Suspended) +In partnership with ALCMI (Addario Lung Cancer Medical Institute), the BEACON-Lung clinical study is intended to evaluate the performance and utility of our proteomic product currently in development, PIR, in advanced stage NSCLC patients who express high PD-L1. The study title is “A Biomarker Analysis in High PD-L1 Expressing NSCLC Patients Treated with An Immune Checkpoint Inhibitor (ICI) With or Without Platinum-Based Chemotherapy.” The study design is an observational, multicenter, open-label study to assess biomarkers (serum, microbiome, radiomics and tissue) as predictive of early progression in 390 treatment-naive patients with advanced stage NSCLC and PD-L1 greater than or equal to 50% treated with two standard of care regimens, triplet therapy (platinum-based chemotherapy plus ICI regimen) and ICI monotherapy (single agent ICI). The objectives are to collect biospecimens and evaluate candidate biomarkers, with a focus on PIR, to detect early progression on ICI monotherapy versus triplet therapy. +Commercialization +For our lung cancer and nodule management tests, commercial efforts are focused on the promotion of our testing strategies to healthcare professionals actively involved in the diagnosis and treatment of lung cancer. Primarily focusing on pulmonology and oncology, the commercial team, consisting of specialty sales representatives, medical affairs, marketing and customer care representatives, works to educate and inform the entire patient care group consisting of physicians, nurses, office staff, laboratory personnel, and administration as to the appropriate use and value provided by our testing. The team’s goal is to drive test adoption through articulating the scientific and clinical evidence behind our tests, how they impact the clinical care of a patient, and how the tests can ultimately help to improve patient outcomes. +Patients with pulmonary nodules are concentrated in the pulmonology sub-specialty, where additional resources such as lung cancer screening and nodule management clinics may exist to provide an increased level of care. We are also engaging large hospital systems in a “top-down” approach, with a goal of incorporating our tests into system wide pathways and protocols. +After a physician orders our tests, blood is collected either in the physician office or laboratory, third-party “store front” patient service centers, or it can be collected in the patient’s home or workplace. We have contracted with a network of patient service centers and mobile phlebotomy services to be enable collection of blood samples outside of the physician office, at home or work for patients across the United States. +For our Biodesix WorkSafe testing program, we have a dedicated outreach team that works with the State of Colorado healthcare providers and hospitals, and employers looking to safely return to work across many industries, including food services, oil and gas, biotechnology and pharmaceuticals, sports teams, universities, and many small businesses. We recognize everyone’s COVID-19 situation is unique, which is why we provide end-to-end customized solutions to support testing for our different customers, such as risk assessment tools, physician ordering services, on-site testing, phlebotomy services, shipping logistics, and ongoing client support. +Our business development team is focused on selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally. We currently hold a medical device establishment license in accordance with the Health Canada +19 +Medical Devices Regulations of the Food and Drugs Act and successfully passed an international Health Canada inspection in October 2021. Our team consists of customer facing business development associates that work with our biopharmaceutical customers to identify projects, draw up statements of work and negotiate service agreements. Alliance managers help to manage the contractual obligations and scope of the project, whereas our operations team assures the project is managed with adequate resources and delivers on time. We take a two-pronged approach generating business in this segment. Primarily, we leverage existing projects and relationships to expand sales in current accounts. We also actively map ongoing drug development projects in biopharmaceutical companies and target programs best suited to our platform for new test development. +Coverage and Reimbursement +The primary source of reimbursement for our tests in the United States is from third-party payers including government payers, such as Medicare, and commercial payers, such as insurance companies. Reimbursement for laboratory tests in the United States is determined by various payers, including private third-party payers, managed care organizations, and state and federal health care programs, such as Medicare and Medicaid. In Medicare, coverage of an item or service depends on whether it is “reasonable and necessary” under the section 1862(a)(1)(A) of the Social Security Act (SSA). For single-source laboratory tests, this determination is typically made by the Medicare Administrative Contractor (MAC) with jurisdiction over the laboratory where the test is performed. Our Boulder, Colorado laboratory is currently under the jurisdiction of Novitas Solutions, Inc. Our De Soto, Kansas laboratory is under the jurisdiction of Wisconsin Physicians Service Insurance Corporation (WPS), which participates in the MolDX program (administered by another MAC, Palmetto GBA) to set coverage policy for molecular diagnostic tests. +Medicare pays for clinical diagnostic laboratory tests (CDLTs), on the Clinical Laboratory Fee Schedule (CLFS). Section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA) added section 1834A to the SSA, which established the current CLFS rate setting processes and coding provisions for CDLTs, and created a new subcategory of CDLTs called Advanced Diagnostic Laboratory Tests (ADLTs), with separate reporting and payment requirements. +Under section 1834A and its implementing regulations, clinical laboratories that receive the majority of their Medicare revenues from payments made under the CLFS and the Physician Fee Schedule report on a triennial basis (or annually for ADLTs), private payer rates and volumes for their tests with specific billing codes based on final payments made during a set data collection period. The payment rate for a test for the ensuing three-year period (or one year for ADLTs) is set at the weighted median of the rates reported under the specific billing code for that test. Newly established codes for CDLTs are priced until the next private payer rate reporting cycle either based on the payment rate of a comparable code on the CLFS, as determined by CMS ("crosswalking") or at the median of rates submitted by the individual MACs based on statutory and regulatory factors ("gapfilling"). New ADLTs are initially priced at “actual list charge” for a nine-month period, after which they are priced based on private payer rates, with a recoupment provision if actual list charge is more than 130% of the weighted median of private payer rates reported. +The various payers in the United States also determine their own billing rules. In December 2020, Medicare revised its billing rules for clinical laboratory tests to require cancer-related protein-based Multianalyte Assays with Algorithmic Analyses to be billed directly to Medicare by the performing laboratory in most cases when performed on a specimen collected from a hospital outpatient. Molecular pathology tests and most ADLTs are also generally required to be billed directly to Medicare by the laboratory under these circumstances. +For our COVID-19 testing program, the primary source of reimbursement is through contracts with hospitals, companies providing wellness testing for their employees, or direct pay from patients. We believe that our lung cancer tests can both improve patient outcomes and help guide cost-effective treatment choices for patients with and at-risk of lung cancer. Achieving broad coverage and adequate reimbursement for each of our tests is a key component of our financial success and will continue to be important over time. +Under the Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief, and Economic Security Act (CARES), Congress has imposed a broad requirement that Medicare fee-for-service, Medicare Advantage, Medicaid, and commercial payers generally cover clinical diagnostic laboratory tests administered during the Public Health Emergency for the detection of SARS-CoV-2 or the diagnosis of the virus that causes COVID-19. Where applicable, the FFCRA and CARES require payers to cover COVID-19 tests without cost sharing or medical management techniques like prior authorization. Medicare fee-for-service does not require cost sharing or prior authorization for any clinical diagnostic laboratory tests. +The Department of Health & Human Services (HHS) has indicated in guidance that the coverage requirements of the FFCRA and CARES can apply both to infection and serological testing, but that they are only applicable to testing that is “diagnostic,” which “may include testing of individuals with signs or symptoms compatible with COVID-19, as well as asymptomatic individuals with known or suspected recent exposure to SARS-CoV-2.” Testing that is “not primarily intended for individualized diagnosis or treatment of COVID-19 or another health condition,” including “testing conducted to screen for general workplace health and safety,” is beyond the scope of the statutory coverage requirements. We believe these coverage requirements apply to the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test when performed for diagnostic purposes. In some cases, we submit claims to insurance payers for the Bio-Rad SARS-CoV-2 ddPCR test and/or the Platelia SARS-CoV-2 Total Ab test. In these cases, insurance payers may have a +20 +different position on the scope of mandatory coverage of our tests under the FFCRA and CARES. More commonly, we enter into arrangements with clients under which the client pays us directly for testing. +Compliance with applicable laws and regulations, as well as internal compliance policies and procedures adds complexity to the billing process. The Centers for Medicare & Medicaid Services (CMS) is responsible for overseeing the establishment of new Healthcare Common Procedure Coding System (HCPCS) codes for billing the Medicare program and other payers. CMS continuously evaluates and implements changes to the Medicare billing, coding, and reimbursement processes. To receive reimbursement from third-party payers, we bill our tests using a variety of HCPCS codes or Current Procedural Terminology (CPT) codes, as defined by the American Medical Association. For some of the tests we conduct, there may not be a specific CPT or HCPCS code, in which case the test may be billed under a miscellaneous code for an unlisted molecular pathology procedure or unlisted multiple anolyte test with algorithmic analysis (MAAA) procedure. Because these miscellaneous codes do not describe a specific service, the third-party payer claim may be examined to determine the service provided, whether the service was appropriate and medically necessary and whether payment should be rendered. This process can result in a delay in processing the claim, a lower reimbursement amount, and/or denial of the claim. +Competitors +We primarily face competition from lung cancer diagnostic solutions companies in the United States, Europe and Asia seeking to answer clinical questions in the space, all of whom provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories and other medical facilities. +Diagnosis—Nodule Management +We are not aware of any other company that offers two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. We are aware of efforts by Veracyte, Inc. to develop and validate a test that may be competitive to the Nodify XL2 and/or Nodify CDT tests in the future. Additionally, Veracyte currently markets a test that is used post-bronchoscopy that is not competitive with our pre-bronchoscopy nodule risk assessment tests. +Prognosis, Treatment Guidance and Monitoring—NSCLC +We are unaware of any other diagnostic test available, commercially or in development, that will compete with our VeriStrat immune profiling test. There is substantial interest and activity in tumor profiling through liquid biopsy. Our genomic test offerings, the GeneStrat ddPCR and GeneStrat NGS tests, face competition from academic hospital laboratories, and companies such as Guardant Health and Foundation Medicine. We believe that there are several companies and academic research institutions in the process of developing tests for monitoring patients on or following treatment for recurrence or progression of lung cancer. +Biopharmaceutical Diagnostic Discovery, Development & Testing Services +We are aware of a number of companies who compete with our diagnostic tests and services, including diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. From the perspective of tumor profiling, we believe Guardant Health and Foundation Medicine are our most significant competitors. Conversely, in the immune profiling market, we believe Adaptive Biotechnologies and Personalis are our most significant competitors. +Clinical Laboratory Operations +We perform the VeriStrat, GeneStrat ddPCR, GeneStrat NGS, and COVID-19 ddPCR tests in our Boulder, Colorado high-complexity CLIA certified clinical laboratory. The laboratory is College of American Pathology (CAP) accredited, New York State Department of Health (NYSDOH)—permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified, along with all other states that require licensing: California, Maryland, Pennsylvania, and Rhode Island. All aspects of the testing process from receipt of the test requisition form through to delivery of test results are performed in the Boulder, Colorado facility. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within three days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +The Nodify XL2, Nodify CDT, COVID cPASS and COVID-19 total antibody tests are performed in our De Soto, Kansas high-complexity CLIA certified clinical laboratory. This clinical laboratory is also CAP-accredited, NYSDOH—permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified and licensed by California, Maryland, Pennsylvania, and Rhode Island. Receipt of requisitions and testing is performed in our De Soto, Kansas clinical laboratory. Delivery of the test results is performed by personnel from our Boulder, Colorado headquarters. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within five days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +Personnel in both facilities are responsible for quality assurance oversight, licensing, and regulation compliance and maintenance to ensure data integrity and consistent, validated processes. +21 +Supply Chain +We rely on third-party suppliers, including in some instances single source suppliers, to provide us with certain components of our diagnostic tests. The number of suppliers feeding into the production of our diagnostic tests is in excess of 65 worldwide. We consider a select few of these suppliers, located in the United States, Europe and China, as critical single source providers of components. Bio-Rad, as described below, is the sole source supplier for our GeneStrat test, COVID-19, and antibody testing program. Oncimmune is also the sole source supplier for our Nodify CDT tests but there are known secondary suppliers for these materials. We have initiated the second source qualification process for the majority of these critical components. +In addition, we purchase supplies through purchase orders without long-term supply agreements with, or guaranteed commitments from, many of our suppliers, including single source suppliers. Additionally, at present, we have a limited contract with a contract manufacturer for the production of certain of our diagnostic testing kits; however, during 2022 we transitioned the majority of kitting performed outside of the Company to our internal operations team for cost savings and risk management. We depend on our suppliers and contract manufacturers to provide us and our customers with materials in a timely manner that meet our and their quality, quantity and cost requirements. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test, but these supplies are able to be supplied by known suppliers. A disruption to this supply would negatively impact our ability to perform the GeneStrat tests until alternatives could be validated. +While we have initiated the second source qualification process for the majority of these critical components, we may not be successful in securing second sourcing for all of them at all or on a timely basis. A disruption to this supply would negatively impact our ability to perform these tests until an alternative supplier could be validated. +All materials for our VeriStrat test and Nodify XL2 tests have alternative suppliers readily available, and a disruption in any single supplier would not materially impact our ability to deliver the test. +Intellectual Property +Our success depends, in part, on our ability to obtain and maintain intellectual property and proprietary protection for our products and other know-how, to operate our business without infringing, misappropriating or otherwise violating the intellectual property and proprietary rights of others, and to defend and enforce our intellectual property and proprietary rights. We take efforts to protect our proprietary position using a variety of methods, which include pursuit of United States and foreign patent applications related to our proprietary technology, inventions and improvements that we determine are important to our business. We also may rely on trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities to develop and maintain our proprietary position. For more information regarding risks relating to intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property.” +We have invested heavily in the protection of our key assets, namely the VeriStrat® and GeneStrat® tests, and we acquired a patent portfolio relating to the Nodify XL2® and Nodify CDT® tests in our acquisitions of Indi in June 2018, and of Oncimmune USA in October 2019 from Oncimmune Limited (Oncimmune). We own patents and patent applications as well as trade secrets relating to our products currently in development, a collection device for whole blood, our business strategy, client lists and business methods. Further, we have expanded our access to key intellectual property through license and co-development agreements, including our Non-Exclusive License Agreement with Bio-Rad (the Bio-Rad License), which allows us to use the Droplet Digital PCR™ technology developed by Bio-Rad and which we employ in our GeneStrat test. +Our patent strategy has focused on creating and acquiring protection for our VeriStrat and Nodify XL2 proteomic tests, while utilizing trade secret and some methods patent protection for our genomic test (the GeneStrat ddPCR and GeneStrat NGS™ tests) and ELISA test (the Nodify CDT test). We have entered into a non-exclusive license agreement with Bio-Rad, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. Bio-Rad owns patents relating to ddPCR and to which we have a non-exclusive license to utilize for the performance of ddPCR in cancer detection testing for third parties as set forth in the Bio-Rad License Agreement. In addition, we have separately been granted permission by Bio-Rad to use the Bio-Rad SARS-CoV-2 ddPCR test and Platelia SARS-CoV-2 Total Ab test for commercial diagnostic services. We are unaware of patents owned by Bio-Rad relating to its COVID-19 antibody test but acknowledge that Bio-Rad has know-how and trade secrets relating to this test. We have patent protection in the United States and other countries around the world for the primary use of the VeriStrat test for profiling of patients with NSCLC, and various other uses of the VeriStrat test, such as breast cancer, prostate cancer, head and neck cancer have received patent protection. We have also received patent protection relating to our core classifier development program, our Diagnostic Cortex® technologies and our approaches to using MALDI-ToF technology (DeepMALDI® techniques). Additionally, our first device patent was issued in 2019 for our internally designed blood collection device. +22 +As of December 31, 2022, our patent portfolio includes 53 issued United States patents, 69 issued foreign patents, which includes five European patents that were nationalized in multiple European countries, and 51 pending applications (including 29 foreign patent applications). With regard to our product development efforts, new applications have been filed around developments relating to ARDS and COVID diagnostics, new analytic methodologies using Shapley values and semi-quantitative spectra analysis in MALDI, and national stage applications are now in active prosecution to protect our pipeline ROR and PIR tests. +The patent portfolio can be broken down into five major categories: +1) +Issued patents and patent applications relating to the VeriStrat and Nodify tests and uses of these tests; +2) +Issued patents and patent applications relating to methods for developing classifiers, including using the Diagnostic Cortex and DeepMALDI technologies; +3) +Issued patents and patent applications relating to tests currently in development; +4) +Issued patents and patent applications relating to our novel blood collection device; and +5) +Issued patents and patent applications relating to tests developed for our third-party partners. +The patents relating to the VeriStrat test are scheduled to expire between 2026 and 2032. The patents relating to the Nodify XL2 test are scheduled to expire beginning in 2031 (excluding any patent term extension granted by the United States Patent and Trademark Office (USPTO)), and the patents relating to the Nodify CDT test are scheduled to expire in 2027. The patent related to the blood collection device is scheduled to expire in 2039. Should our current patent applications in prosecution in the United States issue, the resulting patents would be scheduled to have expiration dates between 2036 and 2040 (excluding any patent term extension(s) granted by the USPTO). +We currently have one pending Patent Cooperation Treaty (PCT) application. PCT patent applications are not eligible to become issued patents until, among other things, we file such PCT applications as national stage patent application(s) within 30 months in the countries in which we seek patent protection. If we do not timely file any national stage patent applications, we may lose our priority date with respect to any such PCT patent applications and any patent protection on the inventions disclosed in such PCT patent applications. Provisional patent applications are not eligible to become issued patents but can become the basis of PCT foreign stage and United States non-provisional patent applications, if such applications are filed within 12 months of filing the related provisional patent application. If we do not timely file any non-provisional patent applications, we will lose our priority date and any patent protection on the inventions disclosed in any such provisional patent application. +In addition, the term of individual issued patents depends upon the legal term for patents in the countries in which they are obtained. In most countries in which we have filed, including the United States, the patent term is generally 20 years from the earliest filing date of a non-provisional patent application, assuming the patent has not been terminally disclaimed over a commonly-owned patent or a patent naming a common inventor, or over a patent not commonly owned but that was disqualified as prior art as the result of activities undertaken within the scope of a joint research agreement. The life of a patent, and the protection it affords, is therefore limited and once the patent lives of our issued patents have expired, we may face competition, including from other competing technologies. In the United States, the term of a patent may also be eligible for patent term adjustment for delays within the USPTO. The term of a patent that covers a biological product may also be eligible for patent term extension when FDA approval is granted for a portion of the term effectively lost as a result of the FDA regulatory review period, subject to certain limitations and provided statutory and regulatory requirements are met. Any such patent term extension can be for no more than five years, only one patent per approved product can be extended, the extension cannot extend the total patent term beyond 14 years from approval, and only those claims covering the approved biological product, a method for using it or a method for manufacturing it may be extended. We may not receive an extension if we fail to exercise due diligence during the testing phase or regulatory review process, fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. There can be no assurance that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. +Our ability to maintain and solidify our proprietary and intellectual property position will depend on our success in obtaining effective patent claims and maintaining and enforcing claims that are granted. However, our owned and licensed patents could be invalidated or narrowed or otherwise fail to adequately protect our proprietary and intellectual property position and our pending owned and licensed patent applications, and any patent applications that we may in the future file or license from third parties, may not result in the issuance of patents. +Because branding is as much a part of any intellectual property strategy as patent or trade secret protection we have a number of registered and pending trademarks relating to our company and products. We have received or filed for trademark protection in the United States for our tradename (Biodesix), the names of five of our commercial tests (namely the VeriStrat, GeneStrat ddPCR, GeneStrat NGS, Nodify XL2 and Nodify CDT tests), and a suite of research tests (ImmunoStrat), as well as having trademark protection for our core development and methodological platforms, such as our Diagnostic Cortex and DeepMALDI technologies. In all, as of +23 +December 31, 2022, we have 22 uniquely registered United States trademarks, 11 of which (including Biodesix, VeriStrat, and GeneStrat) have received foreign issuances as well, with three trademarks pending approval from the USPTO. We will continue to pursue protection in the United States and abroad for our branded assets and will continue to use branding to protect products currently in development, key Biodesix developments and non-trade secret methodologies. +We also rely on trade secrets, including know-how, confidential information, unpatented technologies and other proprietary information, to strengthen or enhance our competitive position, protect and maintain aspects of our business that are not amenable to, or that we do not presently consider appropriate for, patent protection, and prevent competitors from reverse engineering or copying our technologies. We have decided that some technologies, such as our laboratory methodologies (including sample preparation and assay development), and some information (such as client and billing information) are best kept as trade secrets. However, trade secrets and confidential know-how are difficult to protect. To avoid inadvertent and improper disclosure of trade secrets, and to avoid the risks of former employees using these trade secrets to future employment, it is our policy to require employees, consultants and independent contractors to assign all rights to intellectual property they develop in connection with their employment with or services for the Company to the Company. We also protect our existing and developing intellectual property expressly through confidentiality provisions in agreements with third parties. There can be no assurance, however, that these agreements will be self-executing or otherwise provide meaningful protection for our trade secrets or other intellectual property or proprietary information, or adequate remedies in the event of unauthorized use or disclosure of such trade secrets or other intellectual property or proprietary information. +We also seek to preserve the integrity and confidentiality of our trade secrets and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in the measures we take to protect and preserve our trade secrets, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. +We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives, which may include objectives within and outside the United States. Despite our efforts to protect our intellectual property rights, and despite the breadth of protection that has issued around our key assets, these rights may not be respected in the future or may be circumvented or challenged (and potentially invalidated) in a legal proceeding in any jurisdiction where we have intellectual property rights. In addition, the laws of various foreign countries where we have received intellectual property protection and where we may eventually distribute our products may not afford the same protections or assurances to the same extent as the laws in the United States. See “Risk Factors—Risks Related to Our Intellectual Property” for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on us. +Government Regulations +Clinical laboratory tests like our diagnostic tests are regulated under CLIA and State law. The FDA regulates medical devices pursuant to the FDCA, including many diagnostic test kits, such as in vitro diagnostic tests (IVDs). However, most Laboratory Developed Tests (LDTs) are not currently subject to the FDA’s regulation (although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to such regulation) because the FDA has historically exercised enforcement discretion over LDTs. LDTs are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. FDA’s authority to regulate LDTs has been contested for many years, and there have been several legislative and administrative proposals regarding LDT regulation seeking to end or limit enforcement discretion and to bring LDTs under new or existing FDA regulatory frameworks. +We cannot predict the likelihood that Congress will pass legislation or the extent to which such legislation may affect the FDA’s plans to regulate certain LDTs as medical devices or pursuant to a new framework. Until legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval. It is also unclear at this time when or if, the FDA will finalize its plans to end enforcement discretion in the absence of legislation, via notice and comment rulemaking or otherwise. Even if a new framework is not established via legislative or administrative action, the FDA may attempt to regulate and enforce against certain LDTs on a case-by-case basis at any time. +We currently market our GeneStrat, VeriStrat, Nodify XL2 and Nodify CDT tests as LDTs in the United States. As a result, we believe our diagnostic services are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDCA provisions. If the FDA disagrees with the LDT status of any of our tests, the FDA may consider the test to be an unapproved medical device and may subject us to FDA enforcement action, including, without limitation, requiring us to seek clearance, authorization or approval for the laboratory test. If the FDA were to begin enforcement with respect to our LDTs, we could incur substantial costs and delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market requirements. +To date, the FDA has not engaged in notice-and-comment rulemaking or released broad-sweeping guidance over LDTs, but it could choose to do so in the future and if pre-market review is required, our business could be negatively impacted as a result of commercial delay that may be caused by the new requirements. The cost of conducting clinical trials and otherwise developing data and information +24 +to support pre-market applications may be significant. If we are required to submit applications for our currently marketed tests, we may be required to conduct additional studies, which may be time-consuming, costly and could result in our currently-marketed tests being withdrawn from the market. Continued compliance with the FDA’s regulations would increase the cost of conducting our business, and subject us to heightened regulation by the FDA including penalties for failure to comply with these requirements. Failure to comply with applicable regulatory requirements could result in an enforcement action by the FDA, such as fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal sanctions. There are other regulatory and legislative proposals that would increase general FDA oversight of clinical laboratories and LDTs. Until the FDA finalizes its regulatory position regarding LDTs, or the VALID Act or other legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval. The outcome and ultimate impact of such proposals on the business is difficult to predict at this time and we are monitoring developments and anticipate that our products will be able to comply with requirements that may be imposed by the FDA. In the meantime, we maintain our CLIA accreditation, which permits the use of LDTs for diagnostics purposes. +FDA Emergency Use Authorization +Section 564 of the FDCA allows the FDA to authorize the shipment of drugs, biological products, or medical devices that either lack required approval, licensure, or clearance (unapproved products), or are approved but are to be used for unapproved ways to diagnose, treat, or prevent serious diseases or conditions in the event of an emergency declaration by the HHS Secretary. 21 U.S.C. § 360bbb-3(a)(1)-(2). +On January 31, 2020, HHS Secretary Alex M. Azar II declared a public health emergency for COVID-19, under 21 U.S.C. § 360bbb-3(b)(1), justifying the authorization of emergency use of IVDs for detection and/or diagnosis of COVID-19. This determination was published in the Federal Register on February 7, 2020. 85 Fed. Reg. 7316 (Feb. 7, 2020). The EUA declaration under Section 564 of the FDCA is distinct from and independent of the declaration by the Secretary of HHS of a public health emergency under Section 319 of the Public Health Service Act. On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. Because the EUA declaration under Section 564 of the FDCA is distinct from the declaration under Section 319 of the PHS Act, an EUA may remain in effect beyond the duration of the Section 319 declaration. Before HHS terminates an EUA declaration, it will publish a notice of termination in the Federal Register. +While the emergency declaration for COVID-19 IVDs under Section 564 of the FDCA remains in effect, the FDA may authorize the use of an unapproved product or an unapproved use of an approved product if it concludes that: +• +an agent referred to in the emergency declaration could cause a serious or life-threatening disease or condition; +• +it is reasonable to believe that the authorized product may be effective in diagnosing, treating, or preventing that disease or condition or a serious or life-threatening disease or condition caused by an approved product or a product marketed under an EUA; +• +the known and potential benefits of the authorized product, when used for that disease or condition, outweigh known and potential risks, taking into consideration the material threat of agents identified in the emergency declaration; +• +there is no adequate, approved, and available alternative to the authorized product for diagnosing, preventing, or treating the relevant disease or condition; +• +any other criteria prescribed by the FDA is satisfied. Id. § 360bbb-3(c). +Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. +The Bio-Rad SARS-CoV-2 ddPCR test, the cPASS neutralization antibody test kit, and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. We have completed all required performance verification studies to validate the use of the tests in our laboratories in accordance with the FDA Policy for Coronavirus Disease-2019 Tests During the Public Health Emergency, CAP and New York State Clinical Laboratory Standards of Practice (NYS CLEP) requirements. The FDA Policy for COVID-19 tests is a guidance document that explains the FDA’s current thinking on the topic, is subject to change, and does not establish any legally enforceable responsibilities. The FDA does not expect a separate notification or EUA request from high complexity CLIA laboratories that are performing testing for SARS-CoV-2 using only EUA-authorized test kits purchased from commercial manufacturers or their distributors. According to previous versions of the FDA's Policy for COVID-19 tests, a laboratory may make certain modifications to an EUA-authorized test if the modified test is validated using a bridging study without submitting an EUA amendment or formal notification. According to the current FDA Policy for COVID-19 tests (January 12, 2023), a laboratory +25 +that modified an EUA authorized test pursuant to the previous policy for use of a new specimen through a bridging study when the new specimen type had been previously authorized for another test of the same technology may continue to offer the modified test without submitting an EUA amendment or formal notification. +Federal and State Laboratory Licensing Requirements +The Biodesix Boulder, Colorado clinical laboratory is a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, Biodesix’s Quality Management System (QMS) holds an ISO 13485:2016 certificate (passed recertification audit in December 2021). The Biodesix Boulder, Colorado clinical laboratory has received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers, and Molecular and Cellular Tumor Markers and Virology as well as holding state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +CLIA regulations establish standards for proficiency testing; facility administration; general laboratory systems; pre-analytic, analytic systems, post- analytic systems; personnel qualifications and responsibilities; quality control, quality assessment; and specific provisions for laboratories performing moderate to high complexity tests. Our Boulder, Colorado clinical laboratory is inspected biennially as part of its ongoing certification under CLIA certificate of accreditation by CAP. The Boulder, Colorado clinical laboratory most recently passed its CAP inspection in April 2021. +Under CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of or assessment of health. CLIA requires that a laboratory hold a certificate applicable to the type of laboratory examinations it performs and that it complies with, among other things, standards covering operations, personnel, facilities administration, quality systems and proficiency testing, which are intended to ensure, among other things, that clinical laboratory testing services are accurate, reliable and timely. +The Biodesix De Soto, Kansas clinical laboratory is a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, the De Soto, Kansas clinical laboratory passed its first CAP inspection in June 2021. Biodesix’s QMS holds an ISO 13485:2016 certificate (recently passed surveillance audit in January 2023). The De Soto, Kansas clinical laboratory has received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers and Diagnostic Immunology as well as holding state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +The International Organization for Standardization (ISO) is an independent, non-governmental international organization that defines world-class specifications for products, services and systems, to ensure quality, safety and efficiency. ISO 13485:2016 is a harmonized, international regulatory benchmark for quality management systems that addresses most or all of the QMS requirements in markets including the United States, European Union, Australia, Japan and Canada. The ISO 13485:2016 certificate confirms that an organization operates a QMS that conforms to the standards established by ISO. The FDA has proposed a rule to harmonize and modernize its Quality System Regulation (QSR), which would supplant the existing requirements with ISO 13485:2016. Although this rule has been delayed several times since spring 2018, the Office of Management and Budget (OMB) updated its website (January 2022) to indicate that the FDA’s proposed rule to harmonize the agency’s medical device QSR with the ISO 13485 standard has been finished and is now under review by OMB. +To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Laboratories such as ours, which are performing high complexity testing, are required to meet more stringent CLIA requirements than laboratories performing less complex tests, and therefore our laboratories are also subject to random, unannounced survey and inspection at any time. In addition, a laboratory that is certified as “high complexity” under CLIA may develop, manufacture, validate and use proprietary LDTs. CLIA requires analytical validation including accuracy, precision, specificity, sensitivity and establishment of a reference range for any LDT used in clinical testing. The regulatory and compliance standards applicable to the testing we perform may change over time and any such changes could have a material effect on our business. +CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that out-of-state laboratories maintain an in-state laboratory license to perform tests on samples from patients who reside in that state. As a condition of licensure, certain states may require that laboratory personnel meet qualifications, quality control procedures, facility requirements, record maintenance requirements or other state-specific requirements. +Because our Boulder, Colorado clinical laboratory is located in the State of Colorado, we do not need a specific State of Colorado laboratory license, however, we maintain licenses to conduct testing in other states where nonresident laboratories are required to obtain state laboratory licenses. We maintain licenses for our Boulder, Colorado and De Soto, Kansas laboratories with the NYSDOH. We also hold licenses in other states in which we operate, including California, Maryland, Pennsylvania and Rhode Island, that require licensing of out-of-state laboratories under certain circumstances. Other states may currently have or adopt similar licensure requirements in the future, which may require us to modify, delay or stop its operations in those states until such requirements are met. +26 +Failure to comply with CLIA certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate or license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions, and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. +CLIA and state laws and regulations, operating together, sometimes limit the ability of laboratories to offer consumer-initiated testing, also known as direct access testing. We do not offer direct access testing and instead require that our tests be ordered by licensed healthcare providers. +Our Boulder, Colorado and De Soto, Kansas laboratories are certified and adhere to the NYS CLEP, based on New York State Public Health Law, Article 5 Title 5. NYS CLEP is exempt from CLIA and establishes their own method of laboratory certification and test validation approval. To process New York State patient specimens a laboratory must submit a robust analytical and clinical validation package to demonstrate clinical utility of the test and receive approval prior to offering the test in the state of New York. All of our tests have obtained NYS CLEP approval including GeneStrat ddPCR, GeneStrat NGS, VeriStrat, Nodify XL2 and Nodify CDT tests. NYS CLEP requires semi-annual inspections to ensure the laboratory meets all general and specialty standards. Both Biodesix laboratories passed NYS CLEP inspections in May 2019. Due to the pandemic, routine re-inspections have been delayed by NYS CLEP. +Regulatory framework for medical devices in the United States +Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, which are defined to include, among other things, IVDs. The FDA regulates the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. It is possible that one of our current, or future, tests will be subject to FDA authority and oversight as either an IVD or a CDx pursuant to the FDA’s authority to regulate medical devices under the FDCA. +Medical devices are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +product design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the European Economic Area (EEA), a medical device must meet the Medical Devices Directive’s (MDD)/In Vitro Medical Devices Directive’s (IVDD) Essential Requirements or, applicable on May 26, 2021, the Medical Devices Regulation’s (MDR) / applicable on May 26, 2022, In Vitro Medical Devices Regulation’s (IVDR) General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a clinical evaluation report (CER) the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the +27 +benefit-risk ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia , of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia , that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. However, the CE mark will be accepted in the UK until July 1, 2023. +Device classification +Under the FDCA, medical devices are classified into one of three classes: Class I, Class II or Class III, depending on the degree of risk to patients that is associated with each medical device and the amount of oversight needed to provide reasonable assurances with respect to safety and effectiveness of the medical device. +Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to a set of FDA regulations, referred to as the General Controls for Medical Devices, which require compliance with the applicable portions of the FDA’s QSR, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements. +Class II devices are subject to the General Controls as well as any special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, patient registries, FDA guidance documents and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process, although some Class II devices are exempt from the 510(k) requirements. +Class III devices include devices deemed by the FDA to pose the greatest risk: such as life-supporting or life-sustaining devices, implantable devices, or those deemed novel and not substantially equivalent to a predicate device following the 510(k) process. CDx tests are regularly considered Class III devices. +Premarket submission process +Unless a statutory or regulatory exemption or enforcement discretion policy applies, before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, the manufacturer must obtain the FDA’s: (1) permission for commercial distribution under section 510(k) of the FDCA (510(k) clearance); or (2) approval of a Premarket Approval (PMA); or (3) de novo classification and authorization. These processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees. +Under the 510(k)-clearance process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and therefore a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Premarket notifications typically include bench, analytical, and preclinical data. Clinical data is sometimes required to support substantial equivalence. If a manufacturer obtains a 510(k) clearance for its device and then makes a modification that could significantly affect the device’s safety or effectiveness or constitutes a major change or modification in the intended use of the device, a new clearance, authorization or approval may be required. +By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous, costly, and time-consuming PMA approval process or seek reclassification of the device through the De Novo process. +If a predicate device is not available, the FDA allows the submission of a direct De Novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. A De Novo request includes a description of the device, a discussion of the general controls and any specific controls recommended to +28 +provide reasonable assurance of the safety and effectiveness of the device, a description of the probable benefits of the device when compared to the probable risks when the device is used as intended, non-clinical data including bench performance and animal testing, technical information about the device, and clinical data (if applicable). FDA’s goal is to review a De Novo request within 150 review days after receiving the petition. As with a 510(k) submission or PMA, the length of the review can be prolonged if the FDA requests additional information from the applicant. +To obtain a PMA, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling, and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use. +Once filed as a PMA, the FDA has 180 days to review the filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. +Prior to approval of a PMA, the FDA may conduct inspections of any clinical trial data and clinical trial sites, as well as inspections of any manufacturing facility and processes. The FDA can delay, limit or deny approval of a PMA application for many reasons, including (1) the device may not be shown safe or effective to the FDA’s satisfaction; (2) the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval; (3) the manufacturing process or facilities may not meet applicable requirements; and (4) changes in FDA approval policies or adoption of new regulations may require additional data. +If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when data is available. The PMA process can be expensive, uncertain and lengthy. A number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing. New PMA applications or PMA supplements are required for any modifications to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, materials or design of a device that has been approved through the PMA process. +As a condition of PMA application approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer-term safety and effectiveness data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. +The 510(k), De Novo or PMA processes can be expensive, lengthy and unpredictable. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k)-clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device. +Companion Diagnostics and the Premarket Process +We believe that one of our future product candidates may include a companion diagnostic or complementary diagnostic (collectively CDx). CDx’s can identify patients who are most likely to benefit from a particular therapeutic product; identify patients likely to be at increased risk for serious side effects as a result of treatment with a particular therapeutic product; or monitor response to treatment with a particular therapeutic product for the purpose of adjusting treatment to achieve improved safety or effectiveness. The use of the CDx will be stipulated in the labeling of both the CDx and the therapeutic product. The FDA may require an application for the CDx to be separate from the drug approval process, and this could potentially delay the approval of any new drug application or the CDx, or complicate the review process. CDx’s are generally regulated as Class III medical devices by the FDA and are therefore most often subject to the PMA approval process. +The FDA issued guidance in July 2016 for the co-development of CDx tests with a therapeutic product and issued another draft guidance in December 2018 specific to oncology CDx tests. The FDA finalized this draft guidance in April 2020 in “Developing and Labeling In +29 +vitro Companion Diagnostic Devices for a Specific Group of Oncology Therapeutic Products.” The guidance is meant to guide the development of CDx products, which are defined as IVDs that provide information that is essential for the safe and effective use of the therapeutic product. A CDx is often developed and approved or cleared contemporaneously with the therapeutic, and the use of the CDx is stipulated in the labeling of both the CDx and the corresponding therapeutic product. While it supports contemporaneous marketing authorizations, if there are any deficiencies in the submissions, the FDA may place a PMA review of a CDx on hold or request additional testing, which could potentially delay the approval of the corresponding new drug application or the marketing authorization of the CDx, or otherwise complicate the review process. Some oncology CDx tests can be developed in a way that results in labeling for a specific group of oncology therapeutic products, rather than a single therapeutic product. +Post-Market FDA Regulation +Even if regulatory clearance, authorization or approval of a device is granted, the FDA may impose limitations on the uses and indications for which the device may be labeled and promoted, and the device remains subject to significant regulatory requirements. Medical devices may be marketed only for the uses and indications for which they are cleared, authorized or approved. After a device, including a device exempt from FDA premarket review, is placed on the market, numerous post-market regulatory requirements apply, and the FDA has broad authority to enforce these requirements. Medical device manufacturers are subject to unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of any suppliers. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions such as: warning letters, fines, injunctions, consent decrees and civil penalties; unanticipated expenditures, including requirements to repair, replace, and/or refund the cost of the devices, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; the FDA’s refusal of our requests for 510(k) clearance, De Novo classification, or PMA of new products, new intended uses or modifications to existing products; the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries; and withdrawing 510(k) clearance or PMAs that have already been granted and criminal prosecution. In the event that a supplier fails to maintain compliance with the FDA’s or our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. +Federal and State Fraud and Abuse Laws +We are subject to federal fraud and abuse laws such as the federal Anti-Kickback Statute (AKS), the federal prohibition against physician self-referral (Stark Law), the Eliminating Kickbacks in Recovery Act (EKRA), and the federal False Claims Act (FCA). We are also subject to similar state and foreign fraud and abuse laws. +The AKS (Social Security Act § 1128B(b)) prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing or ordering, any item or service that may be reimbursable, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. There are a number of statutory exceptions and regulatory safe harbors to the AKS that provide protection from AKS liability to arrangements that fully satisfy the applicable requirements. +EKRA (18 USC § 220) prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program. The term “health care benefit program” is broadly defined such that EKRA extends to referrals reimbursed by both governmental and commercial third-party payers. EKRA includes a number of statutory exceptions that provide protection from EKRA liability if the applicable requirements are met. +The Stark Law (Social Security Act § 1877) generally prohibits, among other things, clinical laboratories and other so-called “designated health services” entities from billing Medicare for any designated health services when the physician ordering the service, or any member of such physician’s immediate family, has a financial relationship, such as a direct or indirect investment interest in or compensation arrangement with the billing entity, unless the arrangement meets an exception to the prohibition. The Stark Law also prohibits physicians from making such referrals to a designated health services entity. There are also similar state laws that apply where Medicaid and/or commercial payers are billed. +The FCA (31 USC § 3729) imposes penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment to the government that are false or fraudulent, or knowingly making, using or causing to be made or used a false record or statement material to such a false or fraudulent claim, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. This statute also permits a private individual acting as a “qui tam” whistleblower to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $13,508 to $27,018 per false claim or statement for penalties assessed after January 30, 2023, with respect to violations occurring after November 2, 2015. +30 +Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payer knows or should know is likely to influence the beneficiary to order or receive a reimbursable item or service from a particular provider, practitioner, or supplier, and contracting with an individual or entity that the person knows or should know is excluded from participation in a federal health care program. In addition, federal criminal statutes created by the Health Insurance Portability and Accountability Act (HIPAA) prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services. +In addition to these federal laws, there are often similar state anti-kickback and false claims laws that typically apply to arrangements involving reimbursement by a state-funded Medicaid or other health care program. Often, these laws closely follow the language of their federal law counterparts, although they do not always have the same exceptions or safe harbors. In some states, these anti-kickback laws apply with respect to all payers, including commercial payers. +A number of states have enacted laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and other healthcare providers, and, in some states, marketing expenditures. In addition, some state statutes impose outright bans on certain manufacturer gifts to physicians or other health care professionals. Some of these laws, referred to as “aggregate spend” or “gift” laws, carry substantial fines if they are violated. +Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs and extensive annual trainings for all of our employees and contractors. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from participation in government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Anti-Corruption +The Foreign Corrupt Practices Act of 1977 (FCPA) and similar international bribery laws make it unlawful for persons or entities to make payments to foreign government officials to assist in obtaining and maintaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any offer, payment, promise to pay, or authorizing the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to do or omit to do an act in violation of his or her duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business, to any person. In addition to the anti-bribery provisions of the FCPA, the statute also contains accounting requirements designed to operate in tandem with the anti-bribery provisions. Covered companies are required to make and keep books and records that accurately and fairly reflect the transactions of the company and devise and maintain an adequate system of internal accounting controls. With our international operations through our third-party partnerships, we could incur significant fines and penalties, as well as criminal liability, if we fail to comply with either the anti-bribery or accounting requirements of the FCPA, or similar international bribery laws. Even an unsuccessful challenge of our compliance with these laws could cause us to incur adverse publicity and significant legal and related costs. We successfully passed our first FCPA compliance review in 2021 with no findings. +Privacy and Data Protection Laws +Numerous federal and state laws and regulations, including HIPAA, as amended by the Health Information Technology for Economic and Clinical Health (HITECH) Act, govern the collection, dissemination, security, use and confidentiality of protected health information (PHI) and personal information. In the course of performing our business we obtain personal information, including PHI. Laws and regulations relating to privacy, data protection, and consumer protection are evolving and, in some cases, particularly with regard to newer laws, may be subject to potentially differing interpretations. Under HIPAA and HITECH, the HHS issues regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of PHI, used or disclosed by covered entities (CEs) and their authorized business associates (BAs). Because we are a health care provider that electronically transmits health care information, and we also provide certain services to CEs and receive PHI from them, we are at times either a CE or a BA, as defined by HIPAA. Our subcontractors that create, receive, maintain, transmit or otherwise process PHI on our behalf are HIPAA BAs and must also comply with HIPAA, as applicable. +HIPAA and HITECH include the privacy and security rules, breach notification requirements and electronic transaction standards. The privacy rule governs the use and disclosure of PHI, generally prohibits the use or disclosure of PHI except as permitted under the rule, and mandates certain safeguards to protect the privacy of PHI. The privacy rule also sets forth individual rights, such as the right to +31 +access or amend certain records containing such individual’s PHI, or to request restrictions on the use or disclosure of such individual’s PHI. The security rule requires CEs and BAs to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI (also referred to as ePHI) by implementing administrative, physical and technical safeguards. Under HIPAA’s breach notification rule, a CE must notify individuals, the Secretary of HHS, and in some circumstances, the media of certain breaches of unsecured PHI or ePHI, and similar breach notification provisions apply to certain BAs under the HITECH Act. +Penalties for failure to comply with a requirement of HIPAA and HITECH vary depending on the number and nature of the violations and any history of prior violations, but can be significant and include civil monetary or criminal penalties. HIPAA is enforced by the Department of Health and Human Services, Office for Civil Rights, and HIPAA also authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in improper use, access to or disclosure of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA CEs, such as us, and their BAs for compliance with the HIPAA privacy and security standards and breach notification rules. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator. +In addition, we may be subject to state privacy, cybersecurity, and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information Act, which, in addition to HIPAA and HITECH, sets forth standards with which all California health care providers must abide. Colorado has enacted the Colorado Privacy Act, and Virginia has enacted the Consumer Data Protection Act, both of which also have standards that must be complied with that supplement Federal data protection requirements, State laws may be more stringent, broader in scope or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other in regards to personal information treatment, which may complicate compliance efforts. For instance, the California Consumer Privacy Act (CCPA) became effective on January 1, 2020 and was amended by the passage of the California Privacy Rights Act (CPRA) in November of 2020, which amendments came into force on January 1, 2023. The CCPA, among other things, gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA has been amended from time to time, and it remains unclear what, if any, further modifications will be made to this legislation or how it will be interpreted. Although there are certain exemptions for PHI and clinical trial data, the CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future and the CCPA may increase our compliance costs and potential liability. Additionally, the CPRA imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It also creates a new California data protection agency – the California Privacy Protection Agency – specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. Similar laws have been proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that could continue to make compliance challenging and costly. +Additionally, the Federal Trade Commission (FTC) and state attorneys general enforce consumer protection laws that prohibit unfair and deceptive acts and practices, including Section 5 of the FTC Act, which creates standards for the collection, use, dissemination and security of health-related and other personal information. Claims of unfair or deceptive trade practices regarding privacy and security can lead to significant liabilities and consequences, including regulatory investigations, penalties, fines and orders as well as civil claims, which could impact our data practices and operations or cause reputational damage. +We may also be subject to laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may add additional compliance burden and complexity. For example, in the EEA, the collection and use of personal data is governed by the European Union's General Data Protection Regulation (GDPR). In the United Kingdom, the GDPR has been adopted in substantially the same form, however the UK may potentially make revisions in the coming years. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze, store, transfer and otherwise process personal data. European and United Kingdom data protection authorities may interpret the GDPR and national laws differently and impose additional requirements, which adds to the complexity of processing personal data in or from the EEA or United Kingdom. Guidance on implementation and compliance practices is often updated or otherwise revised. GDPR applies extra-territorially under certain circumstances and imposes stringent requirements on controllers and processors of personal data, including, for example, requirements to ensure a legal bases to process personal information, provide robust disclosures to individuals, facilitate data subject rights, provide data security breach notifications within 72 hours after discovering a breach in certain circumstances, limit retention of personal information and apply enhanced protections to health data and other categories of sensitive personal information. The GDPR also has requirements around international transfers of personal data. Requirements around transfers to the United States and other jurisdictions have increased since a July 2020 decision by the Court of Justice of the European Union invalidated the Privacy Shield as a basis to +32 +transfer personal data from Europe to the United States, and added requirements for reliance on Standard Contractual Clauses. Regulatory guidance on requirements for international transfers, and other GDPR compliance matters, continues to evolve; for example, the European Commission in December 2022 announced that it was beginning the process of drafting a new adequacy decision that would ease regulatory barriers for data transfers to the United States. However, it is widely expected that the new adequacy decision will itself face scrutiny from the Court of Justice, underscoring that GDPR compliance is an ongoing endeavor. Failure to comply with the requirements of the GDPR may result in fines of up to €20 million or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. To comply with the GDPR and other applicable international data protection laws and regulations, we may be required to put in place additional mechanisms ensuring compliance, which may result in other substantial expenditures. +Cybersecurity +Our business relies on secure and continuous processing of information and the availability of our IT networks and IT resources, as well as critical IT vendors that support our technology, research and other data processing operations. While we take steps to protect our systems and data, security incidents, data breaches, computer malware and computer hacking attacks have become more prevalent across industries, including the life sciences sector, and may occur on our systems or those of our third-party service providers. Unauthorized persons may in the future be able to exploit weaknesses in the security systems of our (or our third-party service providers) IT networks and gain access to PHI and other personal information, sensitive trade secrets, or other proprietary information. Any wrongful use or disclosure of PHI, other personal information, trade secrets or other proprietary information by us or our third-party service providers could subject us to regulatory fines or penalties, third-party claims or otherwise could adversely affect our business and results of operations. Although HIPAA and the regulations promulgated thereunder do not provide for a private right of action, failures to adequately protect PHI or our IT systems could be viewed as violations of the HIPAA security rule or violations of other applicable information security laws, regulations, contractual obligations or industry standards, and could further result in costly data breach notification obligations that negatively impact our reputation. +Moreover, data security incidents or data breaches, as well as attacks on our IT systems, could result in operational disruptions or data loss or corruption that could adversely impact our business and operations, resulting in substantial investment of resources to investigate, recover and remediate and subject us to heightened regulatory scrutiny. +International Regulations +Many countries in which we may offer any of our diagnostic tests in the future have anti-kickback regulations prohibiting providers from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable under any national health care program. In situations involving physicians employed by state-funded institutions or national health care agencies, violation of the local anti-kickback law may also constitute a violation of the FCPA. +The FCPA prohibits any United States individual, business entity or employee of a United States business entity to offer or provide, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether or not such conduct violates local laws. In addition, it is illegal for a company that reports to the Securities and Exchange Commission (SEC) to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls. We will also be required to maintain accurate information and control over sales and distributors’ activities that may fall within the purview of the FCPA, its books and records provisions and its anti-bribery provisions. +The standard of intent and knowledge in anti-bribery cases is minimal. Intent and knowledge are usually inferred from that fact that bribery took place. The accounting provisions do not require intent. Violations of the FCPA’s anti-bribery provisions for corporations and other business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Other countries, including the United Kingdom and other OECD Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United Kingdom Anti-Bribery Act. +When marketing our diagnostic tests outside of the United States, we may be subject to foreign regulatory requirements governing human clinical testing, prohibitions on the import of tissue necessary for us to perform our diagnostic tests or restrictions on the export of tissue imposed by countries outside of the United States or the import of tissue into the United States, and marketing approval. These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required. +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the EEA, a medical device must meet MDDs/IVDD Essential Requirements or, applicable on May 26, 2021, the MDR applicable on May 26, 2022, IVDR General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a +33 +medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a CER the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia , of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia , that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. However, the CE mark will be accepted in the UK until July 1, 2023. +Healthcare Reform +In March 2010, the Patient Protection and Affordable Care Act (ACA) was enacted in the United States. The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private insurers. For example, the ACA requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices. The medical device tax was permanently repealed at the end of 2019. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters, and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict. +Beginning in 2017, the Trump administration sought to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. The Trump administration issued three executive orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. For example, on December 20, 2019, President Trump signed appropriations legislation for fiscal year 2020 that repealed certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high-cost employer-sponsored insurance plans, for tax years beginning after December 31, 2019; the annual fee imposed on certain health insurance providers based on market share, for calendar years beginning December 31, 2020; and the medical device excise tax on non-exempt medical devices, for sales after December 31, 2019. While Congress did not pass comprehensive legislation that would repeal all or part of the ACA, two bills affecting the implementation of certain taxes under the ACA have been signed into law. Specifically, the Tax Cuts and Jobs Act of 2017 (TCJA), among other things, included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment, or penalty, imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Beginning in 2021, the Biden administration has signaled its intent to pursue policies strengthening the ACA. +Other legislative changes have been proposed and adopted in the United States since the ACA was enacted to reduce healthcare expenditures. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions of Medicare payments to providers of up to 2% per fiscal year that started in 2013 and, due to subsequent statutory amendments, will remain in effect through 2030 unless additional Congressional action is taken. In 2020, the CARES Act temporarily suspended the 2% cut in Medicare payments from May 1, 2020 through December 31, 2020, and it extended the sequestration reductions through fiscal year 2030 to offset the cost of such temporary suspension. The Consolidated Appropriations Act of 2021 further extended the temporary suspension through March 31, 2021. On April 14, 2021, Congress enacted legislation that further extended the suspension through December 31, 2021. On December 10, 2021, further legislation was enacted to extend the suspension through March 31, 2022, after which a 1.0% sequestration applied for Medicare payments made between April 1, 2022 and June 30, 2022. +The American Taxpayer Relief Act of 2012 made other changes, including reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. If federal spending is reduced, anticipated budgetary shortfalls may also impact the ability of relevant agencies, such as the FDA or the National Institutes of Health to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve R&D, manufacturing, and marketing activities, which may delay our ability to develop, market and sell any products we may develop. Additionally, the Biden administration has already indicated a shift in direction from Trump administration policies by issuing orders and other documents rolling back regulations and Executive Orders from the Trump administration, and as noted, indicating that it will pursue policies strengthening the ACA. +34 +In December 2020, in its enactment of the Consolidated Appropriations Act, Congress enacted the No Surprises Act. This law, which took effect January 1, 2022, bars an out-of-network providers from billing patients in excess of the in-network cost sharing for services furnished with respect to a visit at certain in-network health care facilities. The law establishes an independent dispute resolution process between the provider and the payer to determine the appropriate payment rate to the provider. As written, the No Surprises Act may apply to laboratory tests furnished by an independent laboratory with respect to a hospital visit. The law establishes a notice and consent exception that generally does not apply to laboratory tests, although it allows HHS to apply this exception to certain advanced tests. Regulations and subregulatory guidance were issued by HHS, the Department of Labor, and the Department of the Treasury in 2021 and 2022, with the first set of regulations was issued as an Interim Final Rule on July 1, 2021, a second set issued as an Interim Final Rule on September 30, 2021, and a third set issued as a Final Rule on August 19, 2022. These regulations and subregulatory guidance have provided additional information on the applicability of the No Surprises Act, the rules governing the independent dispute resolution process, and specific provider requirements (including the obligation to furnish a “good faith estimates” of “expected charges” to uninsured or self-pay patients), as well as areas of temporary enforcement discretion. +Environmental, Health and Safety Regulations +We are subject to various federal, state, local, and foreign environmental, health and safety laws and regulations and permitting and licensing requirements. Such laws include those governing laboratory practices, the generation, storage, use, manufacture, handling, transportation, treatment, remediation, release and disposal of, and exposure to, hazardous materials and wastes and worker health and safety. Our operations involve the generation, use, storage and disposal of hazardous materials, and the risk of injury, contamination or non-compliance with environmental, health and safety laws and regulations or permitting or licensing requirements cannot be eliminated. In particular, the introduction of our Bio-Rad SARS-CoV-2 ddPCR and Platelia SARS-CoV-2 Total Ab tests requires that we maintain compliance with applicable and evolving federal and state laws and regulations relating to COVID-19, including the generation, use, storage, and disposal of testing materials and agents. Compliance with environmental laws and regulations has not had a material effect on our capital expenditures, earning or competitive position. Most recently, the Boulder, Colorado clinical laboratory passed an on-site inspection from the CDC in June 2021. +Corporate Information +We were incorporated in Delaware in 2005 as Elston Technologies, Inc. Our principal executive offices are located at 2970 Wilderness Place, Suite 100, Boulder, Colorado 80301, and our telephone number is (303) 417-0500. On June 20, 2006, we changed our name to Biodesix, Inc. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.24 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of our initial public offering (IPO). +Additionally, we are a “smaller reporting company ” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million +35 +as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +For certain risks related to our status as an emerging growth company, see “Risk Factors—General Risk Factors—We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.” +Human Capital Resources +Our culture is underpinned by our cultural beliefs including an unwavering commitment to inclusion and diversity. We are committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent offering opportunities for our team members to grow and develop in their careers, supported by a competitive suite of benefits and health and wellness programs. We regularly engage our team members in monthly all-hands meetings to align and focus on the current state of affairs of our business, our partnerships, new products, clinical trials, and other pertinent information about our business. We engage our team members in programs such as peer recognition and recruitment that focuses on recognizing outstanding individual contributions to company performance, cultural fit of new team members and acknowledging the diversity of our team to ensure our team members feel valued and can do their best work. We have a national annual community service initiative, “Biodesix Gives Back” that allows each team member to invest ten hours of paid community service to organizations of their choosing. +As of December 31, 2022, we had approximately 245 full-time and part-time employees, all of whom are located in the United States. Of our 245 full-time and part-time team members, the majority of our team member base is located in proximity to our corporate office and testing facilities located in Boulder, Colorado and our laboratory in De Soto, Kansas. +Diversity, Equity and Inclusion +We believe that a diverse employee population, including cultural background, gender, ethnicity, sexual orientation and lived experiences, is critical to our success. Our employees are encouraged to leverage their personal strengths and experiences to continually innovate and contribute to the development of new ideas and process improvements that drive better experiences for our partners. +Employee Engagement +Our company culture emphasizes the satisfaction and well-being of our team members and a diverse, engaged workforce. We solicit the opinion and views of our team members through surveys and peer focus groups. We have an established and valued Peer Recognition Culture. Teammates recognize other teammates publicly for their support and contributions fostering collaboration, engagement and retention. We regularly review feedback we receive on our current cultural beliefs to determine if any modifications are needed. During 2021, we updated our cultural beliefs to align with our core values that reflect our current focus on Teamwork, Innovation, Making an Impact and Excel. Additionally, the Company annually celebrates our top sales performers through our President’s Club and other top company performers as nominated by fellow team members through our four (4) Performance Excellence Awards that recognize creativity and innovation, an entrepreneurial spirit, a strategic impact on the success of the Company and lastly, embodying the Biodesix cultural beliefs and goes “above and beyond” daily. +Training and Development +We invest in our team members career growth and provide team members with a wide range of development opportunities, including face-to-face, virtual, and self-directed learning, mentoring, coaching, and external development. +Health, Safety and Wellness +The physical health, financial stability, life balance and mental health of each of our team members is vital to our success. We sponsor several cancer awareness activities in our local communities to bring engagement and awareness of health, safety and wellness to positively impact lives. We provide an Employee Assistance Program to enhance physical, financial, and mental well-being for all our team members. Since the onset of the COVID-19 pandemic, we have successfully transitioned a significant portion of our workforce to a remote working environment and implemented strict safety and social distancing measures in our sites to protect the health and safety of our team members. We also have provided extraordinary safety protocols and standards for all “essential” team members who work in our laboratories and our field sales organization including regularly scheduled serial testing for COVID-19. We also have an active “Friends and Family” COVID-19 testing program for our team members, their families and close friends. +Pay Equity +The main objective of our compensation program is to provide a compensation package that will attract, retain, motivate, and reward superior team members who operate in a highly competitive and technologically challenging environment. We emphasize overall Company performance and provide equity incentives for all team members to align their financial interests with the interests of shareholders. In addition, we offer an employee stock purchase plan to all employees in which participants are eligible to purchase shares at a discount to market. We think like customers and act like owners. +36 +Biodesix seeks fairness in total compensation. We benchmark with external comparisons, internal comparisons and look at the relationship between team member roles within the organization. We also review our compensation practices, both in terms of our overall workforce and individual team members, to ensure our pay is fair and equitable. We currently have no pay disparities based on gender, race, or ethnicity. +Available Information +We file with, or furnish to, the SEC reports including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available free of charge on our corporate website ( www.biodesix.com ) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov . The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this Annual Report on Form 10-K. \ No newline at end of file diff --git a/raw/filings/0001439725/2022/0000950170-23-006092/item13.txt b/raw/filings/0001439725/2022/0000950170-23-006092/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..8779a1109182431320eed328d0f7a861d7791fbd --- /dev/null +++ b/raw/filings/0001439725/2022/0000950170-23-006092/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this item is incorporated by reference from the information under the caption "Board and Corporate Governance Matters—Certain Relationships and Related-Party Transactions" and "—Director Independence" contained in the Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001439725/2022/0000950170-23-006092/item9a.txt b/raw/filings/0001439725/2022/0000950170-23-006092/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..f896fe604bfaaba98c6ce37e1872b67436d210cb --- /dev/null +++ b/raw/filings/0001439725/2022/0000950170-23-006092/item9a.txt @@ -0,0 +1,11 @@ +Item 9A. Controls and Procedures. +Evaluation of Disclosure Controls and Procedures +We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing +97 +disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. +Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the criteria established in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), using the 2013 framework. Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2022, the Company's internal control over financial reporting was effective based on the criteria set forth by COSO. +This annual report does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2022, there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001439725/2022/0000950170-23-006092/rp_note.txt b/raw/filings/0001439725/2022/0000950170-23-006092/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001439725/2022/0000950170-23-006092/rpt_disclosure.txt b/raw/filings/0001439725/2022/0000950170-23-006092/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..855cb7cbf5abd7e4207afbf0c3015725cbcae094 --- /dev/null +++ b/raw/filings/0001439725/2022/0000950170-23-006092/rpt_disclosure.txt @@ -0,0 +1,147 @@ +reviewing related-party transactions; +• +approving, or as permitted, pre-approving, audit and permissible non-audit services to be performed by our independent registered public accounting firm; and +• +reviewing and assessing, at least annually, the performance of the audit committee and adequacy of its charter. +Compensation Committee +Our compensation committee consists of Messrs. Massarany and Patience and Drs. Kayyem and Watts, and the chair of our compensation committee +is Mr. Massarany. Our board of directors has determined that each of Messrs. Massarany and Patience and Drs. Kayyem and Watts is independent under the Nasdaq listing rules and is a “non-employee +director” as defined in Rule 16b-3 promulgated under the Exchange Act. The functions of this committee include: +• +reviewing, modifying and overseeing overall compensation strategy and policies; +• +reviewing and approving the compensation arrangements and other terms of employment of our chief executive +officer, other executive officers and senior management, as appropriate; +• +reviewing and recommending to the full board of directors the compensation of our directors; +2023 Proxy Statement +14 +Table of Contents +• +appointing and overseeing the work of compensation consultants, legal counsel or any other advisors and +consultants engaged for the purpose of advising the compensation committee; +• +reviewing, recommending to the full board of directors, as appropriate, and administering equity award plans, +compensation plans and similar programs, as well as modification or termination of plans and programs; +• +establishing policies with respect to equity compensation arrangements; +• +reviewing and evaluating with the chief executive officer and the full board of directors the succession plans +for our executive officers; and +• +reviewing and assessing, at least annually, the performance of the compensation committee and the adequacy of its +charter. +Compensation Committee Interlocks and Insider Participation +None of the members of the compensation committee is currently, or has been at any time during 2022, one of our officers or +employees. None of our executive officers currently serve, or has served during 2022, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors +or compensation committee. +Nominating and Corporate Governance Committee +Our nominating and corporate governance committee consists of Ms. Franchi, Dr. Strobeck and Mr. Schuler, and the chair of our +nominating and corporate governance committee is Dr. Strobeck. Our board of directors has determined that Ms. Franchi, Dr. Strobeck and Mr. Schuler are independent under the applicable listing standards. The functions of this +committee include: +• +reviewing periodically and evaluating director performance of our board of directors and its applicable +committees, and recommending to our board of directors and management areas for improvement; +• +identifying, evaluating, nominating and recommending individuals for membership on our board of directors; +• +reviewing with our chief executive officer the plans for succession to the offices of our executive officers and +make recommendations to our board of directors with respect to the selection of appropriate individuals to succeed to these positions; +• +reviewing and recommending to our board of directors any amendments to our corporate governance policies; and +• +reviewing and assessing, at least annually, the performance of the nominating and corporate governance committee +and the adequacy of its charter. +Director Nomination Process +Selection and Nomination Process +Our board of directors is responsible for nominating members for election to our board of directors by our stockholders at our annual meetings +of stockholders. Whenever a vacancy occurs on our board of directors, +2023 Proxy Statement +15 +Table of Contents +whether due to a newly created director position or the death, resignation, removal or retirement of an existing director, our board of directors is authorized to select a person to fill the +vacancy to serve as a director until the annual meeting of stockholders at which the director’s term expires and until the election and qualification of his or her successor or, if sooner, his or her death, resignation or removal. Any increase +or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. +Criteria for Board Membership +The board of directors and the nominating and corporate governance committee will determine the appropriate characteristics, skills and +experience for the board of directors as a whole and for its individual members. The board of directors and the nominating and corporate governance committee will consider the minimum general criteria set forth below, and may add any specific +additional criteria with respect to specific searches, in selecting candidates and existing directors for service on the board of directors. An acceptable candidate may not fully satisfy all of the criteria, but is expected to satisfy nearly all of +them. While the nominating and corporate governance committee does not have a formal policy in this regard, the diversity of the board of the directors is a consideration in evaluating candidates for director positions, among others. +The board of directors and the nominating and corporate governance committee believe that candidates for director should have certain minimum +qualifications, including being able to read and understand basic financial statements, being over 21 years of age and having the highest personal integrity and ethics. In considering candidates, the board of directors and the nominating and +corporate governance committee intend to consider such factors as possessing relevant expertise upon which to be able to offer advice and guidance to management, having sufficient time to devote to the affairs of the Company, demonstrated excellence +in his or her field, having the ability to exercise sound business judgment and having the commitment to rigorously represent the long-term interests of our stockholders. +The board of directors and the nominating and corporate governance committee review candidates for director nomination in the context of the +current composition of the board of directors, the operating requirements of the Company and the long-term interests of our stockholders. In conducting this assessment, the board of directors and the nominating and corporate governance committee +consider diversity, age, skills, and such other factors as it deems appropriate given the current needs of the board of directors and the Company to maintain a balance of knowledge, experience and capability. In the case of incumbent directors whose +terms of office are set to expire, the board of directors and the nominating and corporate governance committee review such directors’ overall service to the Company during their term, including the number of meetings attended, level of +participation, quality of performance, and any other relationships and transactions that might impair such directors’ independence. In the case of new director candidates, the board of directors and the nominating and corporate governance +committee also determine whether the nominee must be independent for purposes of any stock exchange on which any of the Company’s capital stock is listed. +Stockholder Recommendations and Nominations +Stockholders who wish to recommend candidates may contact the nominating and corporate governance committee in the manner described below +under “Board and Corporate Governance Matters—Stockholder Communications with our Board of Directors.” Stockholder nominations must be made according to the procedures required under our bylaws and described in this proxy statement +under the heading “Additional Information—Stockholder Proposals and Nominations for Next Year’s Annual Meeting of Stockholders.” Stockholder-recommended candidates and stockholder nominees whose nominations comply with these +procedures will be evaluated by our nominating and corporate governance committee in the same manner as other nominees. +2023 Proxy Statement +16 +Table of Contents +Board Diversity Matrix +The table below provides certain highlights of the composition of our board of directors members and nominees as of March 24, 2023. +Nasdaq listing requirements require each listed company to have, or explain why it does not have, two diverse directors on the board, including at least one diverse director who self-identifies as female and at least one diverse director who +self-identifies as an underrepresented minority or LGBTQ+, or for smaller reporting companies, two female directors. Companies listed on the Nasdaq Global Market must have at least one diverse director by December 31, 2023 and two diverse +directors by December 31, 2025. As of March 24, 2023, our board of directors has one diverse director, and we intend to be fully compliant with Nasdaq’s diversity requirement by December 31, 2025. Each of the categories listed in +the below table has the meaning as it is used in Nasdaq Listing Rule 5605(f). +Board Diversity Matrix as of March 24, 2023 +Total Number of Directors +9 +Female +Male +Non-Binary +Did Not Disclose Gender +Part I: Gender Identity +1 +8 +- +- +Directors +Part II: Demographic Background +African American or Black +- +- +- +- +Alaskan Native or Native American +- +- +- +- +Asian +- +- +- +- +Hispanic or Latinx +- +- +- +- +Native Hawaiian or Pacific Islander +- +- +- +- +White +1 +8 +- +- +Two or More Races or Ethnicities +- +- +- +- +LGBTQ+ +- +Did Not Disclose Demographic Background +- +Directors who Identify as Middle Eastern: 1 \ No newline at end of file diff --git a/raw/filings/0001439725/2023/0000950170-24-023513/filing.txt b/raw/filings/0001439725/2023/0000950170-24-023513/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..24aaf10bc0213a8e3f6689cb7403df84ede61181 --- /dev/null +++ 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us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2023-12-31 0001439725 bdsx:CentennialValleyPropertiesILlcLeaseAgreementMember 2022-03-11 2022-03-11 0001439725 bdsx:ContingentConsiderationMember bdsx:ThirdAmendmentToApaAgreementMember bdsx:IntegratedDiagnosticsIncMember srt:ScenarioForecastMember 2024-04-01 2024-04-30 0001439725 us-gaap:CustomerConcentrationRiskMember bdsx:MedicareMember us-gaap:AccountsReceivableMember srt:MinimumMember 2023-01-01 2023-12-31 0001439725 2022-12-31 xbrli:pure utr:sqft bdsx:SubscriptionAgreement bdsx:Facility iso4217:USD xbrli:shares bdsx:Officer bdsx:Test xbrli:shares bdsx:Segment iso4217:USD bdsx:Installment bdsx:RenewalOption bdsx:ShareHolder +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2023 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO +Commission File Number 001-39659 +Biodesix, Inc. +(Exact name of Registrant as specified in its Charter) +Delaware +20-3986492 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer +Identification No.) +919 West Dillon Rd ., +Louisville , CO +80027 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: ( 303 ) 417-0500 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading +Symbol(s) +Name of each exchange on which registered +Common Stock, par value $0.001 per share +BDSX +The NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☒ No ☐ +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☐ +Accelerated filer +☐ +Non-accelerated filer +☒ +Smaller reporting company +☒ +Emerging growth company +☒ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ +As of June 30, 2023, the aggregate market value of common stock held by non-affiliates of the Registrant wa s $ 36.6 million, based on the closing price of the common stock as reported on the NASDAQ Global Market for that date. +The number of shares of Registrant’s Common Stock outstanding as of February 23 , 2024 was 96,942,061 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for its 2024 Annual Meeting of Shareholders are to be incorporated by reference into Part III, as specifically set forth in Part III. +Table of Contents +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +33 +Item 1B. +Unresolved Staff Comments +76 +Item 1C. +Cybersecurity +76 +Item 2. +Properties +76 +Item 3. +Legal Proceedings +77 +Item 4. +Mine Safety Disclosures +77 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +78 +Item 6. +[Reserved] +78 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +79 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +91 +Item 8. +Financial Statements and Supplementary Data +92 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +92 +Item 9A. +Controls and Procedures +92 +Item 9B. +Other Information +92 +Item 9C. +Disclosures Regarding Foreign Jurisdictions that Prevent Inspections +92 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +93 +Item 11. +Executive Compensation +93 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +93 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +93 +Item 14. +Principal Accountant Fees and Services +93 +PART IV +Item 15. +Exhibit and Financial Statement Schedules +94 +Item 16 +Form 10-K Summary +94 +i +SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future financial condition, results of operations, business strategy and plans, and objectives of management for future operations, as well as statements regarding industry trends, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions. +We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, factors, and assumptions described under the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K, regarding, among other things: +• +our inability to achieve or sustain profitability; +• +our audited financial statements include a statement that there is a substantial doubt about our ability to continue as a going concern and a continuation of negative financial trends could result in our inability to continue as a going concern; +• +our ability to attain significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies for our diagnostic tests; +• +difficulties managing our growth, which could disrupt our operations; +• +failure to retain sales and marketing personnel, and failure to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests to generate revenue growth; +• +failure to maintain our current relationships, or enter into new relationships, with biopharmaceutical companies; +• +significant fluctuation in our operating results, causing our operating results to fall below expectations or any guidance we provide; +• +product performance and reliability to maintain and grow our business; +• +third-party suppliers, including courier services and single source suppliers; making us vulnerable to supply problems and price fluctuations; +• +the impact of a pandemic, epidemic, or outbreak of an infectious disease in the United States (U.S.) or worldwide, including the COVID-19 pandemic on our business; +• +natural or man-made disasters and other similar events negatively impacting our business, financial condition, and results of operations; +• +failure to offer high-quality support for our diagnostic tests, which may adversely affect our relationships with providers and negatively impact our reputation among patients and providers; +• +our inability to continue to innovate and improve our diagnostic tests and services we offer; +• +security or data privacy breaches or other unauthorized or improper access; +• +significant disruptions in our information technology systems; +• +the incurrence of substantial liabilities and limiting or halting the marketing and sale of our diagnostic tests due to product liability lawsuits; +• +our inability to compete successfully with competition from many sources, including larger companies; +• +performance issues, service interruptions or price increases by our shipping carriers; +• +cost-containment efforts of our customers, purchasing groups and integrated delivery networks having a material adverse effect on our sales and profitability; +• +potential effects of litigation and other proceedings; +• +general economic and financial market conditions; +• +our ability to attract and retain key personnel; +• +current and future debt financing placing restrictions on our operating and financial flexibility; +1 +• +our need to raise additional capital to fund our existing operations, develop our platform, commercialize new diagnostic tests, or expand our operations; +• +the acquisition of other businesses, which could require significant management attention; +• +the uncertainty of the insurance coverage and reimbursement status of newly approved diagnostic tests; +• +future healthcare reform measures that could hinder or prevent the commercial success of our diagnostic tests; +• +compliance with anti-corruption, anti-bribery, anti-money laundering and similar laws; +• +compliance with healthcare fraud and abuse laws; +• +our ability to develop, receive regulatory clearance or approval or certification for, and introduce new diagnostic tests or enhancements to existing diagnostic tests that will be accepted by the market in a timely manner; +• +failure to comply with ongoing FDA or other domestic and foreign regulatory authority requirements, or unanticipated problems with our diagnostic tests, causing them to be subject to restrictions or withdrawal from the market; +• +future product recalls; +• +legal proceedings initiated by third parties alleging that we are infringing, misappropriating, or otherwise violating their intellectual property rights, the outcome of which would be uncertain; +• +the volatility of the trading price of our common stock; +• +inaccurate estimates or judgments relating to our critical accounting policies, which could cause our operating results to fall below the expectations of securities analysts and investors; and +• +other risks, uncertainties and factors, including those set forth under Item 1A. "Risk Factors". +These risks are not exhaustive. Other sections of this Annual Report on Form 10-K may include additional factors that could harm our business and financial performance. New risk factors may emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. +You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K or to conform these statements to actual results or to changes in our expectations. +In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. +You should read this Annual Report on Form 10-K and the documents that we reference and have filed as exhibits with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. +2 +PART I +Item 1. B usiness. +Our mission is to unite biopharma, physicians, and patients to transform the standard of care and improve outcomes with personalized diagnostics. +Our vision is a world where all critical diseases are diagnosed early and treated quickly with the guidance of personalized diagnostic solutions, so humanity can thrive without the burden of disease. +Business Overview +Biodesix, Inc. (“Biodesix”, “we,” “us,” “our” or the “Company”) is a leading diagnostic solutions company with a focus in lung disease. By combining a multi-omic approach with a holistic view of the patient’s disease state, we believe our testing solutions provide physicians with greater insights to help personalize their patients’ care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe helps improve overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. We also recognize revenue from other services, including amounts derived from licensing our technologies. +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, radiomics, and artificial intelligence (AI) enabled informatics, to discover innovative diagnostic tests for potential clinical use. Our multi-omic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +We operate in a single segment and derive our revenue from two sources: (i) providing diagnostic testing services associated with (a) blood-based lung tests and (b) prior to May 11, 2023, Coronavirus Disease 2019 (COVID-19) tests (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics. We also recognize revenue from other services, including amounts derived from licensing our technologies (Biopharma Services and other). During fiscal years 2023 and 2022, we derived 92% and 90%, respectively, of our total revenues from our diagnostic testing business. +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. Since our inception, we have performed over 600,000 tests and continue to generate a large and growing body of clinical evidence. We have participated in 27 clinical studies, three of which are ongoing, and have published over 300 clinical and scientific peer-reviewed publications, presentations, and abstracts. We have curated a biobank encompassing thousands of biological specimens with associated clinical data, including tumor genomic profiles and immune profiles, which are used for both internal and external research and development initiatives. +We have commercialized five diagnostic tests which are currently on market and we perform more than 30 assays for clinical and research use as part of our laboratory services that have been used by over 65 biopharmaceutical customers and academic partners. +Blood-Based Lung Tests +We have five diagnostic blood-based tests across the lung cancer continuum of care, which generated $45.1 million and $29.3 million in revenue for fiscal year 2023 and 2022, respectively, an annual growth rate of 54%. +Diagnosis +• +Nodify CDT ® and XL2® tests, together marketed as our Nodify Lung ® Nodule Risk Assessment testing, assess a suspicious lung nodule's risk of lung cancer to help identify the most appropriate treatment pathway. The Nodify CDT and XL2 tests have an established average turnaround time of one and five business days, respectively, from receipt of the blood sample, providing physicians with timely results to guide diagnostic planning. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +Treatment & Monitoring +• +GeneStrat® ddPCR, GeneStrat NGS® and VeriStrat® tests, marketed as part of our IQLung™ testing strategy, are used following diagnosis of lung cancer to detect the presence of mutations in the tumor and the state of the patient’s immune system to help guide treatment decisions. The GeneStrat ddPCR tumor genomic profiling test and the VeriStrat immune profiling test have an established average turnaround time of two business days from receipt of the blood sample, and the GeneStrat NGS test has an established average turnaround time of three business days from receipt of the blood sample, providing physicians with timely results to facilitate rapid treatment decisions. The GeneStrat ddPCR test evaluates the +3 +presence of actionable mutations in lung cancer. The test is covered independent of stage and can be used multiple times per patient to monitor changes in mutation status. The GeneStrat NGS test is a broad 52 gene panel, including guideline recommended mutations that help identify advanced stage patients eligible for targeted therapy or clinical trial enrollment. The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. +COVID-19 Pandemic +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe testing program. We generated $0.1 million and $5.2 million in revenue from COVID-19 testing during fiscal year 2023 and 2022, respectively. These tests under the Biodesix WorkSafe testing program were utilized by healthcare providers, including hospitals and nursing homes, and were also offered to businesses and educational systems. We announced multiple partnerships for COVID-19 testing and maintained an agreement with the State of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State, which expired on August 31, 2022. +Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two United States Food and Drug Administration (FDA) Emergency Use Authorization (EUA)-authorized tests, a part of our customizable WorkSafe program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad granted us permission to utilize both tests for commercial diagnostic services. The Bio-Rad SARS-CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under CLIA to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Beginning in second quarter 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass SARS-CoV-2 Neutralizing Antibody testing as a service. The test was the first surrogate neutralizing antibody test with FDA EUA and uses ELISA (as defined below) technology to qualitatively detect circulating neutralizing antibodies to the receptor binding domain (RBD) in the spike protein of SARS-CoV-2. +Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety. On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. In connection with the expiration of the Public Health Emergency declaration under Section 319, the Company no longer provides commercial COVID-19 diagnostic testing services. +The COVID-19 pandemic disrupted, and in the future may continue to disrupt, our lung diagnostic testing operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States of Colorado and Kansas’ public health orders and the guidance from the Centers for Disease Control and Prevention (CDC). Employees who can perform their duties remotely have the option to work from home. Our sales, marketing and business development efforts may be constrained by our operational response to future COVID-19 variant outbreaks. We will continue to adjust our operational norms, as needed, including complying with government directives and guidelines as they are modified and supplemented. +See “Risk Factors” for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations. +Full Year Results for 2023 +For the year ended December 31, 2023, compared to the prior year: +• +Total Revenue was $49.1 million, an increase of 28% primarily driven by: +o +Lung Diagnostic Revenue of $45.1 million, an increase of 54%; +o +Biopharma Services and other revenue of $3.9 million, an increase of 6%; +o +COVID-19 Revenue of $0.1 million, a decrease of 99%; +• +Gross Margin was $36.1 million, resulting in a 73% overall gross margin percentage as compared to 63% in the prior year; +• +Operating Expenses, excluding Direct costs and expenses, were $77.4 million, an increase of 4% and including non-cash share-based compensation expense of $5.4 million as compared to $6.0 million in the prior year; +• +Net Loss was $52.1 million and decreased 20%, due primarily to an overall decrease in total operating expenses and other expenses of $9.2 million and $4.1 million, respectively; +• +Basic and Diluted Net Loss Per Common Share was $0.64; +4 +• +Net Cash Used by Operating Activities was $22.9 million, compared to $45.0 million used in the prior year; and +• +Cash and Cash Equivalents was $26.3 million as of December 31, 2023. +Our Market Opportunity +Diagnostic Testing Market Size and Opportunity +Despite significant advances over the last decade, lung cancer is still the deadliest type of cancer in both men and women in the United States. While diagnostic testing has become routinely used at certain points in the lung cancer continuum of care (diagnosis, treatment and monitoring), we believe there is substantial need for novel, advanced testing to improve on the current standard of care. We estimate that in the United States, the lung cancer continuum of care represents over 10 million annual testing opportunities and is over a $27 billion market annually for testing alone. +Over the last two decades, the use of biomarker testing in clinical trials has increased, with 15% of oncology trials involving the use of biomarker testing in 2000, compared to 55% in 2018. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their research and development pipelines and increase chances of drug development success. We estimate that biopharmaceutical partnering and research opportunities represent over a $2 billion market annually. +Lung Cancer Continuum of Care – Clinical Unmet Needs +Standards of care in lung cancer have evolved rapidly over the past decade, along with our understanding of the disease. With the introduction of numerous treatment options, physicians need an ever-increasing amount of information in order to select the best treatment plan for each individual patient. We believe that the lung cancer continuum of care has a variety of clinical unmet needs ranging from initial diagnosis of lung cancer after discovery of a lung nodule to treatment guidance for early and advanced stage disease, and monitoring for disease progression. +• +Diagnosis : We estimate approximately 1.6 million new incidental lung nodules and potentially 4 million lung nodules from the adoption of screening could be identified annually in the United States. Following initial discovery of a nodule, patients are typically evaluated by a pulmonologist for risk of lung cancer before an invasive procedure is carried out to obtain a tissue sample to confirm diagnosis. This risk assessment is based on clinical factors such as the patient’s smoking history and age, and radiological features such as the size and location of the nodule, obtained from a computed tomography (CT) scan. On initial assessment, we estimate that approximately 80% of patients are identified as low to moderate risk (5-65%) where guideline recommendations for their care plan are unclear, often resulting in either overtreatment of patients with benign nodules or undertreatment in patients with cancer. An estimated 17% of patients initially scheduled for watchful waiting, or follow-up CT scans in intervals up to a year, are later diagnosed with malignant nodules, potentially delaying their diagnosis. Conversely, we estimate that 62% of biopsies and 35% of surgeries performed on lung nodules find benign disease, representing a significant overtreatment that incurs both risk and cost to the patient and their providers. We therefore believe that there is a clear clinical need for blood-based diagnostic testing to help improve the initial risk assessment of pulmonary nodules, helping direct patients to the relevant treatment pathway, and ultimately improving patient outcomes and saving costs to the system. +• +Treatment Guidance – Early Stage : We estimate that there are over 700 thousand testing opportunities annually in the United States in early-stage lung cancer to assess a patient’s risk of recurrence following curative-intent surgery, and to detect potential target mutations for therapeutics. Depending on a patient’s risk of recurrence, they may also receive chemotherapy, radiotherapy or chemoradiation post-surgery. The assessment of risk of recurrence is primarily based on the stage of cancer at diagnosis, with stage I patients typically receiving no additional treatment beyond surgery. However, 20 to 40% of patients with stage I disease do still recur within five years following surgery, representing a sub-group of patients who may have +5 +benefited from more intensive treatment protocol. We believe there is a clear clinical need for blood-based diagnostic testing prior to surgery to identify stage I patients who may benefit from a more intensive treatment protocol and we also believe there is the need for identifying stage II and IIIA patients who may benefit from a less intensive treatment protocol. There have also been recent advances in the use of targeted therapies in early-stage lung disease. These therapies typically target specific genomic mutations or alterations found in some tumors. We believe there is therefore an emerging need for testing designed specifically for mutation detection in early-stage disease. +• +Treatment Guidance – Advanced Stage: We estimate that there are over 3 million diagnostic testing opportunities annually in the United States to guide advanced stage lung cancer treatment decisions. With nearly 60 FDA-approved systemic treatment regimens listed in national treatment guidelines for non-small cell lung cancer (NSCLC), there is an elevated need for personalized biomarkers to help physicians identify the right patient for the right treatment. Multiple tissue-based diagnostic tests have been approved to identify patients eligible for targeted therapies and immunotherapy; however, about 50% of patients do not have sufficient tissue collected following diagnosis to facilitate testing. To compound the issue, different molecular tests take varying amounts of time (days versus weeks) to report results back to the ordering physician. Physicians are often left with a dilemma to either make treatment decisions prior to receiving critical diagnostic test results, or delay treatment initiation while waiting for the test results. Therefore, we believe there is an imminent need for a blood-based testing solution that measures tumor mutations and the patient’s immune profile, to provide physicians with more comprehensive and timely information to initiate personalized treatment as quickly as possible. +• +Monitoring : We estimate that there are over 800 thousand testing opportunities in the United States for blood-based tumor genomic and immune profiling to monitor for disease recurrence and progression in NSCLC patients. Unfortunately, advanced stage lung cancer is often terminal, so repeat tissue biopsy to assess the evolution of resistance mutations or to detect disease progression is not feasible from either a cost or risk perspective to the patient, which we believe demonstrates an important need for blood-based testing to help routinely monitor these patients. As a patient progresses through therapies, changes in their immune system occur and blood-based immune profiling could help physicians identify these changes prior to subsequent therapy selection. +Current Limitations in Biomarker Discovery and Companion Diagnostics +We estimate that the biopharmaceutical biomarker testing and companion diagnostic market opportunity represents a $2 billion market annually . Over the last two decades, the use of biomarker testing in clinical trials has increased, with 15% of oncology trials involving the use of biomarker testing in 2000 compared to 55% in 2018. From 2005 to 2015, a study identified that incorporating biomarkers into clinical development programs increased their probability of therapeutic success rate from phase 1 to FDA-approval by 570%, representing an increase from 1.6% without biomarkers to 10.7% with biomarkers. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their product development efforts and increase chances of drug development success. However, we believe as the market continues to advance, inherent limitations of both biomarker discovery and companion diagnostic development have become more apparent. +Biomarker Discovery : There are many limitations with biomarker discovery in biopharmaceutical drug development, including: +• +Biomarkers with clinical utility are difficult to discover and validate in independent datasets; +• +Classical statistical approaches to biomarker discovery are limited. Single-omic tests fail to see the whole biological picture; +• +Tissue biopsies are limited by the amount of a sample that can be collected: longitudinal testing is difficult and the information gathered is only from the tumor being sampled, this does not account for tumor heterogeneity or the host's immune response; +• +Clinical trials are expensive and take years to complete. It is often difficult to meet clinical trial enrollment goals with long diagnostic testing turnaround times. +Companion Diagnostics (CDx): While developing CDx is critical to precision medicine, the promise of CDx has not been fully realized and there are multiple limitations that still need resolution. The path to co-develop a successful CDx with a corresponding drug has several challenges, including: +• +Traditional CDx agreements may fail to realize the full value of a testing opportunity, leading to difficulty in funding appropriate commercialization; +• +Drug development is a lengthy, complex and costly process. There can be a financial impact to a pharmaceutical company to have a drug selected by a test; +• +Current diagnostic reimbursement policies may not always support the coverage and payment of new CDx; +• +Regulatory agencies continue to work on defining the co-development process, but the environment is continually changing. +6 +Diagnostic Test Discovery and Development at Biodesix +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics to discover innovative diagnostic tests for potential clinical use. We focus on the use of technologies that are capable of single and multi-omic tests in our research and development. We continuously evolve and improve our test discovery and development process. All of the technologies that we employ have been chosen and developed to provide high-quality data to enable our clinical test discovery and development. We feel that this level of data integrity is crucial for the development of diagnostic tests. +We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and learn about biological discoveries that are clinically meaningful. Additionally, we incorporate clinical and molecular profiling data aggregated through our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or other collaborative partnerships, into our platform. Our curated biobank encompasses thousands of biological specimens with associated clinical data, including tumor genomic profiles and immune profiles, which are used for both internal and external research and development initiatives. With our multi-omic approach we are able to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +To achieve our discovery and development objectives, we utilize different technologies, including ddPCR, NGS, LC-MS, ELISA, single cell analyses, and our proprietary DeepMALDI® mass spectrometry platform for the blood-based molecular analysis of the tumor, immune system, and host-status of each patient and/or clinical dataset. We continuously revisit our technology strategy and roadmap to integrate new technologies into our evolving platform, which ultimately support the addition of new service and product revenue offerings. Most diagnostic companies focus their strategy on using a single technology to discover biomarkers for a broad range of clinical questions. We believe that no single technology can interrogate the complexity of the human disease state to help solve all clinical questions. For that reason, we employ a multi-omic approach to solving diagnostic challenges. Because of this approach, we believe we are unique in the diagnostics market, allowing for a broader and more holistic understanding of each patient’s disease state. +We are experts in many technologies, but we are a true market leader with over 15 years of experience in the field of clinical proteomics. For over 15 years, we have been discovering and developing proteomic-based diagnostic tests and have a deep understanding of how to incorporate technologies that can be applied to blood samples in order to extract important protein-based biological information in the form of diagnostic tests, which can aid clinicians and scientists in understanding the dynamic biology of their system of interest, such as a patient with cancer. +Our suite of technologies that assist us in discovery, development and commercialization of novel diagnostic tests includes: +DeepMALDI Mass Spectrometry +We have developed DeepMALDI, a proprietary high-density matrix-assisted laser desorption/ionization time-of-flight (MALDI-ToF) mass spectrometry (MS) technology, to discover potential tests for disease diagnosis, and monitoring for disease progression or recurrence in lung and other disease states. DeepMALDI technology overcomes the limitations of conventional MALDI and other mass spectrometry methods to produce highly sensitive, stable, and reproducible data. This method yields substantially higher quality data content and is thereby well suited for the discovery of biomarkers with clinical utility. We intend to maintain our leadership role in the discovery of proteomics-based diagnostic tests. We utilize our DeepMALDI and MALDI-ToF technologies in our discovery and development efforts and as part of our collaborations with our biopharmaceutical customers and other collaborative partners. +Liquid Chromatography (LC) Mass Spectrometry (MS) +We use Multiple Reaction Monitoring (MRM) MS with triple quadrupole mass spectrometers and up-front liquid chromatography (LC) sample injection in the Nodify XL2 test and as part of our collaborations with our biopharmaceutical customers and other collaborative partners. This mass spectrometry method offers highly sensitive, specific, and cost-effective analysis for simultaneous quantitation of hundreds to several thousands of targeted peptides in a single experiment. We have since included the MRM technologies as part of our services for discovery and development with our biopharmaceutical customers and academic partners. +Enzyme-Linked Immunosorbent Assay (ELISA) +ELISA is the most widely used ligand binding assay platform within and outside the pharmaceutical industry. Formats include direct, indirect and sandwich assays and are typically run in manually or semi-automated modes. We use a semi-automated implementation of ELISA in clinical testing for the Nodify CDT test, and as part of our collaborations with our biopharmaceutical customers and other collaborative partners. The acquisition of Oncimmune USA in 2019 expanded our ability to conduct very high throughput and cost-effective ELISAs in our clinical testing laboratory. We have now included the ELISA technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +7 +Droplet Digital Polymerase Chain Reaction Technology (ddPCR) +We use the ddPCR technology for multiplexed, semi-automated nucleic acid detection. This allows high sensitivity, fast turn-around times, flexibility in our laboratory workflows, rapid scaling from low to moderate anolyte complexity, and high-volume scalability. ddPCR is an absolute quantitation method based on the partitioning of circulating nucleic acids into up to 20,000 droplets per reaction and is used for the GeneStrat ddPCR test. Our strategy with ddPCR relies on a menu of off-the-shelf and custom research use assays, including early access and beta evaluation, which we develop and make available as a part of our commercial pipeline, biopharmaceutical and collaborative test services. We have included the ddPCR technologies for research and development both internally and externally with our biopharmaceutical customers and other collaborative partners. +Next Generation Sequencing Technology (NGS) +We use NGS technology for broad genomic sequencing of clinical specimens. Our strategy with NGS relies on a menu of off-the-shelf and custom research use assays, including early access and beta evaluation, which we develop and make available as a part of our commercial pipeline, biopharmaceutical and collaborative test services. The NGS technology integrates automated systems to yield high sensitivity results with a rapid turnaround time. Since adoption of this technology, we have included the NGS technologies for research and product development both internally and externally with our biopharmaceutical customers and other collaborative partners. +Our Solutions and Products +To help address the current limitations with standard of care in lung cancer diagnosis, treatment, and monitoring, we use combinations of tumor, immune and host profiling, radiological imaging, patient clinical profiling, and our proprietary AI platform to provide a holistic view of each patient’s dynamic disease state. +We have five blood-based diagnostic tests across the lung cancer continuum of care to help address clinical unmet needs by physicians. +• +Diagnosis : We believe there is a clinical need to help physicians reclassify risk of malignancy in patients presenting with suspicious lung nodules. We offer blood-based Nodify Lung Nodule Risk Assessment testing to aid physicians in stratifying patients into distinct nodule management treatment pathways: diagnostic procedure or imaging surveillance. Nodify Lung consists of two blood-based proteomic tests: the Nodify CDT test helps identify patients with lung nodules that are likely malignant and the Nodify XL2 test conversely helps identify those that are likely benign. The Nodify CDT and XL2 tests have established average turnaround times of one business day and five business days from receipt of the blood sample, respectively, providing physicians with timely results to guide diagnostic planning +• +Treatment Guidance : We believe there is an ongoing need for a blood-based testing solution that measures tumor-specific mutations and the patient’s immune profile to provide physicians with more comprehensive information to personalize treatment plans. We offer the blood-based IQLung testing strategy, which consists of the GeneStrat ddPCR and GeneStrat NGS tumor profiling tests and the VeriStrat immune profiling test for patients diagnosed with NSCLC. With an established average turnaround time of three business days, we are able to quickly provide critical diagnostic information to physicians to facilitate personalized treatment decisions for their patients. +• +Monitoring : We believe longitudinally monitoring advanced NSCLC patients for the dynamic evolution of their tumor and immune profile while on treatment can provide an earlier indication of treatment resistance and/or disease progression. We offer the IQLung testing strategy as a blood-based monitoring tool for physicians to track their patients’ disease evolution. +Diagnosis – Nodule Management +We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our blood-based nodule management offering, Nodify Lung Nodule Risk Assessment, assists +8 +physicians in reclassifying a patient’s risk of lung cancer by incorporating their protein biomarker results with radiographic imaging and clinical characteristics. Nodify Lung testing consists of the Nodify CDT and Nodify XL2 proteomic tests, which can be ordered separately or together from a single blood draw to help reclassify risk of cancer to aid physicians in stratifying patients into distinct nodule management pathways: intervention or surveillance. +The Nodify CDT test is used to help identify lung nodules that are likely malignant and the Nodify XL2 test helps identify lung nodules that are likely benign. Nodify Lung testing is available for patients 40 years or older, with nodules between 8 and 30mm, and less than 65% pre-test risk of lung cancer. The testing strategy starts with the Nodify CDT test to determine if a nodule is likely malignant or at a higher risk of lung cancer. The Nodify CDT test helps physicians identify cancer more quickly by prioritizing patients with a higher risk of malignancy for a diagnostic procedure, such as biopsy or surgery. If the nodule is not identified as having a high risk of malignancy by the Nodify CDT test, then the Nodify XL2 test is performed to help determine if the patient’s nodule is likely benign or has a reduced risk of lung cancer and may be a candidate for CT imaging surveillance. Nodify Lung Risk Assessment testing is represented graphically in the image below starting with the patient’s pre-test risk of malignancy and ending with the guideline-recommended diagnostic procedure for each risk category. +We launched the Nodify Lung combined offering of the Nodify CDT and Nodify XL2 tests in March 2020. However, the Nodify XL2 test has been available to all physicians since September 2019 and has been available to a select group of physicians since October 2018. We acquired the Nodify XL2 test from Integrated Diagnostics (Indi) in July 2018 and acquired the Nodify CDT test from Oncimmune USA in October 2019. +Nodify CDT Test +The Nodify CDT test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely malignant or at a higher risk of being cancerous. Results allow physicians to identify patients who may be better candidates for timely invasive diagnostic procedures such as bronchoscopy, transthoracic needle biopsy, or surgical resection, with the goal of diagnosing cancer earlier. The Nodify CDT test enhances lung nodule risk assessment to facilitate compliance with clinical treatment guidelines such as those of the American College of Chest Physicians (ACCP). The Nodify CDT test is validated for use in patients who are 40 years or older, have no history of cancer except non-melanomatous skin cancer, have nodules between 8 and 30mm, and pre-test risk of lung cancer of less than 65%. +The test measures the levels of seven circulating autoantibodies (P53, NY-ESO-1, CAGE, GBU4-5, SOX2, HuD, and MAGE A4) associated with lung cancer, combined with an algorithm to report out three potential results: High Level, Moderate Level, or No Significant Levels of Antibodies Detected (NSLAD). The seven autoantibodies have shown to be elevated for all types of lung cancer, and from the earliest stage of the disease. +Unlike the tumor antigens themselves, the autoantibody levels can be measured accurately through a blood sample, based upon the signal amplification generated by the immune response to cancer. This mechanism of action likely reflects very early events in a tumor’s evolution; as the immune system initiates a response to the cancer, it can also trigger an expansion of self-reactive antibodies that can be measured in circulation. +In addition to the test result of High Level, Moderate Level, or NSLAD, each test report includes the patient’s pre-test risk of malignancy as calculated by the Solitary Pulmonary Nodule (SPN) Risk Assessment calculator, and their post-test risk of cancer incorporating the result of the test. The SPN Risk Assessment calculator was developed by Stephen Swensen, M.D., of the Mayo Clinic and is designed to provide a risk of malignancy for a patient with a newly discovered incidental nodule. The model incorporates six clinical and radiologic factors into the equation: age, nodule size, smoking status, nodule location, spiculation (nodule edge characteristic), and previous history of lung cancer. Incorporating the autoantibody levels with the risk model provides physicians with a more accurate assessment of risk. The Nodify CDT test has an established average turnaround time of one business day from receipt of the blood +9 +sample, providing physicians with timely results to guide diagnostic planning. The Nodify CDT test has been studied in 17 peer-reviewed published studies and presentations. +Nodify XL2 Test +The Nodify XL2 test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely benign or at a reduced risk of being cancerous. Results allow physicians to identify patients who may be better candidates for routine CT surveillance to monitor for growth or shrinkage of the nodule over time instead of an invasive diagnostic procedure. The Nodify XL2 test is used for patients who are 40 years or older, have no history of lung cancer or other recent cancer diagnoses, have nodules between 8 and 30mm, and have a pre-test risk of lung cancer of less than or equal to 50%. +The Nodify XL2 test integrates peptides measured by LC-MS with clinical and radiological characteristics that are combined by an algorithm to report out three potential results: Likely Benign, Reduced Risk, or Indeterminate. Specifically, the Nodify XL2 test measures the relative abundance of two peptides (LG3BP and C163A) in circulation in the patient’s blood. The native proteins from which the peptides are derived have been associated with an inflammatory response to lung cancer. The clinical factors are patient age and smoking status, and radiological factors are nodule size, location, and edge characteristics. +In addition to the test result of Likely Benign, Reduced Risk, or Indeterminate, each test report includes the patient’s pre-test risk of lung cancer as calculated by the SPN Risk Assessment calculator, and their post-Nodify XL2 risk of malignancy incorporating the result of the test. Incorporating the peptide levels with the risk model provides physicians with a revised assessment of risk incorporating the patient’s biology. The Nodify XL2 test has an established average turnaround time of five business days from receipt of the blood sample, providing physicians with timely results to guide diagnostic planning. +Nodify Lung Risk Assessment Testing +In summary, the inclusion of Nodify Lung Risk Assessment testing into clinical practice helps physicians reclassify risk of malignancy of low to moderate risk lung nodules by incorporating the patient’s own biology into the assessment. The Nodify CDT test helps physicians identify patients with a high-risk lung nodule who may benefit from timely intervention, which can ultimately help identify lung cancer earlier. The Nodify XL2 test helps physicians identify patients with a very low risk lung nodule who may benefit from CT surveillance and could avoid unnecessary invasive procedures. +Blood samples for the Nodify XL2 and Nodify CDT tests can be collected in the physician’s office, laboratory, or at home through use of mobile phlebotomy. Mobile phlebotomy options facilitate testing for patients even if they are not seen in person by the physician and instead are seen through telehealth visits. This benefits the patient as scheduling can be conveniently fit to their needs and can keep them away from a physician’s office or hospital for safety concerns. Additionally, mobile phlebotomy benefits the physician as the logistics around a blood draw or tissue sampling are out of their hands. We have a national network of contracted nurses and phlebotomists to support at-home or mobile blood collection. +In addition, on November 14, 2023, the Company announced the validation and launch of a new method of collecting blood specimens for Nodify Lung Nodule Risk Assessment testing. The method uses the FDA-cleared Tasso+™ device, a single-use blood lancing device intended for obtaining capillary whole blood samples from a patient’s upper arm. Capillary blood draws using the Tasso+ device enable blood specimen collection for healthcare providers who do not have convenient access to phlebotomy services or a licensed phlebotomist on staff in the clinic or office. The Tasso+ device was validated by Biodesix to be administered in minutes by any healthcare provider at the time of lung nodule evaluation, creating efficiencies in the Nodify Lung workflow. Biodesix received approval from the New York State Clinical Laboratory Evaluation Program (NYS-CLEP) to use the Tasso+ device as a specimen collection method in support of Nodify Lung testing after entering into a supply agreement with Tasso, Inc. The device is now available for clinical use to collect specimens for Nodify Lung testing. +Both tests require a single blood sample shipped at ambient temperature to our certified, high-complexity clinical laboratory in De Soto, Kansas. Nodify CDT testing requires whole blood and Nodify XL2 testing requires a whole blood K2EDTA tube. Results for the Nodify CDT test alone are typically available within one day. If both tests are ordered for the patient and Nodify CDT returns a result of NSLAD, then both test results are typically available within four to five business days. All results are available through secure communication methods, including a portal, fax, hard copy, or mobile device. +Treatment Guidance and Monitoring +Profiling the tumor through blood-based genomic testing can help identify mutations in genes that may be driving growth of the tumor and may be targets for therapeutics. However, tumors also have intrinsic mechanisms that prevent the patient’s immune system from identifying and eliminating the cancer cells. Profiling the immune system can show if the patient’s immune system may have been subverted and therefore, is less likely to be responsive to immunotherapies. Our blood-based IQLung testing strategy consists of the GeneStrat ddPCR and GeneStrat NGS tumor profiling tests and the VeriStrat immune profiling test, which can be ordered together or separately for patients with NSCLC. Together, the tests have an established average turnaround time of three business days, providing physicians with timely results to facilitate treatment decisions. +10 +GeneStrat ddPCR Test +The GeneStrat test is a blood-based tumor profiling test that detects the guideline recommended, actionable mutations in lung cancer: EGFR, KRAS, BRAF, EML4-ALK, ROS-1, and RET. Physicians can order one or any combination of the gene tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat test performance and potential clinical utility have been published in multiple peer reviewed studies. +The GeneStrat test results have an established average turnaround time of two business days from the start of processing the sample in our Louisville, Colorado clinical laboratory. In a study at Eastern Carolina University, it was observed that blood-based testing was up to three weeks faster than tissue-based testing, with tissue-based testing taking a median of 26 days from sample collection. With GeneStrat testing, results are typically available in time for the patients first oncology visit, allowing the patient to start front-line treatment as quickly as possible. In the same study, it was observed that only 4% of patients had tissue-based molecular test results prior to start of front-line treatment. Meanwhile, after integrating Biodesix testing at the institution, 72% of patients had molecular test results available. Testing with the GeneStrat test can help physicians identify driver mutations quickly to help speed up time to treatment. +GeneStrat NGS Test +The GeneStrat NGS test is a blood-based 52-gene tumor profiling test panel that detects the guideline recommended, actionable mutations in lung cancer including five gene classes (SNV, INDELS, CNA, fusions, and exon-skipping). Specific variants of relevance to NSCLC include EGFR, KRAS, BRAF, EML4-ALK, ROS-1, RET, MET, NTRK. The GeneStrat NGS test is used for late-stage, metastatic NSCLC and physicians can order one or any combination of the IQLung tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat NGS test performance and potential clinical utility have been published in multiple published studies. +GeneStrat NGS test results have an established average turnaround time of three business days from the start of processing the sample in our Louisville, Colorado clinical laboratory. +We believe that rapid, blood-based tumor profiling with the GeneStrat ddPCR and GeneStrat NGS tests can be complementary to both targeted tissue-based testing (including PD-L1) and tissue-based broad genomic sequencing. Testing with GeneStrat ddPCR and +11 +GeneStrat NGS tests at diagnosis can help quickly identify patients who are eligible for targeted therapies. Additionally, blood-based testing upfront can help save valuable tissue for diagnostic evaluation, PD-L1 testing and broad genomic profiling for rare mutations to enroll in clinical trials. +VeriStrat Test +The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. Results help inform physicians whether their patient has a more aggressive cancer and can help with treatment planning. The VeriStrat test profiles the patient’s immune system by measuring eight protein features measured by mass spectrometry and interpreted by a proprietary machine learning-based algorithm to produce either a VeriStrat Good or VeriStrat Poor test result. +The presence of a VeriStrat Poor result indicates the presence of chronic inflammation and a chronic acute phase immune response. A chronic acute phase immune response can trigger the immune system to provide growth factors to the tumor to increase blood flow and tumor growth. The test has been studied in over 85 peer-reviewed and published clinical studies across many different types of therapies such as chemotherapy, targeted therapies, immune therapies, and combinations. The results consistently show the test to be predictive of outcomes, independent of other prognostic factors including PD-L1 expression and performance status. Patients who test as VeriStrat Poor, on average, have an overall survival that is less than half of those who test as VeriStrat Good, independent of treatment type, demonstrating that the test is strongly prognostic. Conversely, patients with a VeriStrat Good test result typically respond better to standard of care treatments than those patients that test as VeriStrat Poor. By using the VeriStrat test for immune profiling, physicians can help identify the patient's immune response to lung cancer to help guide treatment decisions. +GeneStrat ddPCR testing is performed using digital PCR technology, GeneStrat NGS testing is performed using NGS technology, and the protein features in VeriStrat are measured using MALDI-ToF mass spectrometry. Results have an established average turnaround time of three business days through secure communication methods, including a portal, fax, hard copy, or mobile device. +The GeneStrat ddPCR and GeneStrat NGS tests require cell-free (cf) whole blood specimen collection tubes, and VeriStrat requires a whole blood sample spotted onto our proprietary BCD. Both sample types are shipped at ambient temperature and testing is performed in our certified, high-complexity clinical laboratory in Louisville, Colorado. +Biopharmaceutical Diagnostic Discovery, Development and Testing Services Business +We believe our leadership in clinical proteomics and our multi-omic approach to probe the cancer disease state provides our customers with a clear and distinct advantage over other diagnostic service providers who solely focus on either genomics or proteomics. We recognize each clinical development program is complex, which is why we offer end-to-end diagnostic solutions, including: initial biomarker discovery, assay design and validation, testing of clinical trial samples, and commercialization of Companion Diagnostics. +At our core, we hold the belief that no single technology can address all diagnostic research questions. We have embraced a multi-omic approach, harnessing the combined power of genomics and proteomics and with our broad technology and service offerings, we are able to provide the depth and breadth of biomarker tools and diagnostic services required by our biopharmaceutical partners. Our capabilities and expertise allow us to unlock the potential detection of critical disease drivers and resistance mutations, early disease detection, monitoring of treatment responses and resistance, deeper insights into the underlying biology of disease, and the tracking of protein changes and degradation for a comprehensive view of treatment response. We specialize in developing state-of-the-art diagnostics solutions that play a crucial role in personalizing treatment decisions. Our team of scientists are dedicated to creating innovative and reliable diagnostic tools that can contribute to the success of drug development and patient care. Key aspects of our expertise include: +• +Customized CDx Development:  We have a proven track record of developing custom-made diagnostic assays to support the specific needs of any given drug development program. +• +Cutting-Edge Technology:  We have expertise in genomics (ddPCR and NGS) and proteomics (LC-MS/MS and ELISA). Our diagnostics are based on the latest advancements in technology, ensuring accuracy, sensitivity, and reproducibility. We have expertise in liquid biopsy and tissue-based assays. +• +Regulatory Compliance: We have a deep understanding of the regulatory landscape and work closely with regulatory authorities to ensure that our diagnostics meet all necessary compliance standards. Additionally, we have a phase gated product development process pursuant to the FDA and IVDR design control elements. Our quality management system (QMS) infrastructure is highly certified in local, US governmental and international standards and regulations and scalable to support global expansion as evidenced by multiple CE marked products under the IVDR and international registrations and commercial markets. The Biodesix QMS is currently under the purview of CLIA, CAP, NYS-CLEP, and ISO13485. +• +Collaborative Approach: We believe in fostering a collaborative and transparent relationship with our partners, working hand-in-hand to achieve shared objectives and milestones. +12 +We believe we provide benefit to our biopharmaceutical customers as they integrate strategies for increasing the probability of success for pivotal clinical trials. Specifically, our diagnostic testing services may help enable quicker enrollment rates for patients in prospective clinical trials, ranging from phase 1 to phase 3, and could help identify patient populations who may experience the greatest benefit from new therapeutics. Ultimately, our goal is to help biopharmaceutical customers realize greater efficiency in their clinical development programs. We have the ability to access and leverage our sample and data biobank for our partners’ data mining needs, including new test discovery. Additionally, we can leverage our FDA approved, GMP manufacturing facility to design, build and supply clinical trial sites with sample collection kits. +While our biopharmaceutical discovery, diagnostic development and testing revenue continues to grow, it is important to note that we benefit greatly from these partnerships in many ways that expand beyond revenue. We are continuously expanding our knowledge and biological understanding of multiple diseases and the rapidly evolving treatment landscape, while our Diagnostic Cortex® platform continues to be powered through these biomarker analyses. Additionally, our anonymized sample and data biobank continue to grow and can be further leveraged for internal test development and external partnering. Importantly, we look to supplement our product development efforts with companion diagnostics as they are developed. +To date, we have over 65 biopharmaceutical customers and academic partners who have utilized our diagnostic tests and services. The following are a few case studies of early-stage biomarker discovery and development with our biopharmaceutical customers. +• +AstraZeneca: We provided services to AstraZeneca to retrospectively analyze samples from the FLAURA clinical trial (NCT02296125). The goal of this analysis was to interpret and establish the clinical utility of blood-based longitudinal monitoring of EGFR sensitizing and resistance mutations by ddPCR in advanced NSCLC patients treated with osimertinib. The data demonstrated that these circulating DNA mutations could be tracked in blood to interpret the patient’s prognosis, and could help AstraZeneca to identify disease progression three months (median) in advance of standard imaging. We have used our ddPCR assay to monitor EGFR sensitizing and resistance mutations in clinical trial samples from seven different clinical trials for Tagrisso. +• +Genentech: We partnered with Genentech to discover a novel proteomic classifier for advanced NSCLC patients treated with atezolizumab. The test was discovered on a small clinical cohort (n=77) and was independently validated on blinded samples (n=270) from the POPLAR clinical trial (NCT01903993). The validation revealed that the proteomic test was predictive of progression free survival and overall survival for atezolizumab versus the control arm docetaxel. Additionally, an analysis compared the correlation between our proteomic classifier with standard of care biomarkers (PD-L1 expression status and tumor mutation burden), which revealed there was no significant correlation. We published additional work on the Genentech classifier with three posters presented at the society of immunotherapy conference (SITC). This data reinforces that our classifier provides unique and valuable information in the treatment of patients with advanced NSCLC. It is our belief that Genentech could use this strategy to identify patients that could derive a longer progression free survival from atezolizumab. +• +HiberCell: In January 2021, we announced a broad collaboration with HiberCell for CDx discovery, development and commercialization. The agreement initially focuses on the further development of an ELISA as a CDx in future registrational trials for Imprime PGG programs. +13 +Our Competitive Advantages +We believe the following are our key competitive advantages: +• +Our proprietary extensively validated deep learning platform, which is tailored to discover diagnostic tests that address clinical unmet needs. Our platform is an extensively validated deep learning platform optimized for discovery of diagnostic tests. By combining our multi-omic approach with deep learning techniques, we believe we have overcome many standard machine learning challenges. This has enabled us to develop commercial tests for clinical unmet needs and collaborate with our biopharmaceutical customers and academic partners. +• +Our driven approach to precision medicine combined with our diverse technology platforms, partnership and biobank enable us to accelerate development of new tests. We have a variety of samples with associated data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development initiatives. Our biobank, clinical trials, commercial testing and other partnerships provide an ongoing source of new data that can further enhance our test discovery platform. We are continuously identifying and incorporating new market insights and input from our customers, key opinion leaders, and scientific experts to leverage this data in developing our diagnostic tests. +• +Our leadership in clinical proteomics, demonstrated research, development, and scientific expertise, combined with our intellectual property portfolio. Our leadership in clinical proteomics and our multi-omic approach, we believe provides us with a distinct advantage over our competitors, who focus on any single technology, such as genomics or proteomics. Our certified, high-complexity laboratories offer significant advantages in development of commercial tests. +• +Our proprietary technologies and processes are protected by a portfolio of approximately 116 issued patents in the United States and internationally, and 18 uniquely registered United States trademarks. We take efforts to protect our proprietary position using a variety of methods, such as a pursuit of United States and foreign patent applications related to our proprietary technology, use of trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities. +• +Our demonstrated success commercializing diagnostic tests in lung disease as well as unprecedented turnaround times. With five diagnostic tests launched and multiple improvements and several tests currently in development, our commercial portfolio of blood-based solutions currently addresses clinical unmet needs within diagnosis, treatment and monitoring of lung cancer. Our diagnostic tests provide rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan. For example, the blood-based IQLung strategy for lung cancer patients integrates the GeneStrat ddPCR test, the GeneStrat NGS test and the VeriStrat test to support treatment decisions across all stages of lung cancer with results in an unprecedented two to three business days, expediting time to treatment. +• +Our depth and breadth of point of care access to physicians allows us to drive adoption of our diagnostic tests while incorporating real-life feedback to inform new product development. Our commercial team’s primary focus is to articulate the scientific and clinical evidence behind our tests, how they impact clinical care and can ultimately help to improve patient outcomes. Our demonstrated scientific expertise, leadership in clinical proteomics and breadth of data, including peer-reviewed publications, presentations and clinical studies, forms the basis of our relationships with major hospitals and physician networks across the United States. +• +Our commercial infrastructure, which includes our extensive knowledge and experience in sales, marketing, reimbursement and operations, provides us with the ability to launch, scale and drive revenue. We believe our commitment to commercial excellence helps us to leverage insights, operational excellence and proven approaches to deliver revenue growth and enhance the brand of our company and products. We are able to deploy rapid clinical testing turnaround times and develop commercial tests at scale. Scaling of our test capacity to meet volumes is then achieved by adding instrumentation and qualified personnel to our quality systems. +Our Strategy +We strive to provide swift, comprehensive and actionable insights to improve patient outcomes across lung disease and to help answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. To achieve this, we intend to: +• +Drive increased awareness, adoption, and reimbursement coverage of our diagnostic tests by: +o +continuously educating physicians, key opinion leaders, hospital systems, advocacy groups, patients, payers, academic research organizations, and technology assessment and guideline organizations on the clinical data and benefits of our tests; +o +utilizing our pulmonology focused sales force and commercial reach with targeted awareness campaigns to employ highly targeted sales and marketing tactics in pulmonology clinics specializing in the management of lung nodules and the diagnosis of lung cancer; +14 +o +continuing to invest in the expansion of our sales force and commercial support team; +o +incorporating our testing services into diagnostic pathways and protocols via a top-down strategy that introduces our diagnostic tests to the largest United States health systems; and +o +leveraging our clinical data to gain broad coverage from public and private payers for our tests. +• +Deepen our relationships with current biopharmaceutical customers and establish new customer opportunities by: +o +selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally; +o +leveraging existing projects and relationships to expand sales with our current biopharmaceutical customers; and +o +targeting companies developing novel CDx strategies and drug development projects best suited to our platform for new test discovery, development and commercialization. +• +Further demonstrate the clinical utility and health economic benefits of our diagnostic tests by: +o +investing in commercial clinical testing, research studies and clinical trials to further demonstrate the clinical utility of our tests; +o +providing rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan; and +o +providing timely and actionable clinical information to help improve overall patient outcomes and lower the overall healthcare cost. +• +Introduce new diagnostic tests in lung disease by: +o +engaging with our customers, key opinion leaders, leading academic centers, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and to identify additional clinical unmet needs; +o +entering strategic partnerships with biopharmaceutical companies, academic research organizations, technology providers, and other diagnostic companies; and +o +developing CDx tests to support the therapeutics’ regulatory approval and adoption process for our biopharmaceutical customers. +• +Enhance our proprietary AI platform and expand our technology portfolio by: +o +continuing to invest in research and development capabilities to foster innovation in test discovery and development; +o +identifying, acquiring technologies, and integrating new data types into our proprietary AI platform; +o +entering strategic partnerships across our commercial product portfolio and product development efforts in order to further our development capabilities, accelerate launch of commercial products, or expand our service offering; and +o +achieving “Explainable AI” by developing and incorporating computational tools that determine how the Diagnostic Cortex platform makes decisions for patient classification and outcome prediction. +• +Continue to expand and leverage our biobank by: +o +expanding and enhancing the robustness of our samples and the data set, including through our collaborations and partnerships; +o +pursuing commercial opportunities with companies and researchers who are interested in utilizing our biobank for their own discovery and development efforts; and +o +monetizing these commercial opportunities. +Our Diagnostic Tests in Development +With the goal of finding solutions for clinical unmet needs related to diagnosis, treatment and monitoring in lung disease, our diagnostic tests in development include the following: +Early-Stage NSCLC—Risk of Recurrence (ROR) +Currently, surgical resection of the tumor without systemic or radiation therapy is the standard of care for stage I NSCLC patients. However, 20 to 40% of surgically treated patients will suffer a recurrence within five years after surgery. From market research with +15 +pulmonologists, thoracic surgeons, and medical oncologists, we identified a significant clinical unmet need for a blood-based test to help identify stage I NSCLC patients who are at a higher risk of recurrence and may benefit from a more aggressive surgical procedure, or from neoadjuvant or adjuvant systemic treatment. Based on this unmet diagnostic need, we discovered the Risk of Recurrence (ROR) test, which is a pre-surgery blood-based proteomic test, designed with the Diagnostic Cortex platform to predict whether a stage I NSCLC patient has a higher risk of recurrence post-surgical resection. Knowing this information early and before surgery may change the surgical plan and/or support treatment decisions such as neoadjuvant or adjuvant therapy, which have the potential to reduce tumor volume and address micro-metastatic disease as early as possible. Our ROR test validated in an independent sample set, and we are currently working with major academic institutions across the United States to further validate the test. +Late-Stage NSCLC—Immunotherapy Treatment Guidance (PIR) +In 2015, the first immunotherapy-based treatment regimen was approved by the FDA for use in lung cancer. Currently, there are 9 immune checkpoint inhibitor (ICI) regimens (single agent or combinations) recommended by the NCCN guidelines for treatment of advanced NSCLC patients. For a portion of patients treated, these drugs can result in significant improvement in overall survival compared with platinum-based chemotherapy options. +The combination ICI regimens see some improvement in performance over single agent ICI, but side effect profiles are worse, and costs are higher than for single agent ICI. In addition, recent data have shown that a subset of patients experience more rapid disease progression on ICI compared with chemotherapy. We utilized the Diagnostic Cortex platform to discover our Primary Immune Response (PIR) test. PIR is a blood-based proteomic test designed to profile a patient's potential to mount an immune response to their cancer and predict those patients likely to respond to ICI monotherapy treatment, ICI + chemotherapy combination treatment, or who would be highly resistant to ICI therapy. Our PIR test has been validated in multiple independent sample sets for advanced stage NSCLC patients treated with single agent ICI, and we are currently working with major academic institutions across the United States to further validate the test. +Monitoring – Progression & Resistance +Blood-based monitoring with our ddPCR technology may offer a feasible method to non-invasively evaluate therapeutic mechanism of action, disease progression, and the emergence of resistance mutations in patients treated with targeted therapies. Our internal validation studies have shown the utility of the GeneStrat EGFR ddPCR test as an example in all three of these indications. The test can identify disease progression up to three months (median) in advance of standard imaging. Using ddPCR for longitudinal blood-based monitoring of EGFR cell-free DNA mutations is a cost-effective testing method while patients are being treated with targeted therapies. Additional utility for ddPCR may exist in early stage MRD (minimal residual disease) given the sensitivity of this technology. +Clinical Trials +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. We have participated in 27 clinical studies, three of which are ongoing, and have published over 300 peer-reviewed publications and presentations. The following are our ongoing clinical studies for our diagnostic testing solutions. +ORACLE Registry Study (NCT03766958) +The ORACLE registry study was designed to develop real-world clinical utility data for the Nodify XL2 test and is titled “An Observational Registry Study to Evaluate the Performance of the Nodify XL2 Test”. The study objectives are to show a reduction in invasive procedures on patients with benign nodules compared to a historical control obtained from chart review. The first patient enrolled on October 16, 2018. Study enrollment was closed on May 12, 2022, with 494 prospective registry patients enrolled and 348 retrospective chart review patients accrued. As of February 1, 2024 all ORACLE participants have completed the study, site closeout visits are being conducted on the last three open sites and the study will be officially closed by the March 31, 2024. +On July 12, 2023, we announced the prospective, real-world ORACLE study (An Observational Registry Study to Evaluate the Performance of the Nodify XL2 Test) achieved the primary endpoint of a statistically significant change in the proportion of benign lung nodules managed by the Nodify XL2 test experiencing invasive procedures. The ORACLE study showed patients with benign nodules managed with the Nodify XL2 test were 74% less likely to undergo an unnecessary invasive procedure compared to the control group. Additionally, the proportion of patients sent to CT surveillance with malignant nodules did not differ between the Nodify XL2 group and the control group. +ALTITUDE Clinical Utility Study (NCT04171492) +The ALTITUDE clinical utility study is designed to evaluate the performance of Nodify Lung testing (Nodify XL2 and Nodify CDT tests) in a randomized controlled study (RCT). The study is titled “A Multicenter, Randomized Controlled Trial, Prospectively Evaluating the Clinical Utility of the Nodify XL2 Proteomic Test in Incidentally Discovered Low to Moderate Risk Lung Nodules”. We received central institutional review board (IRB) approval in December 2019 and have an enrollment goal of 2,000 patients. The study objectives are to evaluate how the addition of the Nodify Lung test result impacts the clinical decision making for patients with new, incidentally identified solid lung nodules assessed as low to moderate risk of lung cancer. The trial has an adaptive study design with a +16 +blinded standard of care arm and 2:1 randomization for open-label results for the Nodify XL2 test. The study launched in December of 2020. Phase 1 of the study with only the Nodify XL2 test is expected to enroll 500 patients. Phase 2 of the adaptive study design will include an open-label arm for the Nodify CDT test, which is aligned with our commercial testing algorithm. +INSIGHT Observational Study (NCT03289780) +The INSIGHT observational study is designed to evaluate the real-world clinical utility and performance of the IQLung (GeneStrat ddPCR, GeneStrat NGS and VeriStrat tests) testing strategy. The title is “Observational Study Assessing the Clinical Effectiveness of VeriStrat and Validating Immunotherapy Tests in Subjects with Non-Small Cell Lung Cancer (INSIGHT)” and the first patient enrolled on May 11, 2016. On June 27, 2023, we completed enrollment of 5,000 patients with non-small cell lung cancer. Final analysis with 3-year follow-up is estimated to be completed by 2026. Results of an interim analysis were presented most recently at the World Conference on Lung Cancer 2023. Additionally, data on the first 2,000 patients with 1-year follow-up data was published in the Journal for ImmunoTherapy of Cancer in September 2021. The study rationale is to guide the adoption of the VeriStrat test and inform medical decision making, including treatment choice, and enable the validation of additional mass spectrometry-based proteomic tests. The primary study objective is to describe the impact of the VeriStrat test results on treatment decisions, including but not limited to the percentage change in treatment decision, differences in chosen treatments between patients classified as VeriStrat Good and those classified as VeriStrat Poor, and the percentage of patients receiving systemic therapy or supportive therapies only. +Commercialization +For our lung cancer and nodule management tests, commercial efforts are focused on the promotion of our testing strategies to healthcare professionals actively involved in the diagnosis and treatment of lung cancer. Primarily focusing on pulmonology, the commercial team, consisting of specialty sales representatives, medical affairs, marketing and customer care representatives, works to educate and inform the entire patient care group consisting of physicians, nurses, office staff, laboratory personnel, and administration as to the appropriate use and value provided by our testing. The team’s goal is to drive test adoption through articulating the scientific and clinical evidence behind our tests, how they impact the clinical care of a patient, and how the tests can ultimately help to improve patient outcomes. +Patients with pulmonary nodules are concentrated in the pulmonology sub-specialty, where additional resources such as lung cancer screening and nodule management clinics may exist to provide an increased level of care. We are also engaging large hospital systems in a “top-down” approach, with a goal of incorporating our tests into system-wide pathways and protocols. +After a physician orders our tests, blood is collected either in the physician office or laboratory, third-party “store front” patient service centers, or it can be collected in the patient’s home or workplace. We have contracted with a network of patient service centers and mobile phlebotomy services to be enable collection of blood samples outside of the physician office, at home or work for patients across the United States. +In addition, on November 14, 2023, the Company announced the validation and launch of a new method of collecting blood specimens for Nodify Lung Nodule Risk Assessment testing. The method uses the FDA-cleared Tasso+™ device, a single-use blood lancing device intended for obtaining capillary whole blood samples from a patient’s upper arm. Capillary blood draws using the Tasso+ device enable blood specimen collection for healthcare providers who do not have convenient access to phlebotomy services or a licensed phlebotomist on staff in the clinic or office. The Tasso+ device was validated by Biodesix to be administered in minutes by any healthcare provider at the time of lung nodule evaluation, creating efficiencies in the Nodify Lung workflow. Biodesix received approval from the New York State Clinical Laboratory Evaluation Program (NYS-CLEP) to use the Tasso+ device as a specimen collection method in support of Nodify Lung testing after entering into a supply agreement with Tasso, Inc. The device is now available for clinical use to collect specimens for Nodify Lung testing. +Our business development team is focused on selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally. Our team consists of customer facing business development associates that work with our biopharmaceutical customers to identify projects, draw up statements of work and negotiate service agreements. Alliance managers help to manage the contractual obligations and scope of the project, whereas our operations team assures the project is managed with adequate resources and delivers on time. We take a two-pronged approach generating business in this segment. Primarily, we leverage existing projects and relationships to expand sales in current accounts. We also actively map ongoing drug development projects in biopharmaceutical companies and target programs best suited to our platform for new test development. +Coverage and Reimbursement +The primary source of reimbursement for our tests in the United States is from third-party payers, including government payers, such as Medicare, and commercial payers, such as insurance companies. Reimbursement for laboratory tests in the United States is determined by various payers, including private third-party payers, managed care organizations, and state and federal health care programs, such as Medicare and Medicaid. In Medicare, coverage of an item or service depends on whether it is “reasonable and necessary” under Section 1862(a)(1)(A) of the Social Security Act (SSA). For single-source laboratory tests, this determination is typically made by the Medicare Administrative Contractor (MAC) with jurisdiction over the laboratory where the test is performed. Our Louisville, Colorado laboratory is currently under the jurisdiction of Novitas Solutions, Inc. Our De Soto, Kansas laboratory is under the jurisdiction of Wisconsin +17 +Physicians Service Insurance Corporation (WPS), which participates in the MolDX program (administered by another MAC, Palmetto GBA) to set coverage policy for molecular diagnostic tests. +Medicare pays for clinical diagnostic laboratory tests (CDLTs), on the Clinical Laboratory Fee Schedule (CLFS). Section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA) added Section 1834A to the SSA, which established the current CLFS rate setting processes and coding provisions for CDLTs, and created a new subcategory of CDLTs called Advanced Diagnostic Laboratory Tests (ADLTs), with separate reporting and payment requirements. +Under Section 1834A and its implementing regulations, clinical laboratories that receive the majority of their Medicare revenues from payments made under the CLFS and the Physician Fee Schedule report on a triennial basis (or annually for ADLTs), private payer rates and volumes for their tests with specific billing codes based on final payments made during a set data collection period. The payment rate for a test for the ensuing three-year period (or one year for ADLTs) is set at the weighted median of the rates reported under the specific billing code for that test. Newly established codes for CDLTs are priced until the next private payer rate reporting cycle either based on the payment rate of a comparable code on the CLFS, as determined by CMS ("crosswalking") or at the median of rates submitted by the individual MACs based on statutory and regulatory factors ("gapfilling"). New ADLTs are initially priced at “actual list charge” for a nine-month period, after which they are priced based on private payer rates, with a recoupment provision if actual list charge is more than 130% of the weighted median of private payer rates reported. +The various payers in the United States also determine their own billing rules. In December 2020, Medicare revised its billing rules for clinical laboratory tests to require cancer-related protein-based Multianalyte Assays with Algorithmic Analyses to be billed directly to Medicare by the performing laboratory in most cases when performed on a specimen collected from a hospital outpatient. Molecular pathology tests and most ADLTs are also generally required to be billed directly to Medicare by the laboratory under these circumstances. +On July 6, 2023, the Company announced that the Centers for Medicare & Medicaid Services (CMS) has designated the Nodify CDT Test as an Advanced Diagnostic Laboratory Test (ADLT) effective June 30, 2023. Obtaining ADLT status is a recognition that the Nodify CDT test meets the stringent criteria established under the Protecting Access to Medicare Act of 2014. ADLT status is reserved for innovative tests with Medicare coverage that are offered and furnished by a single laboratory and provide new clinical diagnostic information that cannot be obtained from any other test or combination of tests. The Nodify XL2 test was previously awarded ADLT status on May 17, 2019. We believe that our lung cancer tests can both improve patient outcomes and help guide cost-effective treatment choices for patients with and at-risk of lung cancer. Achieving broad coverage and adequate reimbursement for each of our tests is a key component of our financial success and will continue to be important over time. +Compliance with applicable laws and regulations, as well as internal compliance policies and procedures adds complexity to the billing process. The Centers for Medicare & Medicaid Services (CMS) is responsible for overseeing the establishment of new Healthcare Common Procedure Coding System (HCPCS) codes for billing the Medicare program and other payers. CMS continuously evaluates and implements changes to the Medicare billing, coding, and reimbursement processes. To receive reimbursement from third-party payers, we bill our tests using a variety of HCPCS codes or Current Procedural Terminology (CPT) codes, as defined by the American Medical Association. For some of the tests we conduct, there may not be a specific CPT or HCPCS code, in which case the test may be billed under a miscellaneous code for an unlisted molecular pathology procedure or unlisted multiple anolyte test with algorithmic analysis (MAAA) procedure. Because these miscellaneous codes do not describe a specific service, the third-party payer claim may be examined to determine the service provided, whether the service was appropriate and medically necessary and whether payment should be rendered. This process can result in a delay in processing the claim, a lower reimbursement amount, and/or denial of the claim. +Competitors +We primarily face competition from lung cancer diagnostic solutions companies in the United States, Europe and Asia seeking to answer clinical questions in the space, all of whom provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories, and other medical facilities. +Diagnosis—Nodule Management +We are not aware of any other company that offers two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. We are aware of efforts by Veracyte, Inc. to develop and validate a test that may be competitive to the Nodify XL2 and/or Nodify CDT tests in the future. Additionally, Veracyte currently markets a test that is used post-bronchoscopy that is not competitive with our pre-bronchoscopy nodule risk assessment tests. +Treatment Guidance and Monitoring—NSCLC +We are unaware of any other diagnostic test available, commercially or in development, that will compete with our VeriStrat immune profiling test. There is substantial interest and activity in tumor profiling through liquid biopsy. Our genomic test offerings, the GeneStrat ddPCR and GeneStrat NGS tests, face competition from academic hospital laboratories, and companies such as Guardant Health and Foundation Medicine. We believe that there are several companies and academic research institutions in the process of developing tests for monitoring patients or following treatment for recurrence or progression of lung cancer. +18 +Biopharmaceutical Diagnostic Discovery, Development & Testing Services +We are aware of a number of companies who compete with our diagnostic tests and services, including diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. From the perspective of tumor profiling, we believe Guardant Health and Foundation Medicine are our most significant competitors. Conversely, in the immune profiling market, we believe Adaptive Biotechnologies and Personalis are our most significant competitors. +Clinical Laboratory Operations +Throughout 2023, we performed the VeriStrat, GeneStrat ddPCR, and GeneStrat NGS tests in our Boulder, Colorado high-complexity CLIA certified clinical laboratory. The laboratory was College of American Pathology (CAP) accredited, New York State Department of Health (NYSDOH)—permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified, along with all other states that require licensing: California, Maryland, Pennsylvania, and Rhode Island. All aspects of the testing process from receipt of the test requisition form through to delivery of test results were performed in the Boulder, Colorado facility. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within three days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +In January 2024, we relocated our Boulder, Colorado clinical laboratory to Louisville, Colorado. Throughout this transition, we have ensured the maintenance and updating of all relevant certifications and licenses to accurately reflect our new location, guaranteeing our commitment to upholding the highest standards of quality and compliance. As a result, our laboratory operations continued seamlessly without delaying testing. +The Nodify XL2 and Nodify CDT tests are performed in our De Soto, Kansas high-complexity CLIA certified clinical laboratory. This clinical laboratory is also CAP-accredited, NYSDOH—permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified and licensed by California, Maryland, Pennsylvania, and Rhode Island. Receipt of requisitions and testing is performed in our De Soto, Kansas clinical laboratory. Delivery of the test results is performed by personnel from our Louisville, Colorado headquarters. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within five days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +Personnel in both facilities are responsible for quality assurance oversight, licensing, and regulation compliance and maintenance to ensure data integrity and consistent, validated processes. +Supply Chain +We rely on third-party suppliers to provide certain components of our diagnostic tests, including a select few (located in the United States, Europe and China), as critical single source providers of components. Bio-Rad, as described below, is the sole source supplier for our GeneStrat test. Oncimmune is also the sole source supplier for our Nodify CDT tests but there are known secondary suppliers for these materials. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test, but these supplies are able to be supplied by known suppliers. A disruption to this supply would negatively impact our ability to perform the GeneStrat tests until alternatives could be validated. +All materials for our VeriStrat test and Nodify XL2 test have alternative suppliers readily available, and a disruption in any single supplier would not materially impact our ability to deliver the test. +We have initiated the second source qualification process for the majority of these critical components, however, we may not be successful in securing second sourcing for all of them at all or on a timely basis. A disruption to this supply would negatively impact our ability to perform these tests until an alternative supplier could be validated. +Intellectual Property +Our success depends, in part, on our ability to obtain and maintain intellectual property and proprietary protection for our products and other know-how, to operate our business without infringing, misappropriating or otherwise violating the intellectual property and proprietary rights of others, and to defend and enforce our intellectual property and proprietary rights. We take efforts to protect our proprietary position using a variety of methods, which include pursuit of United States and foreign patent applications related to our proprietary technology, inventions and improvements that we determine are important to our business. We also may rely on trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities to develop and maintain our proprietary position. For more information regarding risks relating to intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property.” +19 +We have invested heavily in the protection of our key assets, namely the VeriStrat® and GeneStrat® tests, and we acquired a patent portfolio relating to the Nodify XL2® and Nodify CDT® tests in our acquisitions of Indi in June 2018, and of Oncimmune USA in October 2019 from Oncimmune Limited (Oncimmune). We own patents and patent applications as well as trade secrets relating to our products currently in development, a collection device for whole blood, our business strategy, client lists and business methods. Further, we have expanded our access to key intellectual property through license and co-development agreements, including our Non-Exclusive License Agreement with Bio-Rad (the Bio-Rad License), which allows us to use the Droplet Digital PCR™ technology developed by Bio-Rad and which we employ in our GeneStrat test. +Our patent strategy has focused on creating and acquiring protection for our VeriStrat and Nodify XL2 proteomic tests, while utilizing trade secret and some methods patent protection for our genomic test (the GeneStrat ddPCR and GeneStrat NGS® tests) and ELISA test (the Nodify CDT test). We have entered into a non-exclusive license agreement with Bio-Rad, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. Bio-Rad owns patents relating to ddPCR and to which we have a non-exclusive license to utilize for the performance of ddPCR in cancer detection testing for third parties as set forth in the Bio-Rad License Agreement. We have patent protection in the United States and other countries around the world for the primary use of the VeriStrat test for profiling of patients with NSCLC, and various other uses of the VeriStrat test, such as breast cancer, prostate cancer, head and neck cancer have received patent protection. We have also received patent protection relating to our core classifier development program, our Diagnostic Cortex platform and our approaches to using MALDI-ToF technology (DeepMALDI® techniques). Additionally, our first device patent was issued in 2019 for our internally designed blood collection device. +As of December 31, 2023, our patent portfolio includes 52 issued United States patents, 64 issued foreign patents, and 33 pending applications (including 19 foreign patent applications). With regard to our product development efforts, new applications have been filed around developments relating to COVID/micro-organisms diagnostics, new analytic methodologies using Shapley values and semi-quantitative spectra analysis in MALDI, and national stage applications are now in active prosecution to protect our pipeline ROR and PIR tests. +The patent portfolio can be broken down into five major categories: +1) +Issued patents and patent applications relating to the VeriStrat and Nodify tests and uses of these tests; +2) +Issued patents and patent applications relating to methods for developing classifiers, including using the Diagnostic Cortex and DeepMALDI technologies; +3) +Issued patents and patent applications relating to tests currently in development; +4) +Issued patents and patent applications relating to our novel blood collection device; and +5) +Issued patents and patent applications relating to tests developed for our third-party partners. +The patents relating to the VeriStrat test are scheduled to expire between 2026 and 2032. The patents relating to the Nodify XL2 test are scheduled to expire beginning in 2031 (excluding any patent term extension granted by the United States Patent and Trademark Office (USPTO)), and the patents relating to the Nodify CDT test are scheduled to expire in 2027. The patent related to the blood collection device is scheduled to expire in 2039. Should our current patent applications in prosecution in the United States issue, the resulting patents would be scheduled to have expiration dates between 2036 and 2040 (excluding any patent term extension(s) granted by the USPTO). +We currently have three pending Patent Cooperation Treaty (PCT) applications. PCT patent applications are not eligible to become issued patents until, among other things, we file such PCT applications as national stage patent application(s) within 30 months in the countries in which we seek patent protection. If we do not timely file any national stage patent applications, we may lose our priority date with respect to any such PCT patent applications and any patent protection on the inventions disclosed in such PCT patent applications. Provisional patent applications are not eligible to become issued patents but can become the basis of PCT foreign stage and United States non-provisional patent applications, if such applications are filed within 12 months of filing the related provisional patent application. If we do not timely file any non-provisional patent applications, we will lose our priority date and any patent protection on the inventions disclosed in any such provisional patent application. +In addition, the term of individual issued patents depends upon the legal term for patents in the countries in which they are obtained. In most countries in which we have filed, including the United States, the patent term is generally 20 years from the earliest filing date of a non-provisional patent application, assuming the patent has not been terminally disclaimed over a commonly-owned patent or a patent naming a common inventor, or over a patent not commonly owned but that was disqualified as prior art as the result of activities undertaken within the scope of a joint research agreement. The life of a patent, and the protection it affords, is therefore limited and once the patent lives of our issued patents have expired, we may face competition, including from other competing technologies. In the United States, the term of a patent may also be eligible for patent term adjustment for delays within the USPTO. The term of a patent that covers a biological product may also be eligible for patent term extension when FDA approval is granted for a portion of the term effectively lost as a result of the FDA regulatory review period, subject to certain limitations and provided statutory and regulatory +20 +requirements are met. Any such patent term extension can be for no more than five years, only one patent per approved product can be extended, the extension cannot extend the total patent term beyond 14 years from approval, and only those claims covering the approved biological product, a method for using it or a method for manufacturing it may be extended. We may not receive an extension if we fail to exercise due diligence during the testing phase or regulatory review process, fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. There can be no assurance that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. +Our ability to maintain and solidify our proprietary and intellectual property position will depend on our success in obtaining effective patent claims and maintaining and enforcing claims that are granted. However, our owned and licensed patents could be invalidated or narrowed or otherwise fail to adequately protect our proprietary and intellectual property position and our pending owned and licensed patent applications, and any patent applications that we may in the future file or license from third parties, may not result in the issuance of patents. +Because branding is as much a part of any intellectual property strategy as patent or trade secret protection we have a number of registered and pending trademarks relating to our company and products. We have received or filed for trademark protection in the United States for our trade name (Biodesix), the names of five of our commercial tests (namely the VeriStrat, GeneStrat ddPCR, GeneStrat NGS, Nodify XL2 and Nodify CDT tests), and a suite of research tests (ImmunoStrat® test), as well as having trademark protection for our core development and methodological platforms, such as our Diagnostic Cortex and DeepMALDI technologies. In all, as of December 31, 2023, we have 18 uniquely registered United States trademarks, 8 of which (including Biodesix, VeriStrat, and GeneStrat) have received foreign issuances as well, with four trademarks pending approval from the USPTO. We will continue to pursue protection in the United States and abroad for our branded assets and will continue to use branding to protect products currently in development, key Biodesix developments and non-trade secret methodologies. +We also rely on trade secrets, including know-how, confidential information, unpatented technologies and other proprietary information, to strengthen or enhance our competitive position, protect and maintain aspects of our business that are not amenable to, or that we do not presently consider appropriate for, patent protection, and prevent competitors from reverse engineering or copying our technologies. We have decided that some technologies, such as our laboratory methodologies (including sample preparation and assay development), and some information (such as client and billing information) are best kept as trade secrets. However, trade secrets and confidential know-how are difficult to protect. To avoid inadvertent and improper disclosure of trade secrets, and to avoid the risks of former employees using these trade secrets to future employment, it is our policy to require employees, consultants and independent contractors to assign all rights to intellectual property they develop in connection with their employment with or services for the Company to the Company. We also protect our existing and developing intellectual property expressly through confidentiality provisions in agreements with third parties. There can be no assurance, however, that these agreements will be self-executing or otherwise provide meaningful protection for our trade secrets or other intellectual property or proprietary information, or adequate remedies in the event of unauthorized use or disclosure of such trade secrets or other intellectual property or proprietary information. +We also seek to preserve the integrity and confidentiality of our trade secrets and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in the measures we take to protect and preserve our trade secrets, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. +We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives, which may include objectives within and outside the United States. Despite our efforts to protect our intellectual property rights, and despite the breadth of protection that has issued around our key assets, these rights may not be respected in the future or may be circumvented or challenged (and potentially invalidated) in a legal proceeding in any jurisdiction where we have intellectual property rights. In addition, the laws of various foreign countries where we have received intellectual property protection and where we may eventually distribute our products may not afford the same protections or assurances to the same extent as the laws in the United States. See “Risk Factors—Risks Related to Our Intellectual Property” for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on us. +Government Regulations +Clinical laboratory tests like our diagnostic tests are regulated under CLIA and state law. The FDA regulates medical devices pursuant to the FDCA, including many diagnostic test kits, such as in vitro diagnostic tests (IVDs). However, most Laboratory Developed Tests (LDTs) are not currently subject to the FDA’s regulation (although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to such regulation) because the FDA has historically exercised enforcement discretion over LDTs. LDTs are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. +21 +We currently market our GeneStrat, VeriStrat, Nodify XL2 and Nodify CDT tests as LDTs in the United States. As a result, we believe our diagnostic services are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDCA provisions. If the FDA disagrees with the LDT status of any of our tests, the FDA may consider the test to be an unapproved medical device and may subject us to FDA enforcement action, including, without limitation, requiring us to seek clearance, authorization or approval for the laboratory test. If the FDA were to begin enforcement with respect to our LDTs, we could incur substantial costs and delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market requirements. +FDA’s authority to regulate LDTs has been contested for many years, and there have been several legislative and administrative proposals regarding LDT regulation seeking to end or limit enforcement discretion and to bring LDTs under new or existing FDA regulatory frameworks. +We cannot predict the likelihood that Congress will pass legislation or the extent to which such legislation may affect the FDA’s plans to regulate certain LDTs as medical devices or pursuant to a new framework. It is also unclear at this time whether the FDA will finalize its plans to end enforcement discretion in the absence of legislation, via notice and comment rulemaking or otherwise. Until legislation is passed reforming the federal government’s regulation of LDTs or until the FDA finalizes its proposed rulemaking to end enforcement discretion, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval. Even if a new framework is not established via legislative or administrative action, the FDA may attempt to regulate and enforce against certain LDTs on a case-by-case basis at any time. +On September 29, 2023, FDA announced a proposed rule to amend its regulations to explicitly regulate LDTs as IVD tests in accordance with the agency’s regulatory authority over medical devices and to phase out its enforcement discretion policy for LDTs. If this rule is finalized, our tests that are currently offered as LDTs would become subject to statutory and regulatory provisions that are applicable to medical devices, including but not limited to, medical device reporting and correction and removal reporting requirements, quality systems regulations, registration and listing requirements, and premarket review requirements. +If the FDA finalizes its proposed rule and pre-market review is required, our business could be negatively impacted as a result of commercial delay that may be caused by the new requirements. The cost of conducting clinical trials and otherwise developing data and information to support pre-market applications may be significant. If we are required to submit applications for our currently marketed tests, we may be required to conduct additional studies, which may be time-consuming, costly and could result in our currently-marketed tests being withdrawn from the market. Continued compliance with the FDA’s regulations would increase the cost of conducting our business, and subject us to heightened regulation by the FDA including penalties for failure to comply with these requirements. Failure to comply with applicable regulatory requirements could result in an enforcement action by the FDA, such as fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal sanctions. There are other regulatory and legislative proposals that would increase general FDA oversight of clinical laboratories and LDTs. Until the FDA finalizes its regulatory position regarding LDTs, or the VALID Act or other legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval. The outcome and ultimate impact of such proposals on the business is difficult to predict at this time and we are monitoring developments and anticipate that our products will be able to comply with requirements that may be imposed by the FDA. In the meantime, we maintain our CLIA accreditation, which permits the use of LDTs for diagnostics purposes. +Federal and State Laboratory Licensing Requirements +The Biodesix Boulder, Colorado clinical laboratory was a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, Biodesix’s Quality Management System (QMS) holds an ISO 13485:2016 certificate (successfully passed surveillance audit in March 2023). The Biodesix Boulder, Colorado clinical laboratory received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers, and Molecular and Cellular Tumor Markers and Virology as well as held state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +CLIA regulations establish standards for proficiency testing; facility administration; general laboratory systems; pre-analytic, analytic systems, post- analytic systems; personnel qualifications and responsibilities; quality control, quality assessment; and specific provisions for laboratories performing moderate to high complexity tests. Our Boulder, Colorado clinical laboratory was inspected biennially as part of its ongoing certification under CLIA certificate of accreditation by CAP. The Boulder, Colorado clinical laboratory most recently passed its CAP inspection in February April 2023. In January 2024, we relocated our Boulder, Colorado clinical laboratory to Louisville, Colorado. All certifications and licenses have been successfully updated to accurately reflect our new location. All laboratory operations continued seamlessly without delaying testing. +Under CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of or assessment of health. CLIA requires that a laboratory hold a certificate applicable to the type of laboratory examinations it performs and that it complies with, among other things, +22 +standards covering operations, personnel, facilities administration, quality systems and proficiency testing, which are intended to ensure, among other things, that clinical laboratory testing services are accurate, reliable and timely. +The Biodesix De Soto, Kansas clinical laboratory is a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, the De Soto, Kansas clinical laboratory passed its CAP inspection in May 2023. Biodesix’s QMS holds an ISO 13485:2016 certificate (recently passed surveillance audit in January 2024). The De Soto, Kansas clinical laboratory has received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers and Diagnostic Immunology as well as holding state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +The International Organization for Standardization (ISO) is an independent, non-governmental international organization that defines world-class specifications for products, services and systems, to ensure quality, safety and efficiency. ISO 13485:2016 is a harmonized, international regulatory benchmark for quality management systems that addresses most or all of the QMS requirements in markets including the United States, European Union, Australia, Japan and Canada. The ISO 13485:2016 certificate confirms that an organization operates a QMS that conforms to the standards established by ISO. On January 31, 2024, the FDA issued a final rule to harmonize and modernize its Quality System Regulation (QSR), which would supplant the existing requirements with ISO 13485:2016. The rule amends the current good manufacturing practice requirements of the QSR in 21 CFR 820. The QMSR rule emphasizes risk management activities and risk-based decision making and aims to reduce regulatory burdens on device manufacturers and importers by harmonizing domestic and international requirements. Device manufacturers and importers will have two years to modify their quality systems to meet the requirements of the QMSR rule by February 2, 2026. +To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Laboratories such as ours, which are performing high complexity testing, are required to meet more stringent CLIA requirements than laboratories performing less complex tests, and therefore our laboratories are also subject to random, unannounced survey and inspection at any time. In addition, a laboratory that is certified as “high complexity” under CLIA may develop, manufacture, validate and use proprietary LDTs. CLIA requires analytical validation including accuracy, precision, specificity, sensitivity and establishment of a reference range for any LDT used in clinical testing. The regulatory and compliance standards applicable to the testing we perform may change over time and any such changes could have a material effect on our business. +CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that out-of-state laboratories maintain an in-state laboratory license to perform tests on samples from patients who reside in that state. As a condition of licensure, certain states may require that laboratory personnel meet qualifications, quality control procedures, facility requirements, record maintenance requirements or other state-specific requirements. +Because our Louisville, Colorado clinical laboratory is located in the State of Colorado, we do not need a specific State of Colorado laboratory license, however, we maintain licenses to conduct testing in other states where nonresident laboratories are required to obtain state laboratory licenses. We maintain licenses for our Louisville, Colorado and De Soto, Kansas laboratories with the NYSDOH. We also hold licenses in other states in which we operate, including California, Maryland, Pennsylvania and Rhode Island, that require licensing of out-of-state laboratories under certain circumstances. Other states may currently have or adopt similar licensure requirements in the future, which may require us to modify, delay or stop its operations in those states until such requirements are met. +Failure to comply with CLIA certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate or license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions, and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. +CLIA and state laws and regulations, operating together, sometimes limit the ability of laboratories to offer consumer-initiated testing, also known as direct access testing. We do not offer direct access testing and instead require that our tests be ordered by licensed healthcare providers. +Our Louisville, Colorado and De Soto, Kansas laboratories are certified and adhere to the NYS CLEP, based on New York State Public Health Law, Article 5 Title 5. NYS CLEP is exempt from CLIA and establishes their own method of laboratory certification and test validation approval. To process New York State patient specimens a laboratory must submit a robust analytical and clinical validation package to demonstrate clinical utility of the test and receive approval prior to offering the test in the state of New York. All of our tests have obtained NYS CLEP approval including GeneStrat ddPCR, GeneStrat NGS, VeriStrat, Nodify XL2 and Nodify CDT tests. NYS CLEP requires semi-annual inspections to ensure the laboratory meets all general and specialty standards. Due to the pandemic, NYSDOH CLEP routine re-inspections were delayed by multiple years. Most recently the Boulder, Colorado laboratory successfully passed the NYS CLEP audit in October 2023. The De Soto, Kansas laboratory passed NYS CLEP inspection in May 2019 and still pending new audit assignment. +23 +Regulatory framework for medical devices in the United States and Internationally +Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, which are defined to include, among other things, IVDs. The FDA regulates the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. It is possible that one of our current, or future, tests will be subject to FDA authority and oversight as either an IVD or a CDx pursuant to the FDA’s authority to regulate medical devices under the FDCA. +Medical devices are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +product design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export +Many countries in which we may offer any of our diagnostic tests in the future have anti-kickback regulations prohibiting providers from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable under any national health care program. In situations involving physicians employed by state-funded institutions or national health care agencies, violation of the local anti-kickback law may also constitute a violation of the Foreign Corrupt Practices Act of 1997 (FCPA). +The FCPA prohibits any United States individual, business entity or employee of a United States business entity to offer or provide, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether or not such conduct violates local laws. In addition, it is illegal for a company that reports to the Securities and Exchange Commission (SEC) to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls. We will also be required to maintain accurate information and control over sales and distributors’ activities that may fall within the purview of the FCPA, its books and records provisions and its anti-bribery provisions. +The standard of intent and knowledge in anti-bribery cases is minimal. Intent and knowledge are usually inferred from that fact that bribery took place. The accounting provisions do not require intent. Violations of the FCPA’s anti-bribery provisions for corporations and other business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Other countries, including the United Kingdom and other OECD Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United Kingdom Anti-Bribery Act. +When marketing our diagnostic tests outside of the United States, we may be subject to foreign regulatory requirements governing human clinical testing, prohibitions on the import of tissue necessary for us to perform our diagnostic tests or restrictions on the export of tissue imposed by countries outside of the United States or the import of tissue into the United States, and marketing approval. These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required. +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the European Economic Area (EEA), a medical device must meet the Medical Devices Directive’s (MDD)/In Vitro Medical Devices Directive’s (IVDD) Essential Requirements or, applicable on May 26, 2021, the Medical Devices Regulation’s (MDR) / applicable on May 26, 2022, In Vitro Medical Devices Regulation’s (IVDR) General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are +24 +reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a clinical evaluation report (CER) the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia , of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia , that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. Initially, the government stated the CE mark will be accepted in the UK until July 1, 2023. However, on July 1, 2023, the government updated their guidance for regulating medical devices stating their intention to extend recognition and acceptance of the CE marking for placing most goods on the market in Great Britain, indefinitely, if the device was placed on the EU market before January 1, 2021. +Device classification +Under the FDCA, medical devices are classified into one of three classes: Class I, Class II or Class III, depending on the degree of risk to patients that is associated with each medical device and the amount of oversight needed to provide reasonable assurances with respect to safety and effectiveness of the medical device. +On January 31, 2024, the FDA’s Center for Devices and Radiological Health (CDRH) announced that the Center intends to initiate the reclassification process for most IVD tests that are currently Class III (high risk) into Class II (moderate risk). The majority of these tests are infectious disease and companion diagnostic IVDs. Reclassification would allow manufacturers of certain types of tests to seek marketing clearance through the less burdensome premarket notification (510(k)) pathway rather than the premarket approval pathway, the most stringent type of FDA medical device review. +Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to a set of FDA regulations, referred to as the General Controls for Medical Devices, which require compliance with the applicable portions of the FDA’s QSR, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements. +Class II devices are subject to the General Controls as well as any special controls deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, patient registries, FDA guidance documents and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process, although some Class II devices are exempt from the 510(k) requirements. +Class III devices include devices deemed by the FDA to pose the greatest risk: such as life-supporting or life-sustaining devices, implantable devices, or those deemed novel and not substantially equivalent to a predicate device following the 510(k) process. CDx tests are regularly considered Class III devices. +Premarket submission process +Unless a statutory or regulatory exemption or enforcement discretion policy applies, before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, the manufacturer must obtain the FDA’s: (1) permission for commercial distribution under section 510(k) of the FDCA (510(k) clearance); or (2) approval of a Premarket Approval (PMA); or (3) de novo classification and authorization. These processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees. +Under the 510(k)-clearance process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and therefore a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise +25 +different questions of safety or effectiveness than the predicate device. Premarket notifications typically include bench, analytical, and preclinical data. Clinical data is sometimes required to support substantial equivalence. If a manufacturer obtains a 510(k) clearance for its device and then makes a modification that could significantly affect the device’s safety or effectiveness or constitutes a major change or modification in the intended use of the device, a new clearance, authorization or approval may be required. +By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous, costly, and time-consuming PMA approval process or seek reclassification of the device through the De Novo process. +If a predicate device is not available, the FDA allows the submission of a direct De Novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. A De Novo request includes a description of the device, a discussion of the general controls and any specific controls recommended to provide reasonable assurance of the safety and effectiveness of the device, a description of the probable benefits of the device when compared to the probable risks when the device is used as intended, non-clinical data including bench performance and animal testing, technical information about the device, and clinical data (if applicable). FDA’s goal is to review a De Novo request within 150 review days after receiving the petition. As with a 510(k) submission or PMA, the length of the review can be prolonged if the FDA requests additional information from the applicant. +To obtain a PMA, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling, and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use. +Once filed as a PMA, the FDA has 180 days to review the filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. +Prior to approval of a PMA, the FDA may conduct inspections of any clinical trial data and clinical trial sites, as well as inspections of any manufacturing facility and processes. The FDA can delay, limit or deny approval of a PMA application for many reasons, including (1) the device may not be shown safe or effective to the FDA’s satisfaction; (2) the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval; (3) the manufacturing process or facilities may not meet applicable requirements; and (4) changes in FDA approval policies or adoption of new regulations may require additional data. +If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when data is available. The PMA process can be expensive, uncertain and lengthy. A number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing. New PMA applications or PMA supplements are required for any modifications to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, materials or design of a device that has been approved through the PMA process. +As a condition of PMA application approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer-term safety and effectiveness data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. +The 510(k), De Novo or PMA processes can be expensive, lengthy and unpredictable. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k)-clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be +26 +approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device. +Companion Diagnostics and the Premarket Process +We believe that one of our future product candidates may include a companion diagnostic or complementary diagnostic (collectively CDx). CDx’s can identify patients who are most likely to benefit from a particular therapeutic product, identify patients likely to be at increased risk for serious side effects as a result of treatment with a particular therapeutic product, or monitor response to treatment with a particular therapeutic product for the purpose of adjusting treatment to achieve improved safety or effectiveness. The use of the CDx will be stipulated in the labeling of both the CDx and the therapeutic product. The FDA may require an application for the CDx to be separate from the drug approval process, and this could potentially delay the approval of any new drug application or the CDx, or complicate the review process. CDx’s are generally regulated as Class III medical devices by the FDA and are therefore most often subject to the PMA approval process. +The FDA issued guidance in July 2016 for the co-development of CDx tests with a therapeutic product and issued another draft guidance in December 2018 specific to oncology CDx tests. The FDA finalized this draft guidance in April 2020 in “Developing and Labeling In vitro Companion Diagnostic Devices for a Specific Group of Oncology Therapeutic Products.” The guidance is meant to guide the development of CDx products, which are defined as IVDs that provide information that is essential for the safe and effective use of the therapeutic product. A CDx is often developed and approved or cleared contemporaneously with the therapeutic, and the use of the CDx is stipulated in the labeling of both the CDx and the corresponding therapeutic product. While it supports contemporaneous marketing authorizations, if there are any deficiencies in the submissions, the FDA may place a PMA review of a CDx on hold or request additional testing, which could potentially delay the approval of the corresponding new drug application or the marketing authorization of the CDx, or otherwise complicate the review process. Some oncology CDx tests can be developed in a way that results in labeling for a specific group of oncology therapeutic products, rather than a single therapeutic product. +Post-Market FDA Regulation +Even if regulatory clearance, authorization or approval of a device is granted, the FDA may impose limitations on the uses and indications for which the device may be labeled and promoted, and the device remains subject to significant regulatory requirements. Medical devices may be marketed only for the uses and indications for which they are cleared, authorized or approved. After a device, including a device exempt from FDA premarket review, is placed on the market, numerous post-market regulatory requirements apply, and the FDA has broad authority to enforce these requirements. Medical device manufacturers are subject to unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of any suppliers. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions such as: warning letters, fines, injunctions, consent decrees and civil penalties; unanticipated expenditures, including requirements to repair, replace, and/or refund the cost of the devices, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; the FDA’s refusal of our requests for 510(k) clearance, De Novo classification, or PMA of new products, new intended uses or modifications to existing products; the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries; and withdrawing 510(k) clearance or PMAs that have already been granted and criminal prosecution. In the event that a supplier fails to maintain compliance with the FDA’s or our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. +Federal and State Fraud and Abuse Laws +We are subject to federal fraud and abuse laws such as the federal Anti-Kickback Statute (AKS), the federal prohibition against physician self-referral (Stark Law), the Eliminating Kickbacks in Recovery Act (EKRA), and the federal False Claims Act (FCA). We are also subject to similar state and foreign fraud and abuse laws. +The AKS (Social Security Act § 1128B(b)) prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing or ordering, any item or service that may be reimbursable, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. There are a number of statutory exceptions and regulatory safe harbors to the AKS that provide protection from AKS liability to arrangements that fully satisfy the applicable requirements. +EKRA (18 USC § 220) prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program. The term “health care benefit program” is broadly defined such that EKRA extends to referrals reimbursed by both governmental and commercial third-party payers. EKRA includes a number of statutory exceptions that provide protection from EKRA liability if the applicable requirements are met. +27 +The Stark Law (Social Security Act § 1877) generally prohibits, among other things, clinical laboratories and other so-called “designated health services” entities from billing Medicare for any designated health services when the physician ordering the service, or any member of such physician’s immediate family, has a financial relationship, such as a direct or indirect investment interest in or compensation arrangement with the billing entity, unless the arrangement meets an exception to the prohibition. The Stark Law also prohibits physicians from making such referrals to a designated health services entity. There are also similar state laws that apply where Medicaid and/or commercial payers are billed. +The FCA (31 USC § 3729) imposes penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment to the government that are false or fraudulent, or knowingly making, using or causing to be made or used a false record or statement material to such a false or fraudulent claim, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. This statute also permits a private individual acting as a “qui tam” whistleblower to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $13,508 to $27,018 per false claim or statement for penalties assessed after January 30, 2023, with respect to violations occurring after November 2, 2015. +Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payer knows or should know is likely to influence the beneficiary to order or receive a reimbursable item or service from a particular provider, practitioner, or supplier, and contracting with an individual or entity that the person knows or should know is excluded from participation in a federal health care program. In addition, federal criminal statutes created by the Health Insurance Portability and Accountability Act (HIPAA) prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services. +In addition to these federal laws, there are often similar state anti-kickback and false claims laws that typically apply to arrangements involving reimbursement by a state-funded Medicaid or other health care program. Often, these laws closely follow the language of their federal law counterparts, although they do not always have the same exceptions or safe harbors. In some states, these anti-kickback laws apply with respect to all payers, including commercial payers. +A number of states have enacted laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and other healthcare providers, and, in some states, marketing expenditures. In addition, some state statutes impose outright bans on certain manufacturer gifts to physicians or other health care professionals. Some of these laws, referred to as “aggregate spend” or “gift” laws, carry substantial fines if they are violated. +Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs and extensive annual trainings for all of our employees and contractors. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from participation in government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Anti-Corruption +The FCPA and similar international bribery laws make it unlawful for persons or entities to make payments to foreign government officials to assist in obtaining and maintaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any offer, payment, promise to pay, or authorizing the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to do or omit to do an act in violation of his or her duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business, to any person. In addition to the anti-bribery provisions of the FCPA, the statute also contains accounting requirements designed to operate in tandem with the anti-bribery provisions. Covered companies are required to make and keep books and records that accurately and fairly reflect the transactions of the company and devise and maintain an adequate system of internal accounting controls. With our international operations through our third-party partnerships, we could incur significant fines and penalties, as well as criminal liability, if we fail to comply with either the anti-bribery or accounting requirements of the FCPA, or similar international bribery laws. Even an unsuccessful challenge of our compliance with these laws could cause us to incur adverse publicity and significant legal and related costs. We successfully passed our latest FCPA compliance review in 2023 with no findings. +28 +Privacy and Data Protection Laws +Numerous federal and state laws and regulations, including HIPAA, as amended by the Health Information Technology for Economic and Clinical Health (HITECH) Act, govern the collection, dissemination, security, use and confidentiality of protected health information (PHI) and personal information. In the course of performing our business we obtain personal information, including PHI. Laws and regulations relating to privacy, data protection, and consumer protection are evolving and, in some cases, particularly with regard to newer laws, may be subject to potentially differing interpretations. Under HIPAA and HITECH, the HHS issues regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of PHI, used or disclosed by CEs and their authorized business associates (BAs). Because we are a health care provider that electronically transmits health care information, and we also provide certain services to CEs and receive PHI from them, we are at times either a CE or a BA, as defined by HIPAA. Our subcontractors that create, receive, maintain, transmit or otherwise process PHI on our behalf are HIPAA BAs and must also comply with HIPAA, as applicable. +HIPAA and HITECH include the privacy and security rules, breach notification requirements and electronic transaction standards. The privacy rule governs the use and disclosure of PHI, generally prohibits the use or disclosure of PHI except as permitted under the rule, and mandates certain safeguards to protect the privacy of PHI. The privacy rule also sets forth individual rights, such as the right to access or amend certain records containing such individual’s PHI, or to request restrictions on the use or disclosure of such individual’s PHI. The security rule requires CEs and BAs to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI (also referred to as ePHI) by implementing administrative, physical and technical safeguards. Under HIPAA’s breach notification rule, a CE must notify individuals, the Secretary of HHS, and in some circumstances, the media of certain breaches of unsecured PHI or ePHI, and similar breach notification provisions apply to certain BAs under the HITECH Act. +Penalties for failure to comply with a requirement of HIPAA and HITECH vary depending on the number and nature of the violations and any history of prior violations, but can be significant and include civil monetary or criminal penalties. HIPAA is enforced by the Department of Health and Human Services, Office for Civil Rights, and HIPAA also authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in improper use, access to or disclosure of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA CEs, such as us, and their BAs for compliance with the HIPAA privacy and security standards and breach notification rules. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator. +In addition, we may be subject to state privacy, cybersecurity, and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information Act, which, in addition to HIPAA and HITECH, sets forth standards with which all California health care providers must abide. Colorado has enacted the Colorado Privacy Act, and Virginia has enacted the Consumer Data Protection Act, both of which also have standards that must be complied with that supplement Federal data protection requirements. State laws may be more stringent, broader in scope or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other in regards to personal information treatment, which may complicate compliance efforts. For instance, the California Consumer Privacy Act (CCPA) became effective on January 1, 2020 and was amended by the passage of the California Privacy Rights Act (CPRA) in November of 2020, which amendments came into force on January 1, 2023. The CCPA, among other things, gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA has been amended from time to time, and it remains unclear what, if any, further modifications will be made to this legislation or how it will be interpreted. Although there are certain exemptions for PHI and clinical trial data, the CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future and the CCPA may increase our compliance costs and potential liability. Additionally, the CPRA imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It also creates a new California data protection agency – the California Privacy Protection Agency – specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. Similar laws have been proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that could continue to make compliance challenging and costly. +Additionally, the Federal Trade Commission (FTC) and state attorneys general enforce consumer protection laws that prohibit unfair and deceptive acts and practices, including Section 5 of the FTC Act, which creates standards for the collection, use, dissemination and security of health-related and other personal information. Claims of unfair or deceptive trade practices regarding privacy and security can lead to significant liabilities and consequences, including regulatory investigations, penalties, fines and orders as well as civil claims, which could impact our data practices and operations or cause reputational damage. +29 +We may also be subject to laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may add additional compliance burden and complexity. For example, in the EEA, the collection and use of personal data is governed by the European Union's General Data Protection Regulation (GDPR). In the United Kingdom, the GDPR has been adopted in substantially the same form, however the UK may potentially make revisions in the coming years. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze, store, transfer and otherwise process personal data. European and United Kingdom data protection authorities may interpret the GDPR and national laws differently and impose additional requirements, which adds to the complexity of processing personal data in or from the EEA or United Kingdom. Guidance on implementation and compliance practices is often updated or otherwise revised. GDPR applies extra-territorially under certain circumstances and imposes stringent requirements on controllers and processors of personal data, including, for example, requirements to ensure a legal bases to process personal information, provide robust disclosures to individuals, facilitate data subject rights, provide data security breach notifications within 72 hours after discovering a breach in certain circumstances, limit retention of personal information and apply enhanced protections to health data and other categories of sensitive personal information. The GDPR also has requirements around international transfers of personal data. Requirements around transfers to the United States and other jurisdictions have increased since a July 2020 decision by the Court of Justice of the European Union invalidated the Privacy Shield as a basis to transfer personal data from Europe to the United States, and added requirements for reliance on Standard Contractual Clauses. Regulatory guidance on requirements for international transfers, and other GDPR compliance matters, continues to evolve; for example, in July 2023, the European Commission completed adoption of a new adequacy decision for data flows to the United States. However, it is widely expected that the new adequacy decision will itself face scrutiny from the Court of Justice, underscoring that GDPR compliance is an ongoing endeavor. Failure to comply with the requirements of the GDPR may result in fines of up to €20 million or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. To comply with the GDPR and other applicable international data protection laws and regulations, we may be required to put in place additional mechanisms ensuring compliance, which may result in other substantial expenditures. +Cybersecurity +Our business relies on secure and continuous processing of information and the availability of our IT networks and IT resources, as well as critical IT vendors that support our technology, research and other data processing operations. While we take steps to protect our systems and data, security incidents, data breaches, computer malware and computer hacking attacks have become more prevalent across industries, including the life sciences sector, and may occur on our systems or those of our third-party service providers. Unauthorized persons may in the future be able to exploit weaknesses in the security systems of our (or our third-party service providers) IT networks and gain access to PHI and other personal information, sensitive trade secrets, or other proprietary information. Any wrongful use or disclosure of PHI, other personal information, trade secrets or other proprietary information by us or our third-party service providers could subject us to regulatory fines or penalties, third-party claims or otherwise could adversely affect our business and results of operations. Although HIPAA and the regulations promulgated thereunder do not provide for a private right of action, failures to adequately protect PHI or our IT systems could be viewed as violations of the HIPAA security rule or violations of other applicable information security laws, regulations, contractual obligations or industry standards, and could further result in costly data breach notification obligations that negatively impact our reputation. +Moreover, data security incidents or data breaches, as well as attacks on our IT systems, could result in operational disruptions or data loss or corruption that could adversely impact our business and operations, resulting in substantial investment of resources to investigate, recover and remediate and subject us to heightened regulatory scrutiny. See Item 1C. "Cybersecurity" for additional information on our cybersecurity practices. +Healthcare Reform +In March 2010, the Patient Protection and Affordable Care Act (ACA) was enacted in the United States. The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private insurers. For example, the ACA requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices. The medical device tax was permanently repealed at the end of 2019. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters, and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict. +Beginning in 2017, the Trump administration sought to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. The Trump administration issued three executive orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. For example, on December 20, 2019, President Trump signed appropriations legislation for fiscal year 2020 that repealed certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high-cost employer-sponsored insurance plans, for tax years beginning after December 31, 2019; the annual fee imposed on certain health insurance providers based on market share, for calendar years beginning December 31, 2020; and the medical device excise tax on non-exempt medical devices, for sales after December 31, 2019. While Congress did not pass comprehensive legislation that would repeal all or part of the ACA, two bills affecting the implementation of certain taxes under the +30 +ACA have been signed into law. Specifically, the Tax Cuts and Jobs Act of 2017 (TCJA), among other things, included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment, or penalty, imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Beginning in 2021, the Biden administration has signaled its intent to pursue policies strengthening the ACA. +Other legislative changes have been proposed and adopted in the United States since the ACA was enacted to reduce healthcare expenditures. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions of Medicare payments to providers of up to 2% per fiscal year that started in 2013 and, due to subsequent statutory amendments, will remain in effect through 2030 unless additional Congressional action is taken. In 2020, the CARES Act temporarily suspended the 2% cut in Medicare payments from May 1, 2020 through December 31, 2020, and it extended the sequestration reductions through fiscal year 2030 to offset the cost of such temporary suspension. The Consolidated Appropriations Act of 2021 further extended the temporary suspension through March 31, 2021. On April 14, 2021, Congress enacted legislation that further extended the suspension through December 31, 2021. On December 10, 2021, further legislation was enacted to extend the suspension through March 31, 2022, after which a 1.0% sequestration applied for Medicare payments made between April 1, 2022 and June 30, 2022. +The American Taxpayer Relief Act of 2012 made other changes, including reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. If federal spending is reduced, anticipated budgetary shortfalls may also impact the ability of relevant agencies, such as the FDA or the National Institutes of Health to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve R&D, manufacturing, and marketing activities, which may delay our ability to develop, market and sell any products we may develop. Additionally, the Biden administration has already indicated a shift in direction from Trump administration policies by issuing orders and other documents rolling back regulations and Executive Orders from the Trump administration, and as noted, indicating that it will pursue policies strengthening the ACA. +In December 2020, in its enactment of the Consolidated Appropriations Act, Congress enacted the No Surprises Act. This law, which took effect January 1, 2022, bars out-of-network providers from billing patients in excess of the in-network cost sharing for services furnished with respect to a visit at certain in-network health care facilities. The law establishes an independent dispute resolution process between the provider and the payer to determine the appropriate payment rate to the provider. As written, the No Surprises Act may apply to laboratory tests furnished by an independent laboratory with respect to a hospital visit. The law establishes a notice and consent exception that generally does not apply to laboratory tests, although it allows HHS to apply this exception to certain advanced tests. Regulations and subregulatory guidance were issued by HHS, the Department of Labor, and the Department of the Treasury in 2021 and 2022, with the first set of regulations was issued as an Interim Final Rule on July 1, 2021, a second set issued as an Interim Final Rule on September 30, 2021, and a third set issued as a Final Rule on August 19, 2022. These regulations and subregulatory guidance have provided additional information on the applicability of the No Surprises Act, the rules governing the independent dispute resolution process, and specific provider requirements (including the obligation to furnish a “good faith estimates” of “expected charges” to uninsured or self-pay patients), as well as areas of temporary enforcement discretion. +Environmental, Health and Safety Regulations +We are subject to various federal, state, local, and foreign environmental, health and safety laws and regulations and permitting and licensing requirements. Such laws include those governing laboratory practices, the generation, storage, use, manufacture, handling, transportation, treatment, remediation, release and disposal of, and exposure to potential bloodborne pathogens, hazardous materials and associated wastes. Our operations involve the generation, use, storage and disposal of hazardous materials as well as regulated medical waste, and the risk of injury, contamination or non-compliance with environmental, health and safety laws and regulations or permitting or licensing requirements cannot be eliminated. Compliance with environmental laws and regulations has not had a material effect on our capital expenditures, earning or competitive position. The Boulder, Colorado clinical laboratory passed an on-site inspection from the CDC in June 2021 due to COVID testing, which the Company no longer provides commercially. To date, there has not been a for cause OSHA or EPA inspection. +Corporate Information +We were incorporated in Delaware in 2005 as Elston Technologies, Inc. Throughout 2023, our principal executive offices were located at 2970 Wilderness Place, Suite 100, Boulder, Colorado 80301. Effective December 11, 2023, we relocated our principal executive offices to 919 West Dillon Rd, Louisville, CO 80027, and our telephone number is (303) 417-0500. On June 20, 2006, we changed our name to Biodesix, Inc. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant +31 +to Section 404 of the Sarbanes-Oxley Act of 2002, certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.24 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) until December 31, 2025 (the last day of the fiscal year ending after the fifth anniversary of the completion of our initial public offering (IPO)). +Additionally, we are a “smaller reporting company ” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +For certain risks related to our status as an emerging growth company, see “Risk Factors—General Risk Factors—We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.” +Human Capital Resources +Our culture is underpinned by our cultural beliefs including an unwavering commitment to inclusion and diversity. We are committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent offering opportunities for our team members to grow and develop in their careers, supported by a competitive suite of benefits and health and wellness programs. We regularly engage our team members in monthly all-hands meetings to align and focus on the current state of affairs of our business, our partnerships, new products, clinical trials, and other pertinent information about our business. We engage our team members in programs such as peer recognition and recruitment that focuses on recognizing outstanding individual contributions to company performance, cultural fit of new team members and acknowledging the diversity of our team to ensure our team members feel valued and can do their best work. We have a national annual community service initiative, “Biodesix Gives Back” that allows each team member to invest ten hours of paid community service to organizations of their choosing. +As of December 31, 2023, we had approximately 217 full-time and part-time employees, all of whom are located in the United States. The majority of our team member base is located in proximity to our corporate office and testing facilities located in Louisville, Colorado and our laboratory in De Soto, Kansas. +Diversity, Equity and Inclusion +We believe that a diverse employee population, including cultural background, gender, ethnicity, sexual orientation and lived experiences, is critical to our success. Our employees are encouraged to leverage their personal strengths and experiences to continually innovate and contribute to the development of new ideas and process improvements that drive better experiences for our partners. +Employee Engagement +Our company culture emphasizes the satisfaction and well-being of our team members and a diverse, engaged workforce. We solicit the opinion and views of our team members through surveys and peer focus groups. We have an established and valued Peer Recognition Culture. Teammates recognize other teammates publicly for their support and contributions fostering collaboration, engagement and retention. We regularly review feedback we receive on our current cultural beliefs to determine if any modifications are needed. During 2021, we updated our cultural beliefs to align with our core values that reflect our current focus on Teamwork, Innovation, Making an Impact and Excel. Additionally, the Company annually celebrates our top sales performers through our President’s Club and other top company performers as nominated by fellow team members through our four (4) Performance Excellence Awards that recognize +32 +creativity and innovation, an entrepreneurial spirit, a strategic impact on the success of the Company and lastly, embodying the Biodesix cultural beliefs and goes “above and beyond” daily. +Training and Development +We invest in our team members' career growth and provide team members with a wide range of development opportunities, including face-to-face, virtual, and self-directed learning, mentoring, coaching, and external development. +Health, Safety and Wellness +The physical health, financial stability, life balance and mental health of each of our team members is vital to our success. We sponsor several cancer awareness activities in our local communities to bring engagement and awareness of health, safety and wellness to positively impact lives. We provide an Employee Assistance Program to enhance physical, financial, and mental well-being for all our team members. +Pay Equity +The main objective of our compensation program is to provide a compensation package that will attract, retain, motivate, and reward superior team members who operate in a highly competitive and technologically challenging environment. We emphasize overall Company performance and provide equity incentives for all team members to align their financial interests with the interests of shareholders. In addition, we offer an employee stock purchase plan to all employees in which participants are eligible to purchase shares at a discount to market. We think like customers and act like owners. +Biodesix seeks fairness in total compensation. We benchmark with external comparisons, internal comparisons and look at the relationship between team member roles within the organization. We also review our compensation practices, both in terms of our overall workforce and individual team members, to ensure our pay is fair and equitable. We currently have no pay disparities based on gender, race, or ethnicity. +Available Information +We file with, or furnish to, the SEC reports including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available free of charge on our corporate website ( www.biodesix.com ) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov . The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this Annual Report on Form 10-K. +Item 1A. Risk Factors. +Risk Factors Summary +The following is a summary of the principal risks that could adversely affect our business, operations and financial results. This summary does not address all of the risk that we face and should be read in conjunction with the entire Risk Factors section below beginning at “Risks Related to Our Business and Industry” within this Item 1A. "Risk Factors." +• +We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we achieve profitability, we may not be able to sustain it; +• +Our audited financial statements include a statement that there is a substantial doubt about our ability to continue as a going concern and a continuation of negative financial trends could result in our inability to continue as a going concern; +• +The commercial success of our current and future diagnostic tests and services and our revenue growth depends upon attaining significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies; +• +We may encounter difficulties in managing our growth, which could disrupt our operations; +• +If we fail to retain sales and marketing personnel and, as we grow, fail to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests in a cost-effective manner, we may not be able to generate revenue growth; +• +If we cannot maintain our current relationships, or enter into new relationships, with biopharmaceutical companies, our revenue prospects could be reduced; +• +Our commercial success and revenue growth are highly dependent on the demand for, and increased adoption of, our diagnostic tests, which are subject to a number of risks and uncertainty; +• +We need to ensure strong product performance and reliability to maintain and grow our business; +33 +• +We depend upon third-party suppliers, including single source suppliers, making us vulnerable to supply problems and price fluctuations; +• +Natural or man-made disasters or other similar events may significantly disrupt our business, and negatively impact our business, financial condition and results of operations; +• +Our industry is subject to rapid change, which could make our solutions and the diagnostic tests we develop and services we offer obsolete. If we are unable to continue to innovate and improve our diagnostic tests and services we offer, we could lose customers or market share; +• +Any failure to offer high-quality support for our diagnostic tests and services may adversely affect our relationships with providers and negatively impact our reputation among patients and providers, which may adversely affect our business, financial condition and results of operations; +• +We may face additional costs, loss of revenue, significant liabilities, harm to our brand, decreased use of our products or services and business disruption if there are any security or data privacy breaches or other unauthorized or improper access. +34 +Risk Factors +Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and cash flows. All of the risks described below should be carefully considered together with the other information contained and incorporated by reference in this report. +Risks Related to our Business and Industry +We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we achieve profitability, we may not be able to sustain it. +We have incurred losses since our inception and expect to continue to incur losses for the foreseeable future. We reported net losses of $52.1 million and $65.4 million the years ended December 31, 2023 and 2022, respectively. As a result of these losses, as of December 31, 2023, we had an accumulated deficit of approximately $419.6 million. +We expect that our sales and marketing, research and development, regulatory and other expenses will continue to increase as we expand our marketing efforts for our diagnostic tests and services, expand existing relationships with our customers, obtain regulatory clearances or approvals or certifications for future enhancements to our existing diagnostic tests and services and conduct further clinical trials. In addition, we expect our general and administrative expenses to increase due to the additional costs associated with scaling our business operations and testing capacity as well as being a public company, including due to legal, accounting, insurance, exchange listing and compliance, investor relations and other expenses. As a result, we expect to continue to incur operating losses and may never achieve profitability. We will need to generate significant additional revenue in order to achieve and sustain profitability. Even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. If we do not achieve or sustain profitability, it will be more difficult for us to finance our business and accomplish our strategic objectives, either of which would have a material adverse effect on our business, financial condition and results of operations. +We are an emerging growth company and, as such, we have incurred significant losses since inception and have yet to generate positive cash flows from operations. Our ability to meet our obligations as they come due may be impacted by our ability to remain compliant with financial covenants in our Perceptive Term Loan Facility and may result in our inability to continue as a going concern. Any such impacts could have a material and adverse effect on the price of our common stock. +Our financial statements as of and for the period ended December 31, 2023 were prepared on the assumption that we would continue as a going concern. These financial statements did not include any adjustments that might result from the outcome of this uncertainty. As of December 31, 2023, we maintained cash and cash equivalents of $26.3 million and we have $40.0 million in principal balance outstanding on our Perceptive Term Loan (as defined below). We have incurred significant losses since inception and, as a result, we have funded our operations to date primarily through the sale of common stock in both underwritten public offerings and private placements, the issuance of notes payable, and from our two primary revenue sources: (i) diagnostic testing, which includes lung diagnostic testing and, prior to May 11, 2023, COVID-19 testing, and (ii) providing biopharmaceutical companies with development and testing services and licensing our technology. Our ability to meet our obligations as they come due may be impacted by our ability to remain compliant with financial covenants in the Perceptive Term Loan Facility or to obtain waivers or amendments that impact the related covenants. +Based on our current operating plan, unless we continue to raise additional capital (debt or equity), we expect that we will be unable to maintain our financial covenants under our existing loan agreement during the next twelve months, which could result in an Event of Default (as defined in the Perceptive Term Loan Facility), causing an acceleration and repayment of the outstanding balances. As a result, our management has determined that there is a substantial doubt about our ability to continue as a going concern over the next twelve months from the date these financial statements were issued. Although we have taken steps to improve our liquidity, including through raising debt and equity capital, and have also undertaken several proactive measures including, among other things, the reduction of planned capital expenditures and certain operating expenses, we do not expect that these actions alone will be sufficient to maintain our financial covenants. In addition, if we are not able to improve our operating results, we may need to limit our operations substantially. We will need to raise additional capital in the form of debt or equity to increase our liquidity but there is no assurance that we will be able to secure any such funding in a sufficient amount or on terms that are acceptable to us. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. Furthermore, the reaction of investors to the inclusion of a going concern statement in this report, and our potential inability to continue as a going concern, could materially adversely affect the price of our common stock. +The commercial success of our current and future diagnostic tests and services and our revenue growth depends upon attaining significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies. +Our commercial success depends, in part, on the acceptance of our diagnostic tests and services as being safe and relatively simple for medical personnel to learn and use, clinically flexible, operationally versatile and, with respect to providers and payers, cost effective. +35 +We cannot predict how quickly, if at all, payers, providers, clinics and patients will accept future diagnostic tests and services or, if accepted, how frequently they will be used. These constituents must believe that our diagnostic tests offer benefits over other available alternatives. +The degree of market acceptance of our current and future diagnostic tests and services depends on a number of factors, including: +• +whether there is adequate utilization of our tests by clinicians, biopharmaceutical companies and other target groups based on the potential and perceived advantages of our diagnostic tests over those of our competitors; +• +the convenience and ease of use of our diagnostic tests relative to those currently on the market; +• +the effectiveness of our sales and marketing efforts; +• +our ability to provide incremental data that show the clinical benefits and cost effectiveness, and operational benefits, of our diagnostic tests; +• +the coverage and reimbursement acceptance of our products and services; +• +pricing pressure, including from group purchasing organizations (GPOs), seeking to obtain discounts on our diagnostic tests based on the collective bargaining power of the GPO members; +• +negative publicity regarding our or our competitors’ diagnostic tests resulting from defects or errors; +• +the accuracy of our tests relative to those of our competitors; +• +product labeling or product insert requirements by the FDA or other regulatory authorities or conformity assessment bodies; and +• +limitations or warnings contained in the labeling cleared or approved by the FDA or other regulatory authorities or conformity assessment bodies. +Additionally, even if our diagnostic tests achieve widespread market acceptance, they may not maintain that market acceptance over time if competing diagnostic tests or technologies, which are more cost effective or are received more favorably, are introduced. Failure to achieve or maintain market acceptance and/or market share would limit our ability to generate revenue and would have a material adverse effect on our business, financial condition and results of operations. +We may encounter difficulties in managing our growth, which could disrupt our operations. +As of December 31, 2023, we had approximately 217 full and part-time employees. Over the next several years, we expect to continue to significantly increase the number of our employees and the scope of our operations, particularly in the areas of sales, marketing and reimbursement, product development, regulatory affairs and other functional areas, including finance, accounting, quality and legal. Additionally, we expect to expand our testing capacity as we commercialize additional diagnostic tests. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational quality and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources, we may not be able to manage the expansion of our operations or recruit and train additional qualified personnel in an effective manner. Any inability to manage growth could delay the execution of our business plans or disrupt our operations and have a material and adverse effect on our business, financial condition, and results of operations. +Since our inception, we have experienced multiple cycles of growth and anticipate further growth in our business operations. This future growth could put strain on our organizational, administrative and operational infrastructure, including laboratory operations, quality control, customer service and sales organization management. We expect to continue to increase headcount and to hire more specialized personnel in the future as we grow our business. We will need to continue to hire, train and manage additional qualified scientists, laboratory personnel, client and account services personnel, and sales and marketing staff and improve and maintain our technology to properly manage our growth. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees or if we are not successful in retaining our existing employees, our business may be harmed. +We may not be able to maintain the quality or expected turnaround times of our diagnostic tests and services, or satisfy customer demand as it grows. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures. The time and resources required to implement these new systems and procedures is uncertain, and failure to complete this in a timely and efficient manner could materially adversely affect our operations. Additionally, if we are required to reduce expenses substantially to sustain our operations, we may not have the human resources to maintain growth in our business operations. +36 +If we fail to retain sales and marketing personnel and, as we grow, fail to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests in a cost-effective manner, we may not be able to generate revenue growth. +We currently rely on our direct sales force to sell our diagnostic tests in the United States, and any failure to maintain and grow our direct sales force will negatively affect our business, financial condition and results of operations. The members of our direct sales force are highly trained and possess substantial technical expertise, which we believe is critical in increasing adoption of our diagnostic tests. The members of our United States sales force are at-will employees. The loss of these personnel to competitors, or otherwise, will negatively affect our business, financial condition and results of operations. If we are unable to retain our direct sales force personnel or replace them with individuals of equivalent technical expertise and qualifications, or if we are unable to successfully instill such technical expertise in replacement personnel, it may negatively affect our business, financial condition and results of operations. +In order to generate future growth, we plan to continue to expand and leverage our sales and marketing infrastructure. Identifying and recruiting qualified sales and marketing personnel and training them on how to promote our diagnostic tests, on applicable federal and state laws and regulations and on our internal policies and procedures requires significant time, expense and attention. It often takes several months or more before a sales representative is fully trained and productive. Our sales force may subject us to higher fixed costs than those of companies with competing techniques or diagnostic tests that utilize independent third parties, which could place us at a competitive disadvantage. It will negatively affect our business, financial condition and results of operations if our efforts to expand and train our sales force do not generate a corresponding increase in revenue, and our higher fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand for our diagnostic tests. Any failure to hire, develop and retain talented sales personnel, to achieve desired productivity levels in a reasonable period of time, or timely reduce fixed costs, could negatively affect our business, financial condition and results of operations. Our ability to increase our customer base and achieve broader market acceptance of our diagnostic tests will depend to a significant extent on our ability to expand our marketing efforts. We plan to dedicate significant resources to our marketing programs. It will negatively affect our business, financial condition and results of operations if our marketing efforts and expenditures do not generate a corresponding increase in revenue. In addition, we believe that developing and maintaining broad awareness of our diagnostic tests in a cost-effective manner is critical to achieving broad acceptance of our diagnostic tests. Promotion activities may not generate patient or physician awareness or increase revenue, and even if they do, any increase in revenue may not offset the costs and expenses we incur in building our brand. If we fail to successfully promote, maintain and protect our brand, we may fail to attract or retain the physician acceptance necessary to realize a sufficient return on our brand building efforts, or to achieve the level of brand awareness that is critical for broad use of our diagnostic tests, which in turn could have a material adverse effect on our business, financial condition and results of operations. +If we cannot maintain our current relationships, or enter into new relationships, with biopharmaceutical companies, our revenue prospects could be reduced. +We collaborate with biopharmaceutical companies to analyze patient samples for multiple applications primarily to support clinical trials, including patient identification, companion or complementary diagnostics and retrospective testing. The revenue attributable to our biopharmaceutical customers may also fluctuate in the future, which could have a material adverse effect on our financial condition and results of operations. In addition, the termination of these relationships could result in a temporary or permanent loss of revenue. +Our future success depends in part on our ability to maintain these relationships and to establish new relationships. Many factors have the potential to impact such collaborations, including the type of biomarker support required and our ability to deliver it and our biopharmaceutical customers’ satisfaction with our tests or services and other factors that may be beyond our control. Furthermore, our biopharmaceutical customers may decide to decrease or discontinue their use of our tests due to changes in research and product development plans, failures in their clinical trials, financial constraints, or utilization of internal testing resources or tests performed by other parties, or other circumstances outside of our control. In addition to reducing our revenue, the loss of one or more of these relationships may reduce our exposure to research and clinical trials that facilitate the collection and incorporation of new information into our biobank. +We engage in conversations with biopharmaceutical companies regarding potential commercial opportunities on an ongoing basis. There is no assurance that any of these conversations will result in a commercial agreement, or if an agreement is reached, that the resulting relationship will be successful or that clinical or research studies conducted as part of the engagement will produce successful outcomes. Speculation in the industry about our existing or potential relationships with biopharmaceutical companies can also be a catalyst for adverse speculation about us, our tests and our technology, which can adversely affect our reputation and our business. +Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide. +Our quarterly and annual revenue and operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. Our quarterly and annual operating results may fluctuate as a result of a variety of factors, many of which are outside +37 +our control and, as a result, may not fully reflect the underlying performance of our business. These fluctuations may occur due to a variety of factors, including, but not limited to: +• +the level of demand for our diagnostic tests, which may vary significantly; +• +the timing and cost of manufacturing our diagnostic tests, which may vary depending on the quantity of production and the terms of our agreements with third-party suppliers and manufacturers; +• +expenditures that we may incur to acquire, develop, or commercialize additional tests and technologies; +• +unanticipated pricing pressures; +• +the rate at which we grow our sales force and the speed at which newly hired salespeople become effective, and the cost and level of investment therein; +• +the degree of competition in our industry and any change in the competitive landscape of our industry, including consolidation among our competitors or future partners; +• +coverage and reimbursement policies with respect to lung cancer treatment equipment, and potential future diagnostic tests that compete with our diagnostic tests; +• +the timing and success or failure of clinical trials for our diagnostic tests or any enhancements to such tests we develop or competing diagnostic tests; +• +positive or negative coverage, or public perception, of our diagnostic tests or those of our competitors or broader industry trends; +• +the timing and cost of, and level of investment in, research, development, licenses, regulatory approval, conformity certification, commercialization activities, acquisitions and other strategic transactions, or other significant events relating to our diagnostic tests, which may change from time to time; +• +the timing and cost of obtaining regulatory approvals, conformity certifications or clearances for planned or future improvements or enhancements to our diagnostic tests; +• +changes in regulatory requirements or in the status of regulatory approvals or applications or conformity certifications; +• +pricing, discounts, and incentives for our diagnostic tests; +• +future accounting pronouncements or changes in our accounting policies; and +• +general market conditions. +The cumulative effects of these factors has resulted in large fluctuations and unpredictability in our quarterly and annual financial results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Further, our historical results are not necessarily indicative of results expected for any future period, and quarterly results are not necessarily indicative of the results to be expected for the full year or any other period, and accordingly should not be relied upon as indicative of future performance. +This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any guidance we may provide, or if the guidance we provide is below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any publicly stated guidance we may provide, and could in turn negatively impact our business, financial condition and results of operations. +We need to ensure strong product performance and reliability to maintain and grow our business . +We need to maintain and continuously improve the performance and reliability of our diagnostic tests, including the Nodify XL2 and Nodify CDT tests, and the GeneStrat and VeriStrat tests to achieve our profitability objectives. Poor product performance and reliability could lead to customer dissatisfaction, adversely affect our reputation and revenues, and increase our service and distribution costs and working capital requirements. Our diagnostic tests may contain errors or defects, and while we have made efforts to test them extensively, we cannot assure that our current diagnostic tests, or those developed in the future, will not have performance problems. Performance issues with our diagnostic tests will increase our costs in the near-term and accordingly adversely affect our business, financial condition and results of operations. +We depend upon third-party suppliers, including single source suppliers, making us vulnerable to supply problems and price fluctuations. +We rely on third-party suppliers to provide certain components of our diagnostic tests, including a select few (located in the United States, Europe and China), as critical single source providers of components. Bio-Rad, as described below, is the sole source supplier +38 +for our GeneStrat test. Oncimmune is also the sole source supplier for our Nodify CDT tests but there are known secondary suppliers for these materials. While we have initiated the second source qualification process for the majority of these critical components, we may not be successful in securing second sourcing for all of them at all or on a timely basis. +Many of our suppliers are not obligated to perform services or supply diagnostic testing materials for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. We depend on our suppliers and to provide us and our customers with materials in a timely manner that meet our and their quality, quantity and cost requirements. These suppliers may encounter problems during manufacturing for a variety of reasons, any of which could delay or impede their ability to meet our demand. These suppliers may cease producing the components we purchase from them or otherwise decide to cease doing business with us. Further, we maintain limited volumes of inventory from most of our suppliers. If we inaccurately forecast demand for finished goods, we may be unable to meet customer demand which could harm our competitive position and reputation. In addition, if we fail to effectively manage our relationships, we may be required to change suppliers. While we believe replacement suppliers exist for all materials, components and services necessary to manufacture our diagnostic tests, establishing additional or replacement suppliers for any of these materials, components or services, if required, could be time-consuming and expensive, may result in interruptions in our operations and product delivery, may affect the performance of our diagnostic tests or could require that we modify their processes. Even if we are able to find replacement suppliers, we will be required to verify that the new supplier maintains facilities, procedures and operations that comply with our quality expectations and applicable regulatory requirements. Any of these events could require that we obtain a new regulatory authority approval before we implement the change, which we may not obtain on a timely basis or at all. +If our third-party suppliers fail to deliver the required commercial quantities of materials on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality on a timely basis, the continued commercialization of our diagnostic tests, the supply of our diagnostic tests to customers and the development of any future diagnostic tests will be delayed, limited or prevented, which could have material adverse effect on our business, financial condition and results of operations. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test. Under the terms of this arrangement, we were granted non-exclusive rights to utilize the intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. We agreed to purchase all of the necessary supplies and reagents for such testing exclusively from Bio-Rad. For more information regarding this license and supply agreement and the permission granted to us by Bio-Rad with respect to such tests, please see “Business—Material Agreements—Agreements with Bio-Rad” previously filed with our Form S-1 on October 23, 2020 and “First Amendment to the Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated May 24, 2021” previously filed with our Form 10-Q on August 10, 2021. +This relationship may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. We cannot be certain that, following the realization of this relationship, we will achieve the revenue or specific net income that justifies our entry into it. Any termination of this relationship, or delays in entering into new strategic partnership agreements with Bio-Rad, could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +We may not be able to sufficiently reduce costs in the performance, manufacturing and production of our diagnostic tests to achieve sustainable gross margins. +We partner with suppliers in the development and production of supplies for our diagnostic tests. While we are undertaking a number of initiatives designed to reduce the cost of performing our diagnostic tests, including reducing the costs of supplies, there is no guarantee that we will be able to achieve planned cost reductions from our various cost savings initiatives. There may also be unforeseen occurrences that increase our costs, such as increased prices of the components of our diagnostic tests, changes to labor costs or less favorable terms with third-party suppliers. If we are unable to reduce our costs, or if cost reductions are less significant or less timely than projected, we will not be able to achieve sustainable gross margins, which would adversely affect our ability to invest in and grow our business and adversely impact our business, financial condition and results of operations. +A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide, including a future outbreak of the novel strain of coronavirus disease, COVID-19, and its variants could adversely affect our business. +If a pandemic, epidemic or outbreak of an infectious disease occurs in the United States or worldwide, our business may be adversely affected. For much of 2020 and 2021, COVID-19 spread throughout the United States and to most countries globally, creating significant uncertainty and economic disruption. Numerous U.S. state and local jurisdictions chose to impose “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. In March 2020, the Governor of Colorado, where our headquarters are located, issued “stay at home” orders limiting non-essential activities, travel and business operations. Disruptions or potential disruptions due to the orders and restrictions have included, and in the future may continue to include, the inability of our suppliers to manufacture components and parts and to deliver these to us on a timely basis, or at all; disruptions in our production schedule and ability to assemble diagnostic tests; inventory shortages or obsolescence; delays in actions +39 +of regulatory bodies; diversion of or limitations on employee resources that would otherwise be focused on the operations of our business; delays in growing or reductions in our sales organization, including through delays in hiring, lay-offs, furloughs or other losses of sales representatives; business adjustments or disruptions of certain third parties, including suppliers, medical institutions and clinical investigators with whom we conduct business; and additional government requirements or other incremental mitigation efforts that may further impact our or our suppliers’ capacity to manufacture our diagnostic tests. +The COVID-19 pandemic also negatively affected our non-COVID-19 testing-related revenue and our clinical studies. For example, cancer patients had more limited access to hospitals, healthcare providers and medical resources as they took steps to control the spread of COVID-19. Our biopharmaceutical customers have faced challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized. Further, our clinical studies, such as our ongoing INSIGHT study and our recently launched ALTITUDE study, as well as our arrangements with our biopharmaceutical customers, are expected to take longer to complete than what we expected before the outbreak of the COVID-19 pandemic. +The extent to which the a future pandemic or epidemic, including a future outbreak of the COVID-19 virus, impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the resurgence of COVID-19 or any other virus and the actions to contain or treat its impact, among others. +While the potential economic impact brought by, and the duration of, any pandemic, epidemic or outbreak of an infectious disease, including COVID-19, may be difficult to assess or predict, the widespread COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets and a reduction in our ability to access capital, which could adversely affect our liquidity. In addition, a recession or market correction resulting from the spread of an infectious disease, including COVID-19, could materially affect our business. Such economic recession could have a material adverse effect on our long-term business. To the extent a pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section. +Natural or man-made disasters and other similar events may significantly disrupt our business, and negatively impact our business, financial condition and results of operations. +A significant portion of our employee base, operating facilities and infrastructure are centralized in Louisville, Colorado and we operate a laboratory facility in De Soto, Kansas. Any of our facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, wildfires, floods, nuclear disasters, riots, acts of terrorism or other criminal activities, infectious disease outbreaks or pandemic events power outages and other infrastructure failures, which may render it difficult or impossible for us to operate our business for some period of time. Our facilities would likely be costly to repair or replace, and any such efforts would likely require substantial time. Any disruptions in our operations could adversely affect our business, financial condition and results of operations and harm our reputation. Moreover, although we have disaster recovery plans, they may prove inadequate. We may not carry sufficient business insurance to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on our business, financial condition and results of operations. In addition, the facilities of our suppliers and manufacturers may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or otherwise materially and adversely affect our business. +Any failure to offer high-quality support for our diagnostic tests and services may adversely affect our relationships with providers and negatively impact our reputation among patients and providers, which may adversely affect our business, financial condition and results of operations. +In implementing and using our diagnostic tests and services, providers depend on our support to resolve issues in a timely manner. We may be unable to respond quickly enough to accommodate short-term increases in demand for customer support. Increased customer demand for support could increase costs and adversely affect our business, financial condition and results of operations. Our sales are highly dependent on our reputation and on positive recommendations from our existing patients, care partners, providers and clinics. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could adversely affect our reputation, our ability to sell our diagnostic tests and services, and in turn our business, financial condition and results of operations. +The sizes of the markets for our diagnostic tests and services and any future diagnostic tests and services may be smaller than we estimate and may decline. +Our estimates of the annual total addressable market for our diagnostic tests and services are based on a number of internal and third-party estimates and assumptions, including, without limitation, the assumed prices at which we can sell our diagnostic tests and services in the market. While we believe our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be correct and the conditions supporting our assumptions or estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. +As a result, our estimates of the annual total addressable market for our diagnostic tests and services in different market segments may prove to be incorrect. If the actual number of patients who would benefit from our diagnostic tests, the price at which we can sell them +40 +or the annual total addressable market for them is smaller than we have estimated, it may impair our sales growth and negatively affect our business, financial condition and results of operations. +Our industry is subject to rapid change, which could make our solutions and the diagnostic tests we develop and services we offer, obsolete. If we are unable to continue to innovate and improve our diagnostic tests and services we offer, we could lose customers or market share. +Our industry is characterized by rapid changes, including technological and scientific breakthroughs, frequent new product introductions and enhancements and evolving industry standards, all of which could make our current diagnostic tests and others we are developing obsolete. Our future success will depend on our ability to keep pace with the evolving needs of our customers on a timely and cost-effective basis and to pursue new market opportunities that develop as a result of scientific and technological advances. In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. There have also been advances in methods used to analyze very large amounts of molecular information. We must continuously enhance our offerings and develop new and improved diagnostic tests to keep pace with evolving standards of care. If we do not leverage or scale our sample and data biobank to discover new diagnostic tests or applications or update our diagnostic tests to reflect new scientific knowledge, including about lung cancer biology, information about new cancer therapies or relevant clinical trials, our diagnostic tests could become obsolete and sales of our current diagnostic tests and any new tests we develop could decline or fail to grow as expected. This failure to make continuous improvements to our diagnostic tests to keep ahead of those of our competitors could result in the loss of customers or market share that would adversely affect our business, financial condition and results of operations. +We may face additional costs, loss of revenue, significant liabilities, harm to our brand, decreased use of our products or services and business disruption if there are any security or data privacy breaches or other unauthorized or improper access. +In connection with various facets of our business, we collect and use a variety of personal data, such as names, mailing addresses, email addresses, mobile phone numbers, location information, prescription information and other medical information. Any failure to prevent or mitigate security breaches or improper access to, use, disclosure or other misappropriation of our data or consumers’ personal data could result in significant liability under state, (e.g., state breach notification and privacy laws such as the CCPA) federal (e.g., HIPAA), and the HITECH Act and laws in other jurisdictions (e.g., the GDPR). Such an incident may also cause a material loss of revenue from the potential adverse impact to our reputation and brand, affect our ability to retain or attract new users of our diagnostic tests and services and potentially disrupt our business. +Unauthorized disclosure of sensitive or confidential patient or employee data, including personally identifiable information, whether through a breach of computer systems, systems failure, employee negligence, fraud or misappropriation, or otherwise, or unauthorized access to or through our information systems and networks, whether by our employees or third parties, could result in negative publicity, legal liability and damage to our reputation. Unauthorized disclosure of personally identifiable information could also expose us to sanctions for violations of data privacy laws and regulations around the world. To the extent that any disruption or security breach resulted in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed. For example, the loss of or damage to clinical trial data, such as from completed or ongoing clinical trials, for any of our product candidates would likely result in delays in our marketing approval efforts and significantly increased costs in an effort to recover or reproduce the data. +As we become more dependent on information technologies to conduct our operations, cyber incidents, including deliberate attacks and attempts to gain unauthorized access to computer systems and networks, may increase in frequency and sophistication. These threats pose a risk to the security of our systems and networks, the confidentiality and the availability and integrity of our data and these risks apply both to us, and to third parties on whose systems we rely for the conduct of our business. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we and our partners may be unable to anticipate these techniques or to implement adequate preventative measures. We have in the past experienced, and may in the future, experience security incidents. While no security incidents in the past have had a material adverse effect on our business, financial condition and results of operations, we cannot predict the impact of any such future events. Further, we do not have any control over the operations of the facilities or technology of our cloud and service providers, including any third-party vendors that collect, process and store personal data on our behalf. Our systems, servers and platforms and those of our service providers may be vulnerable to computer viruses or physical or electronic break-ins that our or their security measures may not detect. Individuals able to circumvent such security measures may misappropriate our confidential or proprietary information, disrupt our operations, damage our computers or otherwise impair our reputation and business. We may need to expend significant resources and make significant capital investments to protect against security breaches or to mitigate the impact of any such breaches. In addition, to the extent that our cloud and other service providers, experience security breaches that result in the unauthorized or improper use of confidential data, employee data or personal data, we may not be indemnified for any losses resulting from such breaches. There can be no assurance that we or our third-party providers will be successful in preventing cyber-attacks or successfully mitigating their effects. Recent cyber-attacks purportedly originated by Russian controlled entities have exacerbated in the wake of Russia’s invasion of Ukraine and our systems may be infiltrated by foreign actors. If we are unable to prevent or mitigate the impact of such security breaches, our ability to attract and retain new customers, patients and other partners could be harmed as they may be +41 +reluctant to entrust their data to us, and we could be exposed to litigation and governmental investigations, which could lead to a potential disruption to our business or other adverse consequences. +We have significant payer concentration, with a limited number of customers accounting for a substantial portion of our revenues. +For the year ended December 31, 2023, Medicare reimbursed 43% of our diagnostic test revenue to us and one customer accounted for 10% of our total revenue. For the year ended December 31, 2022, Medicare reimbursed 37% of our diagnostic test revenue to us and one customer accounted for 10% of our total revenue. There are risks whenever a large percentage of total revenues are concentrated with a limited number of payers and customers. It is not possible for us to predict the level of demand for our diagnostic tests and services that will be generated by any of these customers in the future. In addition, revenues from these larger customers may fluctuate from time to time based on these customers’ business needs, the timing of which may be affected by market conditions or other factors outside of our control. These payers and customers could also potentially pressure us to reduce the prices we charge for our diagnostic tests and services, which could have an adverse effect on our margins and financial position and could negatively affect our revenues and results of operations. If any of our largest payers terminates its relationship with us or our tests are no longer reimbursable by such payer, such termination could negatively affect our revenues and results of operations. +Our results of operations will be materially harmed if we are unable to accurately forecast customer demand for, and utilization of, our diagnostic tests and manage our inventory. +To ensure adequate inventory supply, we must forecast inventory needs and manufacture our diagnostic tests based on our estimates of future demand for our diagnostic tests. Our ability to accurately forecast demand for them could be negatively affected by many factors, including our failure to accurately manage our expansion strategy, product introductions by competitors, an increase or decrease in customer demand for our diagnostic tests or for those of our competitors, our failure to accurately forecast customer acceptance of new diagnostic tests, unanticipated changes in general market conditions or regulatory matters and weakening of economic conditions or consumer confidence in future economic conditions. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs, which would cause our gross margin to be adversely affected and could impair the strength of our brand. Conversely, if we underestimate customer demand for our diagnostic tests, our supply chain partners and/or internal manufacturing team may not be able to deliver components and diagnostic tests to meet our requirements, and this could result in damage to our reputation, sales growth and customer relationships. In addition, if we experience a significant increase in demand, additional supplies of raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, or suppliers may not be able to allocate sufficient capacity in order to meet our increased requirements, which will adversely affect our business, financial condition and results of operations. +If we experience significant disruptions in our information technology systems, our business may be adversely affected. +We depend on our information technology systems for the efficient functioning of our business, including the performance, distribution and maintenance of our diagnostic tests and services, as well as for accounting, data storage, compliance, purchasing and inventory management. We do not have redundant information technology in all aspects of our systems at this time. Our information technology systems may be subject to computer viruses, ransomware or other malware, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, damage or interruption from fires or other natural disasters, hardware failures, telecommunication failures and user errors, among other malfunctions. We could be subject to an unintentional event that involves a third party gaining unauthorized access to our systems, which could disrupt our operations, corrupt our data or result in release of our confidential information. Technological interruptions would disrupt our operations, including our ability to timely ship and track diagnostic test orders and results, project inventory requirements, manage our supply chain and otherwise adequately service our customers or disrupt our customers’ ability to use our diagnostic tests. In the event we experience significant disruptions, we may be unable to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our business, financial condition and results of operations. +Currently, we carry business interruption coverage to mitigate certain potential losses but this insurance is limited in amount, and we cannot be certain that such potential losses will not exceed our policy limits. The successful assertion of one or more large claims against us that exceed or are not covered by our insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations. We are increasingly dependent on complex information technology to manage our infrastructure. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance our existing systems. Failure to maintain or protect our information systems and data integrity effectively could have a material adverse effect on our business, financial condition and results of operations. +If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit or halt the marketing and sale of our diagnostic tests and services. The expense and potential unavailability of insurance coverage for liabilities resulting from issues with our diagnostic tests and services could harm us and negatively impact sales. +We face an inherent risk of product liability as a result of the marketing and sale of our diagnostic tests and services. For example, we may be sued if our diagnostic tests or services cause or are perceived to cause injury or are found to be otherwise unsuitable during +42 +manufacturing, marketing or sale. Any such product liability claim may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. In addition, we may be subject to claims against us even if the apparent injury is due to the actions of others or the pre-existing health of the patient. For example, medical personnel, care partners and patients collect samples for our diagnostic tests. If these medical personnel, care partners or patients are not properly trained, are negligent or use our diagnostic tests incorrectly, the capabilities of such tests may be diminished or the patient may suffer critical injury. We may also be subject to claims that are caused by the activities of our suppliers, such as those who provide us with components and sub-assemblies for our diagnostic tests. +If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or halt the marketing and sale of our diagnostic tests and services. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in: +• +decreased demand for our diagnostic tests and services; +• +harm to our reputation; +• +initiation of investigations by regulators; +• +costs to defend the related litigation; +• +a diversion of management’s time and our resources; +• +substantial monetary awards to trial participants or patients; +• +product recalls, withdrawals, or labeling, marketing, or promotional restrictions; +• +loss of revenue; +• +adverse impact on the market price of our common stock; and +• +exhaustion of any available insurance and our capital resources. +We believe we have adequate product liability insurance, but it may not prove to be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive and costs may continue to rise. We may not be able to maintain or obtain insurance at a reasonable cost or in an amount adequate to satisfy any liability that may arise. Our insurance policy contains various exclusions, and we may be subject to a product liability claim for which we have no coverage. The potential inability to obtain sufficient product liability insurance at an acceptable cost to protect against product liability claims could prevent or inhibit the marketing and sale of our diagnostic tests and services. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts, which would have a material adverse effect on our business, financial condition and results of operations. In addition, any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, harm our reputation in the industry, significantly increase our expenses and reduce product sales. +We face competition from many sources, including larger companies, and we may be unable to compete successfully. +There are a number of lung cancer diagnostic solutions companies in the United States, Europe and Asia. Notable competitors in the United States include Veracyte, Inc., Guardant Health, Inc. and Foundation Medicine, Inc. These competitors all provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories and other medical facilities. Many of these organizations are significantly larger with greater financial and personnel resources than us, and enjoy significantly greater market share and have greater resources than we do. As a consequence, they may be able to spend more on product development, marketing, sales and other product initiatives than we can. Some of our competitors have: +• +substantially greater name recognition; +• +broader, deeper, or longer-term relations with healthcare professionals, customers, and third-party payers; +• +more established distribution networks; +• +additional lines of diagnostic tests and the ability to offer rebates or bundle them to offer greater discounts or other incentives to gain a competitive advantage; +• +greater experience in conducting research and development, manufacturing, clinical trials, marketing and obtaining regulatory clearance or approval or certification for diagnostic tests; and +• +greater financial and human resources for product development, sales and marketing and patent litigation. +43 +Our continued success depends on our ability to: +• +further penetrate the lung disease diagnostic solutions market and increase utilization of our diagnostic tests; +• +maintain and widen our technology lead over competitors by continuing to innovate and deliver new product enhancements on a continuous basis; and +• +cost-effectively manufacture our diagnostic tests and their component parts as well as drive down the cost of service. +In addition, competitors with greater financial resources than ours could acquire other companies to gain enhanced name recognition and market share, as well as new technologies or diagnostic tests that could effectively compete with our existing diagnostic tests, which may cause our revenue to decline and would harm our business. +Our competitors also compete with us in recruiting and retaining qualified scientific, management and commercial personnel, as well as in acquiring technologies complementary to, or necessary for, development of our diagnostic tests. Because of the complex and technical nature of diagnostic testing and the dynamic market in which we compete, any failure to attract and retain a sufficient number of qualified employees could materially harm our ability to develop and commercialize our diagnostic tests, which would have a material adverse effect on our business, financial condition and results of operations. +As we attain greater commercial success, our competitors are likely to develop diagnostic tests that offer features and functionality similar to our diagnostic tests that are currently on the market. Improvements in existing competitive diagnostic tests or the introduction of new competitive diagnostic tests may make it more difficult for us to compete for sales, particularly if those competitive diagnostic tests demonstrate better reliability, convenience or effectiveness or are offered at lower prices. +Performance issues, service interruptions or price increases by our shipping carriers and warehousing providers could adversely affect our business and harm our reputation and ability to provide our services on a timely basis. +Expedited, reliable shipping and delivery services and secure warehousing are essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point transport of our diagnostic tests to our customers and for tracking of these shipments, and from time to time require warehousing for our diagnostic tests, sample collection kits and supplies. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any systems, it would be costly to replace such systems in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our diagnostic tests and increased cost and expense to our business. In addition, any significant increase in shipping or warehousing rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters, civil unrest and disturbances or other service interruptions affecting delivery or warehousing services we use would adversely affect our ability to process orders for our diagnostic tests on a timely basis. +We rely on commercial courier delivery services to transport samples to our laboratory facility in a timely and cost-efficient manner and if these delivery services are disrupted, our business will be harmed. Our business depends on our ability to quickly and reliably deliver test results to our customers. Blood samples are typically received within days from the United States and outside the United States for analysis at our Louisville, Colorado and De Soto, Kansas facilities. Disruptions in delivery service, whether due to labor disruptions, bad weather, natural disaster, civil unrest or disturbances, terrorist acts or threats or for other reasons could adversely affect specimen integrity and our ability to process samples in a timely manner and to service our customers, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected. +Cost-containment efforts of our customers, purchasing groups and governmental purchasing organizations could have a material adverse effect on our sales and profitability. +In an effort to reduce costs, many hospitals in the United States have become members of GPOs and Integrated Delivery Networks (IDNs). GPOs and IDNs negotiate pricing arrangements with medical device companies and distributors on behalf of their members, which may include hospitals and other providers. GPOs and IDNs typically award contracts on a category-by-category basis through a competitive bidding process. Bids are generally solicited from multiple providers with the intention of driving down pricing or reducing the number of vendors. Due to the highly competitive nature of the GPO and IDN contracting processes, we may not be able to obtain new, or maintain existing, contract positions with major GPOs and IDNs. Furthermore, the increasing leverage of organized buying groups may reduce market prices for our diagnostic tests, thereby reducing our revenue and margins. +While having a contract with a GPO or IDN for a given product category can facilitate sales to members of that GPO or IDN, such contract positions can offer no assurance that any level of sales will be achieved, as sales are typically made pursuant to individual purchase orders. Even when a provider is the sole contracted supplier of a GPO or IDN for a certain product category, members of the GPO or IDN are generally free to purchase from other suppliers. Furthermore, GPO and IDN contracts typically are terminable without cause by the GPO or IDN upon 60 to 90 days’ notice. Accordingly, the members of such groups may choose to purchase alternative diagnostic tests due to the price or quality offered by other companies, which could result in a decline in our revenue. +44 +Pricing and reimbursement of medical devices is not harmonized at the European level, but is the exclusive competence of the EU Member States. In Europe, pricing and reimbursement decisions are generally made by regional or centralized bodies based on an assessment of the efficacy and clinical effectiveness of the devices or broad device types or procedures. There is a general trend for EU Member States to adopt cost containment measures to control public spend on medical devices. Due to the competitive nature of product offers and prices, we may not be able to obtain new, or maintain existing, contract positions with the EU Member States. +Litigation and other legal proceedings may adversely affect our business. +From time to time, we may become involved in legal proceedings relating to patent and other intellectual property matters, product liability claims, employee claims, tort or contract claims, federal regulatory investigations, securities class action and other legal proceedings or investigations, which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. Litigation is inherently unpredictable and can result in excessive or unanticipated verdicts and/or injunctive relief that affect how we operate our business. We could incur judgments or enter into settlements of claims for monetary damages or for agreements to change the way we operate our business, or both. There may be an increase in the scope of these matters or there may be additional lawsuits, claims, proceedings or investigations in the future, which could have a material adverse effect on our business, financial condition and results of operations. Adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our diagnostic tests and services, even if the regulatory or legal action is unfounded or not material to our operations. +We maintain product and professional liability insurance, but this insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims. Any product liability or professional liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. +General economic and financial market conditions may exacerbate our business risks. +Global macroeconomic conditions and the world’s financial markets remain susceptible to significant stresses, resulting in reductions in available credit and government spending, economic downturn or stagnation, foreign currency fluctuations and volatility in the valuations of securities generally. As a result of uncertainties with respect to financial institutions and the global credit markets and other macroeconomic challenges such as inflationary pressures currently or potentially affecting the economy of the United States and other parts of the world, customers and distributors may experience serious cash flow problems and other financial difficulties, decreasing demand for our products. Our customers and distributors may respond to such economic pressures by reducing or deferring their capital spending or reducing staff. +In addition, events in the United States or foreign markets, such as the United Kingdom’s exit from the European Union, the worldwide effects from the spread of COVID-19, Russia's invasion of Ukraine and political and social unrest in various countries around the world, can impact the global economy and capital markets. Additionally, if our customers and distributors are not successful in generating sufficient revenue or are precluded from securing financing, their businesses will suffer, which may materially and adversely affect our business, financial condition and results of operations. +We may not realize the benefits or costs of our Co-Development and Collaboration Agreement with AVEO Oncology. +In 2014, we entered into a Co-Development and Collaboration Agreement with AVEO Oncology (formerly known as AVEO Pharmaceuticals, Inc.) (AVEO) whereby the two parties agreed to various terms and conditions necessary for the co-development of AVEO’s compound ficlatuzumab (the Collaboration Agreement). +We were granted a limited legal interest in ficlatuzumab and may not have the right to control the development and exploitation of ficlatuzumab. As consideration for the grant, we agreed to cover the first $15.0 million of ficlatuzumab’s clinical development costs, with both parties then sharing all costs equally after the cap was reached. +In October of 2016, the Collaboration Agreement was amended to eliminate the requirement that we cover all of the initial costs. Under the amended terms, we agreed to allow AVEO to recapture its cost that it otherwise would not have been responsible for said recapture to occur out of any royalties or revenues eventually derived from the Collaboration Agreement. As part of the Collaboration Agreement, unless we or AVEO exercised our right to opt-out of co-development, we would equally share in any income received from licensing rights to ficlatuzumab to any third parties. In September 2020, we exercised our opt-out right for the payment of half of the development and regulatory costs for ficlatuzumab. This opt-out was effective as of December 2, 2020 with remaining obligations estimated to be $0.1 million. Following the effective date, we will be entitled to a 10% royalty of net sales of ficlatuzumab and 25% of license income generated from the licensing of ficlatuzumab. Ficlatuzumab is currently being evaluated in squamous cell carcinoma of the head and neck (SCCHN), metastatic pancreatic ductal cancer (PDAC), and acute myeloid leukemia (AML). +Our relationship with AVEO may require us to incur non-recurring and other charges, increase our near and long-term expenditures, or disrupt our management and business. We cannot be certain that, following the realization of this relationship, we will achieve the revenue or specific net income that justifies our entry into it. Any termination of this relationship, or delays in entering into new strategic partnership agreements with AVEO, could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +45 +We are exposed to significant future payments and other obligations associated with our acquisitions of Integrated Diagnostics and Oncimmune, U.S.A., and may not realize the advantages we expect from these acquisitions. +In 2018, we purchased select assets and liabilities from Integrated Diagnostics, Inc. and IND Funding, LLC (collectively, the Seller or Indi) which included the CLIA lab in Seattle, Washington, and all rights to the Nodify XL2 test and intellectual property rights related to that test. The purchase was made for total consideration of $27.6 million, consisting of $8.0 million (10,649,604 shares) of our Series G Preferred Stock and contingent consideration with an initial fair market value of $19.6 million. +The acquisition of Indi included a contingent consideration arrangement that requires additional consideration to be paid by us to the Seller based on the milestone of the attainment of a three consecutive month gross margin target of $2 million within a seven-year period. Under the terms of the original agreement, when the gross margin target was achieved, the Company was required to issue 2,520,108 shares of common stock. For the six months following the achievement of the milestone, Indi had the option to require the Company to redeem the common shares for $37.0 million in cash over eight equal installments. If Indi elected not to exercise this option, we had 12 months to repurchase the common stock in two equal quarterly cash installments totaling $37 million. +In August 2021, the Company entered into an amendment to the original agreement in which all parties agreed to forgo the issuance of common stock and agreed that the Company would instead make six quarterly installments of approximately $4.6 million each, which began in January 2022, and final payment of approximately $9.3 million in July 2023 for a total of $37.0 million (together, the Milestone Payments). The aggregate amount of payments owed by the Company under this amendment is the same as if Indi had exercised the put right or the Company had exercised the call right provided for in the original agreement. +On April 7, 2022, the Company entered into Amendment No. 3 to the Indi APA, in which the parties agreed to restructure the Milestone Payments. The Company made five quarterly installments of $2.0 million each beginning in April 2022, three quarterly installments of $3.0 million which began in July 2023, will make one installment of $5.0 million in April 2024, and will make one installment of approximately $8.4 million in July 2024. In addition, the Company agreed to an exit fee of approximately $6.1 million in October 2024. Interest shall accrue on the difference between the payment schedule as agreed in the August 2021 amendment and the April 2022 amended payment schedule, at an aggregate per annum rate equal to 10%, with such interest to be payable quarterly on the following installment payment date. Our ability to make these payments is subject to ongoing compliance under the Perceptive Term Loan, and, commencing January 1, 2024, consent from Perceptive. +In addition, on October 31, 2019 we completed an acquisition of Freenome's United States operations (formerly "Oncimmune USA" or "Oncimmune") including its CLIA lab in De Soto, Kansas and its incidental pulmonary nodule (IPN) malignancy test, then marketed in the United States as the EarlyCDT Lung® test. We renamed and relaunched the test on February 28, 2020 as the Nodify CDT test and the De Soto, Kansas lab is the sole United States provider of the Nodify CDT test. +As part of the acquisition, we and Oncimmune entered into several agreements to govern the relationship between the parties and to allow us to provide the Nodify CDT test. The overarching umbrella Purchase and Commercialization Agreement (PCA) defines the general relationship between the parties. Included under the PCA was (a) an APA whereby we acquired all of the United States assets associated with the De Soto, Kansas clinical laboratory, as well as the trademarks and patent application associated with the test; (b) an intellectual property license granting us the rights necessary under Oncimmune’s background intellectual property rights to perform the Nodify CDT test; (c) a supply agreement for supplying us with the necessary materials and reagents needed to run the Nodify CDT test; and (d) a development agreement where Oncimmune agrees to assist us in further developing the Nodify CDT test. +We agreed to a revenue share payment of 8% of recognized revenue for non-screening tests up to an annual minimum volume and 5% thereafter, with an escalating minimum through the first four years of sales. Royalty expenses were $1.0 million and $0.9 million for the years ended December 31, 2023 and 2022, respectively. +Our acquisitions may require us to incur non-recurring and other charges, increase our near and long-term expenditures, or disrupt our management and business. We cannot be certain that, following the realization of these acquisitions, we will achieve the revenue or specific net income that justifies our entry into them. This could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +We are highly dependent on our senior management team and key personnel, and our business could be harmed if we are unable to attract and retain personnel necessary for our success. +We are highly dependent on our senior management and other key personnel. Our success will depend on our ability to retain senior management and to attract and retain qualified personnel in the future, including sales and marketing professionals, scientists, clinical specialists, and other highly skilled personnel and to integrate current and additional personnel in all departments. The loss of members of our senior management, sales and marketing professionals, scientists, clinical and regulatory specialists could result in delays in product development and harm our business. If we are not successful in attracting and retaining highly qualified personnel, it would have a material adverse effect on our business, financial condition and results of operations. +46 +Our research and development programs and laboratory operations depend on our ability to attract and retain highly skilled scientists and technicians. +We may not be able to attract or retain qualified scientists and technicians in the future due to the competition for qualified personnel among life science businesses, particularly near our headquarters in Louisville, Colorado and our laboratory facility in De Soto, Kansas. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. We may have difficulties locating, recruiting, or retaining qualified salespeople. Recruiting and retention difficulties can limit our ability to support our research and development and sales programs. To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have issued and may continue to issue equity awards that vest over time. The value to employees of equity awards that vest over time may be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Our employment arrangements with our employees provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We also do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. +Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture and our business may be harmed. +We believe that our culture has been and will continue to be a critical contributor to our success. We expect to continue to hire aggressively as we expand, and we believe our corporate culture has been crucial in our success and our ability to attract highly skilled personnel. If we do not continue to develop our corporate culture or maintain and preserve our core values as we grow and evolve, we may be unable to foster the innovation, curiosity, creativity, focus on execution, teamwork and the facilitation of critical knowledge transfer and knowledge sharing we believe we need to support our growth. Moreover, liquidity available to our employee securityholders could lead to disparities of wealth among our employees, which could adversely impact relations among employees and our culture in general. Our anticipated headcount growth may result in a change to our corporate culture, which could harm our business. +Our ability to utilize our net operating loss carryforwards and research and development credit may be limited. +In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code) a corporation that undergoes an ownership change, generally defined as a greater than 50% change by value in its equity ownership by certain shareholders over a three-year period, is subject to limitations on its ability to utilize its pre-change net operating losses (NOLs) and its research and development credit carryforwards to offset future taxable income. The applicable rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning, directly or indirectly, 5% or more of the stock of a company, as well as changes in ownership arising from new issuances of stock by the company. We believe that our NOLs are currently not subject to limitation under these rules. However, if we undergo an ownership change now or in the future, our ability to utilize NOLs and research and development credit carryforwards could be limited by Sections 382 and 383 of the Code. Future changes in stock ownership may be beyond our control. In addition, our ability to deduct net interest expense may be limited if we have insufficient taxable income for the year during which the interest is incurred, and any carryovers of such disallowed interest would be subject to the limitation rules similar to those applicable to NOLs and other attributes. For these reasons, in the event we experience a change of control, we may not be able to utilize a material portion of the NOLs, research and development credit carryforwards or disallowed interest expense carryovers, even if we attain profitability. +The terms of the Perceptive Term Loan Facility require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business. +On November 16, 2022 (Closing Date), we entered into a credit agreement and guaranty (the Credit Agreement) with Perceptive Credit Holdings IV, LP as the lender and administrative agent (the Lender) that provides for a senior secured delayed draw term loan facility with Perceptive Advisors LLC (Perceptive), in an aggregate principal amount of up to $50.0 million (the Perceptive Term Loan Facility) to refinance long-term debt. The Perceptive Term Loan Facility provides for an “interest-only” period during the term of the loan with principal due at the maturity date, which will be November 21, 2027. +The Perceptive Term Loan Facility may be prepaid at any time, subject to a prepayment premium equal to 2% to 10% of the aggregate outstanding principal amount being prepaid, depending on the date of prepayment. The Perceptive Term Loan Facility contains customary affirmative and negative covenants for a loan, requires us to comply with a minimum cash requirement covenant, and has a trailing twelve month net revenue requirement. Failure to comply with the covenants and loan requirements may result in an event of default. +On May 10, 2023, the Company entered into the First Amendment with the Lender, whereby, subject to the terms and conditions of the First Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold of each fiscal quarter commencing on the fiscal quarter ending June 30, 2023 through and including the fiscal quarter ending +47 +March 31, 2024. As consideration for the First Amendment, the Company agreed to issue to Perceptive a warrant to purchase up to 500,000 shares of the Company’s common stock which are equity classified at a per share exercise price equal to $1.6254. +On August 4, 2023, the Company entered into the Second Amendment to the Credit Agreement and Guaranty (the Second Amendment) with Perceptive as lender and administrative agent and the Company, as borrower, whereby, subject to the terms and conditions of the Second Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing with the fiscal quarter ending June 30, 2024 through and including the fiscal quarter ending December 31, 2025. +The Perceptive Term Loan Facility contains certain covenants limiting our ability to, among other things, engage in certain corporate changes, make certain restricted payments, repay other certain indebtedness or enter into, amend or terminate any other agreements that have the impact of restricting our ability to make loan repayments. +The Credit Agreement also contains certain customary events of default, the occurrence of which could result in the declaration that all outstanding principal and interest under the Perceptive Term Loan Facility is immediately due and payable in whole or in part, which could have a material adverse effect on our business, financial condition, and results of operations. +We will need to raise additional capital to fund our existing operations, develop our platform, commercialize new diagnostic tests or expand our operations. +We will need to raise additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, including to: +• +increase our sales and marketing efforts to drive market adoption of and address competitive developments; +• +fund development and marketing efforts of our diagnostic tests or any other future diagnostic tests; +• +expand our technologies into other types of cancer management and lung disease detection diagnostic tests; +• +acquire, license, or invest in technologies; +• +acquire or invest in complementary businesses or assets; and +• +finance capital expenditures and general and administrative expenses. +Our present and future funding requirements will depend on many factors, including: +• +our ability to achieve revenue growth; +• +our rate of progress in establishing payer coverage and reimbursement arrangements with domestic and international commercial third-party payers and government payers; +• +the cost of expanding our laboratory operations and offerings, including our sales and marketing efforts; +• +our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of and reimbursement for our diagnostic tests; +• +our rate of progress in, and cost of research and development activities associated with, diagnostic tests in research and early development; +• +the effect of competing technological and market developments; +• +costs related to international expansion; and +• +the potential cost of and delays in product development as a result of any regulatory oversight applicable to our diagnostic tests. +The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, our stockholders could experience dilution. Any preferred equity securities issued also could provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our platform technologies or diagnostic tests, pay a portion of our royalties, or grant licenses on terms that are not favorable to us. +48 +Risks Related to our Governmental Regulation +The insurance coverage and reimbursement status of newly approved diagnostic tests, particularly in a new category of diagnostics and therapeutics, is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for current or future diagnostic tests could limit our ability, and that of our collaborators, to fully commercialize our diagnostic tests and decrease our ability to generate revenue. +The availability and extent of reimbursement by governmental and private payers is essential for most patients to be able to afford the clinical diagnostic tests and cellular therapeutics that we and our collaborators currently or in the future plan to develop and sell. In addition, because our clinical diagnostics and diagnostic tests represent new approaches to the research, diagnosis, detection and treatment of diseases, we cannot accurately estimate how our diagnostic tests, and those jointly created with our collaborators, would be priced, whether reimbursement could be obtained or any potential revenue generated. Sales of our diagnostic tests will depend substantially, both domestically and internationally, on the extent to which the costs of our diagnostic tests are paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payers. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize some of our diagnostic tests or services. Even if coverage is provided, the available reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize an adequate return on our investment in any of our diagnostic tests or services. Changes in the reimbursement landscape may occur, which are outside of our control, and may impact the commercial viability of our diagnostic tests. +There is significant uncertainty related to the insurance coverage and reimbursement of newly launched, cleared, authorized or approved diagnostic tests. In the United States, many significant decisions about reimbursement for new diagnostics and medicines are typically made by the CMS, an agency within HHS. CMS decides whether and to what extent a new diagnostic or medicine will be covered and reimbursed under Medicare, although it frequently delegates this authority to local Medicare Administrative Contractors (MACs). Private payers tend to follow Medicare to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for novel diagnostic tests such as ours. Additionally, reimbursement authorities or bodies in Europe may be more conservative than CMS. For example, a number of cancer drugs have been approved for reimbursement in the United States and have not been approved for reimbursement, or have been approved under restricted conditions, in certain European countries. +Outside the United States, the reimbursement process and timelines vary significantly. In Europe, pricing and reimbursement of medical devices is the exclusive competence of the European Union (EU) Member States. However, the European Commission is facilitating a voluntary corporation between the EU Member States on health technology assessments (HTA) which consists of a network of the EU Member States’ national authorities and bodies responsible for HTA and a joint action to support cooperation at scientific and technical level between the HTA bodies. We cannot be sure that such prices and reimbursement decisions will be acceptable to us or our collaborators. If the regulatory authorities in these foreign jurisdictions set prices or make reimbursement criteria that are not commercially attractive for us or our collaborators, our revenues and the potential profitability of our products in those countries would be negatively affected. An increasing number of countries are taking initiatives to control the healthcare budget by focusing cost-cutting efforts on medicinal products, and to a lesser extent, medical devices, provided under their state-run healthcare systems. These price control efforts have impacted all regions of the world, but have been most prominent in the EU. Additionally, some countries require approval of the sale price of a product before it can be marketed or mandatory discounts or profit caps may be applied. Further, after the sale price is approved, it remains subject to review during the product lifecycle. In many countries, the pricing review period begins after marketing or product licensing approval is granted or the CE mark is obtained. As a result, we or our collaborators might obtain marketing approval for a product or service in a particular country, but then may experience delays in the reimbursement approval or be subject to price regulations that would delay the commercial launch of our product or service, possibly for lengthy time periods, which could negatively impact the revenues we are able to generate from the sale of that product or service in that particular country. +Moreover, increasing efforts by governmental and third-party payers, in the United States and abroad, to cap or reduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for newly cleared, authorized, certified or approved devices and medicines and, as a result, they may not cover or provide adequate payment for our clinical diagnostics to be sold by us or our collaborators. For example, in May 2018 the United States government released a “blueprint,” or plan, to reduce the cost of drugs. This blueprint contains certain measures that HHS has been working to implement, although it is possible that HHS’s regulatory priorities may change under the Biden administration. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, which are, in some cases, designed to encourage importation from other countries and bulk purchasing. +We expect to experience pricing pressures on our clinical diagnostics sold by us and our collaborators due to the trend toward value-based pricing and coverage, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs, surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new diagnostic tests. +49 +Measures to reduce healthcare costs may hurt our business. +The majority of our customers are healthcare providers who depend upon reimbursement by government and commercial insurance payers for lung cancer diagnostic solutions services. With a majority of United States patients with lung cancer covered by Medicare, the Medicare reimbursement rate is an important factor in a customer’s decision to use our diagnostic tests and limits the prices we may charge for them. Commercial insurance payers may also exert downward pressure on payment rates for lung cancer treatment services. A reduction in reimbursement rates for lung cancer treatments may adversely affect our customers’ businesses and cause them to enact cost reduction measures that may include reducing the scope of their programs, thereby potentially reducing demand for our diagnostic tests. +Healthcare reform measures could hinder or prevent the commercial success of our diagnostic tests. +In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system in ways that may harm our future revenues and profitability and the demand for our diagnostic tests. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. Current and future legislative proposals to further reform healthcare or reduce healthcare costs may limit coverage of or lower reimbursement for the procedures associated with the use of our diagnostic tests. The effect of any healthcare reform initiative implemented in the future could impact our revenue from the sale of our diagnostic tests. For example, the ACA, contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. +There have been judicial challenges to certain aspects of the ACA, as well as efforts by the Trump administration and Congress to repeal, replace or alter the implementation of certain aspects of the ACA. For example, as part of the TCJA, Congress eliminated the tax penalty, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance. The Further Consolidated Appropriations Act of 2020, Pub. L. No. 116-94, signed into law December 20, 2019, fully repealed the ACA’s “Cadillac Tax” on certain high-cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share (repeal effective in 2021), and the medical device excise tax on non-exempt medical devices. +In addition, other legislative changes have been proposed and adopted since the ACA was enacted. For example, the Budget Control Act of 2011, among other things, included reductions to CMS payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030 unless additional Congressional action is taken, with the exception of a temporary suspension of the 2% cut in Medicare payments from May 1, 2020 through March 31, 2022, and a reduction of the cut to 1% from April 1, 2022 through June 30, 2022. Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced CMS payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover Medicare overpayments to providers from three to five years. +The Biden administration and Congress may continue to pursue significant changes to the current healthcare laws, and the Biden administration has indicated its intent to strengthen the ACA and focus on reducing the cost of healthcare. We face uncertainties that might result from modifications or repeal of any of the provisions of the ACA, including as a result of current and future executive orders and legislative actions. The impact of those changes on us and potential effect on the medical device industry as a whole is currently unknown. Any changes to the ACA are likely to have an impact on our results of operations, and may negatively affect our business, financial condition and results of operations. We cannot predict what other healthcare programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the United States on our business, financial condition and results of operations. +The continuing efforts of the government, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce costs of healthcare may harm: +• +our ability to set a price that we believe is fair for our diagnostic tests; +• +our ability to generate revenue and achieve or maintain profitability; and +• +the availability of capital. +The ACA substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacts our industry. Future changes in healthcare policy could increase our costs and subject us to additional regulatory requirements that may interrupt commercialization of our current and future solutions. Future changes in healthcare policy could also decrease our revenue and impact sales of and reimbursement for our current and future diagnostic tests. +We must comply with anti-corruption, anti-bribery, anti-money laundering and similar laws. +We are subject to the FCPA, which generally prohibits companies in the United States from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business and requires companies to maintain accurate books and records and internal controls. We are also subject to requirements under the United States Treasury Department’s Office of Foreign +50 +Assets Control, United States domestic bribery laws and other anti-corruption, anti-bribery and anti-money laundering laws. While we have policies and procedures in place designed to promote compliance with such laws, our employees or other agents may nonetheless engage in prohibited conduct under these laws for which we or our executives might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have an adverse effect on our business, financial condition and results of operations. +Furthermore, international customers may currently order our diagnostic tests, either directly from us or through a potential joint venture, and we are subject to the FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non-United States government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent distributors to sell our diagnostic tests internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents and we could be held responsible for their actions. Other United States companies in the medical device and biopharmaceutical field have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including laws promulgated by OECD countries in which we operate, such as Israel. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees and could result in a material adverse effect on our business, prospects, financial condition and results of operations. We could also suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures. +We must comply with healthcare fraud and abuse laws. +Various federal and state laws, as well as the laws of foreign countries, prohibit payments to induce the referral, purchase, order or use of healthcare products or services and require medical device companies to limit prevent, and/or monitor, and report certain payments to third-party payers, health care professionals, and other individuals. These healthcare fraud and abuse, anti-kickback, public reporting and aggregate spend laws affect our sales, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with lung cancer treatment providers, hospitals, physicians or other potential purchasers or users, including patients, of medical devices and services. They also impose additional administrative and compliance burdens on us. In particular, these laws influence, among other things, how we structure our sales offerings, including discount practices, customer support, education and training programs and physician consulting and other service arrangements. These laws prohibit certain marketing initiatives that are commonplace in other industries. If we were to offer or pay inappropriate inducements for the purchase, order or use of our diagnostic tests or our services, or our arrangements are perceived as inappropriate inducements, we could be subject to claims under various healthcare fraud and abuse laws. +Restrictions under applicable United States federal and state healthcare laws and regulations include the following: +• +the federal Anti-Kickback Statute, a criminal law, prohibits, among other things, persons and entities from knowingly and willfully offering, paying, soliciting or receiving any remuneration, directly or indirectly, in cash or in kind, to induce or reward purchasing, leasing, ordering, or arranging for, referring, or recommending the purchase, lease, order of any good or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid; +• +the Eliminating Kickbacks in Recovery Act, which prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program; +• +the Beneficiary Inducement Statute, which prohibits any person, organization, or entity from giving anything of value to a federal health care program beneficiary that is likely to induce or influence the beneficiary’s choice of provider, practitioner, or supplier for covered services; +• +the federal civil False Claims Act, which may be enforced through civil whistleblower or qui tam actions and is often used to enforce the federal Anti-Kickback Statute and other healthcare laws and regulations, imposes civil penalties and potential exclusion from federal healthcare programs, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or for making a false record or statement material to an obligation to pay the federal government or for knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the federal government; +• +federal criminal statutes created by HIPAA impose criminal liability for, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program, including private insurance plans, or, in any matter involving a healthcare benefit program, for knowingly and willfully making materially false, fictitious, or fraudulent statements in connection with the delivery of or payment for health care benefits; and +51 +• +analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers, including private insurers. +Other federal and state laws, as well as the laws of foreign countries, generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payments to government or commercial payers that are false or fraudulent, or for items or services that were not provided as claimed. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of product candidates and medical devices from government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations. Moreover, any investigation into our practices could cause adverse publicity and require a costly and time-consuming response. If any physicians or other healthcare providers or entities with whom we expect to do business are found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Manufacturers can also be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by providing inaccurate billing or coding information to customers, by providing improper financial inducements, or through certain other activities. We attempt to ensure that any billing and coding information we provide for our diagnostic tests emphasizes the need for physicians and other providers to make independent judgments, use accurate and appropriate billing and coding that complies with all applicable payer policies, and document the medical need for their patients as appropriate. Nevertheless, the government may not regard any billing errors that may be made by our customers as inadvertent and may examine our role in providing information to our customers, physicians and patients concerning the benefits and potential coverage of more frequent therapy. +FDA regulation of our industry generally or our tests specifically could be disruptive to our business. +Our operations are subject to extensive federal, state, local and foreign laws and regulations, including FDA laws and regulations, all of which are subject to change. These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. We believe that we are in material compliance with all statutory and regulatory requirements applicable to us, but there is a risk that one or more government agencies could take a contrary position, or that a private party could file suit under the qui tam provisions of the federal False Claims Act or a similar state law. Such occurrences, regardless of their outcome, could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations, and other private third-party payers. +The FDA has recently increased its attention to marketing of pharmacogenetic tests. For example, in late 2018, the FDA issued a safety communication regarding genetic laboratory tests with claims to predict a patient’s response to specific medications that have not been reviewed by the FDA and may not be supported by clinical evidence. Among other tests, the FDA notice cited genetic tests that claim results can be used to help physicians identify which antidepressant medication would have increased effectiveness or side effects compared to other antidepressant medications. As explained by the FDA in its update to this safety communication, the FDA sent notices to several firms marketing such pharmacogenetic tests where the FDA believes the relationship between genetic variations and the medication’s effects has not been established, including a warning letter sent to a laboratory, in part, for failing to obtain premarket review of its test. +If the FDA were to determine that our tests are not within the current enforcement discretion policy for LDTs for any reason, or if FDA finalizes its proposed rule to end enforcement discretion or issues new rules, policies, or guidance, due to new legislation or on its own accord, our tests may become subject to FDA requirements, including pre-market review. If this were to happen, it may impact our marketing practices relating to the relevant tests, which in turn may have an adverse impact on our business, financial condition and results of operations. +Failure to comply with federal, state and foreign laboratory licensing requirements and the applicable requirements of the FDA or any other regulatory authority, could cause us to lose the ability to perform our tests, experience disruptions to our business, or become subject to administrative or judicial sanctions. +The diagnostic testing industry is subject to extensive laws and regulations, many of which have not been interpreted by the courts. Tests without FDA clearance, approval, or authorization would not be considered covered countermeasures under the Public Readiness and Emergency Preparedness Act (PREP Act), which authorizes HHS to provide limited liability immunity protection to certain individuals and entities against a claim of loss under federal and state law “caused by, arising out of, relating to, or resulting from” the manufacture, distribution, administration, or use of a covered medical countermeasure, except for claims involving willful misconduct. Consequently, any violations of applicable laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees and could result in a material adverse effect on our business, prospects, financial condition and results of operations. +52 +We are also subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA requires virtually all laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification is also a prerequisite to be eligible to bill state and federal health care programs, as well as many private third-party payers, for laboratory testing services. As a condition of CLIA certification, each of our laboratories is subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by CMS, a CMS agent (typically a state agency), or, if the laboratory holds a CLIA certificate of accreditation, a CMS-approved accreditation organization. +Sanctions for failure to comply with CLIA requirements, including proficiency testing violations, may include suspension, revocation, or limitation of a laboratory’s CLIA certificate, which is necessary to conduct our business, as well as the imposition of significant fines or criminal penalties. +Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing licensure, or our failure to renew a CLIA certificate, a state or foreign license, or accreditation, could have a material adverse effect on our business. If the CLIA certificate of any one of our laboratories is revoked, CMS could seek revocation of the CLIA certificates of our other laboratories based on their common ownership or operation, even though they are separately certified. +In addition, we are subject to state laws and regulations governing laboratory licensure. Some states have enacted state licensure laws that are more stringent than CLIA. Although we have obtained licenses from states where we believe we are required to be licensed, we may become aware of other states that require out-of-state laboratories to obtain licensure in order to accept specimens from the state, and it is possible that other states currently have such requirements or will have such requirements in the future. +We may also be subject to regulation in foreign jurisdictions as we seek to expand international utilization of our tests or such jurisdictions adopt new licensure requirements, which may require review of our tests in order to offer them or may have other limitations that may limit our ability to make our tests available outside of the United States. Complying with licensure requirements in new jurisdictions may be expensive, time-consuming and subject us to significant and unanticipated delays. Changes in state or foreign licensure laws that affect our ability to offer and provide diagnostic services across state or foreign country lines could materially and adversely affect our business. In addition, state and foreign requirements for laboratory certification may be costly or difficult to meet and could affect our ability to receive specimens from certain states or foreign countries. +Failure to comply with applicable clinical laboratory licensure requirements may result in a range of enforcement actions, including suspension, limitation or revocation of our CLIA certificate and/or state licenses, imposition of a directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing clinical laboratory licensure or our failure to renew our CLIA certificate, a state or foreign license or accreditation, could have a material adverse effect on our business, financial condition and results of operations. Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so. +Our Louisville, Colorado and De Soto, Kansas laboratories are both CAP-accredited clinical laboratories regulated by CMS pursuant to CLIA. We also have a current CLIA certificate for each facility. To maintain these certificates, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our laboratory from time to time. Furthermore, our diagnostic tests are categorized as LDTs and are not currently subject to FDA regulation, although certain components provided by third parties and used to create and/or administer the test may be. LDTs are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. Failure to adhere to any new FDA regulation would result in fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal penalties. +Our current line of diagnostic tests is covered under CLIA and CMS, but the FDA may end its general policy of enforcement discretion and regulate laboratory developed tests as medical devices. Changes in the way that the FDA regulates tests performed by laboratories like ours could result in delay or additional expense in offering our tests and tests that we may develop in the future. +The laws and regulations governing the marketing of diagnostic products are evolving, extremely complex and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, including in vitro diagnostics and, therefore, potentially our clinical laboratory tests. +Pursuant to the FDCA and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion, and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. Although the FDA has asserted that it has authority to regulate the development and use of LDTs, such as our and many other laboratories’ tests, as medical devices, it has generally exercised enforcement discretion and is currently not otherwise regulating most tests developed and performed within a single high complexity CLIA-certified laboratory. Pursuant to this enforcement discretion policy, FDA does not require laboratories that furnish LDTs to comply with the agency’s requirements for medical devices (e.g., establishment registration, device listing, quality systems regulations, premarket clearance or premarket approval, and post-market controls). +53 +We believe that our tests, as utilized in our clinical laboratory, are and would be considered LDTs and that as a result, the FDA does not require that we obtain regulatory clearances or approvals for our LDTs or their components pursuant to the FDA’s current policies and guidance. Although we believe that our tests and test components are either exempt from FDA medical device regulations or are subject to an enforcement discretion policy, it is possible that the FDA would not agree with our determinations or that the FDA will change its regulations and policies such that our products become regulated as medical devices. +In recent years, the FDA has publicly announced its intention to regulate certain LDTs and has set forth various proposals for a phased-in risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. Until recently, the FDA has articulated such policies through guidance documents, compliance manuals, website statements, and other informal issuances, but not through notice-and-comment rulemaking. On September 29, 2023, the FDA announced a proposed rule to amend its regulations to explicitly regulate LDTs as IVD tests in accordance with the agency’s regulatory authority over medical devices. If this rule is finalized, our tests that are currently offered as LDTs would become subject to statutory and regulatory provisions that are applicable to medical devices, including but not limited to, medical device reporting and correction and removal reporting requirements, quality systems regulations, registration and listing requirements, and premarket review requirements. +Even if the proposed rule is not finalized, Congress could take action to amend the law to change the current regulatory framework for in vitro diagnostics and LDTs to require premarket review of LDTs and other regulatory requirements. New requirements, whether imposed through legislation or administratively, could result in delay or additional expense in offering our tests and tests that we may develop in the future. Moreover, failure to comply with applicable requirements under the relevant timeframes could cause us to lose the ability to perform our tests, experience disruptions to our business, or become subject to administrative or judicial enforcement actions, which in turn may have an adverse impact on our business, financial condition, and results of operations. +Our operations, therefore, are or may become subject to extensive regulation by the FDA in the United States. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +test design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage, and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales, and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export. +The premarket submission process for medical devices can be expensive, lengthy and unpredictable. The FDA can delay, limit, or deny clearance or approval of a device for many reasons, including: +• +our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or conformity assessment body that the diagnostic tests are safe or effective for their proposed intended uses; +• +the disagreement of the FDA with the design or implementation of our clinical trials or the interpretation of data from clinical trials; +• +serious and unexpected adverse device effects experienced by participants in our clinical trials; +• +the data from our clinical trials may be insufficient to support clearance or approval, where required; +• +our inability to demonstrate that the clinical and other benefits of the device outweigh the risks; +• +the manufacturing process or facilities we use may not meet applicable requirements; and +• +the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance or approval. +54 +The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by any such agency, which may include any of the following sanctions: +• +adverse publicity, warning letters, untitled letters, it has come to our attention letters, fines, injunctions, consent decrees and civil penalties; +• +repair, replacement, refunds, recall or seizure of our diagnostic tests; +• +operating restrictions, partial suspension, or total shutdown of production; +• +denial of our requests for regulatory clearance or premarket approval of new diagnostic tests or services, new intended uses, or modifications to existing diagnostic tests or services; +• +withdrawal of regulatory clearance or premarket approvals that have already been granted; or +• +criminal prosecution. +As discussed above, we believe that our current line of diagnostic tests and their components are LDTs, which are subject to state licensing requirements and federal regulation by CMS under CLIA, although our COVID-19 testing program and select partnerships we may enter may cause us to be subject to additional FDA regulations discussed above. +While we believe that we are currently in material compliance with applicable laws and regulations, it is possible that the FDA, or other regulatory agencies, would not agree with our determinations. If our products became become subject to premarket submission and other FDA requirements, we would need to comply with the applicable regulations or face significant civil and criminal penalties. In addition, IVDs and CDx tests are widely considered to be Class III devices, and it is possible that in the future, we may develop tests that fall into this category. CDx tests in particular may require further administrative procedures in the PMA process. Exposure to these additional regulatory requirements would also affect our business, financial condition and results of operations. +Our future success depends on our ability to develop, receive regulatory clearance or approval or certification for, and introduce new diagnostic tests or enhancements to existing diagnostic tests that will be accepted by the market in a timely manner. There is no guarantee that the FDA will grant 510(k) clearance, De Novo authorization, or PMA approval of our future diagnostic tests and failure to obtain necessary clearances or approvals for our future diagnostic tests would adversely affect our ability to grow our business. +It is important to our business that we build a pipeline of diagnostic test offerings that address limitations of current lung disease diagnostic tests. As such, our success will depend in part on our ability to develop and introduce new diagnostic tests. However, we may not be able to successfully develop and obtain regulatory clearance or approval or certification for enhancements to our existing diagnostic tests, or new diagnostic tests for any number of reasons, including due to the cost associated with certain regulatory approval requirements, or these diagnostic tests may not be accepted by physicians or users. +The success of any new diagnostic test or enhancement to an existing diagnostic test will depend on a number of factors, including our ability to, among others: +• +identify and anticipate physician and patient needs properly; +• +develop and introduce new diagnostic tests or enhancements to our existing diagnostic tests in a timely manner; +• +avoid infringing upon, misappropriating, or violating the intellectual property rights of third parties; +• +demonstrate, if required, the safety and efficacy of new diagnostic tests with data from clinical studies; +• +obtain the necessary regulatory clearances or approvals or certifications for new diagnostic tests or enhancements to existing diagnostic tests; +• +comply fully with FDA and foreign regulations on marketing of new diagnostic tests or modified diagnostic tests; and +• +provide adequate training to potential users of our diagnostic tests. +If we do not develop new diagnostic tests or enhancements to our existing diagnostic tests in time to meet market demand or if there is insufficient demand for these diagnostic tests or enhancements, or if our competitors introduce new diagnostic tests with functionalities that are superior to ours, our results of operations will suffer. +Some of our future diagnostic tests may require FDA clearance of a 510(k) submission. Other diagnostic tests may require the approval of a PMA. In addition, some of our future diagnostic tests may require clinical trials to support regulatory approval and we may not successfully complete these clinical trials. The FDA may not approve or clear these diagnostic tests for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance, De Novo authorization, or premarket approval of new diagnostic tests. Failure to receive clearance or approval for our new diagnostic tests would have an adverse effect on our ability to expand our business. +55 +Modifications to our marketed tests may require new 510(k) clearances, De Novo authorizations, or PMA approvals, or may require us to cease marketing or recall the modified tests until clearances or approvals are obtained. +Modifications to our diagnostic tests may require new regulatory approvals or clearances, including 510(k) clearances, De Novo authorizations, or premarket approvals, or require us to recall or cease marketing the modified systems until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new submission is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We have made modifications to our diagnostic tests in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our diagnostic tests as modified, which could require us to redesign our diagnostic tests and harm our operating results. In these circumstances, we may be subject to significant enforcement actions. +Where we determine that modifications to our diagnostic tests require a new premarket submission, we may not be able to obtain the additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. Obtaining clearances and approvals can be a time-consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced diagnostic tests in a timely manner, which in turn would harm our future growth. +If we or our suppliers fail to comply with ongoing FDA or other domestic and foreign regulatory authority or conformity assessment body requirements, or if we experience unanticipated problems with our diagnostic tests, they could be subject to restrictions or withdrawal from the market. +Any medical device that we manufacture, including those for which we obtain regulatory clearance or approval or certification, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such diagnostic test, will be subject to continued regulatory review, oversight, and periodic inspections by the FDA and other domestic and foreign regulatory bodies or conformity assessment bodies. In particular, we and our suppliers may be required to comply with FDA’s QSR (QSR codified at 21 C.F.R. § 820) for medical devices and ISO regulations for the manufacture of our diagnostic tests and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any diagnostic test for which we obtain clearance or approval. Regulatory bodies, such as the FDA, and conformity assessment bodies enforce the QSR and other regulations through periodic inspections and audits. The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies or conformity assessment bodies, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, one or more of the following enforcement actions: +• +untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; +• +unanticipated expenditures to address or defend such actions; +• +customer notifications for repair, replacement, or refunds; +• +recall, detention, or seizure of our diagnostic tests; +• +operating restrictions or partial suspension or total shutdown of production; +• +refusing or delaying our requests for 510(k) clearance, De Novo authorization, or premarket approval of new diagnostic tests or modified versions of current diagnostic tests; +• +operating restrictions; +• +withdrawing 510(k) clearances, De Novo authorization, or PMA approvals that have already been granted; +• +revocation of EUAs that have been authorized previously; +• +refusal to grant export approval for our diagnostic tests; and +• +criminal prosecution. +If any of these actions were to occur it would harm our reputation and cause our diagnostic test sales and profitability to suffer and may prevent us from generating revenue. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements which could result in our failure to produce our diagnostic tests on a timely basis and in the required quantities, if at all. +In addition, we are required to conduct surveillance to monitor the safety or effectiveness of our diagnostic tests, and we must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our diagnostic tests. Later discovery of previously unknown problems with our diagnostic tests, including unanticipated adverse events or adverse events of +56 +unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such diagnostic tests or manufacturing processes, withdrawal of the diagnostic tests from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties which would adversely affect our business, operating results and prospects. +Our diagnostic tests and services may in the future be subject to product recalls that could harm our reputation, business and financial results. +Medical devices can experience performance problems in the field that require review and possible corrective action. The occurrence of component failures, manufacturing errors, software errors, design defects or labeling inadequacies affecting a medical device could lead to a government-mandated or voluntary recall by the device manufacturer, in particular when such deficiencies may endanger health. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our diagnostic tests and services in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. Product recalls may divert management attention and financial resources, expose us to product liability or other claims, harm our reputation with customers and adversely impact our business, financial condition and results of operations. Other jurisdictions have similar recall requirements. +Legislative or regulatory reforms may make it more difficult and costly for us to obtain regulatory clearance or approval or certification of any future diagnostic tests and to manufacture, market and distribute our diagnostic tests after clearance or approval is obtained. +From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. For example, the Verifying Accurate, Leading-edge IVCT Development (VALID) Act recently introduced in Congress would codify into law the term “in vitro clinical test” in order to create a new medical product category separate from medical devices that would include products currently regulated as in vitro diagnostics as well as LDTs. +In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our diagnostic tests. For example, FDA announced a proposed rule in September 2023 to phase out its enforcement discretion over LDTs and regulate such diagnostic tests as medical devices. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of planned or future diagnostic tests. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. +Any change in the laws or regulations that govern the clearance and approval processes relating to our current, planned and future diagnostic tests could make it more difficult and costly to obtain clearance or approval for new diagnostic tests or to produce, market and distribute existing diagnostic tests. Significant delays in receiving clearance or approval or the failure to receive clearance or approval for any new diagnostic tests would have an adverse effect on our ability to expand our business. +Clinical trials may be necessary to support future product submissions to FDA. These clinical trials are expensive and will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new diagnostic tests and will adversely affect our business, operating results and prospects. +Initiating and completing clinical trials necessary to support any future PMA applications, De Novo requests, and additional safety and efficacy data beyond that typically required for a 510(k) clearance, for our possible future product candidates, will be time consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical trials may not have favorable results in later clinical trials. +Conducting successful clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our diagnostic tests or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. +Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required and we may not adequately develop such protocols to support clearance and approval. Further, the FDA may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause +57 +an increase in costs and delays in the approval and attempted commercialization of our diagnostic tests or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, the FDA may not consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects. +If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval or certification for or commercialize our diagnostic tests and services. +We may not have the ability to independently conduct our pre-clinical and clinical trials for our future diagnostic tests and services and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct such trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our diagnostic tests and services on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control. +Our use, disclosure, and other processing of personally identifiable information, including health information, is subject to HIPAA and other federal, state, and foreign privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our business, operating results and prospects. +We maintain and process, and our third-party vendors, collaborators, contractors and consultants maintain and process on our behalf, a large quantity of sensitive information, including confidential business, personal and patient health information in connection with our clinical studies and our employees, and are subject to data privacy and protection laws and regulations that apply to the collection, transmission, storage and use of personally identifying information, which among other things, impose certain requirements relating to the privacy, security and transmission of personal information. Failure by us or our third-party vendors, collaborators, contractors and consultants to comply with any of these laws and regulations could result in notification obligations or enforcement actions against us, which could result in fines, imprisonment of company officials and public censure, claims for damages by affected individuals, damage to our reputation and loss of goodwill, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects. These laws, rules and regulations evolve frequently and their scope may continually change, through new legislation, amendments to existing legislation and changes in enforcement, and may be inconsistent from one jurisdiction to another. The interpretation and application of consumer, health-related and data protection laws, especially with respect to genetic samples and data, in the United States, the EU and elsewhere, are often uncertain, contradictory and in flux. As a result, implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. +In the United States, numerous federal and state laws and regulations, including federal health information privacy laws, state data breach notification laws, state health information privacy laws and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), that govern the collection, use, disclosure and protection of health-related and other personal information could apply to our operations or the operations of our collaborators. +Domestic laws in this area are complex and developing rapidly. Many state legislatures have adopted legislation relating to privacy, data security and data breaches. Laws in all 50 states require businesses to provide notice to customers whose personally identifiable information has been disclosed as a result of a data breach. The laws are not consistent, and compliance in the event of a widespread data breach is costly. States are also frequently amending existing laws, requiring attention to frequently changing regulatory requirements. For example, California recently enacted the CCPA, which became effective on January 1, 2020. The CCPA, among other things, requires new disclosures to California consumers and affords such consumers new abilities to access and delete their personal information, opt-out of certain sales of personal information and receive detailed information about how their personal information is used. The CCPA provides for fines of up to $7,500 per violation, as well as a private right of action for data breaches that is expected to increase the frequency of data breach litigation. While the CCPA has already been amended multiple times, it is unclear how this legislation will be further modified or how it will be interpreted. Interpretations of the CCPA may continue to evolve with regulatory guidance and the CCPA continue to be amended, including through a ballot initiative, adopted by voters in November 2020, known as the California Privacy Rights Act, or CPRA. The CPRA imposes additional data protection obligations on companies doing business in California, including additional consumer rights, including regarding certain uses of sensitive data. It also creates a new California data protection agency - the California Privacy Protection Agency - specifically tasked to enforce the law, which may likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. The effects of this legislation potentially are far-reaching, however, and may require us to modify our data processing practices and policies and incur substantial compliance-related costs and expenses. The CCPA and other changes in state and federal laws or regulations relating to privacy, data protection and information security, particularly any new or modified laws or regulations that require enhanced protection of certain types of data or new obligations with regard to data retention, transfer or disclosure, could increase the cost of providing our offerings, require significant +58 +changes to our operations or even prevent us from providing certain offerings in jurisdictions in which we currently operate and in which we may operate in the future. +Because of the breadth of these data protection laws and the narrowness of their exceptions and safe harbors, it is possible that our business or data protection policies could be subject to challenge under one or more of such laws. The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of heightened regulatory focus on data privacy and security issues. Although we endeavor to comply with our published policies and documentation and ensure their compliance with current laws, rules and regulations, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policy and other documentation that provide promises and assurances about privacy and security can subject us to potential state and federal action in the United States if they are found to be deceptive, unfair, or misrepresentative of our actual practices. Any failure by us or other parties with whom we do business to comply with this documentation or with federal, state, local or international regulations could result in proceedings against us by governmental entities, private parties or others. In many jurisdictions, enforcement actions and consequences for noncompliance are rising. +If our operations are found to be in violation of any of the data protection laws described above or any other laws that apply to us, we may be subject to penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from participation in government healthcare programs, injunctions, private qui tam actions brought by individual whistleblowers in the name of the government, class action litigation and the curtailment or restructuring of our operations, as well as additional reporting obligations and oversight if we become subject to a corrective action plan or other agreement to resolve allegations of non-compliance with these laws, any of which could adversely affect our ability to operate our business and our results of operations. +In addition, numerous state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability, integrity, and other processing of PHI and PII. These laws and regulations include HIPAA. HIPAA establishes a set of national privacy and security standards for the protection of protected health information (as defined in HIPAA, PHI) by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities (CE), and the business associates (BA) with whom such covered entities contract for services. We are a CE under HIPAA when we are conducting our clinical trials. We are a CE with regard to our observational studies and clinical trials, and also a BA under HIPAA for certain other business activities, and we execute BA agreements with our clients. +HIPAA requires CEs and BAs, such as us, to develop and maintain policies with respect to the protection of, use and disclosure of electronic PHI, including the adoption of administrative, physical and technical safeguards to protect such information, and certain notification requirements in the event of a data breach. +HIPAA imposes mandatory penalties for certain violations. Penalties for violations of HIPAA and its implementing regulations start at $119 per violation and are subject to a cap of $1,785,651 for violations of the same standard in a single calendar year. However, a single breach incident can result in violations of multiple standards. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. +In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA CEs and BAs. With regard to BAs, those audits assess the business associate’s compliance with the HIPAA Privacy and Security Standards. Such audits are conducted randomly and after an entity experiences a breach affecting more than 500 individuals’ data. Undergoing an audit can be costly, can result in fines or onerous obligations, and can damage a BAs reputation. +In addition to HIPAA, numerous other federal, state, and foreign laws and regulations protect the confidentiality, privacy, availability, integrity and security of PHI and other types of PII. Some of these laws and regulations may be preempted by HIPAA with respect to PHI, or may exclude PHI from their scope but impose obligations with regard to PII that is not PHI, and in some cases, can impose additional obligations with regard to PHI. These laws and regulations are often uncertain, contradictory, and subject to changing or differing interpretations, and we expect new laws, rules and regulations regarding privacy, data protection, and information security to be proposed and enacted in the future. HHS is also proposing amendments to the HIPAA Privacy Rule to modernize certain data sharing provisions and enhance patient access to their information. This complex, dynamic legal landscape regarding privacy, data protection, and information security creates significant compliance issues for us and our clients and potentially exposes us to additional expense, adverse publicity and liability. While we have implemented data privacy and security measures in an effort to comply with applicable laws and regulations relating to privacy and data protection, some PHI and other PII or confidential information is transmitted to us by third parties, who may not implement adequate security and privacy measures, but it is possible that laws, rules and regulations relating to privacy, data protection, or information security may be interpreted and applied in a manner that is inconsistent with our practices or those of third parties who transmit PHI and other PII or confidential information to us. If we or these third parties are found to have violated such laws, rules or regulations, it could result in government-imposed fines, orders requiring that we or these third parties change our or their practices, or criminal charges, which could adversely affect our business. +59 +Complying with these various laws and regulations could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business. +We may eventually operate in a number of countries outside of the United States whose laws, including data privacy laws, may in some cases be more stringent than the requirements in the United States. For example, EU and UK data privacy laws have specific requirements relating to cross-border transfers of personal data to certain jurisdictions, including to the United States, have strict requirements relating to personal data collection, use or sharing, and have more stringent requirements relating to organizations’ privacy programs and provide stronger individual rights. Moreover, we may also be subject to evolving international privacy and data security regulations which could result in greater compliance costs and in turn lead to penalties, where such compliance programs are not implemented correctly. +Certain of our processing activities are subject to the EU General Data Protection Regulation and the UK General Data Protection Regulation (collectively, the “GDPR”) – including, those involving pseudonymised / key-coded data - as the GDPR applies extra-territorially. The GDPR imposes strict requirements on controllers and processors processing personal data, including, for example, requirements to: (i) identify a legal basis for the processing of personal data, (ii) provide robust disclosures to individuals, (iii) respond to requests from individuals to exercise their data subject rights, (iv) provide personal data breach notifications within 72 hours after discovering the breach, (v) limit the collection and retention of personal data, (vi) impose specific contractual obligations on processors engaged to process personal data on the instructions of the controller, and (vii) apply enhanced protections to health data and other special categories of personal data. +The EU GDPR also provides that EU Member States may make their own further laws and regulations limiting the processing of personal data, including genetic, biometric or health data, which could limit our ability to use and share such personal data and cause our costs to increase and harm our financial condition. +Failure to comply with the requirements of the GDPR may result in fines of up to €20 million (£17.5 million in the case of the UK GDPR) or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. GDPR compliance may require us to put in place additional mechanisms, which may result in compliance costs and other substantial expenditures. This may be onerous and adversely affect our business, financial condition, results of operations and the profitability of our platform of diagnostic tests. Failure to comply with the GDPR and other countries’ privacy or data security-related laws, rules or regulations could result in material penalties imposed by regulators, affect our compliance with contracts entered into with our collaborators and other third-party payers, and have an adverse effect on our business and financial condition. Currently, the GDPR is only applicable to us as a processor, but as we continue to expand into the European market, the GDPR will have direct applicability to us as a controller. +The GDPR also prohibits the transfer of personal data from the EEA/UK to a country outside of the EEA/UK (e.g., the United States) unless made to a country deemed to have adequate data privacy laws by the European Commission (or UK Government in case of the UK GDPR) or a data transfer mechanism has been put in place. Until recently, one such data transfer mechanism was the EU-US Privacy Shield. However, in July 2020 the Court of Justice of the European Union (CJEU) declared the Privacy Shield to be invalid. Following an executive order on trans-Atlantic data flows issued by President Biden in October 2022, the European Commission in December 2022 announced that it had initiated the process of drafting a new adequacy decision based on a modified data transfer framework that would replace the Privacy Shield, which it completed in July 2023. Though adoption of a new adequacy decision may have the effect of making data transfers to the United States easier, it is widely expected that the updated transfer framework and the adequacy decision will also be reviewed by the CJEU. The CJEU also upheld the validity of standard contractual clauses (SCCs) as a legal mechanism to transfer personal data but companies relying on SCCs will need to carry out a transfer privacy impact assessment, which among other things, assesses laws governing access to personal data in the recipient country and considers whether supplementary measures that provide privacy protections additional to those provided under SCCs will need to be implemented to ensure an essentially equivalent level of data protection to that afforded in the EEA. In turn, the findings of the CJEU will have significant implications for cross-border data flows and may lead to increased transaction, compliance, and technological costs to support international data transfers. +Organizations operating in Canada and covered by the Personal Information Protection and Electronic Documents Act (PIPEDA), or equivalent Canadian provincial laws, must obtain an individual’s consent when they collect, use or disclose that individual’s personal information. Individuals have the right to access and challenge the accuracy of their personal information held by an organization, and personal information may only be used for the purposes for which it was collected. If an organization intends to use personal information for another purpose, it must again obtain that individual’s consent. +We regularly monitor, defend against and respond to attacks to our networks and other information security incidents. Despite our information security efforts, our facilities, systems, and data, as well as those of our third-party service providers, may be vulnerable to privacy and information security incidents such as data breaches, viruses or other malicious code, coordinated attacks, data loss, phishing attacks, ransomware, denial of service attacks, or other security or IT incidents caused by threat actors, technological vulnerabilities or human error. If we, or any of our vendors that support our IT or have access to our data, including any third-party vendors that collect, process and store personal data on our behalf, fail to comply with laws requiring the protection of personal information, or fail to safeguard and defend personal information or other critical data assets or IT systems, we may be subject to regulatory enforcement and +60 +fines as well as private civil actions. We may be required to expend significant resources in the response, containment, mitigation of cybersecurity incidents as well as in defense against claims that our information security was unreasonable or otherwise violated applicable laws or contractual obligations. +Our employees, collaborators, independent contractors and consultants may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements. +We are exposed to the risk that our employees, collaborators, independent contractors and consultants may engage in fraudulent or other illegal activity with respect to our business. Misconduct by these employees could include intentional, reckless and/or negligent conduct or unauthorized activity that violates: +• +FDA regulations, including those laws requiring the reporting of true, complete, and accurate information to the FDA authorities; +• +federal and state healthcare fraud and abuse laws and regulations; or +• +laws that require the true, complete and accurate reporting of financial information or data. +In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Misconduct by these parties could also involve individually identifiable information, including, without limitation, the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. Any incidents or any other conduct that leads to an employee, contractor, or other agent, or our company, receiving an FDA debarment or exclusion by the HHS Office of Inspector General (OIG) could result in penalties, a loss of business from third parties, and severe reputational harm. +We have adopted a Code of Business Conduct and Ethics and compliance policies to govern and deter such behaviors, but it is not always possible to identify and deter misconduct by our employees and other agents, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, treble damages, monetary fines, disgorgement, imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and curtailment of our operations. +Clinical development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results. +Our ongoing research and development and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. We are currently conducting pre-and post-market clinical studies of some of our tests. In the future we may conduct clinical trials to support approval of new diagnostic tests and services, or new indications. Clinical studies may need to be conducted in compliance with FDA regulations or the FDA may take enforcement action. The data collected from these clinical studies may ultimately be used to support marketing authorization for these diagnostic tests and services. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims or that the FDA or foreign authorities and conformity assessment bodies will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our tests are safe and effective for the proposed indicated uses, which could cause us to abandon development of our tests and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, may impact our ability to commercialize our tests and generate revenues. +Many of the factors that may cause or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval or certification. The commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial. +We may find it necessary to engage contract research organizations to perform data collection and analysis and other aspects of our clinical trials, which might increase the cost and complexity of our trials. We may also depend on clinical investigators, medical institutions, and contract research organizations to perform the trials, and would control only certain aspects of their activities. Nevertheless, we would be responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on these third parties would not relieve us of our regulatory responsibilities. We +61 +and our third-party contractors are required to comply with good clinical practices (GCPs) which are regulations and guidelines enforced by the FDA, and comparable regulations enforced by foreign regulatory authorities for products in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any third-party contractor fails to comply with applicable GCPs, the clinical data generated in clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities or conformity assessment bodies may require us to perform additional clinical trials before clearing or approving our marketing applications. A failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory clearance or approval or certification process. In addition, if these parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality, completeness or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical trials may have to be extended, delayed or terminated. +Many of these factors could be beyond our control. We may not be able to undertake additional trials, repeat trials or enter into new arrangements with third parties without undue delays or considerable expenditures. If there are delays in testing or clearances or approvals as a result of the failure to perform by third parties, our research and development costs would increase and we may not be able to obtain regulatory clearance or approval or certification for our tests. In addition, we may not be able to establish or maintain relationships with these parties on favorable terms, if at all. Each of these outcomes would harm our ability to market our tests, or to achieve sustained profitability. +The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects. +We cannot be certain that the results of our future clinical trials will support our future product claims or that the FDA or comparable foreign regulatory authorities or conformity assessment bodies will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the future product’s profile. +Our billing, collections and claims processing activities are complex and time-consuming, and any delay in transmitting and collecting claims or failure to comply with applicable billing requirements, could have an adverse effect on our future revenue. +Billing for our tests is complex, time-consuming and expensive. Depending on the billing arrangement and applicable law, we bill various payers, such as government payers, insurance companies and patients, all of which may have different billing requirements. We may face increased risk in our collection efforts, including long collection cycles and the risk that we may never collect at all, either of which could adversely affect our business, financial condition and results of operations. Several factors make the billing process complex, including: +• +differences between the list price for our tests and the reimbursement rates of payers; +• +compliance with complex federal and state regulations related to billing government healthcare programs, including Medicare and Medicaid, to the extent our tests are covered by such programs; +• +differences in coverage among payers and the effect of patient co-payments or co-insurance; +• +differences in information and billing requirements among payers; +• +changes to codes and coding instructions governing our tests; +• +incorrect or missing billing information; and +• +the resources required to manage the billing and claims appeals process. +These billing complexities and the related uncertainty in obtaining payment for our tests could negatively affect our revenue and cash flow, our ability to achieve profitability and the consistency and comparability of our results of operations. In addition, if claims for our tests are not submitted to payers on a timely basis, or if we fail to comply with applicable billing requirements, it could have an adverse effect on our revenue and our business. +Third-party payers require us to identify the test for which we are seeking reimbursement using a Current Procedural Terminology (CPT) code. The CPT code set is maintained by the American Medical Association (AMA). In cases where there is not a specific CPT code to describe a test, such as with the GeneStrat NGS test, the test may be billed under an unlisted molecular pathology procedure code or through the use of a combination of single gene CPT codes, depending on the payer. The Protecting Access to Medicare Act of 2014 (PAMA) authorized the adoption of new, temporary billing codes and unique test identifiers for FDA-cleared or approved tests as well as advanced diagnostic laboratory tests. The AMA has created a new section of CPT codes, Proprietary Laboratory Analyses codes to facilitate implementation of this section of PAMA. In addition, CMS may assign unique level II Healthcare Common Procedure +62 +Coding System codes to tests that are not already described by a unique CPT code. The VeriStrat, Nodify XL2, and Nodify CDT tests have test specific CPT codes, but the GeneStrat NGS test does not at this time. +In the instance where a code used does not describe a specific test, the insurance claim must be examined to determine what test was provided, whether the test was appropriate and medically necessary, and whether payment should be rendered, which may require a letter of medical necessity from the ordering physician. This process can result in a delay in processing the claim, a lower reimbursement amount or denial of the claim. As a result, obtaining approvals from third-party payers to cover our tests and establishing adequate reimbursement levels is an unpredictable, challenging, time-consuming and costly process and we may never be successful. +We and our third-party manufacturers and suppliers must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do, or interrupt our, business. +Our research and development activities and our third-party manufacturers’ and suppliers’ activities involve the generation, use, storage and disposal of hazardous materials. We work with materials, including chemicals, biological agents and compounds and samples that could be hazardous to human health and safety or the environment. Our operations also produce hazardous and biological waste products. Accordingly, we and our third-party manufacturers and suppliers are subject to federal, state, local and foreign environmental, health and safety laws and regulations, and permitting and licensing requirements, including those governing the generation, use, manufacture, storage, handling, transportation, release and disposal of, and exposure to, these materials, and worker health and safety. +We cannot eliminate the risk of contamination or injury resulting from such hazardous materials. We also cannot guarantee that the procedures utilized by our third-party manufacturers for handling and disposing of hazardous materials and wastes comply with all applicable environmental, health and safety laws and regulations. As a result, we may be held liable for any resulting damages, costs or liabilities, including cleanup costs and liabilities, which could be significant, or our commercialization, research and development efforts and business operations may be restricted or interrupted. +Environmental, health and safety laws and regulations are complex, change frequently and have tended to become more stringent. Compliance with such laws and regulations is expensive, and current or future environmental, health and safety laws and regulations may restrict our operations. If we do not comply with applicable environmental health and safety laws and regulations, and permitting and licensing requirements, we may be subject to fines, penalties, a suspension of our business or other sanctions. +Risks Related to our Intellectual Property +Our success may be impaired if we are unable to obtain, maintain and protect our intellectual property rights. +Our commercial success will depend in part on our ability to obtain and maintain patent and other intellectual property protection in the United States and other countries with respect to our diagnostic tests, products and services and technology. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, to protect our proprietary technology and prevent others from duplicating our suite of diagnostic tests and products. However, these means may afford only limited protection and may not: +• +prevent our competitors from duplicating our diagnostic tests and products, including our Nodify XL2, Nodify CDT, GeneStrat and VeriStrat tests; +• +prevent our competitors from gaining access to our proprietary information and technology, including the Diagnostic Cortex platform, tech platforms such as the DeepMALDI analysis and intellectual property covering technologies that allow us to develop “test algorithms”; or +• +allow us to gain or maintain a competitive advantage. +Any of our patents, including those we may license, may be challenged, invalidated, rendered unenforceable or circumvented. Consequently, we do not know whether any of our diagnostic tests, products and services will be protectable or remain protected by valid and enforceable patents. We may not prevail if our patents are challenged by competitors or other third parties. The United States federal courts or equivalent national courts or patent offices elsewhere may invalidate our patents, find them unenforceable, or narrow their scope. Furthermore, competitors may be able to design around our patents by developing similar or alternative technologies or products in a non-infringing manner, or obtain patent protection for more effective technologies, designs or methods, including for treating lung cancer. If these developments were to occur, our diagnostic tests and products may become less competitive and sales may decline. +We have filed numerous patent applications seeking protection of diagnostic tests and other inventions originating from our research and development. Our patent applications may not result in issued patents, and any patents that are issued may not provide meaningful protection against competitors or competitive technologies. Further, the examination process may require us to narrow the claims for our pending patent applications, which may limit the scope of patent protection that may be obtained if these applications issue. The scope of a patent may also be reinterpreted and significantly reduced after issuance. Even if patent applications we license or own currently or in the future issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with the protection or competitive advantages we are seeking. +63 +Moreover, some of our owned and in-licensed patents and patent applications are, and may in the future be, co-owned with third parties. If we are unable to obtain or maintain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products and technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects. +The patent position of biotechnology companies generally is highly uncertain, involves complex legal and factual questions, and has been the subject of much litigation in recent years. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the determination of patent rights with respect to pharmaceutical compounds and technologies commonly involves complex legal and factual questions, which has in recent years been the subject of much litigation. Various courts, including the United States Supreme Court have rendered decisions that affect the scope of patentability of certain inventions or discoveries relating to biotechnology. These decisions state, among other things, that a patent claim that recites an abstract idea, natural phenomenon, or law of nature (for example, the relationship between particular genetic variants and cancer) are not themselves patentable. Precisely what constitutes a law of nature or abstract idea is uncertain, and it is possible that certain aspects of our technology could be considered unpatentable under applicable law. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. Depending on decisions by the United States Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our and our licensors’ ability to obtain new patents or to enforce our existing owned or in-licensed patents and patents that we might obtain or in-license in the future. Additionally, our pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. The scope of patent protection outside of the United States is also uncertain. Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain, and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property rights or narrow the scope of our owned and licensed patents. +If we are unable to obtain and maintain patent protection for our technology, or if the scope of the patent protection obtained is not sufficient, our competitors could develop and commercialize diagnostic tests, products and services similar or superior to ours, and our competitive position may be adversely affected. It is also possible that we will fail to identify patentable aspects of inventions made in the course of our development and commercialization activities before it is too late to obtain patent protection on them. Therefore, we may miss potential opportunities to strengthen our patent position. In addition, the patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. +Additionally, while software and other of our proprietary works may be protected under copyright law, we have chosen not to register any copyrights in these works, and instead, primarily rely on protecting our software as a trade secret. In order to bring a copyright infringement lawsuit in the United States, the copyright must be registered. Accordingly, the remedies and damages available to us for unauthorized use of our copyrights may be limited. +If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed. +In addition to seeking patent protection for the patents underlying our diagnostic tests, products and services, we also rely upon unpatented trade secrets, know-how and continuing technological innovation to develop and maintain a competitive position. Trade secrets and know-how can be difficult to protect. We seek to protect such proprietary information, in part, through confidentiality agreements with our employees, collaborators, contractors, advisors, consultants and other third parties and invention assignment agreements with our employees. We also have agreements with some of our consultants that require them to assign to us any inventions created as a result of their working with us. The confidentiality agreements are designed to protect our proprietary information and, in the case of agreements or clauses containing invention assignment, to grant us ownership of technologies that are developed through a relationship with employees or third parties. +We cannot guarantee that we have entered into such agreements with each party that has or may have had access to our trade secrets or proprietary information. Additionally, despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to, or independently developed by, a competitor or other third party, our competitive position would be materially and adversely harmed. Furthermore, we expect these trade secrets, know-how and proprietary information to over time be disseminated within the industry through independent +64 +development, the publication of journal articles describing the methodology and the movement of personnel from academic to industry scientific positions. Consequently, we may be unable to prevent our proprietary technology from being exploited in the United States and abroad, which could affect our ability to expand in domestic and international markets or require costly efforts to protect our technology. +We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known, or be independently discovered by, competitors. To the extent that our employees, consultants, contractors or collaborators use intellectual property rights owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions, which could have a material adverse effect on our business, financial condition and results of operations. +We may be subject to claims that we or our employees have misappropriated the intellectual property rights of a third party, including trade secrets or know-how, or are in breach of non-competition or non-solicitation agreements with our competitors, and third parties may claim an ownership interest in intellectual property we regard as our own. +Many of our employees and consultants were previously employed at or engaged by universities or other medical device, diagnostic, biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees, consultants and contractors, may have executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees, consultants and independent contractors do not use the intellectual property rights, proprietary information, know-how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, used, infringed, misappropriated or otherwise violated the intellectual property rights or disclosed the alleged trade secrets or other proprietary information, of these former employers, competitors or other third parties, or to claims that we have improperly used or obtained such trade secrets. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Any litigation or the threat of litigation may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize potential diagnostic tests, products and services, which could harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management and other employees. +Additionally, we may be subject to claims from third parties challenging our ownership interest in intellectual property rights we regard as our own, based on claims that our employees or consultants have breached an obligation to assign inventions to another employer, to a former employer, or to another person or entity. Litigation may be necessary to defend against any other claims, and it may be necessary or we may desire to enter into a license to settle any such claim; however, there can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our diagnostic tests or products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. +An inability to incorporate technologies or features that are important or essential to our diagnostic tests or products could have a material adverse effect on our business, financial condition and results of operations, and may prevent us from selling our rights to either of the Nodify XL2 and Nodify CDT tests, or the VeriStrat and GeneStrat tests. +In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property rights to execute agreements assigning such intellectual property rights to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property rights that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property rights. Such claims could have a material adverse effect on our business, financial condition, results of operations, and prospects. +Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future diagnostic tests, products and services. +Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. In 2011, the Leahy-Smith America Invents Act (Leahy-Smith Act) was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and also may affect patent litigation. These also include provisions that switched the United States from a first-to-invent system to a first-inventor-to-file system, allow third-party submission of prior art to the USPTO during patent prosecution and set forth additional procedures to attack the validity of a patent by the USPTO administered post grant proceedings, including post-grant review, inter partes review and derivation proceedings. Under a first-inventor-to-file system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor was the first to invent the claimed invention. The USPTO recently developed new regulations +65 +and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective in 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition and results of operations. +In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the United States Supreme Court and the United States Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Recent United States Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents, once obtained. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by United States and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future. +If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets and our business may be adversely affected. +Our trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be violating or infringing on other marks. We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these trademarks or trade names, which we need to build name recognition among potential partners and customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement or dilution claims brought by owners of other trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. +We have not yet registered certain of our trademarks in all of our potential markets, although we have registered several connected to our diagnostic tests, products and services in the United States. If we apply to register these and trademarks in the United States and other countries, our applications may not be allowed for registration in a timely fashion or at all, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademark applications and registrations, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would. +Our efforts to enforce or protect our rights related to trademarks, trade secrets, domain names or other intellectual property rights may be ineffective, could result in substantial costs and diversion of resources and could adversely affect our business, financial condition and results of operations. +We may become involved in lawsuits to protect or enforce our patents, the patents of our licensors or other intellectual property rights, which could be expensive, time consuming and unsuccessful. +Competitors or other third parties may infringe, misappropriate or otherwise violate our patents, the patents of our licensors or other intellectual property rights, or we may be required to defend against claims of infringement, misappropriation or other violations. In addition, our patents also may become involved in inventorship, priority or validity disputes. To counter or defend against such claims can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke those parties to assert counterclaims against us alleging that we infringe their patents or other intellectual property. In any such proceeding, a court or other administrative body may decide that a patent or other intellectual property right owned by us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover such technology. Grounds for a validity challenge could include an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, written description, non-enablement or failure to claim patent-eligible subject matter. Grounds for an unenforceability assertion could include an allegation that someone connected with prosecution of the patent withheld information material to patentability from the USPTO, or made a misleading statement, during prosecution. Third parties also may raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include reexamination, post-grant review, inter partes review, interference proceedings, derivation proceedings and equivalent proceedings in foreign jurisdictions, including opposition proceedings. Such proceedings could result in the revocation or cancellation of or amendment to our patents in such a way that they no longer cover our diagnostic tests, products and services or prevent third parties from competing with our diagnostic tests, products and services. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which the patent examiner and we or our licensing partners were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we could lose at +66 +least part, and perhaps all, of the patent protection on our diagnostic tests, products and services. An adverse result in any litigation or other proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. +Moreover, some of our owned and in-licensed patents and patent applications are, and may in the future be, co-owned with third parties. If we are unable to obtain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing diagnostic tests, products, services or technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations. +Even if resolved in our favor, litigation or other proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our management and other personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on our common stock price. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations. +Third parties may initiate legal proceedings alleging that we are infringing, misappropriating, or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business. +The intellectual property landscape in the field of precision oncology is in flux, and it may remain uncertain for the coming years. There may be significant intellectual property related litigation and proceedings relating to our owned and in-licensed, and other third party, intellectual property and proprietary rights in the future. As we move into new markets and applications for our diagnostic tests, products or services, incumbent participants in such markets may assert their patents and other intellectual property rights against us as a means of slowing our entry into such markets or as a means to extract substantial license and royalty payments from us. Our competitors and others may now and, in the future, have significantly larger and more mature patent portfolios than we currently have. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product or service revenue and against whom our own patents may provide little or no deterrence or protection. Therefore, our commercial success depends in part on our non-infringement of the patents or other intellectual property rights of third parties. +However, we may in the future be subject to claims that we, or other parties we have agreed to indemnify, infringe, misappropriate or otherwise violate patents or other intellectual property rights owned or controlled by third parties. Because patent applications are published sometime after filing, and because applications can take several years to issue, there may be additional currently pending third-party patent applications that are unknown to us, which may later result in issued patents. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. We may not have sufficient resources to bring these actions to a successful conclusion. +There is a substantial amount of litigation and other patent challenges, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology industry, including patent infringement lawsuits, interferences, oppositions and inter partes review proceedings before the USPTO, and corresponding foreign patent offices. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, including our competitors, exist in the fields in which we are developing diagnostic tests and in which we may develop future diagnostic tests, products and services. As the precision oncology industry expands and more patents are issued, the risk increases that our diagnostic tests may be subject to claims of infringement of the patent rights of third parties. Numerous significant intellectual property issues have been litigated, are being litigated and will likely continue to be litigated, between existing and new participants in our existing and targeted markets, and competitors have and may assert that our diagnostic tests or services infringe their intellectual property rights as part of a business strategy to impede our successful entry into or growth in those markets. +We could incur substantial costs and divert the attention of our management and technical personnel in defending against any of these claims. Parties making claims against us may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. +Because of the inevitable uncertainty in intellectual property litigation, we could lose a patent infringement or other action asserted against us regardless of our perception of the merits of the case. There is no assurance that a court would find in our favor on questions of infringement, validity, enforceability, or priority. A court of competent jurisdiction could hold that these third-party patents are valid, enforceable, and infringed, which could materially and adversely affect our ability to commercialize any product candidates we may develop and any other product candidates or technologies covered by the asserted third-party patents. In order to successfully challenge +67 +the validity of any such United States patent in federal court, we would need to overcome a presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such United States patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such United States patent. +Parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell diagnostic tests, products or services, and could result in the award of substantial damages against us, including treble damages, attorney’s fees, costs, and expenses if we are found to have willfully infringed. In the event of a successful claim of infringement against us, we may be required to pay damages and ongoing royalties, which could be significant, and obtain one or more licenses from third parties, or be prohibited from selling certain diagnostic tests, products or services. We may not be able to obtain these licenses on acceptable or commercially reasonable terms, if at all, or these licenses may be non-exclusive, which could result in our competitors gaining access to the same intellectual property. In addition, we could encounter delays in diagnostic test introductions while we attempt to develop alternative diagnostic tests, products or services to avoid infringing third-party patents or intellectual property rights. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing diagnostic tests, products or services, and the prohibition of sale of any of our diagnostic tests, products or services could materially affect our business and our ability to gain market acceptance for our diagnostic tests, products and services. +Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. +In addition, our agreements with some of our customers, suppliers or other entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims, including the types of claims described above. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results or financial condition. +We may be subject to claims challenging the priority or inventorship of our patents and other intellectual property rights. +We or our licensors may be subject to claims that former employees, collaborators or other third parties have an interest in our owned or in-licensed patents, trade secrets or other intellectual property rights as an inventor or co-inventor. For example, we or our licensors may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or our or our licensors’ ownership of our owned or in-licensed patents, trade secrets or other intellectual property rights. If we or our licensors fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property rights that are important to our product candidates. +If we or our licensors are unsuccessful in any interference proceeding or other priority or inventorship dispute, we may be required to obtain and maintain licenses from third parties, including parties involved in any such interference proceedings or other priority or inventorship disputes. Such licenses may not be available on commercially reasonable terms or at all, or may be non-exclusive. If we are unable to obtain and maintain such licenses, we may need to cease the development, manufacture, and commercialization of one or more of our diagnostic tests, products or services. The loss of exclusivity or the narrowing of our owned and licensed patent claims could limit our ability to stop others from using or commercializing similar or identical technology and products. Any of the foregoing could result in a material adverse effect on our business, financial condition, results of operations, or prospects. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. +Obtaining and maintaining our patent protection depends on compliance with various required procedures, document submissions, fee payments and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. +Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States at several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees due to non-United States patent agencies. We are also dependent on our licensors to take the necessary action to comply with these requirements with respect to our licensed intellectual property rights. The USPTO and various non-US governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete +68 +loss of patent rights in the relevant jurisdiction. In such an event, our competitors may be able to enter the market without infringing our patents and this circumstance would have a material adverse effect on our business. +Issued patents covering our diagnostic tests and any other or future diagnostic tests, products or services could be found invalid or unenforceable if challenged. +The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability and some of our patents or patent applications, including licensed patents, may be challenged, in courts or patent offices in the United States and abroad, in opposition, derivation, reexamination, inter partes review, post-grant review or interference. Additionally, if we and our licensing partners initiate or become involved in legal proceedings against a third party to enforce a patent covering one of our diagnostic tests, products, services or technologies, the defendant could counterclaim that the patent covering our diagnostic tests, products or services is invalid or unenforceable. In patent litigation in the United States, counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including patent eligible subject matter, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement during prosecution. In addition, the United States now awards patent priority to the first party to file a patent application, and others may submit patent claims covering our inventions prior to us. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our diagnostic tests or any diagnostic tests, products and services that we may develop. +A successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights, which could have a material adverse impact on our business. Furthermore, if the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the outcome, it could dissuade companies from collaborating with us to license, develop or commercialize current or future diagnostic tests, products or services. +We may not be aware of all third-party intellectual property rights potentially relating to our current or future diagnostic tests, products or services. +Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until approximately 18 months after filing or, in some cases, not until such patent applications issue as patents. We, or our current or future license partners or collaborators, might not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings, derivation proceedings or other post-grant proceedings declared by the USPTO. The outcome of such proceedings is uncertain, and other patent applications may have priority over our patent applications. Such proceedings could also result in substantial costs to us and divert our management’s attention and resources. +We rely on licenses from third parties in relation to certain diagnostic tests, products and services and if we lose these licenses then we may be subjected to future litigation. +We are a party to license agreements that grant us rights to use certain intellectual property rights, including patents and patent applications, typically in certain specified fields of use, in connection with our diagnostic tests, products and services. Some of those licensed rights could provide us with freedom to operate for aspects of our diagnostic tests, products and services. We may need to obtain additional licenses from others to advance our research, development and commercialization activities. +The in-licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to in-license or acquire third-party intellectual property rights that we may consider attractive or necessary. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. +Furthermore, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. In addition, we expect that competition for the in-licensing or acquisition of third-party intellectual property rights for product candidates that are attractive to us may increase in the future, which may mean fewer suitable opportunities for us as well as higher acquisition or licensing costs. We may be unable to in-license or acquire the third-party intellectual property rights for product candidates on terms that would allow us to make an appropriate return on our investment. If we are unable to successfully obtain rights to suitable product candidates, our business, financial condition, results of operations and prospects for growth could suffer. +Our existing license agreements impose, and we expect that our future license agreements will impose, various diligence, royalty payment, milestone payment, insurance and other obligations on us. If we fail to comply with these obligations or other obligations in our license agreements, our licensors may have the right to terminate these agreements, in which event we may not be able to develop +69 +and market any product or use any technology that is covered by these agreements. If our license agreements terminate, or we experience a reduction or elimination of licensed rights under these agreements, we may have to negotiate new or reinstated licenses with less favorable terms or we may not have sufficient intellectual property rights to operate our business. The occurrence of such events could materially harm our business. +Our success may depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for our licensed intellectual property rights. Our licensors may not successfully prosecute the patent applications we license. Even if patents issue in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents or may pursue such litigation less aggressively than we would. Without protection for the intellectual property rights we license, other companies might be able to offer substantially identical diagnostic tests for sale, which could adversely affect our competitive business position and harm our business prospects. +Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations and prospects. +Moreover, disputes may also arise between us and our current or future licensors regarding intellectual property rights subject to a license agreement, including those relating to: +• +the scope of rights granted under the license agreement and other interpretation-related issues; +• +whether, and the extent to which, our diagnostic tests, products, services, technology, and processes infringe on intellectual property rights of the licensor that is not subject to the licensing agreement; +• +whether our licensor or its licensor had the right to grant the license agreement; +• +whether third parties are entitled to compensation or equitable relief, such as an injunction, for our use of the intellectual property rights without their authorization; +• +our involvement in the prosecution of licensed patents and our licensors’ overall patent enforcement strategy; +• +the amounts of royalties, milestones, or other payments due under the license agreement; +• +our right to sublicense patent and other rights to third parties under collaborative development relationships; +• +our diligence obligations under the license agreement and what activities satisfy those diligence obligations; +• +the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property rights by our licensors and us and our collaborators; and +• +the priority of invention of patented technology. +If we do not prevail in such disputes, we may lose any or all of our rights under such license agreements. +In addition, the agreements under which we currently license intellectual property rights or technology from third parties are complex and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property rights or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Moreover, if disputes over intellectual property rights that we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, or are insufficient to provide us the necessary rights to use the intellectual property rights, we may be unable to successfully develop and commercialize any affected diagnostic tests, products or services, which could have a material adverse effect on our business, financial conditions, results of operations and prospects. +Absent the license agreements, we may infringe patents subject to those agreements, and if the license agreements are terminated, we may be subject to litigation by the licensor. Litigation could result in substantial costs to us and distract our management. If we do not prevail, we may be required to pay damages, including treble damages, attorneys’ fees, costs and expenses and royalties or be enjoined from selling our diagnostic tests, products or services, which could adversely affect our ability to offer diagnostic tests, products or services, our ability to continue operations and our financial condition. +Some intellectual property that we in-license may have been developed through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements and a preference for companies based in the United States. Compliance with such regulations may limit our exclusive rights, and limit our ability to contract with manufacturers that are not based in the United States. +Certain of the intellectual property that we license may have been developed through the use of United States government funding and therefore may be subject to certain federal regulations. As a result, the United States government may have certain rights to intellectual property embodied in our diagnostic tests, products and services pursuant to the Bayh-Dole Act of 1980 (Bayh-Dole Act). These United +70 +States government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the United States government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). To date, none of our commercialized products are subject to march-in rights. The United States government also has the right to take title to these inventions if we, or the applicable licensor, fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us or the applicable licensor to expend substantial resources. In addition, the United States government requires that any products of the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for United States manufacturers may limit our ability to contract with product manufacturers outside of the United States for products covered by such intellectual property. To the extent any of our current or future owned or licensed intellectual property is generated through the use of United States government funding, the provisions of the Bayh-Dole Act may similarly apply. Any failure by us to comply with federal regulations regarding intellectual property rights that were developed through the use of United States government funding could have a material adverse effect on our business, financial condition, results of operations, and prospects. +Patent terms may be inadequate to protect our competitive position on our diagnostic tests, products and services for an adequate amount of time. +Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest United States non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. +Even if patents covering our diagnostic tests, products and services are obtained, once the patent life has expired, we may be open to competition from competitive diagnostic tests, products and services. Given the amount of time required for the development, testing and regulatory review of potential new diagnostic tests, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing diagnostic tests, products or services similar or identical to ours. +We may not be able to protect our intellectual property rights throughout the world. +Third parties may attempt to commercialize competitive diagnostic tests, products or services in foreign countries where we do not have any patents or patent applications and/or where legal recourse may be limited. This may have a significant commercial impact on our foreign business operations. +Filing, prosecuting and defending patents on our diagnostic tests, products and services in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing diagnostic tests or products made using our inventions in and into the United States or other jurisdictions. Competitors may use our diagnostic tests, products, services and technologies in jurisdictions where we have not obtained patent protection to develop their own diagnostic tests and, further, may export otherwise infringing diagnostic tests or products to territories where we have patent protection but enforcement is not as strong as that in the United States. These diagnostic tests and products may compete with our diagnostic tests, products or services and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. +Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing diagnostic tests, products and services in violation of our intellectual property rights generally. Proceedings to enforce our intellectual property rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license. +Many countries, including India, China, and certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish +71 +the value of such patent. If we or any of our current or future licensors are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition and results of operations may be adversely affected. +Intellectual property rights do not necessarily address all potential threats. +The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example: +• +others may be able to make diagnostic tests or products that are similar to our Nodify XL2, Nodify CDT, GeneStrat or VeriStrat tests or utilize similar technology that is not covered by the claims of our patents or that incorporates certain technology in our Nodify XL2, Nodify CDT, GeneStrat or VeriStrat tests; +• +we, or our current or future licensors or collaborators, might not have been the first to make the inventions covered by the applicable issued patent or pending patent application that we own or license now or may own or license in the future; +• +we, or our current or future licensors or collaborators, might not have been the first to file patent applications covering certain of our or their inventions; +• +others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights; +• +it is possible that our current or future pending patent applications will not lead to issued patents; +• +issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties; +• +our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive diagnostic tests, products and services for sale in our major commercial markets; +• +we may not develop additional proprietary technologies that are patentable; +• +the patents of others may harm our business; and +• +we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property rights. +Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. +General Risk Factors +We expect that the price of our common stock will fluctuate substantially and you may not be able to sell your shares at or above the price you paid for them. +The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including: +• +volume and customer mix for our Nodify XL2, Nodify CDT, GeneStrat ddPCR, GeneStrat NGS, and VeriStrat testing; +• +the introduction of new diagnostic tests or enhancements to such tests by us or others in our industry; +• +disputes or other developments with respect to our or others’ intellectual property rights; +• +our ability to develop, obtain regulatory clearance or approval or certification for, and market new and enhanced diagnostic tests on a timely basis; +• +product liability claims or other litigation; +• +quarterly variations in our results of operations or those of others in our industry; +• +media exposure of our diagnostic tests or of those of others in our industry; +• +changes in governmental regulations or in the status of our regulatory approvals or applications; +• +changes in earnings estimates or recommendations by securities analysts; and +• +general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors. +In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may significantly affect the market +72 +price of our common stock, regardless of our actual operating performance, and you may not realize any return on your investment in us and may lose some or all of your investment. +In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert management’s attention and resources from our business. +Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline. +The trading market for our common stock develops is influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a small reporting company and emerging growth company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with us, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. +We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors. +We are an “emerging growth company,” as defined in the JOBS Act. We may take advantage of certain exemptions and relief from various public reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act. We will be exempt from any rules that could be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements; we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved. +Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.24 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) until December 31, 2025 (the year ended December 31st following the fifth anniversary of our IPO). +We are also a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our common shares held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common shares held by nonaffiliates exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +Investors may find our common stock less attractive to the extent we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline or become more volatile. +If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. +The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. It is possible that interpretation, industry practice and guidance may evolve over time. If our +73 +assumptions change or if actual circumstances differ from our assumptions, our operating results may be adversely affected and could fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. +Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders. +Our officers, directors and principal stockholders each holding more than 5% of our common stock collectively control approximately 67.0% of our outstanding common stock as of December 31, 2023. As a result, these stockholders, if they act together, will be able to control the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change of control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of our other stockholders. +Operating as a public company requires us to incur substantial costs and requires substantial management attention. +As a public company, we have incurred and will continue to incur costs associated with corporate governance requirements that are applicable to us as a public company, including rules and regulations of the SEC, under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Securities Exchange Act of 1934, as amended (the Exchange Act), as well as the rules of NASDAQ. Compliance with these rules and regulations have significantly increased our accounting, legal and financial compliance costs and make some activities more time-consuming. These rules and regulations could make it more expensive for us to maintain directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers. Accordingly, increases in costs incurred as a result of being a publicly traded company may adversely affect our business, financial condition and results of operations. +If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock. +As a result of being a public company, we are required, under Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis. +During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. The effectiveness of our controls and procedures may be limited by a variety of factors, including: +• +faulty human judgment and simple errors, omissions, or mistakes; +• +fraudulent action of an individual or collusion of two or more people; +• +inappropriate management override of procedures; and +• +the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial control. +When we cease to be an “emerging growth company” under the federal securities laws, our auditors will be required to express an opinion on the effectiveness of our internal controls. If we are unable to confirm that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline. +Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud. +We are subject to the periodic reporting requirements of the Exchange Act. We have designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected. +74 +Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management. +Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. +Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. +Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees. +Our amended and restated certificate of incorporation specifies that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders. Notwithstanding the foregoing, the exclusive forum provision will not apply to any claim to enforce any liability or duty created by the Exchange Act or the Securities Act and for which the federal courts have exclusive jurisdiction. We believe this exclusive forum provision benefits us by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in such action. +Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us. +Our amended and restated articles of incorporation provide that we will indemnify our directors and officers to the fullest extent permitted by Section 145 of the Delaware General Corporate Law. +In addition, as permitted by the Delaware General Corporate Law, our amended and restated articles of incorporation and our indemnification agreements that we have entered into with our directors and officers provide that: +• +we will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by applicable law. Such law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful; +• +we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law; +• +we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification; +• +the rights conferred in our amended and restated articles of incorporation are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and +• +we may not retroactively amend our amended and restated articles of incorporation provisions to reduce our indemnification obligations to directors, officers, employees and agents. +75 +1B. Unresolved S taff Comments. +None. +1C. Cyberse curity. +Risk Management and Strategy +Our business relies on secure and continuous processing of information and the availability of our IT networks and IT resources, as well as critical IT vendors that support our technology, research and other data processing operations. We have integrated cybersecurity risk management into our broader risk management framework. This integration ensures that cybersecurity considerations are an integral part of our decision-making processes at every level. Our IT department continuously evaluates and addresses cybersecurity risks in alignment with our business objectives and operational needs. The Company maintains comprehensive security policies and procedures. These policies and procedures include but are not limited to security and data privacy training for staff, physical security, and electronic data security. Our electronic data security policies and procedures follow HIPAA, GDPR, SEC guidelines, and examples encompass data access controls, data privacy controls, password controls, data encryption, and incident response including an in-depth process for determining materiality. On top of the policies, our network is protected via firewall implementation and cyber-threat monitoring which includes 24/7 vulnerability scanning and 24/7 monitoring using extended detection and response for advanced intrusion detection. +The Company also engages with a range of external experts in evaluating and testing our risk management systems. These partnerships allow us to leverage specialized knowledge and insights, ensuring our cybersecurity strategies and processes remain at the forefront of industry best practices. Our collaboration with these third-parties includes audits, threat assessments, and consultation on security enhancements. +The Company is also aware of the risks associated with third-party service providers. To oversee these risks, we conduct thorough security assessments of all third-party providers before engagement and maintain ongoing monitoring to ensure compliance with our cybersecurity standards. +Current Cybersecurity Risks +As of the date of this Annual Report on Form 10-K, the Company has not experienced any cybersecurity threats that have materially affected or are reasonably likely to materially affect the Company. In the event of a cybersecurity incident, the Company is equipped with a well-defined incident response plan. This plan includes immediate actions to mitigate the impact and long-term strategies for remediation and prevention of future incidents. See "Risk Factors— We may face additional costs, loss of revenue, significant liabilities, harm to our brand, decreased use of our products or services and business disruption if there are any security or data privacy breaches or other unauthorized or improper access." +Management and Board Oversight +Our management is responsible for day-to-day risk management activities. Our Board of Directors, acting directly and through its committees, is responsible for the oversight of our risk management. The Nominating and Governance Committee monitors our cybersecurity risk profile, receives periodic updates from management on all matters related to cybersecurity and reports to our full Board of Directors on an annual basis or as necessary. The Nominating and Governance Committee is composed of members with diverse expertise that allows them to oversee cybersecurity risks effectively. +Management is involved in assessing and managing material cybersecurity risks and incidents through dialogue with our Information Security Officer. Our Information Security Officer brings expertise to this role through his in-depth knowledge and experience in technology management and cybersecurity. Our Information Security Officer is continually informed about the latest developments in cybersecurity. This is crucial for the effective prevention, detection, mitigation and remediation of cybersecurity incidents, and allows him to regularly inform our Chief Executive Officer and Chief Financial Officer of any and all aspects of our business related to cybersecurity and information technology. +Our Chief Executive Officer, Chief Financial Officer and Information Security Officer regularly report to the Nominating and Governance Committee to ensure effective and efficient oversight of our cybersecurity threats and material risks, and to assist in proper risk management. Significant cybersecurity matters and strategic risk management decisions will be escalated from the Nominating and Governance Committee to the Board of Directors, ensuring that there is comprehensive oversight and the full Board of Directors can provide guidance on critical cybersecurity issues. +Item 2. Pro perties. +Throughout fiscal year 2023 our headquarters were located in Boulder, Colorado, where we leased office and laboratory space, under an operating lease agreement that expired in January 2024. In March 2022, the Company entered into a lease agreement (the CVP Lease) with Centennial Valley Properties I, LLC, a Colorado limited liability company for office and laboratory space in Louisville, Colorado. In August 2022, CVP assigned the lease to CVP I Owner LLC, within the terms allowing for the assignment of the lease. The purpose +76 +of the CVP Lease was to replace the Company’s leased premises in Boulder, Colorado. The Company relocated its corporate headquarters to Louisville, Colorado in December 2023. We also lease office and laboratory space located in De Soto, Kansas, under an operating lease agreement that expires in October 2026. A portion of our employees are located outside of Colorado and Kansas, and others work from home. Our properties are suitable for our current business operations. +Location +Use +Square Feet +Expiration +Louisville, Colorado +Office and laboratory +79,980 +March 31, 2035 +De Soto, Kansas +Office and laboratory +9,066 +October 31, 2026 +Item 3. Legal Proceedings. +From time to time, we may become involved in legal proceedings or investigations which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition, or cash flows. +Item 4. Mine Saf ety Disclosures. +None. +77 +PART II +Item 5. Market for Registrant’s Common Equity, Related Stock holder Matters and Issuer Purchases of Equity Securities. +Market Information +Our common stock is traded on The NASDAQ Global Market under the symbol “BDSX”. The high and low closing prices for our common stock on The NASDAQ Global Market from January 1, 2023 to December 31, 2023 were $2.50 and $1.04, respectively. +Holders of our Common Stock +As of February 23, 2024, there were approximately 239 holders of our common stock. +Dividend Policy +We have never declared or paid dividends on our common stock and do not expect to pay dividends on our common stock for the foreseeable future. We anticipate that all of our liquidity in the foreseeable future will be used for the operation and growth of our business. Any future determination to declare dividends will be subject to the discretion of our Board of Directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects, and any other factors deemed relevant by our Board of Directors. In addition, the terms of our term loan restrict our ability to pay dividends on our common stock, and we may also enter into credit agreements or other borrowing arrangements in the future that will further restrict our ability to declare or pay dividends on our common stock. +Recent Sales of Unregistered Securities and Use of Proceeds +On August 3, 2023, the Company entered into subscription agreements (the August 2023 Subscription Agreements) with all of the members of our Board of Directors, all Section 16 officers, and additional members of the Biodesix leadership team (together, the Investors) for the issuance and sale by the Company of an aggregate of 16,975,298 shares of the Company’s common stock at a purchase price (determined in accordance with NASDAQ rules relating to the “Minimum Value” of the Company’s common stock) of $1.62 per share for an aggregate purchase price of approximately $27.5 million. The Subscription Agreements did not include any registration rights. +The Company used the proceeds for the commercial expansion of sales, research and development, and for general corporate purposes (see – Item 8. "Financial Statements and Supplementary Data"). +On November 21, 2022, the Company entered into subscription agreements (the November 2022 Subscription Agreements) with certain members of management, including the Company’s Chief Executive Officer and Chief Financial Officer, for the issuance and sale by the Company of an aggregate of 235,056 shares of the Company’s common stock at a purchase price (determined in accordance with NASDAQ rules relating to the “Minimum Value” of the Company’s common stock) of $1.15 per share for an aggregate purchase price of approximately $270,000. The November 2022 Subscription Agreements did not include any registration rights and included lock up restrictions in effect during the period ending 90 days subsequent to November 21, 2022. +The Company used the proceeds to, among other things and in conjunction with a public offering, fund the repayment of the promissory note with Streeterville Capital, LLC (Streeterville), the Loan and Security Agreement with Silicon Valley Bank (SVB), and for general corporate purposes (see – Item 8. "Financial Statements and Supplementary Data"). +On April 7, 2022, the Company entered into subscription agreements (the April 2022 Subscription Agreements) with a consortium of investors (the April Investors), including three members of our Board of Directors and other existing shareholders of the Company, for the issuance and sale by the Company of an aggregate of 6,508,376 shares of the Company’s common stock at a purchase price (determined in accordance with NASDAQ rules relating to the “Minimum Value” of the Company’s common stock) of $1.79 per share, which is equal to the closing price of the Company’s common stock on April 7, 2022, generating proceeds of $11.7 million. The three members of our Board of Directors acquired an aggregate of 3,631,284 shares pursuant to the form of the April 2022 Subscription Agreements that did not include any registration rights as they are exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the Securities Act), and Rule 506 promulgated thereunder. The remaining 2,877,092 shares were acquired by others pursuant to the form of the April 2022 Subscription Agreements whereby we agreed to file, subject to certain exceptions, a shelf registration statement with respect to resales of such shares with the SEC no later than 60 days from April 7, 2022, which the Company filed on June 6, 2022. +The Company used the proceeds to, among other things, fund the partial repayment of the 2021 Term Loan and for general corporate purposes (see – Item 8. "Financial Statements and Supplementary Data"). +Item 6. [ Reserved] +78 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Biodesix, Inc. is referred to throughout this Annual Report on Form 10-K for the period ended December 31, 2023 (Form 10-K) as “we”, “us”, “our” or the “Company.” +The following discussion of our financial condition and results of operations should be read together with our audited financial statements and related notes and other financial information included elsewhere in this Annual Report on Form 10-K. +In addition to historical financial information, this discussion and other parts of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part I, Item 1A above. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ from those anticipated. +These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. +The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), is provided to supplement the audited financial statements and the related notes in Part II - Item 8 of this Annual Report on Form 10-K. We intend for this discussion to provide you with information that will assist you in understanding our financial statements, the changes in key items in those financial statements from year to year and the primary factors that accounted for those changes. Data for the years ended December 31, 2023 and 2022 has been derived from our audited financial statements included in this Annual Report on Form 10-K. +Overview +We are a leading diagnostic solutions company with a focus in lung disease. By combining a multi-omic approach with a holistic view of the patient’s disease state, we believe our testing solutions provide physicians with greater insights to help personalize their patient’s care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe helps improve overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. We also recognize revenue from other services, including amounts derived from licensing our technologies. +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, radiomics, and AI enabled informatics, to discover innovative diagnostic tests for potential clinical use. Our multi-omic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage with our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic treatment landscape to identify additional clinical unmet needs where a diagnostic test could help improve patient care. Additionally, we incorporate clinical and molecular profiling data from our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or other collaborative partnerships, to continue to advance our platform. We have a variety of samples with associated data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development initiatives. +We have commercialized five diagnostic tests for our lung diagnostic business, each of which have Medicare coverage, which are currently available for use by physicians. Our Nodify XL2 and Nodify CDT tests, marketed as Nodify Lung Nodule Risk Assessment testing, assess the risk of lung cancer to help identify the most appropriate treatment pathway. The Nodify CDT and XL2 tests have an established average turnaround time of one and five business days, respectively, from receipt of the blood sample, providing physicians with timely results to guide diagnostic planning. The Nodify Lung Risk Assessment testing has resulted in a change in the calculated risk of malignancy in 80-85% of the cases. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our GeneStrat ddPCR, GeneStrat NGS, and VeriStrat tests, marketed as part of our IQLung testing strategy, are used following diagnosis of lung cancer to detect the presence of mutations in the tumor and the state of the patient’s immune system to help guide treatment decisions. The GeneStrat targeted tumor genomic profiling test and the VeriStrat immune profiling test have an established average turnaround time of two business days. The GeneStrat NGS test is our blood-based NGS test and has an established average turnaround time of three business days. The 52-gene panel includes +79 +guideline recommended mutations to help physicians treating advanced-stage lung cancer patients identify all four major mutation classes and genes, such as EGFR, ALK, KRAS, MET, NTRK, ERBB2, and others, and delivers them in an expedited timeframe so patient treatment can begin sooner. +In addition to the five diagnostic tests currently on the market, we perform more than 30 assays for research use as part of our laboratory services that have been used by over 65 biopharmaceutical companies and academic partners. All of our diagnostic and services testing is performed at one of our two accredited, high-complexity clinical laboratories in Louisville, Colorado and De Soto, Kansas. +Since our inception, we have performed over 600,000 clinical diagnostic tests, and continue to generate a large and growing body of clinical evidence consisting of over 300 clinical and scientific peer-reviewed publications, presentations, and abstracts. Through ongoing study of each of our tests, we continue to grow our depth of understanding of disease biology and the broad utility of each of our tests. We believe we are poised for rapid growth by leveraging our scientific development and laboratory operations expertise along with our commercial infrastructure which includes sales, marketing, reimbursement, and regulatory affairs. +In the United States, we market our tests to clinical customers through our targeted sales organization, which includes sales representatives that are engaged in sales efforts and promotional activities primarily to pulmonologists, oncologists, cancer centers and nodule clinics. We market our tests and services to biopharmaceutical companies globally through our targeted business development team, which promotes the broad utility of our tests and testing capabilities throughout drug development and commercialization which is of value to pharmaceutical companies and their drug-development process. +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe testing program, which included three commercialized tests. These tests under the Biodesix WorkSafe testing program were utilized by healthcare providers, including hospitals and nursing homes, and were also offered to businesses and educational systems. We announced multiple partnerships for COVID-19 testing and maintained an agreement with the State of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State, which expired on August 31, 2022. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two FDA EUA authorized tests, a part of our customizable program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. The Bio-Rad SARS-CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under CLIA to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Beginning in second quarter 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass SARS-CoV-2 Neutralizing Antibody testing as a service. The test was the first surrogate neutralizing antibody test with FDA EUA and uses ELISA technology to qualitatively detect circulating neutralizing antibodies to the RBD in the spike protein of SARS-CoV-2 that are produced in response to a previous SARS-CoV-2 infection. +Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety. On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. In connection with the expiration of the Public Health Emergency declaration under Section 319, the Company no longer provides commercial COVID-19 diagnostic testing services. +Factors Affecting Our Performance +We believe there are several important factors that have impacted our operating performance and results of operations, including: +• +Testing volume and customer mix. Our revenues and costs are affected by the volume of testing and mix of customers from period to period. We evaluate both the volume of our commercial tests, or the number of tests that we perform for patients on behalf of clinicians, as well as tests for biopharmaceutical companies. Our performance depends on our ability to retain and increase adoption with existing customers, as well as attract new customers. We believe that the test volume we receive from clinicians and biopharmaceutical companies are indicators of growth in each of these customer verticals. Customer mix for our tests has the potential to significantly impact our results of operations, as the average selling price for biopharmaceutical sample testing is currently significantly greater than our average selling price for clinical tests since we are not a contracted provider for, or our tests are not covered by all clinical patients’ insurance. We evaluate our average selling price for tests that are covered by Medicare, Medicare Advantage and commercial payers to understand the trends in reimbursement and apply those trends to our revenue recognition policies. +• +Reimbursement for clinical diagnostic testing. Our revenue depends on achieving broad coverage and reimbursement for our tests from third-party payers, including both commercial and government payers. On June 7, 2022, we announced that WPS Government Health Administrators, the Medicare administrative contractor with jurisdiction for Biodesix’s De Soto, Kansas laboratory, has provided coverage for the Nodify CDT lung nodule test. All five Biodesix blood-based lung diagnostic +80 +tests within the Nodify Lung Nodule Risk Assessment testing strategy and IQLung strategy for lung cancer patients are now covered by Medicare. Payment from third-party payers differs depending on whether we have entered into a contract with the payers as a “participating provider” or do not have a contract and are considered a “non-participating provider.” Payers will often reimburse non-participating providers, if at all, at a lower rate than participating providers. +Historically, we have experienced situations where commercial payers proactively reduced the amounts they were willing to reimburse for our tests, and in other situations, commercial payers have determined that the amounts they previously paid were too high and have sought to recover those perceived excess payments by deducting such amounts from payments otherwise being made. When we contract to serve as a participating provider, reimbursements are made pursuant to a negotiated fee schedule and are limited to only covered indications. Becoming a participating provider generally results in higher reimbursement for covered indications and lack of reimbursement for non-covered indications. As a result, the impact of becoming a participating provider with a specific payer will vary. If we are not able to obtain or maintain coverage and adequate reimbursement from third-party payers, we may not be able to effectively increase our testing volume and revenue as expected. Additionally, retrospective reimbursement adjustments can negatively impact our revenue and cause our financial results to fluctuate. +On October, 17, 2022, the Company announced that the U.S. Department of Veterans Affairs (the VA), the largest integrated health care system in the United States, awarded a Federal Supply Schedule Contract for the Company’s entire portfolio of lung cancer diagnostic tests. The VA provides care at 1,298 health care facilities, including 171 VA Medical Centers and 1,113 outpatient sites of care of varying complexity to over 9 million veterans enrolled in the VA health care program. All of our existing lung diagnostic tests will be payable when performed and partnering with the VA represents a large opportunity for Biodesix to help improve care for our Veterans by integrating our five diagnostic products and testing strategies into our country’s largest health system. +On December 19, 2022, the Company announced the signing of our first four private payer commercial policies covering our Nodify XL2 test. These contracts included three Blue Cross Blue Shield plans in North Carolina, South Carolina, and Kansas City, and a contract with Capital District Physician’s Health Plan in New York. In total these new private pay contracts add approximately 4.5 million covered lives, and are in geographic regions of the country where the incidence of lung cancer is high. +On July 6, 2023, the Company announced that the Centers for Medicare & Medicaid Services (CMS) has designated the Nodify CDT Test as an Advanced Diagnostic Laboratory Test (ADLT) effective June 30, 2023. Obtaining ADLT status is a recognition that the Nodify CDT test meets the stringent criteria established under the Protecting Access to Medicare Act of 2014. ADLT status is reserved for innovative tests with Medicare coverage that provide new clinical diagnostic information that cannot be obtained from any other test or combination of tests. +• +Investment in clinical studies and product innovation to support growth. A significant aspect of our business is our investment in research and development, including the development of new products and our investments in clinical utility studies. We have invested heavily in clinical studies for our on market and pipeline products. Our studies focus primarily on the clinical utility of our tests including the ongoing INSIGHT study to continue our clinical understanding of the predictive and prognostic value of the VeriStrat test. On June 27, 2023, we completed and closed enrollment of 5,000 patients in the INSIGHT study with non-small cell lung cancer. The ALTITUDE study, launched during the fourth quarter 2020, seeks to further demonstrate the efficacy of the Nodify XL2 and Nodify CDT tests. A secondary focus of our studies is understanding the economic impact of our tests in assisting with decisions related to patient management and the potential impact of our tests in reducing overall healthcare costs. On July 12, 2023, we announced the prospective, real-world ORACLE study (An Observational Registry Study to Evaluate the Performance of the Nodify XL2 Test) achieved the primary endpoint of a statistically significant change in the proportion of benign lung nodules managed by Nodify XL2 experiencing invasive procedures. The ORACLE study showed patients with benign nodules managed with the Nodify XL2 test were 74% less likely to undergo an unnecessary invasive procedure compared to the control group. Additionally, the proportion of patients sent to CT surveillance with malignant nodules did not differ between the Nodify XL2 group and the control group. +Our clinical research has resulted in approximately 90 peer-reviewed publications for our tests. In addition to clinical studies, we are collaborating with investigators from multiple academic cancer centers. On June 3, 2022, we announced the intent to develop a new novel molecular minimal residual disease (MRD) test as a part of a master sponsored research agreement (MSRA) with Memorial Sloan Kettering Cancer Center (MSK). In addition, the MSRA between MSK and the Company also includes the potential future development of other diagnostic tests aimed at improving the treatment of cancer. We believe these studies are critical to gaining physician adoption and driving favorable coverage decisions by payers and expect our investments in research and development to increase. Further we also expect to increase our research and development expenses to fund further innovation and develop new clinically relevant tests. +• +Ability to attract new biopharmaceutical customers and maintain and expand relationships with existing customers. Our business development team promotes the broad utility of our products for biopharmaceutical companies in the United +81 +States and internationally. Our revenue, business opportunities and growth depend in part on our ability to attract new biopharmaceutical customers and to maintain and expand relationships with existing biopharmaceutical customers. We expect to increase our sales and marketing expenses in furtherance of this as we continue to develop these relationships, and we expect to support a growing number of investigations and clinical trials. If our relationships expand, we believe we may have opportunities to offer our platform for companion diagnostic development, novel target discovery and validation efforts, and to grow into other commercial opportunities. For example, we believe our multi-omic data including genomic and proteomic data, in combination with clinical outcomes or claims data, has revenue-generating potential, including for novel target identification and companion diagnostic discovery and development. +On June 30, 2022, the Company announced an arrangement with Royal Philips, a global leader in health care technology, in which our Nodify Lung blood-based lung nodule risk assessment testing will be incorporated into Philips Lung Cancer Orchestrator lung cancer patient management system. The incorporation of proteomics data – along with the radiologic and patient history data currently used to determine treatment decisions – can help create diagnostic efficiency for cancer care centers in the management of a growing number of lung nodule cases, via the contextual launch of Biodesix Nodify Lung application within Lung Cancer Orchestrator. Philips Lung Cancer Orchestrator solution is designed to enable health systems to operationalize lung cancer screening and lung nodule management programs at scale. +• +Motivating and expanding our field sales force and customer support team. Our field sales force is the primary point of contact in the clinical setting. These representatives of the Company must cover expansive geographic regions which limits their time for interaction and education of our products in the clinical setting. We plan to continue investing in the field sales force through select expansion and provide them with tools that maximize their education and selling efforts in order to achieve greater returns. Additionally, we plan to invest in the marketing and customer support teams to continue to provide the field sales force with the resources to be successful. +While each of these areas present significant opportunities for us, they also pose significant risks and challenges that we must address. See Part I, Item 1A. “Risk Factors” for more information. +COVID-19 Pandemic +The COVID-19 pandemic disrupted, and may continue to disrupt, our lung diagnostic testing operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States of Colorado and Kansas’ public health orders and the guidance from the Centers for Disease Control and Prevention (CDC). Employees who can perform their duties remotely have the option to work from home. Our sales, marketing and business development efforts may be constrained by our operational response to future COVID-19 variant outbreaks. We will continue to adjust our operational norms, as needed, including complying with government directives and guidelines as they are modified and supplemented. +The COVID-19 pandemic and the surge associated with multiple variants have negatively affected our lung diagnostic testing-related revenue and our clinical studies. Beginning in the third quarter 2020, the Company’s COVID-19 testing services began to experience rapid growth with a peak in the first quarter 2021; however, subsequent to this peak, we experienced a rapid decline in COVID-19 testing revenue primarily as a result of a few significant contracts that expired as well as the ongoing increase in COVID-19 vaccination rates across the U.S. and the adoption and availability of at-home testing. On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. In connection with the expiration of the Public Health Emergency declaration under Section 319, the Company no longer provides commercial COVID-19 diagnostic testing services. +See Part I, Item 1A. “Risk Factors” for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations. +Fourth Quarter and Full Year 2023 Financial and Operational Highlights +The following were significant developments affecting our business, capital structure and liquidity during the year ended December 31, 2023 as compared to the same period in 2022 unless otherwise noted: +• +Total revenue of $14.7 million and $49.1 million for the fourth quarter and fiscal 2023, respectively, an increase of 52% and 49% over the respective prior year comparable periods excluding COVID testing revenues, and an increase of 53% and 28% over the respective prior year comparable periods including COVID testing revenues; +o +Lung Diagnostic revenue of $12.8 million and $45.1 million for the fourth quarter and fiscal 2023, respectively, an increase of 55% and 54% over the respective prior year comparable periods, primarily driven by the continued adoption of Nodify Lung® Nodule Risk Assessment tests; +82 +o +Biopharma Services and other revenue of $1.9 million and $3.9 million for the fourth quarter and fiscal 2023, respectively, an increase of 38% and 6% over the respective prior year comparable periods, a result of both delivering against our expanding book of business and securing new agreements; +• +Gross profit was $11.3 million or 77% and $36.1 million or 73% for the fourth quarter and fiscal 2023, respectively, as a percentage of revenue compared to 66% and 63% in the prior year comparable periods, primarily driven by growth in Lung Diagnostic testing and optimization of testing workflows that resulted in improvements in costs per test, the ongoing recovery of our Biopharma Services business, and the commercial discontinuation of lower-margin COVID-19 testing; +• +Operating expenses (excluding direct costs and expenses) of $18.2 million and $77.4 million for the fourth quarter and fiscal 2023, a decrease of 10% and increase of 4% over the respective prior year comparable periods; +o +Decrease in fourth quarter 2023 is primarily attributable to a decrease in research and development costs, partially offset by increased sales and marketing costs to support Lung Diagnostic sales growth, enhance product awareness and drive adoption, while the full year increase in operating expenses was driven by an increase in sales and marketing costs, partially offset by a reduction in research and development costs; +o +Includes non-cash stock compensation expense of $1.1 million and $5.4 million during fourth quarter and fiscal 2023, respectively, a decrease of 48% and 10% over the respective prior year comparable periods; +• +Net loss of $9.1 million and $52.1 million for the fourth quarter and fiscal 2023, respectively, an improvement of 55% and 20% over the respective prior year comparable periods; +o +Fourth quarter and fiscal 2023 included a gain of $0.1 million and loss of $1.3 million, respectively, from the change in fair value of warrant liabilities associated with our term loan facility with Perceptive Advisors (Perceptive); +o +Fourth quarter and fiscal 2022 included loss on debt extinguishment and modification of $4.0 million and $7.0 million, respectively; +• +Cash and cash equivalents of $26.3 million as of December 31, 2023; +o +The Company successfully drew down the second tranche of $10 million from its $50 million term loan facility with Perceptive in the fourth quarter of 2023; +o +Cash balance includes the remaining $12.2 million of the $27.5 million private placement announced in August 2023. +Components of Operating Results +Revenues +We derive our revenue from two primary sources: (i) providing diagnostic testing in the clinical setting (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, clinical trial testing, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics. We also recognize revenue from other services, including amounts derived from licensing our technologies (Biopharma Services and other). +Diagnostic Tests +Diagnostic test revenue is generated from delivery of results from our diagnostic tests. In the United States, we performed tests as both an in-network and out-of-network service provider depending on the test performed and the contracted status of the insurer. We provide diagnostic tests in two primary categories: (i) lung diagnostic testing and (ii) COVID-19 testing. On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. In connection with the expiration of the Public Health Emergency declaration under Section 319, the Company no longer provides commercial COVID-19 diagnostic testing services. +We consider diagnostic testing to be completed upon the delivery of test results to our customer, either the prescribing physician or third-party to which we contracted for services to be performed, which is considered the performance obligation. The fees for such services are billed either to a third party such as Medicare, medical facilities, commercial insurance payers, or to the patient. We determine the transaction price related to our contracts by considering the nature of the payer, test type, the historical amount of time until payment by a payer, and historical price concessions granted to groups of customers. +Biopharma Services and other +Services revenue is generated from the delivery of our on-market tests, pipeline tests, custom diagnostic testing, and other scientific services for a purpose as defined by any individual customer. At times we collaborate with large biopharmaceutical companies in an attempt to discover biomarkers that would be helpful in their drug development or marketing. The performance obligations and related revenue for these sales is defined by a written agreement between us and our customer. These services are generally completed upon +83 +the delivery of testing results, or other contractually defined milestone(s), to the customer, which is considered the performance obligation. Customers for these services are typically large pharmaceutical companies where collectability is reasonably assured and therefore revenue is accrued upon completion of the performance obligations. Revenue derived from services is often unpredictable and can cause significant swings in our overall net revenue line from quarter to quarter. +In addition, other revenue includes amounts derived from licensing our digital sequencing technologies to our international laboratory partners. We are compensated through royalty-based payments for the licensed technology, and depending on the nature of the technology licensing arrangements, and considering factors including, but not limited to: enforceable right to payment and payment terms, and if an asset with alternative use is created, these revenues are recognized in the period when royalty-bearing sales occur. +Operating Expenses +Direct costs and expenses +Cost of diagnostic testing generally consists of cost of materials, direct labor, including bonuses, employee benefits, share-based compensation, equipment and infrastructure expenses associated with acquiring and processing test samples, including sample accessioning, test performance, quality control analyses, charges to collect and transport samples; curation of test results for physicians; and in some cases, license or royalty fees due to third parties. Costs associated with performing our tests are recorded as the tests are processed regardless of whether revenue was recognized with respect to the tests. Infrastructure expenses include allocated depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs. Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents. While we do not believe the technologies underlying these licenses are necessary to permit us to provide our tests, we do believe these technologies are potentially valuable and of possible strategic importance to us or our competitors. Under these license agreements, we are obligated to pay aggregate royalties ranging from 1% to 8% of sales in which the patents or know-how are used in the product or service sold, sometimes subject to minimum annual royalties or fees in certain agreements. +We expect the aggregate cost of diagnostic testing to increase in line with the increase in the number of tests we perform, but the cost per test to decrease modestly over time due to the efficiencies we may gain as test volume increases, and from automation and other cost reductions. Cost of services includes costs incurred for the performance of development services requested by our customers. Costs of development services will vary depending on the nature, timing and scope of customer projects. +Research and development +Research and development expenses consist of costs incurred to develop technology and include salaries, share-based compensation and benefits, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services, clinical studies, other outside costs and costs to develop our technology capabilities. Research and development expenses account for a significant portion of our operating expenses and consist primarily of external and internal costs incurred in connection with the discovery and development of our product candidates. +External expenses include: (i) payments to third parties in connection with the clinical development of our product candidates, including contract research organizations and consultants; (ii) the cost of manufacturing products for use in our preclinical studies and clinical trials, including payments to contract manufacturing organizations (CMOs) and consultants; (iii) scientific development services, consulting research fees and for sponsored research arrangements with third parties; (iv) laboratory supplies; and (v) allocated facilities, depreciation and other expenses, which include direct or allocated expenses for IT, rent and maintenance of facilities. External expenses are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers or our estimate of the level of service that has been performed at each reporting date. We track external costs by the stage of program, clinical or preclinical. +Internal expenses include employee-related costs, including salaries, share-based compensation and related benefits for employees engaged in research and development functions. We do not track internal costs by product candidate because these costs are deployed across multiple programs and, as such, are not separately classified. +Research and development costs are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or services are rendered. Costs to develop our technology capabilities are recorded as research and development. +We expect our research and development expenses to increase as we continue to innovate and develop additional products and expand our data management resources. As our services revenue grows, an increasing portion of research and development dollars are expected to be allocated to cost of services for biopharmaceutical service contracts. This expense, though expected to increase in dollars, is expected to decrease as a percentage of revenue in the long term, though it may fluctuate as a percentage of our revenues from period to period due to the timing and extent of these expenses. +84 +Sales, marketing, general and administrative +Our sales and marketing expenses are expensed as incurred and include costs associated with our sales organization, including our direct sales force and sales management, client services, marketing and reimbursement, as well as business development personnel who are focused on our biopharmaceutical customers. These expenses consist primarily of salaries, commissions, bonuses, employee benefits, share-based compensation, and travel, as well as marketing and educational activities and allocated overhead expenses. We expect our sales and marketing expenses to increase in dollars as we expand our sales force, increase our presence within the United States, and increase our marketing activities to drive further awareness and adoption of our tests and our future products. These expenses, though expected to increase in dollars, are expected to decrease as a percentage of revenue in the long term, though they may fluctuate as a percentage of our revenues from period to period due to the timing and extent of these expenses. +Our general and administrative expenses include costs for our executive, accounting, finance, legal and human resources functions. These expenses consist principally of salaries, bonuses, employee benefits, share-based compensation, and travel, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. We expect that our general and administrative expenses will continue to increase in dollars, primarily due to increased headcount and costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, maintaining compliance with exchange listing and requirements of the SEC, director and officer insurance premiums and investor relations. These expenses, though expected to increase in dollars, are expected to decrease as a percentage of revenue in the long term, though they may fluctuate as a percentage from period to period due to the timing and extent of these expenses. +Non-Operating Expenses +Interest Expense and Interest Income +For the year ended December 31, 2023, interest expense consists of cash and non-cash interest from the Perceptive Term Loan Facility and changes in the value of our contingent consideration associated with the passage of time subsequent to the achievement of the gross margin target in the second quarter 2021. For the year ended December 31, 2022, interest expense primarily consists of cash and non-cash interest from the secured promissory note with Streeterville, the 2021 Term Loan, the Perceptive Term Loan, and changes in the value of our contingent consideration. Interest income, which is included in ‘Other income, net’ in the statements of operations consists of income earned on our cash and cash equivalents. +Results of Operations +The following table sets forth the significant components of our results of operations for the periods presented (in thousands, except percentages): +Year Ended December 31, +Change +2023 +2022 +$ +% +Revenues +$ +49,087 +$ +38,212 +$ +10,875 +28 +% +Operating expenses +Direct costs and expenses +13,010 +14,154 +(1,144 +) +(8 +)% +Research and development +9,988 +13,102 +(3,114 +) +(24 +)% +Sales, marketing, general and administrative +67,387 +61,462 +5,925 +10 +% +Impairment loss on intangible assets +44 +81 +(37 +) +(46 +)% +Total operating expenses +90,429 +88,799 +1,630 +2 +% +Loss from operations +(41,342 +) +(50,587 +) +9,245 +18 +% +Other (expense) income +Interest expense +(9,536 +) +(8,072 +) +(1,464 +) +(18 +)% +Loss on extinguishment of liabilities, net +— +(6,981 +) +6,981 +100 +% +Change in fair value of warrant liability, net +(1,274 +) +84 +(1,358 +) +(1,617 +)% +Other income, net +6 +109 +(103 +) +(94 +)% +Total other expense +(10,804 +) +(14,860 +) +(4,056 +) +(27 +)% +Net loss +$ +(52,146 +) +$ +(65,447 +) +$ +13,301 +20 +% +Share-based compensation (1) +$ +5,373 +$ +5,961 +$ +(588 +) +(10 +)% +(1) Amounts represent share-based compensation expense reported in the Company’s results of operations above. +85 +Revenues +We generate revenue by providing laboratory testing of our diagnostic tests and services. Our revenues for the periods indicated were as follows (in thousands, except percentages): +Year Ended December 31, +Change +2023 +2022 +$ +% +Revenues +Lung Diagnostic +$ +45,135 +$ +29,298 +$ +15,837 +54 +% +COVID-19 +57 +5,240 +(5,183 +) +(99 +)% +Diagnostic Testing revenue +45,192 +34,538 +10,654 +31 +% +Biopharma Services and other revenue +3,895 +3,674 +221 +6 +% +Total revenues +$ +49,087 +$ +38,212 +$ +10,875 +28 +% +Total revenue increased $10.9 million or 28% for the year ended December 31, 2023 compared to the year ended December 31, 2022. +Diagnostic test revenue increased $10.7 million or 31% for the year ended December 31, 2023 compared to the same period in 2022. The increase for the year ended December 31, 2023 compared to the same period in 2022 is due to an increase in our lung diagnostic testing revenue of $15.8 million, driven by an increase in our Nodify XL2 and CDT diagnostic tests delivered. The Company’s lung diagnostic sales efforts continued to gain momentum during the year ended December 31, 2023 as the number of tests delivered reached the highest in Company history for four consecutive quarters. Partially offsetting this increase was a $5.2 million reduction in COVID-19 testing revenue for the year ended December 31, 2023, resulting from the expiration of significant COVID-19 testing contracts and the recession of the COVID-19 pandemic. Additionally, on January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. In connection with the expiration of the Public Health Emergency declaration under Section 319, the Company no longer provides COVID-19 diagnostic testing services commercially. +Biopharma Services and other revenue increased $0.2 million or 6% for the year ended December 31, 2023 compared to the same period in 2022. The increase in revenue for the year ended December 31, 2023 was primarily due to recovery in testing volumes from clinical studies and services. +Operating Expenses +Direct costs and expenses +Direct costs and expenses related to revenue decreased $1.1 million or 8% for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease in costs for the year ended December 31, 2023 was driven primarily by the overall decline in COVID-19 testing volume and reductions in inventory obsolescence as the Company began exiting our commercial COVID-19 testing services in the latter half of 2022. This was partially offset by an increase in direct costs and expenses associated with increased lung diagnostic and services testing volume. +Research and development +Research and development expenses decreased $3.1 million or 24% for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease in cost was due primarily to a decrease in internal expenses associated with compensation and benefit costs as well as clinical trial and other external costs associated with contracted services and laboratory costs. +The following table summarizes our external and internal costs for the years ended December 31, 2023 and 2022 (in thousands, except percentages): +Year Ended December 31, +Change +2023 +2022 +$ +% +External expenses: +Clinical trials and associated costs +$ +1,663 +$ +2,551 +$ +(888 +) +(35 +)% +Other external costs +2,822 +3,625 +(803 +) +(22 +)% +Total external costs +4,485 +6,176 +(1,691 +) +(27 +)% +Internal expenses +5,503 +6,926 +(1,423 +) +(21 +)% +Total research and development expenses +$ +9,988 +$ +13,102 +$ +(3,114 +) +(24 +)% +Sales, marketing, general and administrative +Sales, marketing, general and administrative expenses increased $5.9 million or 10% for the year ended December 31, 2023 compared to the year ended December 31, 2022. This increase was driven primarily by increases in employee compensation and benefits associated with an increase in sales team headcount and variable compensation as well as increases in non-employee costs associated with increased spending on various sales meetings, training, and campaigns during 2023 as compared to 2022. During the year ended December 31, +86 +2022, the Company’s sales efforts continued to be impacted by the COVID-19 pandemic due to surges associated with multiple variants, restricting and delaying the Company's ability to execute our lung diagnostic sales strategy, resulting in lower sales and marketing costs in the first half of 2022. +Non-Operating Expenses +Interest expense +Interest expense increased $1.5 million or 18% for the year ended December 31, 2023 compared to the year ended December 31, 2022. The interest expense for the year ended December 31, 2023 is primarily related to interest associated with the Perceptive Term Loan Facility of $5.5 million and interest associated with the contingent consideration of $3.9 million. The interest expense for the year ended December 31, 2022 is primarily related to interest associated with the contingent consideration of $3.3 million, Perceptive Term Loan Facility of $0.5 million, the 2021 Term Loan with Silicon Valley Bank of $2.4 million, and securities purchase agreement with Streeterville Capital, LLC of $1.8 million in 2022. +Loss on extinguishment of liabilities, net +The Company recorded a loss on extinguishment of liabilities of zero and $7.0 million for the years ended December 31, 2023 and 2022, respectively. On April 7, 2022, the Company entered into Amendment No. 3 to the Indi APA in which all parties agreed to restructure the milestone payments. During the three months ended June 30, 2022, the Company evaluated Amendment No. 3 to the Indi APA in accordance with applicable accounting standards under U.S. GAAP which resulted in the extinguishment of the original instrument due to the substantially different terms. As a result, during the three months ended June 30, 2022, we recorded a loss on the extinguishment of $2.9 million. Additionally, as a result of the extinguishment of Promissory Note One and the 2021 Term Loan, the Company recorded a loss on debt extinguishment of $3.6 million and $0.5 million, respectively, associated with the prepayment premium and the write-off of unamortized original issue discount (OID) and debt issuance costs. +Change in fair value of warrant liability +On November 21, 2022, as consideration for the Perceptive Term Loan, the Company issued the Perceptive Warrant, with warrants exercisable into 3,000,000 shares of the Company’s common stock issued on the funding date of the Tranche A Loan which are equity classified (the Initial Warrants). In addition to the Initial Warrants and to the extent the Company has the ability to exercise its right to borrow the remaining availability under the Perceptive Term Loan, additional warrants will become exercisable into 1,000,000 shares of common stock concurrently with the borrowing of the Tranche B Loan (the Tranche B Warrants), and additional warrants will become exercisable into 1,000,000 shares of common stock concurrently with the borrowing of the Tranche C Loan (the Tranche C Warrants). The Company initially accounted for the Tranche B and C Warrants as liabilities as the Tranche B and C Warrants did not meet the criteria for equity classification. During the year ended December 31, 2023, the Company recorded a $1.3 million net loss as a change in fair value through the statement of operations due to changes in unobservable inputs. This is a result of changes in the probability of our ability to draw on Tranche B and C loans. On December 15, 2023 (the Tranche B Borrowing Date), the Company exercised its ability to draw the Tranche B loan. In connection with the Tranche B draw, the Company remeasured the Tranche B Warrants through the Tranche B Borrowing Date and recorded the change in fair value through the statement of operations and, subsequently, reclassified the fair value to additional paid-in capital. As of December 31, 2023, the Tranche C Warrants remain classified as a liability. +Liquidity and Capital Resources +We are an emerging growth company and, as such, have yet to generate positive cash flows from operations. We have funded our operations to date principally from net proceeds from the sale of our common stock, the sale of convertible preferred stock, revenue from diagnostic testing and services, and the incurrence of indebtedness as described below. +On March 7, 2022 (the LPC Effective Date), we entered into a purchase agreement with Lincoln Park Capital Fund, LLC (the Purchase Agreement), pursuant to which Lincoln Park has committed to purchase up to $50.0 million of our common stock (the LPC Facility). Under the terms and subject to the conditions of the Purchase Agreement, we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $50.0 million of our common stock. Such sales of common stock by us, if any, will be subject to certain limitations, and may occur from time to time, at our sole discretion, over the 36-month period commencing on the LPC Effective Date. As consideration for Lincoln Park's irrevocable commitment to purchase our common stock upon the terms of and subject to satisfaction of the conditions set forth in the Purchase Agreement, on the LPC Effective Date, we issued 184,275 shares of common stock to Lincoln Park as a commitment fee valued at $600,000 for which no consideration was received. +On April 7, 2022, we entered into subscription agreements with a consortium of investors, including three members of our Board of Directors and other existing shareholders of the Company, for the issuance and sale by the Company of an aggregate of 6,508,376 shares of our common stock in an offering for an aggregate purchase price of approximately $11.7 million. +The Company amended the Indi APA agreement in April 2022 in which all parties agreed to restructure the Milestone Payments whereby the Company will make five quarterly installments of $2.0 million each beginning in April 2022, three quarterly installments of $3.0 million beginning in July 2023, one installment of $5.0 million in April 2024, and one installment of approximately $8.4 million in July +87 +2024. In addition, the Company agreed to an exit fee of approximately $6.1 million in October 2024. Interest shall accrue on the difference between the payment schedule as agreed in the August 2021 amendment and the April 2022 amended payment schedule, at an aggregate per annum rate equal to 10%, with such interest to be payable quarterly on the following installment payment date. Our ability to make these payments is subject to ongoing compliance under the Perceptive Term Loan and commencing January 1, 2024, consent from Perceptive. +On May 9, 2022, the Company entered into a securities purchase agreement with Streeterville, pursuant to which, among other things, Streeterville: (i) purchased Promissory Note One in the aggregate principal amount totaling $16.0 million in exchange for $15.0 million less certain expenses. Promissory Note One could, at the Company's option, be settled in cash or shares of common stock of the Company, upon the terms and subject to the limitations and conditions. On May 9, 2022, the Company closed on Promissory Note One for gross proceeds of $15.0 million (approximately $12.8 million, net, after deducting debt issuance costs and OID). +On November 21, 2022, the Company funded and/or closed various financing transactions, including: (i) a term loan facility with Perceptive Advisors, LLC (Perceptive) for up to $50.0 million, with funding of $30.0 million on November 21, 2022, and two additional contingently issuable tranches of $10.0 million each subject to certain terms and conditions, including revenue milestones, (ii) a follow-on equity offering of common stock for $40.4 million in gross proceeds and (iii) a subscription agreement for the issuance of common stock to certain members of the Company’s management team for $0.3 million. Collectively, the Company raised gross proceeds of approximately $70.7 million ($65.7 million after deducting commissions, fees and expenses payable). Approximately $23.9 million of the net proceeds were used to retire Promissory Note One with Streeterville and the 2021 Term Loan with Silicon Valley Bank. The remaining proceeds of approximately $42.0 million were used for commercial expansion of sales, supporting the Company’s product pipeline, research and development and for general corporate purposes. +The Perceptive Term Loan Facility contains certain representations and warranties, affirmative covenants, negative covenants, financial covenants, and conditions that are customarily required for similar financings. The Company must (i) at all times prior to the Maturity Date maintain a minimum cash balance of $2.5 million; and (ii) as of the last day of each fiscal quarter commencing with the fiscal quarter ending March 31, 2023, recognize revenue in amounts agreed to between the Company and Perceptive. +On April 7, 2023, the Company entered into a limited waiver under which Perceptive agreed to waive the minimum revenue requirement for the three months ended March 31, 2023 (Limited Waiver). In addition, on May 10, 2023, the Company entered into the First Amendment to the Perceptive Term Loan Facility (the First Amendment) with Perceptive, whereby subject to the terms and conditions of the First Amendment, the minimum net revenue covenant was modified to reduce the threshold through the twelve month period ended March 31, 2024. +On August 3, 2023, the Company entered into subscription agreements with all of the members of our Board of Directors, all Section 16 officers, and additional members of the Biodesix leadership team for the issuance and sale by the Company of an aggregate of 16,975,298 of the Company’s common stock for an aggregate purchase price of approximately $27.5 million. During the three months ended September 30, 2023, the Company received $15.3 million in proceeds and issued 9,454,927 shares of common stock. On September 27, 2023, the Company entered into an amendment to delay final closing on one subscription agreement. The remaining $12.2 million in proceeds was received and 7,520,371 shares of common stock were issued during the three months ended December 31, 2023. +On August 4, 2023, the Company entered into the Second Amendment to the Perceptive Term Loan Facility (the Second Amendment) with Perceptive, whereby subject to the terms and conditions of the Second Amendment, the minimum net revenue covenant was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing on the fiscal quarter ending June 30, 2024 through and including the fiscal quarter ending December 31, 2025. +Pursuant to the original terms of the agreement with Perceptive, the Perceptive Term Loan Facility includes an additional Tranche B Loan, in an aggregate amount of up to $10.0 million, which was accessible by the Company so long as the Company satisfied certain customary conditions precedent, including revenue milestones. Under the terms of the Second Amendment, the conditions precedent for drawing on the Tranche B Loan were amended to (i) reduce the trailing-twelve month revenue milestone and (ii) add the receipt of aggregate cash proceeds of at least $27.5 million from an equity offering of the Company's common stock. During the three months ended December 31, 2023, the Company met the conditions precedent associated with the Tranche B Loan and, on December 15, 2023, the Company exercised its ability to draw the Tranche B loan for $10.0 million (the Tranche B Loan). +During the year ended December 31, 2023, the Company raised approximately $0.6 million ($0.6 million after deducting underwriting discounts and commissions and offering expenses payable), in gross proceeds from the sale of 376,456 common shares at a weighted average price per share of $1.66 under the ATM facility. As of December 31, 2023, the Company had remaining available capacity for share issuances of approximately $28.9 million under the ATM facility and up to $46.9 million under the LPC Facility, each subject to the restrictions and limitations of the underlying facilities, as well as volume limitations under applicable SEC rules and regulations that limit their availability as sources of funding. +As of December 31, 2023, we maintained cash and cash equivalents of $26.3 million and we have $40.0 million in outstanding aggregate principal amount on our Perceptive Term Loan. We have incurred significant losses since inception and, as a result, we have funded our +88 +operations to date primarily through the sale of common stock, the sale of convertible preferred stock, the issuance of notes payable, and from our two primary revenue sources: (i) diagnostic testing, which includes lung diagnostic testing and, prior to May 11, 2023, COVID-19 testing, and (ii) providing biopharmaceutical companies with development and testing services and licensing our technologies. In accordance with Accounting Standards Update 2014-15 (ASC Topic 205-40), Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods. In evaluating the Company’s ability to continue as a going concern, management projected its cash flow sources and evaluated the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements were issued. Management considered the Company’s current projections of future cash flows, current financial condition, sources of liquidity and debt obligations for at least one year from the date of issuance of this Form 10-K in considering whether it has the ability to meet its obligations. +Our ability to meet our obligations as they come due may be impacted by our ability to remain compliant with financial covenants in our loan agreement or to obtain waivers or amendments that impact the related covenants. As of December 31, 2023, the Company was in compliance with all restrictive covenants associated with its borrowing and entered into a limited waiver on February 14, 2024 to the Perceptive Term Loan Facility (the Limited Waiver). Subject to the terms and conditions of the Limited Waiver, Perceptive agreed to (i) waive compliance with the December 31, 2023 Minimum Net Revenue covenant and (ii) waive the requirement that the Annual Report on Form 10-K for the year-ended December 31, 2023 and auditor's opinion on the financial statements herein shall not be subject to any going concern or like qualification or exception audit. +Based on our current operating plan, unless we continue to raise additional capital (debt or equity), we expect that we will be unable to maintain our financial covenants under our existing loan agreement during the next twelve months, which could result in an Event of Default, as defined in the Perceptive Term Loan Facility, causing an acceleration of the outstanding balances. We have taken steps to improve our liquidity through raising debt and equity capital and have also undertaken several proactive measures including, among other things, the reduction of planned capital expenditures and certain operating expenses but we do not expect that these actions alone will be sufficient to maintain our financial covenants. +On February 29, 2024, the Company entered into a third amendment to the Perceptive Term Loan Facility (the Third Amendment), whereby, subject to the terms and conditions of the Third Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing on the fiscal quarter ending March 31, 2024 through and including the fiscal quarter ending December 31, 2025. +To maintain an adequate amount of available liquidity and execute our current operating plan, we will need to continue to raise additional funds from external sources, such as through the issuance of equity or debt securities and any such financing activities are subject to market conditions. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. There can be no assurance that additional capital will be available to us or, if available, will be available in sufficient amounts or on terms acceptable to us or on a timely basis. If adequate capital resources are not available on a timely basis, we intend to consider limiting our operations substantially. This limitation of operations could include a hiring freeze, reductions in our workforce, reduction in cash compensation, deferring capital expenditures, and reducing other operating costs. +We expect to continue to incur operating losses in the near term while we make investments to support our anticipated growth. Our current operating plan, which is in part determined based on our most recent historical actual results and trends, along with the items noted above, raises substantial doubt about the Company’s ability to continue as a going concern for a period beyond one year from when the December 31, 2023 financial statements are issued. Our audited financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments that might be necessary should we be unable to continue as a going concern. +Cash Flows +The following summarizes our cash flows for the periods indicated (in thousands): +Year Ended December 31, +2023 +2022 +Net cash flows (used in) provided by: +Operating activities +$ +(22,870 +) +$ +(44,972 +) +Investing activities +(23,062 +) +(3,534 +) +Financing activities +29,129 +58,882 +Net (decrease) increase in cash and cash equivalents and restricted cash +$ +(16,803 +) +$ +10,376 +89 +Our cash flows resulted in a net decrease in cash and cash equivalents and restricted cash of $16.8 million during the year ended December 31, 2023 as compared to the net increase in cash of $10.4 million for the year ended December 31, 2022. For the year ended December 31, 2023, net cash used in operating activities decreased by approximately $22.1 million primarily due to the $18.3 million in tenant improvement allowances received for capital expenditures and leasehold improvements related to the CVP Lease which have been reimbursed from the CVP landlord (see cash used in investing activities below). Partially offsetting the CVP tenant improvement allowances is $2.5 million of the contingent consideration payment made during the three months ended December 31, 2023 which is now classified as a cash outflow from operating activities due to the applicable US GAAP requirements. Additionally, the Company had favorable changes in working capital that contributed to the changes in net cash used in operating activities compared to the same period in 2022. During the year ended December 31, 2022, our $5.0 million cash collateralized letter of credit under the operating lease agreement with CVP was released and the funds were subsequently transferred to the landlord as a refundable deposit to secure the performance of the Company’s obligations. +Net cash used in investing activities during the year ended December 31, 2023 totaled $23.1 million, an increase of $19.5 million compared to the same period in 2022. The increase in net cash used in investing activities was primarily due to increases in purchases of property and equipment and capital expenditures for leasehold improvements related to the CVP Lease. These leasehold improvements are tenant improvements and have been reimbursed from the Landlord, as described above in net cash used in operating activities. +Net cash provided by financing activities during the year ended December 31, 2023 totaled $29.1 million, a decrease of $29.8 million compared to the same period in 2022. The net cash provided by financing activities for the year ended December 31, 2023 primarily resulted from $28.0 million net proceeds from the issuance of common stock, $10.0 million net proceeds from the issuance of Tranche B under the Perceptive Term Loan Facility, and $0.7 million in proceeds from the issuance of common stock under the ESPP and exercise of stock options. These proceeds were partially offset by milestone payments to Indi of $8.6 million. The net cash provided by financing activities for the year ended December 31, 2022 primarily resulted from $56.3 million net proceeds from the issuance of common stock, $41.4 million net proceeds from the issuance of Promissory Note One and the Perceptive Term Loan, and $0.6 million in proceeds from the issuance of common stock under the ESPP and exercise of stock options. These proceeds were partially offset by the repayment of Promissory Note One and the 2021 Term Loan of $28.6 million, and milestone payments to Indi of $10.8 million. +Contractual Obligations and Commitments +The following table summarizes our non-cancelable contractual obligations and commitments as of December 31, 2023 (in thousands): +Payments due by period (1) +Total +Less than +1 year +1 to 3 +years +4 to 5 +years +More than +5 years +Borrowings and interest (2) +$ +62,903 +$ +5,897 +$ +11,677 +$ +45,329 +$ +— +Contingent consideration +23,403 +23,403 +— +— +— +Operating lease obligations +46,909 +2,406 +8,176 +8,214 +28,113 +Finance lease obligations +769 +356 +413 +— +— +Total +$ +133,984 +$ +32,062 +$ +20,266 +$ +53,543 +$ +28,113 +(1) +Royalty payments that we may owe are not included as the amount and timing of such payments is uncertain. +(2) +Includes the Perceptive Term Loan payments of principal and interest. Interest amounts associated with the Perceptive Term Loan are variable and estimated based on the interest rate in effect at December 31, 2023. +Off-Balance Sheet Arrangements +As of December 31, 2023, we have not entered into any off-balance sheet arrangements. +Critical Accounting Policies and Significant Judgments and Estimates +In accordance with accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Certain of these estimates significantly influence the portrayal of our financial condition and results of operations and require us to make difficult, subjective or complex judgments. Our critical accounting policies are described in greater detail below and in Note 2 to our financial statements in Item 8 of this Annual Report on Form 10-K. +Revenue Recognition +We recognize revenue when our customers obtain control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for our goods or services. To determine revenue recognition for our arrangements with our customers, we perform a five-step process, which includes: (i) identifying the contract(s) with a customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations in the contract; and (v) recognizing revenue when (or as) we satisfy our performance obligations. The Company generates +90 +revenues from (i) diagnostic tests and (ii) assay development, testing services, and licensing our technologies (Biopharma Services and other revenue). +The Company recognizes revenues related to blood-based lung diagnostic billings based on estimates of the amounts ultimately expected to be collected from customers on a portfolio approach. In determining the amount to accrue for a delivered test, the Company considers factors such as test type, payment history, payer coverage, whether there is a reimbursement contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. Variable consideration, if any, is estimated based on an analysis of historical experience and adjusted as better estimates become available. These estimates require significant judgment by management. +The Company also provides services to patients with whom the Company does not have contracts as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification 606 (ASC 606). The Company recognizes revenue for these patients when contracts, as defined in ASC 606, are established at the amount of consideration to which it expects to be entitled, or when the Company receives substantially all of the consideration subsequent to satisfaction and delivery of the performance obligations. +In addition, other revenue includes amounts derived from licensing our digital sequencing technologies to our international laboratory partners. We are compensated through royalty-based payments for the licensed technology, and depending on the nature of the technology licensing arrangements and considering factors including but not limited to enforceable right to payment and payment terms, and if an asset with alternative use is created, these revenues are recognized in the period when royalty-bearing sales occur. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.24 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) until December 31, 2025 (the year ended December 31st following the fifth anniversary of our initial public offering). +Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which: (i) the market value of our common shares held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common shares held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. +Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk. +We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. +Interest Rate Risk +We are exposed to market risk for changes in interest rates related primarily to our cash and cash equivalents, marketable securities and our indebtedness, including our outstanding Perceptive Term Loan. As of December 31, 2023, we had $40.0 million outstanding on the Perceptive Term Loan Facility which has an annual rate equal to the greater of (a) forward-looking one-month term SOFR as posted by CME Group Inc. and (b) 3.0% per annum, plus an applicable margin of 9.0%. Historically, we have not entered into derivative agreements such as interest rate caps and swaps to manage our floating interest rate exposure. +91 +Periodically throughout the year, we have maintained balances in various operating accounts in excess of federally insured limits. Our cash and cash equivalents are funds held in checking and bank savings accounts, primarily at one U.S. financial institutions. We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. We continually monitor our positions with, and the credit quality of, the financial institutions with which we invest. +As of December 31, 2023, a hypothetical 100 basis point increase in interest rates would have an estimated $0.4 million impact per year on our financial position and results of operations, based on the current Perceptive Term Loan principal remaining outstanding through maturity. +Item 8. Financial Statement s and Supplementary Data. +The financial statements and supplementary data are as set forth in the index to the financial statements on page F-1. +Item 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure. +None. +Item 9A. Controls and Procedures. +Evaluation of Disclosure Controls and Procedures +We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. +Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the criteria established in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), using the 2013 framework. Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2023, the Company's internal control over financial reporting was effective based on the criteria set forth by COSO. +This annual report does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2023, there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information. +None of our directors or officers adopted , modified, or terminated a Rule 10b5-1 trading arrangement during the quarter ended December 31, 2023. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. +Not Applicable. +92 +PART III +Item 10. Directors, Executive Off icers and Corporate Governance. +The information required by this item with respect to directors is incorporated by reference from the information under the captions "Board and Corporate Governance Matters—Proposal One: Election of Directors" and "—Director Independence" contained in our Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2023 in connection with the solicitation of proxies for our 2024 Annual Meeting of Stockholders (the Proxy Statement). Certain information required by this item concerning executive officers is set forth in the Proxy Statement under the caption "Executive Compensation—Compensation of Named Executive Officers" and is incorporated herein by reference. +Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16(a) of the Exchange Act. This disclosure is contained in the section entitled "Stock Ownership—Delinquent Section 16(a) Reports" in the Proxy Statement and is incorporated herein by reference. +We have adopted a Code of Business Conduct and Ethics that applies to all of our officers and employees, including our President and Chief Executive Officer, our Chief Financial Officer and other employees who perform financial or accounting functions. The Code of Business Conduct and Ethics sets forth the basic principles that guide the business conduct of our employees. Stockholders may request a free copy of our Code of Business Conduct and Ethics by contacting Biodesix, Inc., Attention: Chief Financial Officer, 919 West Dillon Rd, Louisville, Colorado 80027. +To date, there have been no waivers under our Code of Business Conduct and Ethics. We intend to disclose future amendments to certain provisions of our Code of Business Conduct and Ethics or waivers of such Codes granted to executive officers and directors on our website at http://www.biodesix.com within four business days following the date of such amendment or waiver. +Our Board of Directors has appointed an Audit Committee, comprised of Ms. Jean Franchi, as Chairwoman, Messrs. Hany Massarany, Lawrence T. Kennedy, Jr., and Dr. Matthew Strobeck. The Board of Directors has determined that Ms. Franchi qualifies as an Audit Committee Financial Expert under the definition outlined by the Securities and Exchange Commission. In addition, each of the members of the Audit Committee qualifies as an "independent director" under the current rules of The NASDAQ Stock Market and Securities and Exchange Commission rules and regulations. +Item 11. Executiv e Compensation. +The information required by this item is incorporated by reference from the information under "Executive Compensation" contained in the Proxy Statement and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Own ers and Management and Related Stockholder Matters. +The information required by this item is incorporated by reference from the information under the captions "Stock Ownership—Security Ownership of Certain Beneficial Owners and Management", "Executive Compensation", and "Equity Compensation Plan Information" contained in the Proxy Statement and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this item is incorporated by reference from the information under the caption "Board and Corporate Governance Matters—Policies and Procedures for Related Party Transactions" and "—Director Independence" contained in the Proxy Statement and is incorporated herein by reference. +Item 14. Principal Accoun tant Fees and Services. +The information required by this item is incorporated by reference from the information under the caption "Audit Matters—Principal Accountant Fees and Services" contained in the Proxy Statement and is incorporated herein by reference. +93 +PART IV +Item 15. Exhibit and Financ ial Statement Schedules. +(a) +Documents filed as a part of the report. +1. +Financial Statements +Reference is made to the Index to Financial Statements of Biodesix, Inc. included in Item 8 of Part II hereof. +2. +Financial Statement Schedules +All schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto. +3. +See Item 15(b) below. Each management contract or compensating plan or arrangement required to be filed has been identified. +(b) +Exhibits. +Item 16. Form 10-K Summary. +Not applicable. +94 +Exhibit Index +Exhibit +Number +Description +3.1** +Amended and Restated Certificate of Incorporation of Biodesix, Inc., dated October 30, 2020 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on December 10, 2020). +3.2** +Amended and Restated Bylaws of Biodesix, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on October 12, 2020). +4.1** +Specimen stock certificate evidencing shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 21, 2020). +4.2** +Eleventh Amended and Restated Investor Rights Agreement, by and among Biodesix, Inc. and the investors listed on Exhibit A thereto, dated October 10, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +4.3** +Warrant held by Innovatus Life Sciences Lending Fund I, LP, to Purchase Series G Preferred Stock, dated February 23, 3018 (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +4.4** +Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.5 to the Company's Form 10-K filed with the SEC on March 16, 2021). +4.5** +Form of Note, dated November 21, 2022, issued by the Company to Perceptive Credit Holdings IV, LP. (incorporated by reference to Exhibit 4.1 and Exhibit 10.1 in the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +4.6** +Warrant to Purchase Stock, dated November 21, 2022, issued by the Company to Perceptive Credit Holdings IV, LP. (incorporated by reference to Exhibit 4.2 in the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +4.7** +Warrant to Purchase Stock, dated May 10, 2023, issued by the Company to Perceptive Credit Holdings IV, LP (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 11, 2023). +10.1+** +Biodesix, Inc. Amended and Restated 2006 Employee, Director and Consultant Stock Plan, as amended to date (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.1+** +Form of Stock Option Grant Notice under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.2+** +Form of Option Agreement under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.3+** +Form of Notice of Exercise under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.3 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.3+** +Biodesix, Inc. 2016 Equity Incentive Plan, as amended to date (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.4.1+** +Form of Stock Option Grant Notice under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.4.2+** +Form of Option Agreement under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.4.3+** +Form of Notice of Exercise under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.3 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +95 +10.5+** +Biodesix, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 26, 2020). +10.5.1+** +Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5.1 to the Company's Form 10-K filed with the SEC on March 16, 2021). +10.5.2+** +Forms of Restricted Stock Unit Award Grant Notice and Award Agreement under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5.2 to the Company's Form 10-Q filed with the SEC on August 10, 2021). +10.6+** +Biodesix, Inc. 2020 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 26, 2020). +10.7.1+** +Biodesix, Inc., First Amended Bonus-to-Options Program, adopted by the Board of Directors on October 15, 2010 (incorporated by reference to Exhibit 10.5.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.7.2+** +Biodesix, Inc., Second Amended Bonus-to-Options Program, adopted by the Board of Directors on June 21, 2011 (incorporated by reference to Exhibit 10.5.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.7.3+** +Biodesix, Inc., Third Amended Bonus-to-Options Program, adopted by the Board of Directors on December 31, 2015 (incorporated by reference to Exhibit 10.5.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.8.1+** +Biodesix, Inc. 2021 Senior Management Bonus to Equity Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 4, 2022). +10.8.2+** +Amendment No. 1 to the Biodesix, Inc. 2021 Senior Management Bonus to Equity Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 4, 2022). +10.8.3+** +Amendment No. 2 to the Biodesix, Inc. 2021 Senior Management Bonus to Equity Plan (incorporated by reference to Exhibit 10.8.3 to the Company’s Annual Report on Form 10-K filed with the SEC on March 6, 2023). +10.9.1+** +Form of Stock Option Grant Notice under the Biodesix, Inc. Bonus-To-Options Program (incorporated by reference to Exhibit 10.6.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.9.2+** +Form of Option Agreement under the Biodesix, Inc. Bonus-To-Options Program (incorporated by reference to Exhibit 10.6.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.10+** +Form of Indemnification Agreement, by and between Biodesix, Inc. and each of its directors and executive officers (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 14, 2020). +10.11†+** +Executive Employment Letter, by and between Biodesix, Inc. and Scott Hutton, dated February 23, 2020 (incorporated by reference to Exhibit 10.9.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.12†+** +Executive Employment Letter, by and between Biodesix, Inc. and Robin Harper Cowie, dated February 23, 2020 (incorporated by reference to Exhibit 10.10.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.13.1†** +Office Lease between Aero-Tech Investments, LLC and Biodesix, Inc., dated October 5, 2011 (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.13.2** +Office Lease between Aero-Tech Investments, LLC and Biodesix, Inc., dated January 24, 2022 (incorporated by reference to Exhibit 10.13.2 to the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2022). +10.14.1†** +Lease Assignment of De Soto Facility, dated November 1, 2019 (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +96 +10.14.2** +De Soto Amendment to Commercial Lease Agreement, effective April 4, 2023, by and between Biodesix, Inc. and De Soto Investments, LLC (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 11, 2023). +10.15.1** +Lease agreement by and between Centennial Valley Properties I, LLC and Biodesix, Inc. dated March 11, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2022). +10.15.2** +First Amendment to Lease Agreement by and between Centennial Valley Properties I, LLC and Biodesix, Inc. dated March 11, 2022 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2022). +10.16** +Patent Assignment between Biodesix, Inc., and Integrated Diagnostics, Inc., dated June 30, 2018 (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.17†** +IP Assignment Agreement between Oncimmune Limited, and Biodesix, Inc., dated October 31, 2019 (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.18†** +IP License Agreement between Oncimmune Limited, and Biodesix, Inc., dated October 31, 2019 (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.19†** +Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated August 1, 2019 (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.20†** +Supply Agreement between Biodesix, Inc., and Oncimmune, dated October 31, 2019 (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.21†** +Supply Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated August 1, 2019 (incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.22†** +Co-Development and Collaboration Agreement between AVEO Pharmaceuticals, Inc., and Biodesix, Inc., dated April 9, 2014, as amended October 14, 2016 (incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.23.1†** +Asset Purchase Agreement among Biodesix, Inc., Integrated Diagnostics, Inc., and the stockholders of Integrated Diagnostics, Inc., listed therein, dated June 30, 2018 (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.23.2** +Amendment No. 2 to Asset Purchase Agreement and Plan of Reorganization (incorporated by reference to Exhibit 10.38 to the Company's Form 10-Q filed with the SEC on August 10, 2021). +10.23.3** +Amendment No. 3 to Asset Purchase Agreement and Plan of Reorganization (incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q filed with the SEC on May 11, 2022). +10.24†** +Asset Purchase Agreement between Oncimmune Limited and Biodesix, Inc., dated June 27, 2019, as amended to date (incorporated by reference to Exhibit 10.24 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.25** +First Amendment to the Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated May 24, 2021 (incorporated by reference to Exhibit 10.37 to the Company's Form 10-Q filed with the SEC on August 10, 2021). +10.26** +Purchase Agreement, dated March 7, 2022, by and between Biodesix, Inc. and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on March 7, 2022). +10.27** +Registration Rights Agreement, dated March 7, 2022, by and between Biodesix, Inc. and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K filed with the SEC on March 7, 2022). +97 +10.28** +Form of Subscription Agreement with resale registration rights provision, dated April 7, 2022 (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on April 11, 2022). +10.29** +Form of Subscription Agreement without registration rights, entered by the three members of our Board of Directors, dated April 7, 2022 (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K filed with the SEC on April 11, 2022). +10.30** +Credit Agreement and Guaranty, dated as of November 16, 2022, by and among the Company and Perceptive Credit Holdings IV, LP. (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +10.31** +Limited Waiver, dated April 7, 2023, by and between Biodesix, Inc. and Perceptive Credit Holdings IV, LP (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 11, 2023). +10.32** +First Amendment to Credit Agreement and Guaranty, dated May 10, 2023, by and among the Company and Perceptive Credit Holdings IV, LP (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 11, 2023). +10.33** +Second Amendment to Credit Agreement and Guaranty, dated August 4, 2023, by and among the Company and Perceptive Credit Holdings IV, LP (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 7, 2023). +10.34* +Limited Waiver, dated February 14, 2024, by and between Biodesix, Inc. and Perceptive Credit Holdings IV, LP +10.35* +Third Amendment to Credit Agreement and Guaranty, dated February 29, 2024, by and among the Company and Perceptive Credit Holdings IV, LP. +10.36** +Security Agreement, dated as of November 21, 2022, by and among the Company and Perceptive Credit Holdings IV, LP. (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +10.37** +Form of Subscription Agreement, dated November 21, 2022 (incorporated by reference to Exhibit 10.3 to the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +10.38** +Form of Subscription Agreement, dated August 3, 2023 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 7, 2023). +23.1* +Consent of independent registered public accounting firm. +24.1* +Power of Attorney (included on the signature page of this Form 10-K). +31.1* +Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +31.2* +Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1*** +Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2*** +Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +97.1* +Policy Relating to Recovery of Erroneously Award Compensation. +101.INS* +Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. +101.SCH* +Inline XBRL Taxonomy Extension Schema with Embedded Linkbase Documents +104 +Cover Page Interactive Data File (embedded within the Inline XBRL document) +† Portions of this exhibit have been omitted as the Registrant has determined that the omitted information (i) is not material and (ii) would likely cause competitive harm to the Registrant if publicly disclosed. ++ Indicates management contract or compensatory plan. +98 +* Filed herewith. +** Previously filed. +*** Furnished herewith. +99 +SIGNAT URES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized . +Biodesix, Inc. +Date: March 1, 2024 +By: +/s/ CHRISTOPHER C. VAZQUEZ +Christopher C. Vazquez +Chief Accounting Officer +(Principal Accounting Officer) +POWER OF ATTORNEY +Each person whose signature appears below constitutes and appoints Scott Hutton and Robin Harper Cowie, and each of them, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to file with the Securities and Exchange Commission this Form 10-K and any and all amendments and exhibits thereto, and all documents in connection therewith, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and purposes as he or she might or could do in person, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his or her substitutes may lawfully do or cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. +Name +Title +Date +/s/ SCOTT HUTTON +President, Chief Executive Officer (Principal Executive Officer) +March 1, 2024 +Scott Hutton +/s/ ROBIN HARPER COWIE +Chief Financial Officer, Secretary and Treasurer +March 1, 2024 +Robin Harper Cowie +/s/ CHRISTOPHER C. VAZQUEZ +Chief Accounting Officer +March 1, 2024 +Christopher C. Vazquez +/s/ JOHN PATIENCE +Chairman and Director +March 1, 2024 +John Patience +/s/ JEAN FRANCHI +Director +March 1, 2024 +Jean Franchi +/s/ JON FAIZ KAYYEM +Director +March 1, 2024 +Jon Faiz Kayyem, Ph.D. +/s/ LAWRENCE T. KENNEDY, JR. +Director +March 1, 2024 +Lawrence T. Kennedy, Jr. +/s/ HANY MASSARANY +Director +March 1, 2024 +Hany Massarany +/s/ JACK SCHULER +Director +March 1, 2024 +Jack Schuler +/s/ MATTHEW STROBECK +Director +March 1, 2024 +Matthew Strobeck, Ph.D. +/s/ CHARLES WATTS +Director +March 1, 2024 +Charles Watts, M.D. +100 +Item 8. Financial Statements and Supplementary Data +BIODESIX, Inc. +INDEX TO FINANCIAL STATEMENTS +Report of Independent Registered Public Accounting Firm ( KPMG LLP , Denver, CO , Auditor Firm ID: 185 ) +F- 2 +Balance Sheets as of December 31, 2023 and 2022 +F- 3 +Statements of Operations for the Years Ended December 31, 2023 and 2022 +F- 4 +Statements of Stockholders’ Equity for the Years Ended December 31, 2023 and 2022 +F- 5 +Statements of Cash Flows for the Years Ended December 31, 2023 and 2022 +F- 6 +Notes to Financial Statements +F- 8 +F- 1 +Report of Independent Regist ered Public Accounting Firm +To the Stockholders and the Board of Directors +Biodesix, Inc.: +Opinion on the Financial Statements +We have audited the accompanying balance sheets of Biodesix, Inc. (the Company) as of December 31, 2023 and 2022, the related statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. +Going Concern +The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and needs to raise additional equity or debt capital to fund its operations. These matters raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. +Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 2016. +Denver, Colorado +March 1, 2024 +F- 2 +BIODESIX, INC. +Balance Sheets +(in thousands, except share data) +December 31, 2023 +December 31, 2022 +Assets +Current assets +Cash and cash equivalents +$ +26,284 +$ +43,088 +Accounts receivable, net of allowance for doubtful accounts of $ 65 and $ 118 +7,679 +5,065 +Other current assets +5,720 +5,181 +Total current assets +39,683 +53,334 +Non‑current assets +Property and equipment, net +27,867 +5,848 +Intangible assets, net +7,911 +9,797 +Operating lease right-of-use assets +1,745 +2,973 +Goodwill +15,031 +15,031 +Other long-term assets +6,859 +5,923 +Total non‑current assets +59,413 +39,572 +Total assets +$ +99,096 +$ +92,906 +Liabilities and Stockholders' Equity +Current liabilities +Accounts payable +$ +2,929 +$ +1,685 +Accrued liabilities +7,710 +8,218 +Deferred revenue +324 +962 +Current portion of operating lease liabilities +252 +1,543 +Current portion of contingent consideration +21,857 +10,341 +Current portion of notes payable +51 +49 +Other current liabilities +293 +41 +Total current liabilities +33,416 +22,839 +Non‑current liabilities +Long‑term notes payable, net of current portion +35,225 +25,004 +Long-term operating lease liabilities +25,163 +5,254 +Contingent consideration +— +18,645 +Other long-term liabilities +712 +558 +Total non‑current liabilities +61,100 +49,461 +Total liabilities +94,516 +72,300 +Commitments and contingencies +Stockholders' equity +Preferred stock, $ 0.001 par value, 5,000,000 authorized; +0 (2023 and 2022) issued and outstanding +— +— +Common stock, $ 0.001 par value, 200,000,000 authorized; +96,235,883 (2023) and 77,614,358 (2022) shares issued and outstanding +96 +78 +Additional paid‑in capital +424,050 +387,948 +Accumulated deficit +( 419,566 +) +( 367,420 +) +Total stockholders' equity +4,580 +20,606 +Total liabilities and stockholders' equity +$ +99,096 +$ +92,906 +The accompanying Notes are an integral part of these financial statements. +F- 3 +BIODESIX, INC. +Statements of Operations +(in thousands, except per share data) +Year Ended December 31, +2023 +2022 +Revenues +$ +49,087 +$ +38,212 +Operating expenses: +Direct costs and expenses +13,010 +14,154 +Research and development +9,988 +13,102 +Sales, marketing, general and administrative +67,387 +61,462 +Impairment loss on intangible assets +44 +81 +Total operating expenses +90,429 +88,799 +Loss from operations +( 41,342 +) +( 50,587 +) +Other (expense) income: +Interest expense +( 9,536 +) +( 8,072 +) +Loss on extinguishment of liabilities, net +— +( 6,981 +) +Change in fair value of warrant liability, net +( 1,274 +) +84 +Other income, net +6 +109 +Total other expense +( 10,804 +) +( 14,860 +) +Net loss +$ +( 52,146 +) +$ +( 65,447 +) +Net loss per share, basic and diluted +$ +( 0.64 +) +$ +( 1.55 +) +Weighted-average shares outstanding, basic and diluted +82,113 +42,103 +The accompanying Notes are an integral part of these financial statements. +F- 4 +BIODESIX, INC. +Statements of Stockholders' Equity +(in thousands) +Common Stock +Additional Paid‑In +Accumulated +Total Stockholders' +Shares +Amount +Capital +Deficit +Equity +Balance ‑ December 31, 2021 +30,790 +$ +31 +$ +321,669 +$ +( 301,973 +) +$ +19,727 +Issuance of common stock, net +45,705 +46 +56,189 +— +56,235 +Issuance of common stock under employee stock purchase plan +194 +— +355 +— +355 +Issuance of common stock for deferred offering costs +184 +— +600 +— +600 +Exercise of stock options +384 +1 +268 +— +269 +Release of restricted stock units +357 +— +— +— +— +Issuance of Initial Warrants +— +— +2,906 +— +2,906 +Share‑based compensation +— +— +5,961 +— +5,961 +Net loss +— +— +— +( 65,447 +) +( 65,447 +) +Balance - December 31, 2022 +77,614 +78 +387,948 +( 367,420 +) +20,606 +Issuance of common stock, net +17,352 +17 +27,986 +— +28,003 +Issuance of common stock under employee stock purchase plan +437 +— +643 +— +643 +Exercise of stock options +123 +— +91 +— +91 +Release of restricted stock units +710 +1 +— +— +1 +Issuance of First Amendment warrants +— +— +674 +— +674 +Reclassification of Tranche B warrants to additional paid-in capital +— +— +1,335 +— +1,335 +Share‑based compensation +— +— +5,373 +— +5,373 +Net loss +— +— +— +( 52,146 +) +( 52,146 +) +Balance - December 31, 2023 +96,236 +$ +96 +$ +424,050 +$ +( 419,566 +) +$ +4,580 +The accompanying Notes are an integral part of these financial statements. +F- 5 +BIODESIX, INC. +Statements of Cash Flows +(in thousands) +Year Ended December 31, +2023 +2022 +Cash flows from operating activities +Net loss +$ +( 52,146 +) +$ +( 65,447 +) +Adjustments to reconcile net loss to net cash, cash equivalents, and restricted +cash used in operating activities +Depreciation and amortization +3,328 +3,597 +Amortization of lease right-of-use assets +2,179 +2,247 +Loss on extinguishment of liabilities, net +— +6,981 +Share‑based compensation expense +5,373 +5,961 +Change in fair value of warrant liability, net +1,274 +( 84 +) +Provision for doubtful accounts +497 +93 +Accrued interest, amortization of debt issuance costs and other +5,111 +5,037 +Inventory excess and obsolescence +166 +906 +Impairment loss on intangible assets +44 +81 +Changes in operating assets and liabilities: +Accounts receivable +( 4,718 +) +( 1,501 +) +Other current assets +905 +1,113 +Other long-term assets +33 +( 3,504 +) +Accounts payable and other accrued liabilities +513 +( 773 +) +Deferred revenue +( 755 +) +( 1,213 +) +Contingent consideration +( 2,494 +) +— +Tenant improvement allowances received +18,323 +2,471 +Current and long-term operating lease liabilities +( 503 +) +( 937 +) +Net cash and cash equivalents and restricted cash used in operating activities +( 22,870 +) +( 44,972 +) +Cash flows from investing activities +Purchase of property and equipment +( 22,919 +) +( 3,298 +) +Patent costs and intangible asset acquisition, net +( 143 +) +( 236 +) +Net cash and cash equivalents and restricted cash used in investing activities +( 23,062 +) +( 3,534 +) +Cash flows from financing activities +Proceeds from the issuance of common stock +28,126 +59,538 +Proceeds from issuance of common stock under employee stock purchase plan +643 +355 +Proceeds from exercise of stock options +91 +269 +Payment of contingent consideration +( 8,581 +) +( 10,822 +) +Proceeds from term loan and notes payable +10,000 +45,102 +Repayment of term loan and notes payable +( 49 +) +( 28,604 +) +Payment of debt issuance costs +( 833 +) +( 3,725 +) +Deferred offering costs +— +( 129 +) +Equity financing costs +( 80 +) +( 3,069 +) +Other +( 188 +) +( 33 +) +Net cash and cash equivalents and restricted cash provided by financing activities +29,129 +58,882 +Net (decrease) increase in cash and cash equivalents and restricted cash +( 16,803 +) +10,376 +Cash, cash equivalents, and restricted cash ‑ beginning of period +43,174 +32,798 +Cash, cash equivalents, and restricted cash ‑ end of period +$ +26,371 +$ +43,174 +The accompanying Notes are an integral part of these financial statements. +F- 6 +BIODESIX, INC. +Statements of Cash Flows +(in thousands) +(Continued from the previous page) +Supplemental cash flow information : +Year Ended December 31, +2023 +2022 +Common stock issued for deferred offering costs +$ +— +$ +600 +Deferred offering costs amortized against Additional paid-in capital +— +75 +Debt issuance costs included in accounts payable and other accrued liabilities +18 +631 +Equity financing costs included in accounts payable and other accrued liabilities +43 +160 +Issuance of Perceptive Warrants +674 +3,051 +Operating lease right-of-use assets obtained in exchange for lease liabilities at adoption of ASC 842 +— +1,269 +Operating lease right-of-use assets obtained in exchange for lease liabilities +797 +3,936 +Finance lease right-of-use assets obtained in exchange for lease liabilities +773 +123 +Cash paid for interest +3,994 +1,009 +Reclassification of warrant liability to additional paid-in capital +1,335 +— +Purchases of property & equipment included in accounts payable and accrued liabilities +793 +— +The accompanying Notes are an integral part of these financial statements. +F- 7 +BIODESIX, INC. +Notes to Financ ial Statements +Note 1 – Organization and Description of Business +Biodesix, Inc. (the “Company”, “Biodesix”, “we” “us” and “our”), formerly Elston Technologies, Inc., was incorporated in Delaware in 2005. The Company’s headquarters are in Colorado and the Company performs its blood-based diagnostic tests in its laboratory facilities which are located in Louisville, Colorado and De Soto Kansas. Throughout 2023, the Company leased its headquarters and laboratory facilities in Boulder, Colorado, under a lease agreement that expired in January 2024 and the Company subsequently relocated its corporate headquarters and laboratory facilities to Louisville, Colorado. The Company conducts all of its operations within a single legal entity. Biodesix is a leading diagnostic solutions company with a focus in lung disease. The Company develops diagnostic tests addressing important clinical questions by combining multi-omics through the use of artificial intelligence enabled informatics. We derive our revenue from two sources: (i) providing diagnostic testing services associated with (a) blood-based lung tests and (b) prior to May 11, 2023, Coronavirus Disease 2019 (COVID-19) tests (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics. We also recognize revenue from other services, including amounts derived from licensing our technologies (Biopharma Services and other). Biodesix offers five Medicare-covered tests for patients with lung diseases which includes our blood-based Nodify Lung® Nodule Risk Assessment testing, consisting of the Nodify XL2® and the Nodify CDT® tests. These tests evaluate the risk of malignancy in incidental pulmonary nodules, enabling physicians to better triage patients to the most appropriate course of action. Additionally, our blood-based IQLung™ testing strategy for lung cancer patients integrates the GeneStrat® ddPCR test, the GeneStrat NGS® test and the VeriStrat® test to support treatment decisions across all stages of lung cancer. +The Company also offered three SARS-CoV-2 tests. The Bio-Rad SARS-CoV-2 ddPCR test, the cPASS ™ neutralization antibody test kit, and the Platelia SARS-CoV-2 Total Ab test were granted Emergency Use Authorization (EUA) by the Federal Drug Administration (FDA). On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. In connection with the expiration of the Public Health Emergency declaration under Section 319, the Company no longer provides commercial COVID-19 diagnostic testing services. +Blood-Based Lung Tests +The Company offers five blood-based lung cancer tests across the lung cancer continuum of care: +Diagnosis +• +Nodify CDT and Nodify XL2 tests, marketed as Nodify Lung Nodule Risk Assessment testing, assess a suspicious lung nodule's risk of lung cancer to help identify the most appropriate treatment pathway. The Nodify CDT and XL2 tests have an established average turnaround time of one and five business days, respectively, from receipt of the blood sample, providing physicians with timely results to guide diagnostic planning. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +Treatment & Monitoring +• +GeneStrat ddPCR, GeneStrat NGS and VeriStrat tests, marketed as part of our IQLung testing strategy, are used following diagnosis of lung cancer to detect the presence of mutations in the tumor and the state of the patient’s immune system to help guide treatment decisions. The GeneStrat ddPCR tumor genomic profiling test and the VeriStrat immune profiling test have established an average turnaround time of two business days from receipt of the blood sample, and the GeneStrat NGS test has an established average turnaround time of three business days from receipt of the blood sample, providing physicians with timely results to facilitate treatment decisions. The GeneStrat ddPCR test evaluates the presence of actionable mutations in lung cancer. The test is covered independent of stage and can be used multiple times per patient to monitor changes in mutation status. The GeneStrat NGS test is a broad 52 gene panel, including guideline recommended mutations that help identify advanced stage patients eligible for targeted therapy or clinical trial enrollment. The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. +In developing the Company's products, the Company has built or gained access to regulatory approvals, product development know-how, unique biorepositories, proprietary and patented technologies, specimen collection kit manufacturing capabilities, and bioinformatics methods that it believes are important to the development of new targeted therapies, determining clinical trial eligibility and guiding treatment selection. The Company’s testing services are made available through its clinical laboratories. +F- 8 +Note 2 – Summary of Significant Accounting Policies +Basis of Presentation and Estimates +The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates include: revenue recognition; the estimation of the fair value of goodwill and other intangible assets pursuant to the Company's annual impairment analysis; fair value of stock options; income tax uncertainties, including a valuation allowance for deferred tax assets; fair value of warrant liabilities; leases, including the estimated incremental borrowing rates ; and contingencies. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recognized revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions. +Liquidity and Capital Resources +As of December 31, 2023, we maintained cash and cash equivalents of $ 26.3 million and we have $ 40.0 million in outstanding aggregate principal amount on our Perceptive Term Loan Facility (see Note 8 – Debt ). We have incurred significant losses since inception and, as a result, we have funded our operations to date primarily through the sale of common stock, the sale of convertible preferred stock, the issuance of notes payable, and from our two primary revenue sources: (i) diagnostic testing, which includes lung diagnostic testing and, prior to May 11, 2023, COVID-19 testing, and (ii) providing biopharmaceutical companies with development and testing services and licensing our technologies. In accordance with Accounting Standards Update 2014-15 (ASC Topic 205-40), Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods. In evaluating the Company’s ability to continue as a going concern, management projected its cash flow sources and evaluated the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements were issued. Management considered the Company’s current projections of future cash flows, current financial condition, sources of liquidity and debt obligations for at least one year from the date of issuance of this Form 10-K in considering whether it has the ability to meet its obligations. +Our ability to meet our obligations as they come due may be impacted by our ability to remain compliant with financial covenants in our Perceptive Term Loan Facility (see Note 8 – Debt ) or to obtain waivers or amendments that impact the related covenants. As of December 31, 2023, the Company was in compliance with all restrictive covenants associated with its borrowing and entered into a limited waiver on February 14, 2024 to the Perceptive Term Loan Facility (the Limited Waiver). Subject to the terms and conditions of the Limited Waiver, Perceptive agreed to (i) waive compliance with the December 31, 2023 Minimum Net Revenue covenant and (ii) waive the requirement that the Annual Report on Form 10-K for the year-ended December 31, 2023 and auditor's opinion on the financial statements herein shall not be subject to any going concern or like qualification or exception audit. +Based on our current operating plan, unless we continue to raise additional capital (debt or equity), we expect that we will be unable to maintain our financial covenants under our existing loan agreement during the next twelve months, which could result in an Event of Default (as defined in the Perceptive Term Loan Facility), causing an acceleration and repayment of the outstanding balances. We have taken steps to improve our liquidity through raising debt and equity capital and have also undertaken several proactive measures including, among other things, the reduction of planned capital expenditures and certain operating expenses but we do not expect that these actions alone will be sufficient to maintain our financial covenants. The Perceptive Term Loan Facility requires the Company to recognize revenue in amounts agreed to between the Company and Perceptive as of the last day of each fiscal quarter, which commenced with the fiscal quarter ending March 31, 2023. On May 10, 2023 (the First Amendment Effective Date), the Company entered into the First Amendment to the Credit Agreement (the First Amendment), whereby subject to the terms and conditions of the First Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold through the twelve month period ended March 31, 2024. On August 4, 2023, the Company entered into a second amendment to the Perceptive Term Loan Facility, whereby subject to the terms and conditions of the second amendment, the Minimum Net Revenue Covenant was amended to reduce the relevant threshold through the twelve month period ended December 31, 2025 (see Note 8 – Debt ) and raised approximately $ 27.5 million in net proceeds through a private placement equity offering (see Note 10 – Equity ). Subsequent to December 31, 2023, the Company entered into a third amendment to the Perceptive Term Loan Facility, whereby, subject to the terms and conditions of the third amendment, the Minimum Net Revenue Covenant was amended to reduce the relevant threshold through the fiscal quarter ended December 31, 2025 (see Note 16 – Subsequent Events ). +To maintain an adequate amount of available liquidity and execute our current operating plan, we will need to continue to raise additional funds from external sources, such as through the issuance of equity or debt securities; however, we have not secured such funding at the time of this filing and any such financing activities are subject to market conditions. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making +F- 9 +capital expenditures or declaring dividends. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. There can be no assurance that additional capital will be available to us or, if available, will be available in sufficient amounts or on terms acceptable to us or on a timely basis. If adequate capital resources are not available on a timely basis, we intend to consider limiting our operations substantially. This limitation of operations could include a hiring freeze, reductions in our workforce, reduction in cash compensation, deferring capital expenditures, and reducing other operating costs. +We expect to continue to incur operating losses in the near term while we make investments to support our anticipated growth. Our current operating plan, which is in part determined based on our most recent historical actual results and trends, along with the items noted above, raises substantial doubt about the Company’s ability to continue as a going concern for a period beyond one year after these financial statements are issued. Our audited financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments that might be necessary should we be unable to continue as a going concern. +Segment Reporting +The Company has a single operating segment focused on providing diagnostic testing services to customers. Substantially all of the Company’s revenue and all long-lived assets were derived or located in the United States for the years ended December 31, 2023 and 2022 . +Revenue Recognition +The Company generates revenues from two primary sources: (i) providing diagnostic testing in the clinical setting (Diagnostic tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, clinical trial testing, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics. We also recognize revenue from other services, including amounts derived from licensing our technologies (Biopharma Services and other revenue). +Diagnostic test revenues consist of blood-based lung tests and are recognized in the amount expected to be received in exchange for diagnostic tests when the diagnostic tests are delivered. The Company determines the transaction price and amount to accrue related to its blood-based lung diagnostic test contracts using a portfolio approach by considering: +• +the nature of the payer and payer coverage; +• +payment history; +• +test type; +• +the historical amount of time until payment by a payer; +• +historical price concessions granted to groups of customers; +• +whether there is a reimbursement contract between the payer and the Company; +• +payment as a percentage of agreed upon rate (if applicable); +• +amount paid per test; and +• +any current developments or changes that could impact reimbursement. +Variable consideration, if any, is estimated based on an analysis of historical experience and adjusted as better estimates become available. These estimates require significant judgment by management. +Biopharma Services revenue consists of various types of tests or other scientific services for a purpose as defined by any individual customer, which are often larger biopharmaceutical companies, as defined by a written agreement between the Company and the customer. These services are generally completed upon the delivery of testing results, or achievement of contractual milestone(s) as defined in the customer agreements. Customers for these services are typically large biopharmaceutical companies where collectability is reasonably assured and therefore revenue is accrued upon completion of the performance obligations. Revenue for these services is recognized upon delivery of the completed test results, or upon completion of the contractual milestone(s). +In addition, other revenue includes amounts derived from licensing our digital sequencing technologies to our international laboratory partners. We are compensated through royalty-based payments for the licensed technology, and depending on the nature of the technology licensing arrangements, and considering factors including, but not limited to: enforceable right to payment and payment terms, and if an asset with alternative use is created, these revenues are recognized in the period when royalty-bearing sales occur. +The Company also provides services to patients with whom the Company does not have contracts as defined Accounting Standards Codification (ASC) 606, Revenue from contracts with customers . The Company recognizes revenue for these patients when contracts are established at the amount of consideration to which it expects to be entitled, or when the Company receives substantially all of the consideration subsequent to satisfaction and delivery of the performance obligations. +F- 10 +Deferred revenue consists of payments received for research, development, and testing services fees received prior to the completion of performance of these tests and services. +See Note 11 — Revenue and Accounts Receivable Credit Concentration for additional information. +Direct Costs and Expenses +The components of our cost of diagnostic tests and testing services consist of cost of materials, direct labor, including bonuses, benefit and share-based compensation, depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs associated with acquiring and processing test samples, including sample accessioning, test performance, quality control analyses, charges to collect and transport samples; curation of test results for physicians; and in some cases, license or royalty fees due to third parties. +Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents. Costs associated with performing tests are expensed as the test is processed regardless of whether and when revenue is recognized with respect to that test. +Research and Development Expenses +Research and development expenses include external and internal costs incurred to develop our technology, collect clinical samples, and conduct clinical studies to develop and support our products. External costs consist primarily of payments to clinical trial sites, sample acquisition costs and laboratory supplies purchased in connection with the Company’s discovery and preclinical activities, process development and clinical development activities, infrastructure expenses, including allocated facility occupancy and information technology costs. Internal expenses include employee-related costs, including salaries, share-based compensation, and related benefits for employees engaged in research and development functions. +The Company estimates and accrues its expenses resulting from its obligations under contracts with vendors and consultants in connection with conducting research and development activities. The financial terms of these contracts vary from contract to contract and may result in payments that do not match the periods over which materials or services are provided under such contracts. The Company’s estimates depend on the timeliness and accuracy of the data provided by consultants and vendors regarding the status of each activity. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information received. Research and development costs are expensed as incurred. +Sales, Marketing, General and Administrative Expenses +Selling expenses consist primarily of costs associated with our sales organization, including our direct sales force and sales management, client services, marketing, and reimbursement, as well as business development personnel who are focused on our biopharmaceutical customers. These expenses consist primarily of salaries, commissions, bonuses, employee benefits, travel, and share-based compensation, as well as marketing and educational activities and allocated overhead expenses. +Sales, marketing, general and administrative expenses also include costs for our marketing and sales organizations, and other functions including finance, legal, human resources, and information technology. These expenses consist principally of salaries, bonuses, employee benefits, travel, share-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. +Concentrations of Credit Risk and Other Uncertainties +Substantially all of the Company’s cash and cash equivalents are deposited with one major financial institution in the United States. The Company continually monitors its positions with, and the credit quality of, the financial institution with which it holds cash. Periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. +Several of the components for certain of the Company's sample collection kits, test reagents, and test systems are obtained from single-source suppliers. If these single-source suppliers fail to satisfy the Company's requirements on a timely basis, the Company could suffer delays in being able to deliver its diagnostic solutions, a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results. +For a discussion of credit risk concentration of accounts receivable as of December 31, 2023 and 2022, see Note 11 — Revenue and Accounts Receivable Credit Concentration . +Cash and Cash Equivalents +Cash equivalents consist of short-term, highly-liquid instruments with an original maturity of three months or less from the date of purchase. +F- 11 +Restricted Cash +Restricted cash consists of deposits related to the Company’s corporate credit card. As of December 31, 2023 and 2022, the Company had $ 0.1 million restricted cash , respectively, which was included in ‘ Other current assets ’ in the accompanying balance sheets. +Accounts Receivable and Allowance for Doubtful Accounts +Accounts receivable are stated at the amount management expects to collect from customers based on their outstanding invoices. Management reviews accounts receivable quarterly to determine if any receivable will potentially be uncollectible and to estimate the amount of allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable value based on historical experience, customer creditworthiness, facts, and circumstances specific to outstanding balances, and payment terms. +Inventory +Inventory consists primarily of material supplies, which are consumed in the performance of testing services and charged to ‘Direct c osts and expenses’. Inventory is stated at cost and reported within ‘Other current assets’ in the balance sheet and was $ 1.4 million for both years ended December 31, 2023 and 2022 , respectively. The Company recorded a reserve for excess inventory of $ 0.1 million for both years ended December 31, 2023 and 2022, respectively. During the years ended December 31, 2023 and 2022 , the Company recorded $ 0.2 million and $ 0.9 million, respectively, to the statement of operations for excess and obsolete inventory. +Property and Equipment +Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and five years . Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the statements of operations in the period realized. +Long-lived assets to be held and used are evaluated for impairment when events or circumstances indicate the carrying value of a long-lived asset or asset group is less than the undiscounted cash flows from the use and eventual disposition over its remaining useful life. The Company assesses recoverability by comparing the sum or projected undiscounted cash flows from the use and eventual disposition of the asset or asset group to its carrying value, and records an impairment loss if the carrying value is greater than the undiscounted future cash flows. There were no impairments for th e years ended December 31, 2023 and 2022 . +Intangible Assets +Intangible assets primarily consist of intangible assets acquired as part of business combinations, external costs associated with patent applications that are probable of future economic benefits, and trademark costs. Finite-lived intangibles are stated at cost, net of accumulated amortization. The Company amortizes finite-lived intangible assets using the straight-line method over their estimated useful lives of 10 years , based on management's estimate of the period over which their economic benefits will be realized, product life and patent life. Trademarks are considered indefinite lived and are not amortized. +Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate a reduction to fair value below their carrying amounts. There were immaterial impairments during the years ended December 31, 2023 and 2022 . +Goodwill +Goodwill represents the excess of purchase price over amounts allocated to acquired assets and liabilities assumed in business combinations. The carrying value of goodwill is evaluated for impairment at least annually or more frequently when events or circumstances occur indicate a potential for impairment. The annual impairment test is performed on the last day of our fourth quarter. Prior to performing a quantitative evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of the reporting unit exceeds its carrying value. In the event the Company determines that it is more likely than not the carrying value of our single reporting unit is higher than its estimated fair value, quantitative testing is performed comparing recorded values to estimated fair values. If impairment is present, the impairment loss is measured as the excess of the recorded goodwill over its implied fair value. Through December 31, 2023, there were no accumulated impairment losses. +Leases +The Company acts as a lessee under all its lease agreements and holds various real estate leases for its headquarters and laboratory facilities in Colorado and Kansas and other various copier leases. +The Company elected the following practical expedients as part of the adoption of ASC 842, Leases : +• +Package of practical expedients which allows the Company to carry forward the historical lease classification; +• +Hindsight practical expedient which allows the Company to use hindsight in determining the lease term, in assessing purchase options, and in assessing impairment of right-of-use (ROU) assets; +F- 12 +• +Short-term lease practical expedient which allows the Company to capitalize only those leases with an initial term of twelve months or more; and +• +The practical expedient to account for lease and non-lease components (such as common area maintenance, utilities, insurance and taxes) as a single lease component for all classes of underlying assets. +Management determines if an arrangement is a lease at inception or upon modification of a contract. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the statements of operations. When determining whether a lease is a finance lease or an operating lease, ASC 842 does not specifically define criteria to determine the “major part of remaining economic life of the underlying asset” and “substantially all of the fair value of the underlying asset.” For lease classification determination, Management continues to use (i) 75% or greater to determine whether the lease term is a major part of the remaining economic life of the underlying asset and (ii) 90% or greater to determine whether the present value of the sum of lease payments is substantially all of the fair value of the underlying asset. +ROU assets represent the Company's right to use an underlying asset for the lease term. Lease liabilities represent the Company's obligation to make lease payments under the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses either the rate implicit in the lease or its incremental borrowing rate, as applicable, based on the information available at lease commencement date. The Company applies the estimated incremental borrowing rates on a lease-by-lease level based on the economic environment associated with the lease. The operating lease ROU asset also includes any lease prepayments, net of lease incentives. Certain of the Company's leases include options to extend or terminate the lease. As leases approach maturity, the Company considers various factors such as market conditions and the terms of any renewal and termination options that may exist to determine whether we will renew or terminate the lease, as such, we generally do not include renewal or termination options in our lease terms for calculating our lease liability, as the options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options at the time of the lease commencement. The Company's lease agreements do not contain any material residual value guarantees or restrictive covenants. Lease expense for lease payments of operating leases is recognized on a straight-line basis over the term of the lease. The Company uses the long-lived assets impairment guidance to determine recognition and measurement of an ROU asset impairment, if any. The Company monitors for events or changes in circumstances that require a reassessment. +Additional information and disclosures required by this standard are contained in Note 9 — Leases . +Other Assets +The Company has a $ 5.0 million cash refundable deposit to secure the performance of the Company’s obligations associated with the operating lease agreement with Centennial Valley Properties I, LLC (see Note 9 – Leases ). As of December 31, 2023 and 2022 , the $ 5.0 million refundable deposit is reported within 'Other long-term assets' in the balance sheet. +Fair Value of Financial Instruments +U.S. GAAP for fair value establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). We utilize a combination of market and income approaches to value our financial instruments. Our financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. Fair value measurements are categorized within the fair value hierarchy based upon the lowest level of the most significant inputs used to determine fair value. +The three levels of the hierarchy and the related inputs are as follows: +Level +Inputs +1 +Unadjusted quoted prices in active markets for identical assets and liabilities. +2 +Unadjusted quoted prices in active markets for similar assets and liabilities; +Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or +Inputs other than quoted prices that are observable for the asset or liability. +3 +Unobservable inputs for the asset or liability. +The carrying amounts of certain financial instruments including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, other long-term assets, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. +See Note 4 — Fair Value for further discussion related to estimated fair value measurements. +Contingent Consideration +The fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value are recorded as ‘Interest expense’ in the statements of operations. +F- 13 +Warrant Liability +The fair value of warrant liabilities is assessed at each balance sheet date and changes, if any, to the fair value are recorded as 'Change in fair value of warrant liability, net' in the statement of operations . +Share‑Based Compensation +Stock Options +The Company grants service condition and performance condition stock options. Stock options are granted with exercise prices equal to the fair market value of our common stock on the date of grant. The grant date fair value of each employee stock option is estimated on the date of grant using the Black-Scholes option-pricing model, which requires the use of assumptions, including the expected term of the option, expected volatility of our stock price, expected dividend yield, and the risk-free interest rate, among others. We estimate forfeitures and adjust these estimates to actual forfeitures as they occur. These assumptions involve inherent uncertainties including market conditions and employee behavior that are generally outside of the Company’s control. Service condition stock options are expensed based on the grant date fair value of the awards using the straight-line method over the requisite service period. Performance-condition stock options, if granted, vest based on achievement of multiple weighted performance goals, certification of performance achievement by the Compensation Committee of the Board of Directors, and continued service. For performance-condition stock options, compensation expense is updated for our expected performance level against performance goals at the end of each reporting period, which involves judgment as to achievement of certain performance metrics. +Restricted Stock Units (RSUs) +The Company grants service-condition RSUs. The grant date fair values of these RSUs are based on the closing market price of our common stock on the grant date. We estimate forfeitures and adjust these estimates to actual forfeitures as they occur. The service-condition RSUs vest based on continued service with compensation expense recognized on a straight-line basis over the requisite service period. +See Note 12 — Share-Based Compensation for additional information related to share-based compensation. +Income Taxe s +The Company accounts for income taxes in accordance with ASC 740, Income Taxes , under which deferred income taxes are recognized based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results, or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. The recorded valuation allowance is based on significant estimates and judgments and if the facts and circumstances change, the valuation allowance could materially change. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. +See Note 14 — Income Taxes for additional information related to income taxes. +Net Loss per Common Share +Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the period, if dilutive, using the treasury stock method. Potentially dilutive securities consisting of options to purchase common stock, warrants to purchase common stock, RSUs and shares subject to purchase under our employee stock purchase plan were excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive for all periods presented. +Note 3 – Recent Issued Accounting Standards +Recently adopted accounting standards +In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (ASC Topic 326). This ASU requires measurement and recognition of expected credit losses for financial assets. This guidance became effective for the Company beginning January 1, 2023. The Company evaluated the guidance and determined the overall impact of the adoption had an immaterial impact on our financial statements. +F- 14 +Standards being evaluated +In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting: Improvements to Reportable Segment Disclosures (ASC Topic 280). This ASU requires all public entities to provide additional disclosures about the entity's reportable segments and more detailed information about a reportable segment's expenses. This guidance will become effective for the Company beginning January 1, 2024, with early adoption permitted. The Company is currently evaluating this guidance and assessing the overall impact on its financial statements. +In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . This ASU improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid by jurisdiction. This guidance will become effective for the Company beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating this guidance and assessing the overall impact on its financial statements. +Note 4 - Fair Value +Recurring Fair Value Measurements +Our borrowing instruments are recorded at their carrying values in the balance sheets, which may differ from their respective fair values. The fair value of borrowings as of December 31, 2023 and 2022 is primarily associated with the Perceptive Term Loan Facility entered into with Perceptive Credit Holdings IV, LP, in November 2022 and was determined using a discounted cash flow analysis, excluding the fair value of the Perceptive Warrant (as defined below) issued in conjunction with the transaction. The carrying value of outstanding borrowings approximates the fair value as of December 31, 2023. The difference between the carrying value and fair value of outstanding borrowings as of December 31, 2022 is due to the debt issuance costs and the fair value of the Perceptive Warrant netted against the Perceptive Term Loan Facility. The table below presents the carrying and fair values of outstanding borrowings, which are classified as Level 2, as of the dates indicated (in thousands): +As of +December 31, 2023 +December 31, 2022 +Carrying Value +Fair Value +Carrying Value +Fair Value +Borrowings +$ +35,276 +$ +35,506 +$ +25,053 +$ +26,785 +The financial liabilities that are measured and recorded at estimated fair value on a recurring basis consist of our contingent consideration associated with our previous acquisition of Indi and the warrant liabilities granted as consideration for the Perceptive Term Loan Facility (see Note 8 - Debt ), which were accounted for as liabilities and remeasured through our statements of operations. +The table below presents the reported fair values of contingent consideration and warrant liabilities, which are classified as Level 3 in the fair value hierarchy, as of the dates indicated (in thousands): +Description +December 31, 2023 +December 31, 2022 +Current portion of contingent consideration +$ +21,857 +$ +10,341 +Contingent consideration +— +18,645 +Total contingent consideration +$ +21,857 +$ +28,986 +Warrant liabilities +$ +— +$ +61 +F- 15 +The following table presents the changes in contingent consideration and warrant liabilities for the dates indicated (in thousands): +Level 3 Rollforward +Contingent Consideration +Warrant Liabilities +Balance - December 31, 2021 +$ +33,792 +$ +— +Additions +— +145 +Changes in fair value, net +— +( 84 +) +Interest expense +3,082 +— +Loss on extinguishment of liabilities +2,934 +— +Payments +( 10,822 +) +— +Balance - December 31, 2022 +28,986 +61 +Changes in fair value, net +— +1,274 +Interest expense +3,946 +— +Payments +( 11,075 +) +— +Reclassification of Tranche B Warrants to additional paid-in capital +— +( 1,335 +) +Balance - December 31, 2023 +$ +21,857 +$ +— +Contingent consideration +In connection with the acquisition of Indi in 2018, the Company recorded contingent consideration for amounts contingently payable to Indi's selling shareholders pursuant to the terms of the asset purchase agreement (the Indi APA). The contingent consideration arrangement requires additional consideration to be paid by the Company to such shareholders upon attainment of a three-consecutive month gross margin target of $ 2.0 million within the seven-year period after the acquisition date, which was achieved during the three months ended June 30, 2021. Under the terms of the original agreement, when the gross margin target was achieved the Company was required to issue 2,520,108 shares of common stock. For the six months following the achievement of the gross margin target, Indi had the option to require the Company to redeem these common shares for $ 37.0 million in cash over eight equal quarterly installments. If Indi elected to not exercise its option, the Company had 12 months to repurchase the common stock in two equal and consecutive quarterly cash installments totaling $ 37.0 mi ll ion. +In August 2021, the Company entered into an amendment to the original agreement in which all parties agreed to forgo the issuance of common stock and agreed that the Company would, in lieu thereof, make six quarterly installments of approximately $ 4.6 million each beginning in January 2022 and a final payment of approximately $ 9.3 million in July 2023 for a total of $ 37.0 million (the Milestone Payments and each individually a Milestone Payment). The aggregate amount of payments owed by the Company under this amendment is the same as if Indi had exercised the put right or the Company had exercised the call right provided for in the original agreement. +On April 7, 2022, the Company entered into Amendment No. 3 to the Indi APA, in which the parties agreed to restructure the Milestone Payments. The Company made five quarterly installments of $ 2.0 million each beginning in April 2022, three quarterly installments of $ 3.0 million which began in July 2023, will make one installment of $ 5.0 million in April 2024, and will make one installment of approximately $ 8.4 million in July 2024. In addition, the Company agreed to an exit fee of approximately $ 6.1 million in October 2024. Interest shall accrue on the difference between the payment schedule as agreed in the August 2021 amendment and the April 2022 amended payment schedule, at an aggregate per annum rate equal to 10 %, with such interest to be payable quarterly on the following installment payment date. Our ability to make these payments is subject to ongoing compliance under the Perceptive Term Loan Facility. We obtained consent from Perceptive and subsequently paid the contractual Milestone Payment due January 1, 2024. +The contingent consideration liability is accounted for at fair value and subject to certain unobservable inputs. The significant unobservable inputs used in the measurement of the fair value include the probability of successful achievement of the specified product gross margin targets, the period in which the targets were expected to be achieved, and discount rates which ranged from 11 % to 16 %. As a result of the achievement of the gross margin target, the only remaining significant unobservable input used in the measurement of fair value includes the discount rate since all other inputs became fixed and determinable. Significant increases or decreases in the discount rate could result in a significantly higher or lower fair value measurement. +During the years ended December 31, 2023 and 2022, the Company recorded $ 3.9 million and $ 3.1 million, r espectively, in interest expense due to the passage of time and fixed payment schedule. +In accordance with ASC 230, Statement of Cash Flows , cash paid to settle the contingent consideration liability recognized at fair value as of the acquisition date (including measurement-period adjustments) should be reflected as a cash outflow for financing activities while the remaining portion of the amount paid should be reflected as a cash outflow from operating activities in the statement of cash flows. A portion of the October 2023 and all 2024 Milestone Payments are classified as cash outflows from operating activities in the Company's statements of cash flows. +Warrant Liabilities +On November 21, 2022, as consideration for the Perceptive Term Loan Facility (see Note 8 – Debt ), the Company issued Perceptive a warrant to purchase up to 5,000,000 shares of the Company's common stock (the Perceptive Warrant), including Initial Warrants and +F- 16 +Additional Warrants (as defined in Note 10 – Equity below). The Initial Warrants and First Amendment Warrants are equity classified (see Note 10 – Equity ) while the Tranche B and C Warrants were initially classified as liabilities within 'Other short-term liabilities' and recognized at fair value. The fair value of the Tranche B and C Warrants is determined using a Black-Scholes model and subject to certain unobservable inputs. The significant unobservable inputs used in the measurement of the fair value include the fair value of the Company's common stock, risk-free rate, the volatility of common stock, and the probability of the expected borrowing. Significant increases or decreases in the unobservable inputs could result in a significantly higher or lower fair value measurement. During the year ended December 31, 2023, the Company recorded a $ 1.3 million loss as a change in fair value through the statement of operations due to changes in unobservable inputs. This is a result of changes in the probability of our ability to draw on Tranche B and C loans. During the year ended December 31, 2022 , the Company recorded $ 0.1 million as a change in fair value through the statement of operations due to changes in unobservable inputs. +On December 15, 2023 (the Tranche B Borrowing Date), the Company exercised its ability to draw the Tranche B loan (see Note 8 – Debt ). In connection with the Tranche B draw, the Company remeasured the Tranche B Warrants through the Tranche B Borrowing Date and recorded the change in fair value through the statement of operations and, subsequently, reclassified the fair value to additional paid-in capital (see Note 10 – Equity ). +Note 5 – Property and Equipment +Property and equipment consist of the following (in thousands): +December 31, 2023 +December 31, 2022 +Lab equipment +$ +6,089 +$ +6,035 +Leasehold improvements +24,713 +2,365 +Computer equipment +1,221 +749 +Furniture and fixtures +1,034 +349 +Software +325 +324 +Vehicles +97 +97 +Construction in process +— +2,947 +33,479 +12,866 +Less accumulated depreciation +( 5,612 +) +( 7,018 +) +Total property and equipment, net +$ +27,867 +$ +5,848 +Depreciation expense related to pr operty and equipment was: +Year Ended December 31, +2023 +2022 +Direct costs and expenses +$ +460 +$ +591 +Selling, marketing, general and administrative +885 +1,031 +Total +$ +1,345 +$ +1,622 +Note 6 – Goodwill and Intangible Assets +Intangible assets, excluding goodwill, consist of the following (in thousands): +December 31, 2023 +December 31, 2022 +Cost +Accumulated +Amortization +Net Carrying Value +Cost +Accumulated +Amortization +Net Carrying Value +Intangible assets subject to amortization +Patents +$ +1,975 +$ +( 752 +) +$ +1,223 +$ +1,880 +$ +( 647 +) +$ +1,233 +Purchased technology +16,900 +( 10,328 +) +6,572 +16,900 +( 8,450 +) +8,450 +Intangible assets not subject to +amortization +Trademarks +116 +— +116 +114 +— +114 +Total +$ +18,991 +$ +( 11,080 +) +$ +7,911 +$ +18,894 +$ +( 9,097 +) +$ +9,797 +F- 17 +Amortization expense related to definite-lived intangible assets was (in thousands): +Year Ended December 31, +2023 +2022 +Direct costs and expenses +$ +2 +$ +2 +Sales, marketing, general and administrative +1,981 +1,973 +Total +$ +1,983 +$ +1,975 +Future estimated amortization expense of intangible assets is (in thousands): +As of +December 31, 2023 +2024 +$ +1,978 +2025 +1,972 +2026 +1,959 +2027 +1,007 +2028 +59 +2029 and thereafter +820 +Total +$ +7,795 +Note 7 – Accrued Liabilities +Accrued liabilities consist of the following (in thousands): +As of December 31, +2023 +2022 +Compensation related accruals +$ +3,855 +$ +4,671 +Accrued clinical trial expense +983 +1,232 +Other expenses +2,872 +2,315 +Total accrued liabilities +$ +7,710 +$ +8,218 +Note 8 – Debt +Our long-term debt primarily consists of notes payable associated with our Perceptive Term Loan Facility which is described in further detail below. Long-term notes payable were as follows (in thousands): +December 31, 2023 +December 31, 2022 +Perceptive Term Loan Facility +$ +40,000 +$ +30,000 +Other +78 +127 +Unamortized debt discount and debt issuance costs +( 4,802 +) +( 5,074 +) +35,276 +25,053 +Less: current maturities +51 +49 +Long-term notes payable +$ +35,225 +$ +25,004 +Perceptive Term Loan Facility +On November 16, 2022 (the Closing Date), the Company entered into a Credit Agreement and Guaranty (the Credit Agreement) with Perceptive Credit Holdings IV, LP as lender and administrative agent (the Lender). The Credit Agreement provides for a senior secured delayed draw term loan facility with Perceptive Advisors LLC (Perceptive), in an aggregate principal amount of up to $ 50.0 million (the Perceptive Term Loan Facility). The Tranche A Loan, in an aggregate amount of up to $ 30.0 million (the Tranche A Loan), was funded under the Perceptive Term Loan Facility on November 21, 2022 (the Funding Date). The Company's net proceeds from the Tranche A Loan were approximately $ 27.9 million, after deducting debt issuance costs and expenses. In addition to the Tranche A Loan, the Perceptive Term Loan Facility includes an additional Tranche B Loan, in an aggregate amount of up to $ 10.0 million, and an additional Tranche C Loan, in an aggregate amount of up to $ 10.0 million, which are accessible by the Company so long as the Company satisfies certain customary conditions precedent, including revenue milestones. On December 15, 2023, the Company exercised its ability to draw the Tranche B loan for $ 10.0 million. The Tranche C loan has a loan commitment date through September 30, 2024. The Perceptive Term Loan Facility has a maturity date of November 21, 2027 (the Maturity Date) and provides for an interest-only period during the term of the loan with principal due at the Maturity Date. +F- 18 +Interest Rate +The Perceptive Term Loan Facility will accrue interest at an annual rate equal to the greater of (a) forward-looking one-month term SOFR as posted by CME Group Inc. and (b) 3.0 % per annum, plus an applicable margin of 9.0 %. As of December 31, 2023, the stated interest rate was approximately 14.4 % . +Amortization and Prepayment +On the Maturity Date, the Company is required to pay the Lender the aggregate outstanding principal amount underlying the Perceptive Term Loan Facility and any accrued and unpaid interest thereon. Prior to the Maturity Date, there will be no scheduled principal payments under the Perceptive Term Loan Facility. The Perceptive Term Loan Facility may be prepaid at any time, subject to a prepayment premium equal to 2 % to 10 % of the aggregate outstanding principal amount being prepaid, depending on the date of prepayment. +Security Instruments and Warrants +Pursuant to a Security Agreement, dated as of the Funding Date (the Security Agreement), between the Company and the Lender, substantially all of the Company’s obligations under the Credit Agreement are secured by a first lien perfected security interest on all of the Company’s assets, subject to customary exceptions. +As consideration for the Credit Agreement, the Company has issued, on the Funding Date, the Perceptive Warrant of up to 5,000,000 shares of the Company's common stock , including the Initial Warrants which are equity classified at a per share exercise price equal to $ 1.0648 which is equal to the 10-day volume weighted average price (VWAP) of the Company’s common stock, on the business day immediately prior to the Closing Date of the Tranche A Loan . In connection with the Tranche B borrowing, additional warrants became exercisable into 1,000,000 shares of common stock with a per share exercise price equal t o $ 1.0648 , which is equal to the Initial Warrant exercise price (the Tranche B Warrants) and expire on December 15, 2033 . +In addition to the Initial and Tranche B Warrants, additional warrants will become exercisable into 1,000,000 shares of common stock concurrently with the borrowing date of the Tranche C Loan (the Tranche C Warrants). The per share exercise price for the Tranche C Warrants will be equal to the lower of (A) the Initial Warrant exercise price or (B) the 10-day VWAP ending on the business day immediately preceding the funding date of the Tranche C loan . Each warrant will be exercisable, in whole or in part, until the 10th anniversary of the date of issuance. If the Tranche C loan is not drawn by the loan commitment date, the associated Tranche C Warrants expire and will not become exercisable. The Company accounts for the Tranche C Warrants as liabilities as the Tranche C Warrants do not meet the criteria for equity treatment (see Note 4 – Fair Value ). +Representations, Warranties, Covenants, and Events of Default +The Credit Agreement contains certain representations and warranties, affirmative covenants, negative covenants, financial covenants, and conditions that are customarily required for similar financings. The affirmative covenants, among other things, require the Company to undertake various reporting and notice requirements, maintain insurance and maintain in full force and effect all Regulatory Approvals, Material Agreements, Material Intellectual Property (each as defined in the Credit Agreement) and other rights, interests or assets (whether tangible or intangible) reasonably necessary for the operations of the Company’s business. The negative covenants restrict or limit the ability of the Company to, among other things and subject to certain exceptions contained in the Credit Agreement, incur new indebtedness; create liens on assets; engage in certain fundamental corporate changes, such as mergers or acquisitions, or changes to the Company’s business activities; make certain Investments or Restricted Payments (each as defined in the Credit Agreement); change its fiscal year; pay dividends; repay other certain indebtedness; engage in certain affiliate transactions; or enter into, amend or terminate any other agreements that has the impact of restricting the Company’s ability to make loan repayments under the Credit Agreement. In addition, the Company must (i) at all times prior to the Maturity Date maintain a minimum cash balance of $ 2.5 million; and (ii) as of the last day of each fiscal quarter commencing on the fiscal quarter ending March 31, 2023, recognize revenue in amounts agreed to between the Company and Perceptive. +On May 10, 2023, the Company entered into the First Amendment with the Lender, whereby subject to the terms and conditions of the First Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold of each fiscal quarter commencing on the fiscal quarter ending June 30, 2023 through and including the fiscal quarter ending March 31, 2024. As consideration for the First Amendment, the Company agreed to issue to Perceptive a warrant to purchase up to 500,000 shares of the Company’s common stock (the First Amendment Warrants) which are equity classified at a per share exercise price equal to $ 1.6254 (see Note 10 – Equity ). +On August 4, 2023 (the Second Amendment Effective Date), the Company entered into the Second Amendment to the Credit Agreement and Guaranty (the Second Amendment) with Perceptive as lender and administrative agent and the Company, as borrower, whereby subject to the terms and conditions of the Second Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing on the fiscal quarter ending June 30, 2024 through and including the fiscal quarter ending December 31, 2025. +F- 19 +Under the terms of the Second Amendment, the conditions precedent for drawing on the Tranche B Loan were amended to (i) reduce the trailing-twelve month revenue milestone and (ii) add the receipt of aggregate cash proceeds of at least $ 27.5 million from an equity offering of the Company's common stock. During the three months ended September 30, 2023, the Company met the amended trailing-twelve month revenue milestone associated with the Tranche B Loan. On August 3, 2023, the Company entered into subscription agreements for the issuance and sale by the Company of an aggregate of 16,975,298 of the Company’s common stock at a purchase price of $ 1.62 per share for an aggregate purchase price of approximately $ 27.5 million. During the three months ended September 30, 2023, the Company received $ 15.3 million in proceeds and issued 9,454,927 shares of common stock pursuant to the Subscription Agreements. On September 27, 2023, the Company entered into an amendment to delay final closing on one subscription agreement. The remaining $ 12.2 million in proceeds were received and 7,520,371 shares of common stock were issued during the three months ended December 31, 2023 (see Note 10 – Equity ). +The Credit Agreement also contains certain customary Events of Default which include, among others, non-payment of principal, interest, or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross- defaults to material contracts, certain regulatory-related events and events constituting a change of control. As of December 31, 2023, the Company was in compliance with all restrictive covenants associated with its borrowing and entered into a limited waiver on February 14, 2024 to the Perceptive Term Loan Facility (the Limited Waiver). Subject to the terms and conditions of the Limited Waiver, Perceptive agreed to (i) waive compliance with the December 31, 2023 Minimum Net Revenue covenant and (ii) waive the requirement that the Annual Report on Form 10-K for the year-ended December 31, 2023 and auditor's opinion on the financial statements herein shall not be subject to any going concern or like qualification or exception audit. The occurrence of an Event of Default could result in, among other things, the declaration that all outstanding principal and interest under the Perceptive Term Loan Facility are immediately due and payable in whole or in part. +The Initial Warrants and Additional Warrants were valued at $ 2.9 million and $ 0.1 million, respectively, using the Black-Scholes option-pricing model, estimated settlement probabilities and estimated exercise prices. As a result of the fees paid to Perceptive and the value of the Perceptive Warrant, the Company recognized a discount on the Perceptive Term Loan in the amount of $ 5.2 million. The First Amendment Warrants were valued at $ 0.7 million using the Black-Scholes option-pricing model which the recognized as a discount on the Perceptive Term Loan Facility. The Company recorded the debt discount as a reduction to the principal amount of the debt and is amortized as interest expense over the life of the debt. +Scheduled principal repayments (maturities) of long-term obligations were as follows (in thousands): +As of +December 31, 2023 +2024 +$ +50 +2025 +21 +2026 +7 +2027 and thereafter +40,000 +Total +$ +40,078 +Note 9 – Leases +Operating Leases +The Company acts as a lessee under all its lease agreements. Throughout 2023, the Company leased its headquarters and laboratory facilities in Boulder, Colorado, under a lease agreement that expired in January 2024 and the Company subsequently relocated its corporate headquarters and laboratory facilities to Louisville, Colorado. The Company also leases laboratory and office space in De Soto, Kansas, under a non-cancelable lease agreement for approximately 9,066 square feet that was set to expire in October 2023 . In April 2023, the Company amended the agreement to extend the lease agreement through October 2026. The Company also holds various copier leases under non-cancelable lease agreements that expire in the next one to three years . +Centennial Valley Properties I, LLC Lease Agreement +On March 11, 2022, the Company entered into a Lease Agreement (the Lease) with Centennial Valley Properties I, LLC, a Colorado limited liability company (the Landlord) for office and laboratory space in Louisville, Colorado (the Leased Premises). The Leased Premises replaced the Company’s headquarters and laboratory facilities in Boulder, Colorado in January 2024. +The initial term of the Lease is twelve years (the Initial Term) from the commencement date, which is the earlier of: (i) the Company conducting revenue generating business (as defined in the Lease), or (ii) April 1, 2023 . The Company has two renewal options to extend the term of the Lease for an additional seven - or ten-year terms for each renewal. During the three months ended June 30, 2022, the lease commenced for accounting purposes resulting in $ 2.0 million in ROU assets and lease liabilities being recorded , however, the Lease commenced for legal purposes on April 1, 2023 (the Commencement Date) . +F- 20 +Under the Lease, the Company will lease approximately 79,980 square feet at the Leased Premises. The Company will pay base rent over the life of the Lease beginning at approximately $ 227,000 per month and escalating, based on fixed escalation provisions, to approximately $ 326,000 per month, plus certain operating expenses and taxes. The Company's obligation to pay base rent shall be abated, commencing as of the Commencement Date and ending on and including the date that is 12 months after the Commencement Date (the Abated Rent Period). Further, the Company's obligation to pay base rent with respect to a portion of the area of the Lease Premises equal to 19,980 square feet shall be abated (the Partial Abated Rent), commencing as of the day after the end of the Abated Rent Period and ending on and including the date that is 24 months after the Commencement Date (the Partial Abated Rent Period). Pursuant to a work letter entered by the parties in connection with the Lease, the Landlord will contribute an aggregate of $ 18.8 million toward the cost of construction and improvements for the Leased Premises and the Company exercised its option for an additional tenant improvement allowance of $ 2.0 million (the Extra Allowance Amount). The Company will repay the Extra Allowance Amount actually funded by the Landlord in equal monthly payments with an interest rate of 6 % per year over the Initial Term excluding any part of the Abated Rent Period or Partial Abated Rent Period, which shall start to accrue on the date that the Landlord first disburses the Extra Allowance Amount. The Company made an accounting policy election to reduce the right-of-use asset and lease liability at lease commencement because the Lease specifies a maximum level of reimbursement for tenant improvements which are probable of being incurred and within the Company's control. Due to the tenant improvement allowances at the accounting lease commencement date and rent abatement periods described above, the Company expects the lease liability to accrete to approximat ely $ 25.5 mil lion by November 2024 after receiving $ 20.8 million in lessor reimbursements. As of December 31, 2023, the Company has utilized the total $ 20.8 million ($ 18.3 million and $ 2.5 million during the years ended December 31, 2023, and 2022, respectively) in tenant improvement allowances for capital expenditures for leasehold improvements related to the Leased Premises and have been reimbursed from the Landlord. +The Lease includes various covenants, indemnities, defaults, termination rights, and other provisions customary for lease transactions of this nature. During the three months ended September 30, 2022, a $ 5.0 million cash collateralized letter of credit under the operating lease agreement was released and the funds were subsequently transferred to the Landlord as a refundable deposit (subject to contingent reduction over the term of the lease) to secure the performance of the Company’s obligations. The $ 5.0 million refundable deposit is included within ' Other long-term assets ' in the balance sheet as of December 31, 2023 and 2022. +Operating lease expense for all operating leases was $ 4.3 million and $ 2.6 million and for the year ended December 31, 2023 and 2022, respectively. As of December 31, 2023 , the weighted-average remaining lease term and discount rate associated with our operating leases were 10.9 years and 11.40 %, respe ctively. +Future minimum lease payments associated with our operating leases were as follows (in thousands): +As of +December 31, 2023 +2024 +$ +2,406 +2025 +4,032 +2026 +4,144 +2027 +4,063 +2028 +4,151 +2029 and thereafter +28,113 +Total future minimum lease payments +46,909 +Less amount representing interest +( 21,494 +) +Total lease liabilities +$ +25,415 +Note 10 – Equity +Common Stock +The Company’s Restated Certificate of Incorporation authorizes the Company to issue up to 200,000,000 shares of common stock with a par value of $ 0.001 per share. The holder of each share of common stock is entitled to one vote per share. The common shareholders are entitled to dividends whenever funds and assets are legally available and when and if declared by the Board of Directors. The Company is currently subject to restrictions on the payment of dividends (see Note 8 – Debt ) and no dividends have been declared as of December 31, 2023. +Preferred Stock +The Company’s Restated Certificate of Incorporation authorizes the Company to issue up to 5,000,000 shares of preferred stock with a par value of $ 0.001 per share. As of December 31, 2023 and 2022 , no shares of preferred stock were issued or outstanding. +Equity Financing Programs +The Company maintains two facilities that enable equity financing on an ongoing basis at the Company’s sole discretion, our at-the-market offering (ATM) and our common stock purchase agreement with Lincoln Park Capital Fund, LLC (Lincoln Park). +F- 21 +In November 2021, the Company entered into a sales agreement with a financial institution, pursuant to which the Company may issue and sell, from time to time, shares of its common stock having an aggregate offering price of up to $ 50.0 million (the ATM Shares), subject to terms and conditions. The Shares will be offered and sold by the Company pursuant to its previously filed and currently effective registration statement on Form S-3, and sales of common stock, if any, will be made at market prices by methods deemed to be an “at-the-market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on the NASDAQ Global Market, or any other existing trading market for our common stock. +On March 7, 2022 (the LPC Effective Date), the Company entered into a purchase agreement with Lincoln Park Capital Fund, LLC (the Purchase Agreement), pursuant to which Lincoln Park has committed to purchase up to $ 50.0 million of the Company's common stock (the LPC Facility). Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $ 50.0 million of the Company’s common stock. Such sales of common stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company’s sole discretion, over the 36-month period commencing on the LPC Effective Date. The number of shares the Company may sell to Lincoln Park on any single business day in a regular purchase is 50,000 shares, but that amount may be increased up to 100,000 shares, depending upon the market price of the Company’s common stock at the time of sale and subject to a maximum limit of $ 1.5 million per regular purchase. The purchase price per share for each such regular purchase will be based on prevailing market prices of the Company’s common stock immediately preceding the time of sale as computed under the Purchase Agreement. In addition to regular purchases, the Company may also direct Lincoln Park to purchase other amounts as accelerated purchases or as additional accelerated purchases. +Under applicable rules of the NASDAQ Global Market, in no event may the Company issue or sell to Lincoln Park under the Purchase Agreement more than 19.99% of the shares of the Company’s common stock outstanding immediately prior to the execution of the Purchase Agreement (the Exchange Cap), unless (i) the Company obtains stockholder approval to issue shares of common stock in excess of the Exchange Cap or (ii) the average price of all applicable sales of common stock to Lincoln Park under the Purchase Agreement equals or exceeds $2.20 per share, such that issuances and sales of the common stock to Lincoln Park under the Purchase Agreement would be exempt from the Exchange Cap limitation under applicable NASDAQ rules. +Lincoln Park has no right to require the Company to sell any shares of common stock to Lincoln Park, but Lincoln Park is obligated to make purchases as the Company directs, subject to certain conditions. In all instances, the Company may not sell shares of its common stock to Lincoln Park under the Purchase Agreement if doing so would result in Lincoln Park beneficially owning more than 9.99 % of its common stock. +Actual sales of shares of common stock to Lincoln Park under the Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the common stock and determinations by the Company as to the appropriate sources of funding for the Company and its operations. The net proceeds, if any, under the Purchase Agreement will depend on the frequency and prices at which the Company sells shares of its common stock to Lincoln Park. The Company intends to use any net proceeds from the sale of its common stock to Lincoln Park to advance its growth strategy and for general corporate purposes. On the LPC Effective Date, the Company issued 184,275 shares of common stock to Lincoln Park as a commitment fee (the Initial Commitment Shares) for which the Company did not receive consideration and, upon the available amount being reduced to an amount equal to or less than $ 20.0 million, the Company will be required to issue 61,425 shares (the Additional Commitment Shares and together with the Initial Commitment Shares, collectively, the Commitment Shares). The Initial Commitment Shares issued were valued at $ 600,000 and, together with due diligence expenses and legal fees of $ 129,000 , reflect deferred offering costs of $ 729,000 , which are included on the balance sheet in 'Other long-term assets'. The deferred offering costs will be charged against 'Additional paid-in capital' upon future proceeds from the sale of common stock under the Purchase Agreement. During the year ended December 31, 2022 , $ 75,000 of deferred offering costs were charged against 'Additional paid-in capital'. As of December 31, 2023 , $ 654,000 of deferred offering costs remain. +The Purchase Agreement may be terminated by the Company at any time, at its sole discretion, without any cost or penalty, by giving one business day notice to Lincoln Park to terminate the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the common stock. Although the Company has agreed to reimburse Lincoln Park for a limited portion of the fees it incurred in connection with the Purchase Agreement, the Company did not pay any additional amounts to reimburse or otherwise compensate Lincoln Park in connection with the transaction, other than the issuance of the Commitment Shares. +During the year ended December 31, 2023, the Company raised approximately $ 0.6 million ($ 0.6 million after deducting underwriting discounts and commissions and offering expenses payable), in gross proceeds from the sale of 376,456 common shares at a weighted average price per share of $ 1.66 under the ATM facility. As of December 31, 2023, the Company had remaining available capacity for share issuances of approximately $ 28.9 million under the ATM facility and up to $ 46.9 million under the LPC facility, each subject to the restrictions and limitations of the underlying facilities, as well as volume limitations under applicable SEC rules and regulations that limit their availability as sources of funding. +F- 22 +Public Offering +On November 21, 2022, the Company closed an underwritten public offering (the Public Offering) of 35,075,000 shares of its common stock (the Public Offering Shares), including 4,575,000 shares purchased by the underwriter pursuant to an option to purchase additional shares. The Public Offering Shares were issued and sold pursuant to an underwriting agreement, dated November 16, 2022, by and between the Company and William Blair & Company, L.L.C., as sole underwriter, at a public offering price per share of $ 1.15 . The Company received net proceeds of approximately $ 37.5 million from the Public Offering after deducting underwriting discounts, commissions, and offering expenses payable by the Company. +The Public Offering was made pursuant to the Company’s effective Registration Statement on Form S-3 previously filed with the Securities and Exchange Commission on November 29, 2021 and a prospectus supplement, dated November 16, 2022, relating to the Offering. +Subscription Agreements +On April 7, 2022, the Company entered into subscription agreements (the April 2022 Subscription Agreements) with a consortium of investors (the April 2022 Investors), including three members of our Board of Directors and other existing shareholders of the Company, for the issuance and sale by the Company of 6,508,376 shares of the Company’s common stock in a private placement offering. The three members of our Board of Directors acquired an aggregate of 3,631,284 shares pursuant to the form of a Subscription Agreement that did not include any registration rights. The remaining 2,877,092 shares were acquired by others pursuant to the form of a Subscription Agreement whereby the Company agreed to file, subject to certain exceptions, a shelf registration statement with respect to resales of such shares with the Securities and Exchange Commission no later than 60 days from April 7, 2022, which the Company filed on June 6, 2022. +Pursuant to the April 2022 Subscription Agreements, the April 2022 Investors purchased shares at a purchase price (determined in accordance with NASDAQ rules relating to the “Minimum Value” of the Company’s common stock) of $ 1.79 per share, which is equal to the closing price of the Company's common stock on April 7, 2022, for an aggregate purchase price of approximately $ 11.7 million. The April 2022 Subscription Agreements include customary representations, warranties and covenants by the parties to the agreement. +On November 21, 2022, the Company entered into subscription agreements (the November 2022 Subscription Agreements) with certain members of management (the November 2022 Investors), including the Company’s Chief Executive Officer and Chief Financial Officer, for the issuance and sale by the Company of an aggregate of 235,056 shares of the Company’s common stock in a private placement offering. The November 2022 Subscription Agreement did not include any registration rights and included lock up restrictions that were in effect during the period ending 90 days subsequent to November 21, 2022. +Pursuant to the November 2022 Subscription Agreements, the November 2022 Investors purchased shares at a purchase price (determined in accordance with NASDAQ rules relating to the “Minimum Value” of the Company’s common stock) of $ 1.15 per share, which is equal to the public offer price in the Public Offering, for an aggregate purchase price of approximately $ 270,000 . The November 2022 Subscription Agreements include customary representations, warranties and covenants by the parties to the agreement. +On August 3, 2023, the Company entered into subscription agreements (the August 2023 Subscription Agreements) with all the members of our Board of Directors, all Section 16 officers, and additional members of the Biodesix leadership team (together, the August 2023 Investors) for the issuance and sale by the Company of an aggregate of 16,975,298 shares of the Company’s common stock in a private equity offering. The Subscription Agreements did not include any registration rights. +Pursuant to the August 2023 Subscription Agreements, the August 2023 Investors purchased shares at a purchase price (determined in accordance with NASDAQ rules relating to the “Minimum Value” of the Company’s common stock) of $ 1.62 per share, which is equal to the closing price of the Company's common stock on August 3, 2023, for an aggregate purchase price of approximately $ 27.5 million. The August 2023 Subscription Agreements include customary representations, warranties and covenants by the parties to the agreement. During the three months ended September 30, 2023, the Company received $ 15.3 million in proceeds and issued 9,454,927 shares of common stock pursuant to the Subscription Agreements. On September 27, 2023, the Company entered into an amendment to delay final closing on one subscription agreement. The remaining $ 12.2 million in proceeds were received and 7,520,371 shares of common stock were issued during the three months ended December 31, 2023. +Warrants +During 2018, the Company issued warrants to purchase shares of convertible preferred stock in conjunction with the sale of certain convertible preferred shares and issuance of debt. The Company issued to the lender a warrant to purchase 613,333 shares of Series G convertible preferred stock, at an exercise price of $ 0.75 per share, subject to adjustment upon specified dilutive issuances. The warrant was immediately exercisable upon issuance and expires on February 23, 2028 . Through the effective date of the Company’s initial public offering (IPO) in October 2020, the Series G warrants were remeasured to an estimate of fair value using a Black-Scholes pricing model. As a result of the Company’s IPO, the preferred stock warrants were automatically converted to warrants to purchase 103,326 shares of common stock with a weighted average exercise price of $ 4.46 and were also transferred to additional paid-in capital. All common stock warrants remain outstanding as of December 31, 2023. +F- 23 +On November 21, 2022, as consideration for the Perceptive Term Loan Facility (see Note 8 – Debt ), the Company issued the Perceptive Warrant to purchase up to 5,000,000 shares of the Company's common stock, including the Initial Warrants. In addition to the Initial Warrants, the Additional Warrants will each become exercisable into 1,000,000 shares of common stock concurrently with the borrowing date of the Tranche B and C Loans, respectively. The Company accounts for the Additional Warrants as liabilities as the Additional Warrants do not meet the criteria for equity treatment (see Note 4 – Fair Value ). The per share exercise price for the Initial Warrants is equal to $ 1.0648 , which is equal to the lower of (A) the 10-day VWAP of the Company’s common stock on the business day immediately prior to the Closing Date of the Tranche A Loan or (B) the public offering price per share of common stock of $ 1.15 . The Initial Warrants are equity classified and were immediately exercisable upon issuance and expire on November 21, 2032 . The Initial Warrants were valued at $ 2.9 million using the Black-Scholes option-pricing model assuming an expected term of 10 years, a volatility of 81.3 %, a dividend yield of 0 % and a risk-free interest rate of 3.67 %. All Initial Warrants remain outstanding as of December 31, 2023. +On May 10, 2023, as consideration for the First Amendment (see Note 8 – Debt ), the Company agreed to issue to Perceptive a warrant to purchase up to 500,000 shares of the Company’s common stock (the First Amendment Warrants) at a per share exercise price equal to $ 1.6254 , which is equal to the 10-day VWAP of the Company’s common stock ending on the business day immediately prior to the First Amendment Effective Date. The First Amendment Warrants are equity classified and immediately exercisable upon issuance and expire on May 10, 2033 . The First Amendment Warrants were valued at $ 0.7 million using the Black-Scholes option-pricing model assuming an expected term of 10 years, a volatility of 78.7 %, a dividend yield of 0 % and a risk-free interest rate of 3.49 %. All First Amendment Warrants remain outstanding as of December 31, 2023. +On December 15, 2023 (the Tranche B Borrowing Date), the Company exercised its ability to draw the Tranche B loan (see Note 8 – Debt ). In connection with the Tranche B draw, the Company remeasured the Tranche B Warrants through the Tranche B Borrowing Date and recorded the change in fair value through the statement of operations and, subsequently, reclassified the fair value to additional paid-in capital. The Tranche B Warrants are now equity classified and immediately exercisable upon issuance and expire on December 15, 2033 . The Tranche B Warrants were value d at $ 1.3 million using the Black-Scholes option-pricing model assuming an expected term of 10 years, a volatility of 76.2 %, a dividend yield of 0 % and a risk-free interest rate of 3.91 % . All Tranche B Warrants remain outstanding as of December 31, 2023 . +Note 11 – Revenue and Accounts Receivable Credit Concentration +We derive our revenue from two primary sources: (i) providing diagnostic testing in the clinical setting (Diagnostic tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, clinical trial testing, development and testing services provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics. We also recognize revenue from other services, including amounts derived from licensing our technologies (Biopharma Services and other). +Diagnostic test revenues consist of blood-based lung tests and, prior to May 11, 2023, COVID-19 tests, which are recognized in the amount expected to be received in exchange for diagnostic tests when the diagnostic tests are delivered. The Company conducts diagnostic tests and delivers the completed test results to the prescribing physician or patient, as applicable. The fees for diagnostic tests are billed either to a third party such as Medicare, medical facilities, commercial insurance payers, or to the patient. The Company determines the transaction price related to its diagnostic test contracts by considering the nature of the payer, test type, and historical price concessions granted to groups of customers. For diagnostic test revenue, the Company estimates the transaction price, which is the amount of consideration it expects to be entitled to receive in exchange for providing services based on its historical collection experience, using a portfolio approach. The Company recognizes revenues for diagnostic tests upon delivery of the tests to the physicians requesting the tests or patient, as applicable. +Services revenue consists of on-market tests, pipeline tests, custom diagnostic testing, and other scientific services for a purpose as defined by any individual customer, which is often with biopharmaceutical companies. The performance obligations and related revenue for these sales is defined by a written agreement between the Company and the customer. These services are generally completed upon the delivery of testing results, or other contractually defined milestone(s), to the customer. Revenue for these services is recognized upon delivery of the completed test results, or upon completion of the contractual milestone(s). In addition, other revenue includes amounts derived from licensing our digital sequencing technologies to our international laboratory partners. We are compensated through royalty-based payments for the licensed technology, and depending on the nature of the technology licensing arrangements and considering factors including but not limited to enforceable right to payment and payment terms, and if an asset with alternative use is created, these revenues are recognized in the period when royalty-bearing sales occur. +Revenues consisted of the following (in thousands): +Year Ended December 31, +2023 +2022 +Diagnostic Tests +$ +45,192 +$ +34,538 +Biopharma Services and other +3,895 +3,674 +Total revenue +$ +49,087 +$ +38,212 +F- 24 +Deferred Revenue +Deferred revenue consists of cash payments from customers received in advance of delivery. As test results are delivered, the Company recognizes the deferred revenue in 'Revenues' in the statements of operations. The Company had $ 1.0 million in ‘Deferred revenue’ recorded in the balance sheet as of December 31, 2022 and $ 0.6 million was added throughout 2023 to ‘Deferred revenue’ for up-front cash payments received while $ 1.3 million was recognized in 'Revenues' during the year ended December 31, 2023 . The ‘Deferred revenue’ of $ 0.3 million re corded in the balance sheet as of December 31, 2023 is expected to be recognized in revenues over the next twelve months as test results are delivered and services are performed. As of December 31, 2023 and 2022, the Company had $ 0.3 million and $ 0.4 million in non-cu rrent deferred revenue, respectively, recorded within ‘Other long-term liabilities’ in the balance sheets which represent amounts to be recognized in excess of twelve months from the respective balance sheet date. +The Company’s customers in excess of 10% of total revenue and their related revenue as a percentage of total revenue were as follows: +Year Ended December 31, +2023 +2022 +United Healthcare +10 +% +— +The State of Colorado +— +10 +% +In addit ion to the above table, we collect reimbursement on behalf of customers covered by Medicare, which accounted for 43 % and 37 % of the Company’s total revenue for the years ended December 31, 2023 and 2022, respectively. The Company is subject to credit risk from its accounts receivable related to services provided to its customers. +The Company’s third-party payors and other customers in excess of 10% of accounts receivable, and their related accounts receivable as a percentage of total accounts receivable were as follows: +As of +December 31, 2023 +December 31, 2022 +Medicare +21 +% +23 +% +AstraZeneca UK +— +18 +% +Note 12 – Share Based Compensation +Predecessor 2016 and 2006 Equity Incentive Plans +Under the 2006 Equity Incentive Plan (2006 Plan), the Company was authorized to grant incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards and RSUs. No additional awards may be granted under the 2006 Plan. +In February 2016, the Company adopted the 2016 Equity Incentive Plan (2016 Plan) as a successor to and continuation of the prior 2006 Plan. The 2016 Plan provided for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSUs, and other stock awards to directors, employees, and consultants. Awards granted under the 2016 Plan or the 2006 Plan that were unallocated, expired or otherwise terminated, or were forfeited, cancelled, or repurchased by the Company, became available for future issuance under the 2016 Plan. In addition, shares subject to an award were withheld to satisfy a participant’s tax withholding obligations, or were reacquired by the Company as consideration for the exercise or purchase price of a stock award also became available for future issuance under the 2016 Incentive Plan. No additional awards may be granted under the 2016 Plan. +2020 Equity Incentive Plan +Effective upon the closing of our IPO, the Company’s Board of Directors approved the 2020 Equity Incentive Plan (2020 Plan), which replaced the 2016 Plan. The 2020 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSUs, performance awards and other stock awards. Officers, directors, employees, consultants, agents, and independent contractors who provide services to the Company may receive awards. The terms of all awards are governed by an agreement between the Company and the recipients, as administered and approved by the Compensation Committee of the Board of Directors). Any awards that expire or are forfeited under the 2016 Plan or 2006 Plan become available for issuance under the 2020 Plan. +The number of shares originally reserved for issuance under the 2020 Plan was 1,893,395 . The 2020 Plan includes an annual increase on the first day of each calendar year, beginning with the calendar year ending December 31, 2022, and continuing until, and including, the calendar year ending December 31, 2030. The annual increase will be equal to the lesser of (i) 4 % of the number of shares of our common stock issued and outstanding as of December 31st of the immediately preceding calendar year and (ii) such lesser amount determined by the Board of Directors. +To the extent an equity award granted under the 2020 Plan (other than any substitute award) or granted under any other equity plan maintained by us under which awards are outstanding as of the effective date of the 2020 Plan (the Prior Plans) expires or otherwise terminates without having been exercised or paid in full, or is settled in cash, the shares subject to such award will become available for +F- 25 +future grant under the 2020 Plan. In addition, to the extent shares subject to an award are withheld to satisfy a participant’s tax withholding obligation upon the exercise or settlement of such award (other than any substitute award) or to pay the exercise price of a stock option granted under the 2020 Plan or a prior plan, such shares will become available for future grant under the 2020 Plan. The total number of shares available for grant under all plans as of December 31, 2023 was 960,305 . +Employee Stock Purchase Plan +Effective with our IPO in October 2020, the Company’s Board of Directors and its stockholders approved the Company’s Employee Stock Purchase Plan (the ESPP). The number of shares originally reserved for issuance under the ESPP was 338,106 . The maximum number of shares of our common stock available under the ESPP will automatically increase on the first trading day of each calendar year by an amount equal to the lesser of (i) 1 % of the shares of our common stock issued and outstanding on December 31st of the immediately preceding calendar year, and (ii) an amount determined by our Board of Directors. +Subject to any plan limitations, the ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. The price at which common stock is purchased under the ESPP is equal to 85 % of the fair market value of the Company’s common stock on the first or last day of the offering period, whichever is lower. No employee may participate in an offering period if the employee owns 5% or more of the total combined voting power or value of the Company’s stock. The ESPP provides for successive six-month offering periods beginning on September 1st and March 1st of each year. During the year ended December 31, 2023, 437,135 shares were issued under the ESPP leaving 309,012 shares remaining for future issuance. +Description of Awards Granted +The Company has granted incentive stock options, non-statutory stock options, performance-based stock options, and RSUs. +Incentive stock options, which may only be issued to employees, are granted at an exercise price per share equal to the closing market price of the Company’s common stock on the grant date, and vest over time as determined by the Compensation Committee, provided that the term of the options may not exceed ten years from the date of grant. Accelerated vesting may occur in the event of an optionee's death, disability, or other events. +Non-statutory stock options, which may be issued to employees, non-employees and directors, are granted at an exercise price per share equal to the closing market price of the Company’s common stock on the grant date, and vest over time as determined by the Compensation Committee, provided that the term of the options may not exceed ten years from the date of grant. Accelerated vesting may occur in the event of an optionee's death, disability, or other events. +Performance-based stock options are typically granted on an annual basis and consist of a performance-based and service-based component. The performance targets and vesting conditions for performance-condition options are based on achievement of recognized revenue targets. Performance-based options vest in three equal annual installments beginning one year after the grant date , pending certification of performance achievement by the Compensation Committee and continued service. The fair value of performance-condition awards is based on the closing market price of the Company’s common stock on the grant date. There are no performance-based stock options outstanding as of December 31, 2023. +RSUs and the related terms and conditions are awarded at the discretion of the Compensation Committee. RSU holders have a contractual right to receive a share of common stock when vested. RSUs vest over time as determined by the Compensation Committee. RSU agreements may provide for accelerated vesting in the event of a stock unit holder's death, disability, or retirement or other events. +Our Compensation Committee may grant other stock awards that are based on or related to shares of our common stock, such as awards of shares of common stock granted as bonus and not subject to any vesting conditions, deferred stock units, stock purchase rights, and shares of our common stock issued in lieu of our obligations to pay cash under any compensatory plan or arrangement. +Stock Option Exchange Program +On June 23, 2023, the Company commenced a voluntary offer to exchange certain eligible options held by eligible employees of the Company for new options (the Exchange Offer). The Exchange Offer expired on July 24, 2023 . Pursuant to the Exchange Offer, 83 eligible holders elected to exchange, and the Company accepted for cancellation, eligible options to purchase an aggregate of 757,595 shares of the Company’s common stock, representing approximately 99 % of the total shares of common stock underlying the eligible options. On July 24, 2023, immediately following the expiration of the Exchange Offer, the Company granted new options to purchase 156,868 shares of common stock, pursuant to the terms of the Exchange Offer and the Company’s 2020 Equity Incentive Plan. The exercise price of the new options granted pursuant to the Exchange Offer was $ 1.20 per share, which was the closing price of the common stock on the NASDAQ Global Market on the grant date of the new options. Each new option granted in exchange for the vested shares underlying an eligible option will fully vest on the first day of the month following the first anniversary of the month in which the Exchange Offer is completed. Each new option granted in exchange for the unvested shares underlying an eligible option will vest under an extended vesting schedule, with vesting commencing on the first day of the month following the first anniversary of the month in which the Exchange Offer is completed, and occurring in a series of equal monthly installments over the number of months that were +F- 26 +remaining in the surrendered eligible option’s vesting schedule immediately prior to the Exchange Offer. Each new option has a maximum term of ten years. +The exchange of stock options was treated as a modification for accounting purposes. The incremental expense was immaterial for the new options and was calculated using the Black-Scholes option pricing model. The incremental expense and the unamortized expense remaining on the exchanged options as of the modification date will be recognized over the new vesting schedule. +Bonus-To-Options Program +The Company also has a Bonus-to-Options Program (the Bonus Option Program) which is separate from previously described plans and was initially adopted by the Board of Directors in 2008, and subsequently amended and restated in 2010, 2011, 2015, and 2022. For fiscal year 2023, the Bonus Option Program is subject to the shares reserved under the 2020 Plan. The Bonus Option Program, which is limited to participation of the Chief Executive Officer, direct reports to the Chief Executive Officer and Vice Presidents of the Company, allows participants who so elect to convert a portion of their annual cash bonus into fully vested, non-qualified stock options to purchase shares of common stock (Bonus Options). The exercise price for the options under the Bonus Option Program equals the closing market price of the Company's common stock on the grant date, as disclosed below under “ Fair Value of Common Stock ”. Bonus Options issued must be exercised within a ten-year term. +The Company recorded the following activity related to the Bonus Option Program during the year ended December 31, 2023 (in thousands, excepted weighted average exercise price and weighted average contractual life): +Number of +Options +Weighted Average +Exercise Price +Weighted Average +Contractual +Life (Years) +Aggregate +Intrinsic +Value +Outstanding ‑ January 1, 2023 +526 +$ +10.69 +7.6 +$ +2 +Granted +876 +2.00 +— +— +Forfeited/canceled +( 217 +) +4.52 +— +— +Exercised +— +— +— +— +Cancelled under the Option Exchange +( 169 +) +20.67 +— +— +Granted under the Option Exchange +34 +1.20 +— +— +Outstanding ‑ December 31, 2023 +1,050 +$ +2.81 +8.4 +$ +22 +Exercisable ‑ December 31, 2023 +1,016 +$ +2.86 +8.3 +$ +— +The Company record ed $ 0.4 million and $ 1.1 million du ring the years ended December 31, 2023 and 2022, respectively, associated with the estimate of options to be delivered to eligible participants under the Bonus Option Program and which were granted in the first quarter of 2024 and 2023, respectively, by the Compensation Committee of the Board of Directors. In determining the amount of share-based compensation to recognize under the Bonus Option Program, the Company estimates the bonus attainment for the year and determines the expected number of options to be delivered to eligible participants. A Black-Scholes option pricing model is used to determine the estimated fair value of the expected number of options to be delivered to eligible participants. The key elements in determining the estimated fair value include assumptions for volatility, the risk-free interest rate, expected dividends and strike price, utilizing the measurement date closing stock price until the grants are authorized. +Share-Based Compensation Expense +Share-based compensation expense reported in the Company’s statements of operations was (in thousands): +Year Ended December 31, +2023 +2022 +Direct costs and expenses +$ +53 +$ +65 +Research and development +331 +427 +Sales, marketing, general and administrative +4,989 +5,469 +Total +$ +5,373 +$ +5,961 +The unrecognized remaining share-based compensation expense for optio ns and RSUs was approximately $ 5.9 million as of December 31, 2023 and is expected to be amortized to expense over the next 2.5 years. +F- 27 +Stock Options +Stock option activity during the year ended December 31, 2023, excluding the Bonus Option Program described above, was (in thousands, except weighted average exercise price and weighted average contractual life): +Number of +Options +Weighted Average +Exercise Price +Weighted Average +Contractual +Life (Years) +Aggregate +Intrinsic +Value +Outstanding - January 1, 2023 +2,541 +$ +8.40 +7.4 +$ +1,489 +Granted +454 +1.83 +— +— +Forfeited/canceled +( 365 +) +8.97 +— +— +Exercised +( 123 +) +0.74 +— +— +Cancelled under the Option Exchange +( 589 +) +20.43 +— +— +Granted under the Option Exchange +123 +1.20 +— +— +Outstanding ‑ December 31, 2023 +2,041 +$ +3.36 +6.9 +$ +964 +Exercisable ‑ December 31, 2023 +1,298 +$ +4.04 +5.9 +$ +748 +Fair Value of Common Stock +The fair value of the Company’s common stock is determined based on its closing market price on the date of grant. The estimated grant date fair value of stock options was calculated using the Black-Scholes option-pricing model, based on the following assumptions: +• +Expected Term : The expected term represents the period that the options granted are expected to be outstanding using the simplified method (based on the mid-point between the vesting date and the end of the contractual term). +• +Expected Volatility : The Company uses an average historical stock price of selected comparable companies over the expected term of the awards as the Company does not have sufficient trading history for its common stock. +• +Risk-Free Interest Rate : The Company uses the risk-free interest rate over the expected term of the options based on the constant maturity rate of U.S. Treasury securities with similar maturities as of the date of the grant. +• +Expected Dividend Yield : The Company is currently subject to restrictions on the payment of dividends (see Note 8 - Debt ) and no dividends have been declared as of December 31, 2023 and 2022. The Company has not paid and does not anticipate paying any dividends in the near future. Therefore, the expected dividend yield was zero. +The fair value of each option grant was estimated on the grant date with the following weighted average assumptions for the years indicated: +Year Ended December 31, +2023 +2022 +Expected term (in years) +5.39 +5.65 +Expected volatility +80.1 +% +72.6 +% +Risk‑free rate +3.98 +% +1.32 +% +Expected dividend yield +— +% +— +% +Restricted Stock Units +Restricted stock unit activity during the year ended December 31, 2023 was (in thousands, except weighted average grant date fair value per share): +Number of Shares +Weighted Average +Grant Date Fair Value Per Share +Outstanding ‑ January 1, 2023 +1,211 +$ +2.36 +Granted +2,474 +1.92 +Forfeited/canceled +( 246 +) +2.52 +Released +( 710 +) +2.48 +Outstanding ‑ December 31, 2023 +2,729 +$ +1.91 +Note 13 – Net Loss per Common Share +Basic net loss per share excludes dilution and is computed by dividing net loss attributable to the common stockholders by the weighted-average shares outstanding during the period. Diluted net loss per common share reflects the potential dilution that could occur if +F- 28 +securities or other contracts to issue common stock were exercised, resulting in the issuance of shares of common stock that would then share in the earnings or losses of the Company. +Basic and diluted loss per share as of the dates indicated were (in thousands, except per share amounts): +Year Ended December 31, +2023 +2022 +Numerator +Net loss attributable to common stockholders +$ +( 52,146 +) +$ +( 65,447 +) +Denominator +Weighted-average shares outstanding used +in computing net loss per share, basic and diluted +82,113 +42,103 +Net loss per share, basic and diluted +$ +( 0.64 +) +$ +( 1.55 +) +The potentially dilutive securities as of December 31, 2023 and 2022 primarily represent the shares subject to future issuance under stock options awards, warrants, RSUs, and shares subject to purchase under our ESPP, the terms of which are described in further detail in Note 12 – Share Based Compensation . The potentially dilutive securities would be subject to the treasury stock method when dilutive. +The following outstanding common stock equivalents were excluded from diluted net loss attributable to common stockholders for the periods presented because inclusion would be anti-dilutive (in thousands): +Year Ended December 31, +2023 +2022 +Options to purchase common stock +3,091 +3,067 +Shares committed under ESPP +59 +80 +Warrants +5,603 +5,103 +Restricted stock units +2,729 +1,211 +Total +11,482 +9,461 +Note 14 - Income Taxes +Since inception, the Company has incurred net taxable losses, and accordingly, no current provision for income taxes has been recorded. The effective income tax rate of the provision for income taxes differs from the federal statutory rate as follows: +Year Ended December 31, +2023 +2022 +Federal statutory income tax rate +21 +% +21 +% +State income taxes, net of federal benefit +1 +5 +Research and developments credits +1 +1 +Permanent items +( 3 +) +( 4 +) +Change in valuation allowance +( 20 +) +( 23 +) +Effective income tax rate +— +% +— +% +F- 29 +The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities are as follows (in thousands): +As of December 31, +2023 +2022 +Deferred Tax Assets: +Net operating loss carryforwards +$ +72,722 +$ +70,822 +Research and development tax credits +4,149 +3,807 +Interest expense limitation +5,120 +3,036 +Property and equipment +— +234 +Capitalized research costs +4,281 +2,874 +Share-based compensation +1,685 +1,619 +Lease liability +6,398 +— +Accruals and reserves +667 +1,932 +Total +95,022 +84,324 +Valuation allowance +( 93,023 +) +( 82,552 +) +Total deferred tax assets after valuation allowance +1,999 +1,772 +Deferred Tax Liabilities: +Property and equipment +( 4 +) +— +Right-of-Use Asset +( 692 +) +— +Intangible assets +( 1,303 +) +( 1,772 +) +Total deferred tax liabilities +( 1,999 +) +( 1,772 +) +Net deferred tax assets and liabilities +$ +— +$ +— +At December 31, 2023, the Company ha d $ 310.4 million and $ 5.2 million of federal net operating loss and research and experimentation tax carryforwards, respectively, which are set to expire beginning in 2026 . The Internal Revenue Code contains provisions that may limit the net operating loss carryovers available to be used in any year if certain events occur, including significant changes in ownership interest. +In assessing the realizability of its deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As the Company does not have any historical taxable income, projections of future taxable income over the periods in which the deferred tax assets are deductible, and after consideration of the history of operating losses, the Company does not believe it is more likely than not that it will realize the benefits of net deferred tax assets and, accordingly, has established a valuation allowance equal to 100 % of net deferred tax assets. The valuation allowance increased by $ 10.5 million during 2023 and $ 15.1 million during 2022. +During 2023, the Company determined that it has uncertain tax positions related to its U.S. research and development credits. As of December 31, 2023 and 2022, there w as no accrued interest related to uncertain tax positions. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change in the next twelve months. A reconciliation of beginning and ending balances for unrecognized tax benefits is as follows (in thousands): +Year Ended December 31, +2023 +2022 +Balance at January 1 +$ +952 +$ +843 +Additions for tax positions related to the current year +57 +109 +Additions for tax positions related to prior years +28 +— +Reductions for tax positions related to prior years +— +— +Reductions related to settlements +— +— +Reductions related to a lapse of statute +— +— +Balance at December 31 +$ +1,037 +$ +952 +The Company monitors proposed and issued tax law, regulations, and cases to determine the potential impact of uncertain income tax positions. As of December 31, 2023, the Company had not identified any potential subsequent events that would have a material impact on unrecognized income tax benefits within the next twelve months. +The Company’s federal and state returns for all years will remain open to examination by federal and state tax authorities for three and four years, respectively, from the date of utilization of any net operating loss carryforwards. +F- 30 +Note 15 – Commitments and Contingencies +Co‑Development Agreement +In April 2014 and amended in October 2016, the Company entered into a worldwide agreement with AVEO to develop and commercialize AVEO's hepatocyte growth factor inhibitory antibody ficlatuzumab with the Company's proprietary companion diagnostic test, BDX004, a version of the Company’s serum protein test that is commercially available to help physicians guide treatment decisions for patients with advanced non-small cell lung cancer (NSCLC). Under the terms of the agreement, AVEO will conduct a proof of concept (POC) clinical study of ficlatuzumab for NSCLC in which BDX004 will be used to select clinical trial subjects (the NSCLC POC Trial). Under the agreement, the Company and AVEO would share equally in the costs of the NSCLC POC Trial, and each would be responsible for 50 % of development and regulatory costs associated with all future clinical trials agreed upon by the Company and AVEO. The Company and AVEO continue to conduct POC clinical trials of ficlatuzumab in combination with BDX004. +In September 2020, the Company exercised its opt-out right with AVEO for the payment of 50 % of development and regulatory costs for ficlatuzumab effective December 2, 2020 (the AVEO Effective Date). In September 2021, AVEO announced that the FDA has granted Fast Track Designation (FTD) to ficlatuzumab for the treatment of patients with relapsed or recurrent head and neck squamous cell carcinoma. In November 2021 AVEO also announced plans to initiate a potential registrational Phase 3 clinical trial for ficlatuzumab in the first half of 2023. The Company had $ 0.1 million in remaining obligations related to the AVEO agreement as of December 31, 2023 . Following the AVEO Effective Date, the Company is entitled to a 10 % royalty of net sales of ficlatuzumab and 25 % of license income generated from the licensing of ficlatuzumab from AVEO. There were no royalties received or expenses related to this agreement for the years ended December 31, 2023 and 2022. +License Agreements +In August 2019, we entered into a non-exclusive license agreement with Bio-Rad Laboratories, Inc. (Bio-Rad) (the Bio-Rad License). Under the terms of the Bio-Rad License, the Company received a non-exclusive license, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of Droplet Digital PCR™ (ddPCR) in cancer detection testing for third parties in the United States. The Company also agreed to purchase all of the necessary supplies and reagents for such testing exclusively from Bio-Rad, pursuant to a separately executed supply agreement (the Supply Agreement) with Bio-Rad. As further consideration for the non-exclusive license, the Company agreed to pay a royalty of 2.5 % on the net revenue received for the performance of such ddPCR testing collected from third parties. On May 24, 2021, the Company entered into the First Amendment to the Non-Exclusive License Agreement with Bio-Rad which amended the Bio-Rad License such that, effective May 1, 2021, the Company no longer paid a royalty of 2.5 % on the net revenue received for the performance of such ddPCR testing collected from third parties. The Bio-Rad License expires in August 2024 . Either party may terminate for the other’s uncured material breach or bankruptcy events. Bio-Rad may terminate the Bio-Rad License if the Company does not purchase licensed products under the Supply Agreement for a consecutive twelve-month period or for any material breach by us of the Supply Agreement. There wer e no expenses related to this agreement for the years ended December 31, 2023 and 2022. +On May 13, 2021 (the CellCarta Effective Date), we reached agreement with CellCarta Biosciences Inc. (formerly “Caprion Biosciences, Inc.”) (the CellCarta License) on a new royalty bearing license agreement for the Nodify XL2 test. The parties agreed to terminate all prior agreements and replace with this new arrangement, which has a 1 % fee on net sales made from the first commercial sale of the Nodify XL2 test to the CellCarta Effective Date as an upfront make-good payment covering past royalties due and a royalty rate of 0.675 % on future Nodify XL2 test net sales worldwide for 15 years from the first commercial sale, ending in 2034 . Royalty expense under the CellCarta License for each of the years ended December 31, 2023 and 2022 wa s $ 0.2 million and $ 0.1 million, respective ly. +On October 31, 2019, we completed an acquisition of Freenome's United States operations (formerly "Oncimmune USA" or "Oncimmune") including its CLIA lab in De Soto, Kansas and its incidental pulmonary nodule malignancy test, then marketed in the United States as the EarlyCDT Lung® test. We renamed and relaunched the test on February 28, 2020 as the Nodify CDT test. As part of the acquisition of the assets of Oncimmune, the Company entered into several agreements to govern the relationship between the parties. The Company agreed to a license agreement and royalty payment related to the Nodify CDT test of 8 % of recognized revenue for non-screening tests up to an annual minimum volume and 5 % thereafter, with an escalating minimum through the first four years of sales . Royalty expenses we re $ 1.0 million and $ 0.9 million f or the years ended December 31, 2023 and 2022, respectively. +Litigation, Claims and Assessments +From time to time, we may become involved in legal proceedings or investigations which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition, or cash flows. +F- 31 +Note 16 – Subsequent Events +Perceptive Term Loan Facility Limited Waiver and Amendment +On February 14, 2024 a limited waiver to the Perceptive Term Loan Facility was executed (the Limited Waiver), whereby, subject to the terms and conditions of the Limited Waiver, Perceptive agreed to (i) waive compliance with the December 31, 2023 Minimum Net Revenue covenant and (ii) waive the requirement that the Annual Report on Form 10-K for the year-ended December 31, 2023 and auditor's opinion on the financial statements herein shall not be subject to any going concern or like qualification or exception audit. +On February 29, 2024 (the Third Amendment Effective Date), the Company entered into the Third Amendment to the Credit Agreement and Guaranty (the Third Amendment) with Perceptive as lender and administrative agent and the Company, as borrower, whereby subject to the terms and conditions of the Third Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing on the fiscal quarter ending March 31, 2024 through and including the fiscal quarter ending December 31, 2025. +F- 32 \ No newline at end of file diff --git a/raw/filings/0001439725/2023/0000950170-24-023513/filing_metadata.csv b/raw/filings/0001439725/2023/0000950170-24-023513/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..cae0dfc5f0114d5e29cb5252d490e1e8c6d4cff8 --- /dev/null +++ b/raw/filings/0001439725/2023/0000950170-24-023513/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001439725,BDSX,BIODESIX INC,10-K,2024-03-01,2023-12-31,2024-03-01T11:11:25.000Z,0000950170-24-023513,bdsx-20231231.htm,10-K,13597063,1,1,https://www.sec.gov/Archives/edgar/data/1439725/000095017024023513/bdsx-20231231.htm,https://www.sec.gov/Archives/edgar/data/1439725/000095017024023513/,2023,2023,1 diff --git a/raw/filings/0001439725/2023/0000950170-24-023513/item1.txt b/raw/filings/0001439725/2023/0000950170-24-023513/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..6c73d32541d681c7688325d076b6c92cdcfa64c9 --- /dev/null +++ b/raw/filings/0001439725/2023/0000950170-24-023513/item1.txt @@ -0,0 +1,472 @@ +Item 1. B usiness. +Our mission is to unite biopharma, physicians, and patients to transform the standard of care and improve outcomes with personalized diagnostics. +Our vision is a world where all critical diseases are diagnosed early and treated quickly with the guidance of personalized diagnostic solutions, so humanity can thrive without the burden of disease. +Business Overview +Biodesix, Inc. (“Biodesix”, “we,” “us,” “our” or the “Company”) is a leading diagnostic solutions company with a focus in lung disease. By combining a multi-omic approach with a holistic view of the patient’s disease state, we believe our testing solutions provide physicians with greater insights to help personalize their patients’ care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe helps improve overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. We also recognize revenue from other services, including amounts derived from licensing our technologies. +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, radiomics, and artificial intelligence (AI) enabled informatics, to discover innovative diagnostic tests for potential clinical use. Our multi-omic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +We operate in a single segment and derive our revenue from two sources: (i) providing diagnostic testing services associated with (a) blood-based lung tests and (b) prior to May 11, 2023, Coronavirus Disease 2019 (COVID-19) tests (Diagnostic Tests); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics. We also recognize revenue from other services, including amounts derived from licensing our technologies (Biopharma Services and other). During fiscal years 2023 and 2022, we derived 92% and 90%, respectively, of our total revenues from our diagnostic testing business. +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. Since our inception, we have performed over 600,000 tests and continue to generate a large and growing body of clinical evidence. We have participated in 27 clinical studies, three of which are ongoing, and have published over 300 clinical and scientific peer-reviewed publications, presentations, and abstracts. We have curated a biobank encompassing thousands of biological specimens with associated clinical data, including tumor genomic profiles and immune profiles, which are used for both internal and external research and development initiatives. +We have commercialized five diagnostic tests which are currently on market and we perform more than 30 assays for clinical and research use as part of our laboratory services that have been used by over 65 biopharmaceutical customers and academic partners. +Blood-Based Lung Tests +We have five diagnostic blood-based tests across the lung cancer continuum of care, which generated $45.1 million and $29.3 million in revenue for fiscal year 2023 and 2022, respectively, an annual growth rate of 54%. +Diagnosis +• +Nodify CDT ® and XL2® tests, together marketed as our Nodify Lung ® Nodule Risk Assessment testing, assess a suspicious lung nodule's risk of lung cancer to help identify the most appropriate treatment pathway. The Nodify CDT and XL2 tests have an established average turnaround time of one and five business days, respectively, from receipt of the blood sample, providing physicians with timely results to guide diagnostic planning. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +Treatment & Monitoring +• +GeneStrat® ddPCR, GeneStrat NGS® and VeriStrat® tests, marketed as part of our IQLung™ testing strategy, are used following diagnosis of lung cancer to detect the presence of mutations in the tumor and the state of the patient’s immune system to help guide treatment decisions. The GeneStrat ddPCR tumor genomic profiling test and the VeriStrat immune profiling test have an established average turnaround time of two business days from receipt of the blood sample, and the GeneStrat NGS test has an established average turnaround time of three business days from receipt of the blood sample, providing physicians with timely results to facilitate rapid treatment decisions. The GeneStrat ddPCR test evaluates the +3 +presence of actionable mutations in lung cancer. The test is covered independent of stage and can be used multiple times per patient to monitor changes in mutation status. The GeneStrat NGS test is a broad 52 gene panel, including guideline recommended mutations that help identify advanced stage patients eligible for targeted therapy or clinical trial enrollment. The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. +COVID-19 Pandemic +In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe testing program. We generated $0.1 million and $5.2 million in revenue from COVID-19 testing during fiscal year 2023 and 2022, respectively. These tests under the Biodesix WorkSafe testing program were utilized by healthcare providers, including hospitals and nursing homes, and were also offered to businesses and educational systems. We announced multiple partnerships for COVID-19 testing and maintained an agreement with the State of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State, which expired on August 31, 2022. +Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two United States Food and Drug Administration (FDA) Emergency Use Authorization (EUA)-authorized tests, a part of our customizable WorkSafe program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad granted us permission to utilize both tests for commercial diagnostic services. The Bio-Rad SARS-CoV-2 ddPCR test was FDA EUA authorized on May 1, 2020, authorizing performance of the test in laboratories certified under CLIA to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody test intended for detecting a B-cell immune response to SARS-CoV-2. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized on April 29, 2020. Beginning in second quarter 2021, we began partnering with GenScript Biotech Corporation to commercialize the blood-based cPass SARS-CoV-2 Neutralizing Antibody testing as a service. The test was the first surrogate neutralizing antibody test with FDA EUA and uses ELISA (as defined below) technology to qualitatively detect circulating neutralizing antibodies to the receptor binding domain (RBD) in the spike protein of SARS-CoV-2. +Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety. On January 30, 2023, the White House issued a Statement of Administration Policy announcing the President’s intention to allow the Public Health Emergency declaration under Section 319 to expire on May 11, 2023. In connection with the expiration of the Public Health Emergency declaration under Section 319, the Company no longer provides commercial COVID-19 diagnostic testing services. +The COVID-19 pandemic disrupted, and in the future may continue to disrupt, our lung diagnostic testing operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States of Colorado and Kansas’ public health orders and the guidance from the Centers for Disease Control and Prevention (CDC). Employees who can perform their duties remotely have the option to work from home. Our sales, marketing and business development efforts may be constrained by our operational response to future COVID-19 variant outbreaks. We will continue to adjust our operational norms, as needed, including complying with government directives and guidelines as they are modified and supplemented. +See “Risk Factors” for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations. +Full Year Results for 2023 +For the year ended December 31, 2023, compared to the prior year: +• +Total Revenue was $49.1 million, an increase of 28% primarily driven by: +o +Lung Diagnostic Revenue of $45.1 million, an increase of 54%; +o +Biopharma Services and other revenue of $3.9 million, an increase of 6%; +o +COVID-19 Revenue of $0.1 million, a decrease of 99%; +• +Gross Margin was $36.1 million, resulting in a 73% overall gross margin percentage as compared to 63% in the prior year; +• +Operating Expenses, excluding Direct costs and expenses, were $77.4 million, an increase of 4% and including non-cash share-based compensation expense of $5.4 million as compared to $6.0 million in the prior year; +• +Net Loss was $52.1 million and decreased 20%, due primarily to an overall decrease in total operating expenses and other expenses of $9.2 million and $4.1 million, respectively; +• +Basic and Diluted Net Loss Per Common Share was $0.64; +4 +• +Net Cash Used by Operating Activities was $22.9 million, compared to $45.0 million used in the prior year; and +• +Cash and Cash Equivalents was $26.3 million as of December 31, 2023. +Our Market Opportunity +Diagnostic Testing Market Size and Opportunity +Despite significant advances over the last decade, lung cancer is still the deadliest type of cancer in both men and women in the United States. While diagnostic testing has become routinely used at certain points in the lung cancer continuum of care (diagnosis, treatment and monitoring), we believe there is substantial need for novel, advanced testing to improve on the current standard of care. We estimate that in the United States, the lung cancer continuum of care represents over 10 million annual testing opportunities and is over a $27 billion market annually for testing alone. +Over the last two decades, the use of biomarker testing in clinical trials has increased, with 15% of oncology trials involving the use of biomarker testing in 2000, compared to 55% in 2018. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their research and development pipelines and increase chances of drug development success. We estimate that biopharmaceutical partnering and research opportunities represent over a $2 billion market annually. +Lung Cancer Continuum of Care – Clinical Unmet Needs +Standards of care in lung cancer have evolved rapidly over the past decade, along with our understanding of the disease. With the introduction of numerous treatment options, physicians need an ever-increasing amount of information in order to select the best treatment plan for each individual patient. We believe that the lung cancer continuum of care has a variety of clinical unmet needs ranging from initial diagnosis of lung cancer after discovery of a lung nodule to treatment guidance for early and advanced stage disease, and monitoring for disease progression. +• +Diagnosis : We estimate approximately 1.6 million new incidental lung nodules and potentially 4 million lung nodules from the adoption of screening could be identified annually in the United States. Following initial discovery of a nodule, patients are typically evaluated by a pulmonologist for risk of lung cancer before an invasive procedure is carried out to obtain a tissue sample to confirm diagnosis. This risk assessment is based on clinical factors such as the patient’s smoking history and age, and radiological features such as the size and location of the nodule, obtained from a computed tomography (CT) scan. On initial assessment, we estimate that approximately 80% of patients are identified as low to moderate risk (5-65%) where guideline recommendations for their care plan are unclear, often resulting in either overtreatment of patients with benign nodules or undertreatment in patients with cancer. An estimated 17% of patients initially scheduled for watchful waiting, or follow-up CT scans in intervals up to a year, are later diagnosed with malignant nodules, potentially delaying their diagnosis. Conversely, we estimate that 62% of biopsies and 35% of surgeries performed on lung nodules find benign disease, representing a significant overtreatment that incurs both risk and cost to the patient and their providers. We therefore believe that there is a clear clinical need for blood-based diagnostic testing to help improve the initial risk assessment of pulmonary nodules, helping direct patients to the relevant treatment pathway, and ultimately improving patient outcomes and saving costs to the system. +• +Treatment Guidance – Early Stage : We estimate that there are over 700 thousand testing opportunities annually in the United States in early-stage lung cancer to assess a patient’s risk of recurrence following curative-intent surgery, and to detect potential target mutations for therapeutics. Depending on a patient’s risk of recurrence, they may also receive chemotherapy, radiotherapy or chemoradiation post-surgery. The assessment of risk of recurrence is primarily based on the stage of cancer at diagnosis, with stage I patients typically receiving no additional treatment beyond surgery. However, 20 to 40% of patients with stage I disease do still recur within five years following surgery, representing a sub-group of patients who may have +5 +benefited from more intensive treatment protocol. We believe there is a clear clinical need for blood-based diagnostic testing prior to surgery to identify stage I patients who may benefit from a more intensive treatment protocol and we also believe there is the need for identifying stage II and IIIA patients who may benefit from a less intensive treatment protocol. There have also been recent advances in the use of targeted therapies in early-stage lung disease. These therapies typically target specific genomic mutations or alterations found in some tumors. We believe there is therefore an emerging need for testing designed specifically for mutation detection in early-stage disease. +• +Treatment Guidance – Advanced Stage: We estimate that there are over 3 million diagnostic testing opportunities annually in the United States to guide advanced stage lung cancer treatment decisions. With nearly 60 FDA-approved systemic treatment regimens listed in national treatment guidelines for non-small cell lung cancer (NSCLC), there is an elevated need for personalized biomarkers to help physicians identify the right patient for the right treatment. Multiple tissue-based diagnostic tests have been approved to identify patients eligible for targeted therapies and immunotherapy; however, about 50% of patients do not have sufficient tissue collected following diagnosis to facilitate testing. To compound the issue, different molecular tests take varying amounts of time (days versus weeks) to report results back to the ordering physician. Physicians are often left with a dilemma to either make treatment decisions prior to receiving critical diagnostic test results, or delay treatment initiation while waiting for the test results. Therefore, we believe there is an imminent need for a blood-based testing solution that measures tumor mutations and the patient’s immune profile, to provide physicians with more comprehensive and timely information to initiate personalized treatment as quickly as possible. +• +Monitoring : We estimate that there are over 800 thousand testing opportunities in the United States for blood-based tumor genomic and immune profiling to monitor for disease recurrence and progression in NSCLC patients. Unfortunately, advanced stage lung cancer is often terminal, so repeat tissue biopsy to assess the evolution of resistance mutations or to detect disease progression is not feasible from either a cost or risk perspective to the patient, which we believe demonstrates an important need for blood-based testing to help routinely monitor these patients. As a patient progresses through therapies, changes in their immune system occur and blood-based immune profiling could help physicians identify these changes prior to subsequent therapy selection. +Current Limitations in Biomarker Discovery and Companion Diagnostics +We estimate that the biopharmaceutical biomarker testing and companion diagnostic market opportunity represents a $2 billion market annually . Over the last two decades, the use of biomarker testing in clinical trials has increased, with 15% of oncology trials involving the use of biomarker testing in 2000 compared to 55% in 2018. From 2005 to 2015, a study identified that incorporating biomarkers into clinical development programs increased their probability of therapeutic success rate from phase 1 to FDA-approval by 570%, representing an increase from 1.6% without biomarkers to 10.7% with biomarkers. We believe the field of biomarker discovery and companion diagnostic development for biopharmaceutical therapeutics is set to continue growing as biopharmaceutical companies seek to de-risk their product development efforts and increase chances of drug development success. However, we believe as the market continues to advance, inherent limitations of both biomarker discovery and companion diagnostic development have become more apparent. +Biomarker Discovery : There are many limitations with biomarker discovery in biopharmaceutical drug development, including: +• +Biomarkers with clinical utility are difficult to discover and validate in independent datasets; +• +Classical statistical approaches to biomarker discovery are limited. Single-omic tests fail to see the whole biological picture; +• +Tissue biopsies are limited by the amount of a sample that can be collected: longitudinal testing is difficult and the information gathered is only from the tumor being sampled, this does not account for tumor heterogeneity or the host's immune response; +• +Clinical trials are expensive and take years to complete. It is often difficult to meet clinical trial enrollment goals with long diagnostic testing turnaround times. +Companion Diagnostics (CDx): While developing CDx is critical to precision medicine, the promise of CDx has not been fully realized and there are multiple limitations that still need resolution. The path to co-develop a successful CDx with a corresponding drug has several challenges, including: +• +Traditional CDx agreements may fail to realize the full value of a testing opportunity, leading to difficulty in funding appropriate commercialization; +• +Drug development is a lengthy, complex and costly process. There can be a financial impact to a pharmaceutical company to have a drug selected by a test; +• +Current diagnostic reimbursement policies may not always support the coverage and payment of new CDx; +• +Regulatory agencies continue to work on defining the co-development process, but the environment is continually changing. +6 +Diagnostic Test Discovery and Development at Biodesix +Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics to discover innovative diagnostic tests for potential clinical use. We focus on the use of technologies that are capable of single and multi-omic tests in our research and development. We continuously evolve and improve our test discovery and development process. All of the technologies that we employ have been chosen and developed to provide high-quality data to enable our clinical test discovery and development. We feel that this level of data integrity is crucial for the development of diagnostic tests. +We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and learn about biological discoveries that are clinically meaningful. Additionally, we incorporate clinical and molecular profiling data aggregated through our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or other collaborative partnerships, into our platform. Our curated biobank encompasses thousands of biological specimens with associated clinical data, including tumor genomic profiles and immune profiles, which are used for both internal and external research and development initiatives. With our multi-omic approach we are able to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. +To achieve our discovery and development objectives, we utilize different technologies, including ddPCR, NGS, LC-MS, ELISA, single cell analyses, and our proprietary DeepMALDI® mass spectrometry platform for the blood-based molecular analysis of the tumor, immune system, and host-status of each patient and/or clinical dataset. We continuously revisit our technology strategy and roadmap to integrate new technologies into our evolving platform, which ultimately support the addition of new service and product revenue offerings. Most diagnostic companies focus their strategy on using a single technology to discover biomarkers for a broad range of clinical questions. We believe that no single technology can interrogate the complexity of the human disease state to help solve all clinical questions. For that reason, we employ a multi-omic approach to solving diagnostic challenges. Because of this approach, we believe we are unique in the diagnostics market, allowing for a broader and more holistic understanding of each patient’s disease state. +We are experts in many technologies, but we are a true market leader with over 15 years of experience in the field of clinical proteomics. For over 15 years, we have been discovering and developing proteomic-based diagnostic tests and have a deep understanding of how to incorporate technologies that can be applied to blood samples in order to extract important protein-based biological information in the form of diagnostic tests, which can aid clinicians and scientists in understanding the dynamic biology of their system of interest, such as a patient with cancer. +Our suite of technologies that assist us in discovery, development and commercialization of novel diagnostic tests includes: +DeepMALDI Mass Spectrometry +We have developed DeepMALDI, a proprietary high-density matrix-assisted laser desorption/ionization time-of-flight (MALDI-ToF) mass spectrometry (MS) technology, to discover potential tests for disease diagnosis, and monitoring for disease progression or recurrence in lung and other disease states. DeepMALDI technology overcomes the limitations of conventional MALDI and other mass spectrometry methods to produce highly sensitive, stable, and reproducible data. This method yields substantially higher quality data content and is thereby well suited for the discovery of biomarkers with clinical utility. We intend to maintain our leadership role in the discovery of proteomics-based diagnostic tests. We utilize our DeepMALDI and MALDI-ToF technologies in our discovery and development efforts and as part of our collaborations with our biopharmaceutical customers and other collaborative partners. +Liquid Chromatography (LC) Mass Spectrometry (MS) +We use Multiple Reaction Monitoring (MRM) MS with triple quadrupole mass spectrometers and up-front liquid chromatography (LC) sample injection in the Nodify XL2 test and as part of our collaborations with our biopharmaceutical customers and other collaborative partners. This mass spectrometry method offers highly sensitive, specific, and cost-effective analysis for simultaneous quantitation of hundreds to several thousands of targeted peptides in a single experiment. We have since included the MRM technologies as part of our services for discovery and development with our biopharmaceutical customers and academic partners. +Enzyme-Linked Immunosorbent Assay (ELISA) +ELISA is the most widely used ligand binding assay platform within and outside the pharmaceutical industry. Formats include direct, indirect and sandwich assays and are typically run in manually or semi-automated modes. We use a semi-automated implementation of ELISA in clinical testing for the Nodify CDT test, and as part of our collaborations with our biopharmaceutical customers and other collaborative partners. The acquisition of Oncimmune USA in 2019 expanded our ability to conduct very high throughput and cost-effective ELISAs in our clinical testing laboratory. We have now included the ELISA technologies for research and development both internally and externally with our biopharmaceutical customers and academic partners. +7 +Droplet Digital Polymerase Chain Reaction Technology (ddPCR) +We use the ddPCR technology for multiplexed, semi-automated nucleic acid detection. This allows high sensitivity, fast turn-around times, flexibility in our laboratory workflows, rapid scaling from low to moderate anolyte complexity, and high-volume scalability. ddPCR is an absolute quantitation method based on the partitioning of circulating nucleic acids into up to 20,000 droplets per reaction and is used for the GeneStrat ddPCR test. Our strategy with ddPCR relies on a menu of off-the-shelf and custom research use assays, including early access and beta evaluation, which we develop and make available as a part of our commercial pipeline, biopharmaceutical and collaborative test services. We have included the ddPCR technologies for research and development both internally and externally with our biopharmaceutical customers and other collaborative partners. +Next Generation Sequencing Technology (NGS) +We use NGS technology for broad genomic sequencing of clinical specimens. Our strategy with NGS relies on a menu of off-the-shelf and custom research use assays, including early access and beta evaluation, which we develop and make available as a part of our commercial pipeline, biopharmaceutical and collaborative test services. The NGS technology integrates automated systems to yield high sensitivity results with a rapid turnaround time. Since adoption of this technology, we have included the NGS technologies for research and product development both internally and externally with our biopharmaceutical customers and other collaborative partners. +Our Solutions and Products +To help address the current limitations with standard of care in lung cancer diagnosis, treatment, and monitoring, we use combinations of tumor, immune and host profiling, radiological imaging, patient clinical profiling, and our proprietary AI platform to provide a holistic view of each patient’s dynamic disease state. +We have five blood-based diagnostic tests across the lung cancer continuum of care to help address clinical unmet needs by physicians. +• +Diagnosis : We believe there is a clinical need to help physicians reclassify risk of malignancy in patients presenting with suspicious lung nodules. We offer blood-based Nodify Lung Nodule Risk Assessment testing to aid physicians in stratifying patients into distinct nodule management treatment pathways: diagnostic procedure or imaging surveillance. Nodify Lung consists of two blood-based proteomic tests: the Nodify CDT test helps identify patients with lung nodules that are likely malignant and the Nodify XL2 test conversely helps identify those that are likely benign. The Nodify CDT and XL2 tests have established average turnaround times of one business day and five business days from receipt of the blood sample, respectively, providing physicians with timely results to guide diagnostic planning +• +Treatment Guidance : We believe there is an ongoing need for a blood-based testing solution that measures tumor-specific mutations and the patient’s immune profile to provide physicians with more comprehensive information to personalize treatment plans. We offer the blood-based IQLung testing strategy, which consists of the GeneStrat ddPCR and GeneStrat NGS tumor profiling tests and the VeriStrat immune profiling test for patients diagnosed with NSCLC. With an established average turnaround time of three business days, we are able to quickly provide critical diagnostic information to physicians to facilitate personalized treatment decisions for their patients. +• +Monitoring : We believe longitudinally monitoring advanced NSCLC patients for the dynamic evolution of their tumor and immune profile while on treatment can provide an earlier indication of treatment resistance and/or disease progression. We offer the IQLung testing strategy as a blood-based monitoring tool for physicians to track their patients’ disease evolution. +Diagnosis – Nodule Management +We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our blood-based nodule management offering, Nodify Lung Nodule Risk Assessment, assists +8 +physicians in reclassifying a patient’s risk of lung cancer by incorporating their protein biomarker results with radiographic imaging and clinical characteristics. Nodify Lung testing consists of the Nodify CDT and Nodify XL2 proteomic tests, which can be ordered separately or together from a single blood draw to help reclassify risk of cancer to aid physicians in stratifying patients into distinct nodule management pathways: intervention or surveillance. +The Nodify CDT test is used to help identify lung nodules that are likely malignant and the Nodify XL2 test helps identify lung nodules that are likely benign. Nodify Lung testing is available for patients 40 years or older, with nodules between 8 and 30mm, and less than 65% pre-test risk of lung cancer. The testing strategy starts with the Nodify CDT test to determine if a nodule is likely malignant or at a higher risk of lung cancer. The Nodify CDT test helps physicians identify cancer more quickly by prioritizing patients with a higher risk of malignancy for a diagnostic procedure, such as biopsy or surgery. If the nodule is not identified as having a high risk of malignancy by the Nodify CDT test, then the Nodify XL2 test is performed to help determine if the patient’s nodule is likely benign or has a reduced risk of lung cancer and may be a candidate for CT imaging surveillance. Nodify Lung Risk Assessment testing is represented graphically in the image below starting with the patient’s pre-test risk of malignancy and ending with the guideline-recommended diagnostic procedure for each risk category. +We launched the Nodify Lung combined offering of the Nodify CDT and Nodify XL2 tests in March 2020. However, the Nodify XL2 test has been available to all physicians since September 2019 and has been available to a select group of physicians since October 2018. We acquired the Nodify XL2 test from Integrated Diagnostics (Indi) in July 2018 and acquired the Nodify CDT test from Oncimmune USA in October 2019. +Nodify CDT Test +The Nodify CDT test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely malignant or at a higher risk of being cancerous. Results allow physicians to identify patients who may be better candidates for timely invasive diagnostic procedures such as bronchoscopy, transthoracic needle biopsy, or surgical resection, with the goal of diagnosing cancer earlier. The Nodify CDT test enhances lung nodule risk assessment to facilitate compliance with clinical treatment guidelines such as those of the American College of Chest Physicians (ACCP). The Nodify CDT test is validated for use in patients who are 40 years or older, have no history of cancer except non-melanomatous skin cancer, have nodules between 8 and 30mm, and pre-test risk of lung cancer of less than 65%. +The test measures the levels of seven circulating autoantibodies (P53, NY-ESO-1, CAGE, GBU4-5, SOX2, HuD, and MAGE A4) associated with lung cancer, combined with an algorithm to report out three potential results: High Level, Moderate Level, or No Significant Levels of Antibodies Detected (NSLAD). The seven autoantibodies have shown to be elevated for all types of lung cancer, and from the earliest stage of the disease. +Unlike the tumor antigens themselves, the autoantibody levels can be measured accurately through a blood sample, based upon the signal amplification generated by the immune response to cancer. This mechanism of action likely reflects very early events in a tumor’s evolution; as the immune system initiates a response to the cancer, it can also trigger an expansion of self-reactive antibodies that can be measured in circulation. +In addition to the test result of High Level, Moderate Level, or NSLAD, each test report includes the patient’s pre-test risk of malignancy as calculated by the Solitary Pulmonary Nodule (SPN) Risk Assessment calculator, and their post-test risk of cancer incorporating the result of the test. The SPN Risk Assessment calculator was developed by Stephen Swensen, M.D., of the Mayo Clinic and is designed to provide a risk of malignancy for a patient with a newly discovered incidental nodule. The model incorporates six clinical and radiologic factors into the equation: age, nodule size, smoking status, nodule location, spiculation (nodule edge characteristic), and previous history of lung cancer. Incorporating the autoantibody levels with the risk model provides physicians with a more accurate assessment of risk. The Nodify CDT test has an established average turnaround time of one business day from receipt of the blood +9 +sample, providing physicians with timely results to guide diagnostic planning. The Nodify CDT test has been studied in 17 peer-reviewed published studies and presentations. +Nodify XL2 Test +The Nodify XL2 test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely benign or at a reduced risk of being cancerous. Results allow physicians to identify patients who may be better candidates for routine CT surveillance to monitor for growth or shrinkage of the nodule over time instead of an invasive diagnostic procedure. The Nodify XL2 test is used for patients who are 40 years or older, have no history of lung cancer or other recent cancer diagnoses, have nodules between 8 and 30mm, and have a pre-test risk of lung cancer of less than or equal to 50%. +The Nodify XL2 test integrates peptides measured by LC-MS with clinical and radiological characteristics that are combined by an algorithm to report out three potential results: Likely Benign, Reduced Risk, or Indeterminate. Specifically, the Nodify XL2 test measures the relative abundance of two peptides (LG3BP and C163A) in circulation in the patient’s blood. The native proteins from which the peptides are derived have been associated with an inflammatory response to lung cancer. The clinical factors are patient age and smoking status, and radiological factors are nodule size, location, and edge characteristics. +In addition to the test result of Likely Benign, Reduced Risk, or Indeterminate, each test report includes the patient’s pre-test risk of lung cancer as calculated by the SPN Risk Assessment calculator, and their post-Nodify XL2 risk of malignancy incorporating the result of the test. Incorporating the peptide levels with the risk model provides physicians with a revised assessment of risk incorporating the patient’s biology. The Nodify XL2 test has an established average turnaround time of five business days from receipt of the blood sample, providing physicians with timely results to guide diagnostic planning. +Nodify Lung Risk Assessment Testing +In summary, the inclusion of Nodify Lung Risk Assessment testing into clinical practice helps physicians reclassify risk of malignancy of low to moderate risk lung nodules by incorporating the patient’s own biology into the assessment. The Nodify CDT test helps physicians identify patients with a high-risk lung nodule who may benefit from timely intervention, which can ultimately help identify lung cancer earlier. The Nodify XL2 test helps physicians identify patients with a very low risk lung nodule who may benefit from CT surveillance and could avoid unnecessary invasive procedures. +Blood samples for the Nodify XL2 and Nodify CDT tests can be collected in the physician’s office, laboratory, or at home through use of mobile phlebotomy. Mobile phlebotomy options facilitate testing for patients even if they are not seen in person by the physician and instead are seen through telehealth visits. This benefits the patient as scheduling can be conveniently fit to their needs and can keep them away from a physician’s office or hospital for safety concerns. Additionally, mobile phlebotomy benefits the physician as the logistics around a blood draw or tissue sampling are out of their hands. We have a national network of contracted nurses and phlebotomists to support at-home or mobile blood collection. +In addition, on November 14, 2023, the Company announced the validation and launch of a new method of collecting blood specimens for Nodify Lung Nodule Risk Assessment testing. The method uses the FDA-cleared Tasso+™ device, a single-use blood lancing device intended for obtaining capillary whole blood samples from a patient’s upper arm. Capillary blood draws using the Tasso+ device enable blood specimen collection for healthcare providers who do not have convenient access to phlebotomy services or a licensed phlebotomist on staff in the clinic or office. The Tasso+ device was validated by Biodesix to be administered in minutes by any healthcare provider at the time of lung nodule evaluation, creating efficiencies in the Nodify Lung workflow. Biodesix received approval from the New York State Clinical Laboratory Evaluation Program (NYS-CLEP) to use the Tasso+ device as a specimen collection method in support of Nodify Lung testing after entering into a supply agreement with Tasso, Inc. The device is now available for clinical use to collect specimens for Nodify Lung testing. +Both tests require a single blood sample shipped at ambient temperature to our certified, high-complexity clinical laboratory in De Soto, Kansas. Nodify CDT testing requires whole blood and Nodify XL2 testing requires a whole blood K2EDTA tube. Results for the Nodify CDT test alone are typically available within one day. If both tests are ordered for the patient and Nodify CDT returns a result of NSLAD, then both test results are typically available within four to five business days. All results are available through secure communication methods, including a portal, fax, hard copy, or mobile device. +Treatment Guidance and Monitoring +Profiling the tumor through blood-based genomic testing can help identify mutations in genes that may be driving growth of the tumor and may be targets for therapeutics. However, tumors also have intrinsic mechanisms that prevent the patient’s immune system from identifying and eliminating the cancer cells. Profiling the immune system can show if the patient’s immune system may have been subverted and therefore, is less likely to be responsive to immunotherapies. Our blood-based IQLung testing strategy consists of the GeneStrat ddPCR and GeneStrat NGS tumor profiling tests and the VeriStrat immune profiling test, which can be ordered together or separately for patients with NSCLC. Together, the tests have an established average turnaround time of three business days, providing physicians with timely results to facilitate treatment decisions. +10 +GeneStrat ddPCR Test +The GeneStrat test is a blood-based tumor profiling test that detects the guideline recommended, actionable mutations in lung cancer: EGFR, KRAS, BRAF, EML4-ALK, ROS-1, and RET. Physicians can order one or any combination of the gene tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat test performance and potential clinical utility have been published in multiple peer reviewed studies. +The GeneStrat test results have an established average turnaround time of two business days from the start of processing the sample in our Louisville, Colorado clinical laboratory. In a study at Eastern Carolina University, it was observed that blood-based testing was up to three weeks faster than tissue-based testing, with tissue-based testing taking a median of 26 days from sample collection. With GeneStrat testing, results are typically available in time for the patients first oncology visit, allowing the patient to start front-line treatment as quickly as possible. In the same study, it was observed that only 4% of patients had tissue-based molecular test results prior to start of front-line treatment. Meanwhile, after integrating Biodesix testing at the institution, 72% of patients had molecular test results available. Testing with the GeneStrat test can help physicians identify driver mutations quickly to help speed up time to treatment. +GeneStrat NGS Test +The GeneStrat NGS test is a blood-based 52-gene tumor profiling test panel that detects the guideline recommended, actionable mutations in lung cancer including five gene classes (SNV, INDELS, CNA, fusions, and exon-skipping). Specific variants of relevance to NSCLC include EGFR, KRAS, BRAF, EML4-ALK, ROS-1, RET, MET, NTRK. The GeneStrat NGS test is used for late-stage, metastatic NSCLC and physicians can order one or any combination of the IQLung tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat NGS test performance and potential clinical utility have been published in multiple published studies. +GeneStrat NGS test results have an established average turnaround time of three business days from the start of processing the sample in our Louisville, Colorado clinical laboratory. +We believe that rapid, blood-based tumor profiling with the GeneStrat ddPCR and GeneStrat NGS tests can be complementary to both targeted tissue-based testing (including PD-L1) and tissue-based broad genomic sequencing. Testing with GeneStrat ddPCR and +11 +GeneStrat NGS tests at diagnosis can help quickly identify patients who are eligible for targeted therapies. Additionally, blood-based testing upfront can help save valuable tissue for diagnostic evaluation, PD-L1 testing and broad genomic profiling for rare mutations to enroll in clinical trials. +VeriStrat Test +The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. Results help inform physicians whether their patient has a more aggressive cancer and can help with treatment planning. The VeriStrat test profiles the patient’s immune system by measuring eight protein features measured by mass spectrometry and interpreted by a proprietary machine learning-based algorithm to produce either a VeriStrat Good or VeriStrat Poor test result. +The presence of a VeriStrat Poor result indicates the presence of chronic inflammation and a chronic acute phase immune response. A chronic acute phase immune response can trigger the immune system to provide growth factors to the tumor to increase blood flow and tumor growth. The test has been studied in over 85 peer-reviewed and published clinical studies across many different types of therapies such as chemotherapy, targeted therapies, immune therapies, and combinations. The results consistently show the test to be predictive of outcomes, independent of other prognostic factors including PD-L1 expression and performance status. Patients who test as VeriStrat Poor, on average, have an overall survival that is less than half of those who test as VeriStrat Good, independent of treatment type, demonstrating that the test is strongly prognostic. Conversely, patients with a VeriStrat Good test result typically respond better to standard of care treatments than those patients that test as VeriStrat Poor. By using the VeriStrat test for immune profiling, physicians can help identify the patient's immune response to lung cancer to help guide treatment decisions. +GeneStrat ddPCR testing is performed using digital PCR technology, GeneStrat NGS testing is performed using NGS technology, and the protein features in VeriStrat are measured using MALDI-ToF mass spectrometry. Results have an established average turnaround time of three business days through secure communication methods, including a portal, fax, hard copy, or mobile device. +The GeneStrat ddPCR and GeneStrat NGS tests require cell-free (cf) whole blood specimen collection tubes, and VeriStrat requires a whole blood sample spotted onto our proprietary BCD. Both sample types are shipped at ambient temperature and testing is performed in our certified, high-complexity clinical laboratory in Louisville, Colorado. +Biopharmaceutical Diagnostic Discovery, Development and Testing Services Business +We believe our leadership in clinical proteomics and our multi-omic approach to probe the cancer disease state provides our customers with a clear and distinct advantage over other diagnostic service providers who solely focus on either genomics or proteomics. We recognize each clinical development program is complex, which is why we offer end-to-end diagnostic solutions, including: initial biomarker discovery, assay design and validation, testing of clinical trial samples, and commercialization of Companion Diagnostics. +At our core, we hold the belief that no single technology can address all diagnostic research questions. We have embraced a multi-omic approach, harnessing the combined power of genomics and proteomics and with our broad technology and service offerings, we are able to provide the depth and breadth of biomarker tools and diagnostic services required by our biopharmaceutical partners. Our capabilities and expertise allow us to unlock the potential detection of critical disease drivers and resistance mutations, early disease detection, monitoring of treatment responses and resistance, deeper insights into the underlying biology of disease, and the tracking of protein changes and degradation for a comprehensive view of treatment response. We specialize in developing state-of-the-art diagnostics solutions that play a crucial role in personalizing treatment decisions. Our team of scientists are dedicated to creating innovative and reliable diagnostic tools that can contribute to the success of drug development and patient care. Key aspects of our expertise include: +• +Customized CDx Development:  We have a proven track record of developing custom-made diagnostic assays to support the specific needs of any given drug development program. +• +Cutting-Edge Technology:  We have expertise in genomics (ddPCR and NGS) and proteomics (LC-MS/MS and ELISA). Our diagnostics are based on the latest advancements in technology, ensuring accuracy, sensitivity, and reproducibility. We have expertise in liquid biopsy and tissue-based assays. +• +Regulatory Compliance: We have a deep understanding of the regulatory landscape and work closely with regulatory authorities to ensure that our diagnostics meet all necessary compliance standards. Additionally, we have a phase gated product development process pursuant to the FDA and IVDR design control elements. Our quality management system (QMS) infrastructure is highly certified in local, US governmental and international standards and regulations and scalable to support global expansion as evidenced by multiple CE marked products under the IVDR and international registrations and commercial markets. The Biodesix QMS is currently under the purview of CLIA, CAP, NYS-CLEP, and ISO13485. +• +Collaborative Approach: We believe in fostering a collaborative and transparent relationship with our partners, working hand-in-hand to achieve shared objectives and milestones. +12 +We believe we provide benefit to our biopharmaceutical customers as they integrate strategies for increasing the probability of success for pivotal clinical trials. Specifically, our diagnostic testing services may help enable quicker enrollment rates for patients in prospective clinical trials, ranging from phase 1 to phase 3, and could help identify patient populations who may experience the greatest benefit from new therapeutics. Ultimately, our goal is to help biopharmaceutical customers realize greater efficiency in their clinical development programs. We have the ability to access and leverage our sample and data biobank for our partners’ data mining needs, including new test discovery. Additionally, we can leverage our FDA approved, GMP manufacturing facility to design, build and supply clinical trial sites with sample collection kits. +While our biopharmaceutical discovery, diagnostic development and testing revenue continues to grow, it is important to note that we benefit greatly from these partnerships in many ways that expand beyond revenue. We are continuously expanding our knowledge and biological understanding of multiple diseases and the rapidly evolving treatment landscape, while our Diagnostic Cortex® platform continues to be powered through these biomarker analyses. Additionally, our anonymized sample and data biobank continue to grow and can be further leveraged for internal test development and external partnering. Importantly, we look to supplement our product development efforts with companion diagnostics as they are developed. +To date, we have over 65 biopharmaceutical customers and academic partners who have utilized our diagnostic tests and services. The following are a few case studies of early-stage biomarker discovery and development with our biopharmaceutical customers. +• +AstraZeneca: We provided services to AstraZeneca to retrospectively analyze samples from the FLAURA clinical trial (NCT02296125). The goal of this analysis was to interpret and establish the clinical utility of blood-based longitudinal monitoring of EGFR sensitizing and resistance mutations by ddPCR in advanced NSCLC patients treated with osimertinib. The data demonstrated that these circulating DNA mutations could be tracked in blood to interpret the patient’s prognosis, and could help AstraZeneca to identify disease progression three months (median) in advance of standard imaging. We have used our ddPCR assay to monitor EGFR sensitizing and resistance mutations in clinical trial samples from seven different clinical trials for Tagrisso. +• +Genentech: We partnered with Genentech to discover a novel proteomic classifier for advanced NSCLC patients treated with atezolizumab. The test was discovered on a small clinical cohort (n=77) and was independently validated on blinded samples (n=270) from the POPLAR clinical trial (NCT01903993). The validation revealed that the proteomic test was predictive of progression free survival and overall survival for atezolizumab versus the control arm docetaxel. Additionally, an analysis compared the correlation between our proteomic classifier with standard of care biomarkers (PD-L1 expression status and tumor mutation burden), which revealed there was no significant correlation. We published additional work on the Genentech classifier with three posters presented at the society of immunotherapy conference (SITC). This data reinforces that our classifier provides unique and valuable information in the treatment of patients with advanced NSCLC. It is our belief that Genentech could use this strategy to identify patients that could derive a longer progression free survival from atezolizumab. +• +HiberCell: In January 2021, we announced a broad collaboration with HiberCell for CDx discovery, development and commercialization. The agreement initially focuses on the further development of an ELISA as a CDx in future registrational trials for Imprime PGG programs. +13 +Our Competitive Advantages +We believe the following are our key competitive advantages: +• +Our proprietary extensively validated deep learning platform, which is tailored to discover diagnostic tests that address clinical unmet needs. Our platform is an extensively validated deep learning platform optimized for discovery of diagnostic tests. By combining our multi-omic approach with deep learning techniques, we believe we have overcome many standard machine learning challenges. This has enabled us to develop commercial tests for clinical unmet needs and collaborate with our biopharmaceutical customers and academic partners. +• +Our driven approach to precision medicine combined with our diverse technology platforms, partnership and biobank enable us to accelerate development of new tests. We have a variety of samples with associated data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external research and development initiatives. Our biobank, clinical trials, commercial testing and other partnerships provide an ongoing source of new data that can further enhance our test discovery platform. We are continuously identifying and incorporating new market insights and input from our customers, key opinion leaders, and scientific experts to leverage this data in developing our diagnostic tests. +• +Our leadership in clinical proteomics, demonstrated research, development, and scientific expertise, combined with our intellectual property portfolio. Our leadership in clinical proteomics and our multi-omic approach, we believe provides us with a distinct advantage over our competitors, who focus on any single technology, such as genomics or proteomics. Our certified, high-complexity laboratories offer significant advantages in development of commercial tests. +• +Our proprietary technologies and processes are protected by a portfolio of approximately 116 issued patents in the United States and internationally, and 18 uniquely registered United States trademarks. We take efforts to protect our proprietary position using a variety of methods, such as a pursuit of United States and foreign patent applications related to our proprietary technology, use of trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities. +• +Our demonstrated success commercializing diagnostic tests in lung disease as well as unprecedented turnaround times. With five diagnostic tests launched and multiple improvements and several tests currently in development, our commercial portfolio of blood-based solutions currently addresses clinical unmet needs within diagnosis, treatment and monitoring of lung cancer. Our diagnostic tests provide rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan. For example, the blood-based IQLung strategy for lung cancer patients integrates the GeneStrat ddPCR test, the GeneStrat NGS test and the VeriStrat test to support treatment decisions across all stages of lung cancer with results in an unprecedented two to three business days, expediting time to treatment. +• +Our depth and breadth of point of care access to physicians allows us to drive adoption of our diagnostic tests while incorporating real-life feedback to inform new product development. Our commercial team’s primary focus is to articulate the scientific and clinical evidence behind our tests, how they impact clinical care and can ultimately help to improve patient outcomes. Our demonstrated scientific expertise, leadership in clinical proteomics and breadth of data, including peer-reviewed publications, presentations and clinical studies, forms the basis of our relationships with major hospitals and physician networks across the United States. +• +Our commercial infrastructure, which includes our extensive knowledge and experience in sales, marketing, reimbursement and operations, provides us with the ability to launch, scale and drive revenue. We believe our commitment to commercial excellence helps us to leverage insights, operational excellence and proven approaches to deliver revenue growth and enhance the brand of our company and products. We are able to deploy rapid clinical testing turnaround times and develop commercial tests at scale. Scaling of our test capacity to meet volumes is then achieved by adding instrumentation and qualified personnel to our quality systems. +Our Strategy +We strive to provide swift, comprehensive and actionable insights to improve patient outcomes across lung disease and to help answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. To achieve this, we intend to: +• +Drive increased awareness, adoption, and reimbursement coverage of our diagnostic tests by: +o +continuously educating physicians, key opinion leaders, hospital systems, advocacy groups, patients, payers, academic research organizations, and technology assessment and guideline organizations on the clinical data and benefits of our tests; +o +utilizing our pulmonology focused sales force and commercial reach with targeted awareness campaigns to employ highly targeted sales and marketing tactics in pulmonology clinics specializing in the management of lung nodules and the diagnosis of lung cancer; +14 +o +continuing to invest in the expansion of our sales force and commercial support team; +o +incorporating our testing services into diagnostic pathways and protocols via a top-down strategy that introduces our diagnostic tests to the largest United States health systems; and +o +leveraging our clinical data to gain broad coverage from public and private payers for our tests. +• +Deepen our relationships with current biopharmaceutical customers and establish new customer opportunities by: +o +selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally; +o +leveraging existing projects and relationships to expand sales with our current biopharmaceutical customers; and +o +targeting companies developing novel CDx strategies and drug development projects best suited to our platform for new test discovery, development and commercialization. +• +Further demonstrate the clinical utility and health economic benefits of our diagnostic tests by: +o +investing in commercial clinical testing, research studies and clinical trials to further demonstrate the clinical utility of our tests; +o +providing rapid, actionable, and holistic diagnostic information to help inform physicians on the next steps in a patient’s care plan; and +o +providing timely and actionable clinical information to help improve overall patient outcomes and lower the overall healthcare cost. +• +Introduce new diagnostic tests in lung disease by: +o +engaging with our customers, key opinion leaders, leading academic centers, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and to identify additional clinical unmet needs; +o +entering strategic partnerships with biopharmaceutical companies, academic research organizations, technology providers, and other diagnostic companies; and +o +developing CDx tests to support the therapeutics’ regulatory approval and adoption process for our biopharmaceutical customers. +• +Enhance our proprietary AI platform and expand our technology portfolio by: +o +continuing to invest in research and development capabilities to foster innovation in test discovery and development; +o +identifying, acquiring technologies, and integrating new data types into our proprietary AI platform; +o +entering strategic partnerships across our commercial product portfolio and product development efforts in order to further our development capabilities, accelerate launch of commercial products, or expand our service offering; and +o +achieving “Explainable AI” by developing and incorporating computational tools that determine how the Diagnostic Cortex platform makes decisions for patient classification and outcome prediction. +• +Continue to expand and leverage our biobank by: +o +expanding and enhancing the robustness of our samples and the data set, including through our collaborations and partnerships; +o +pursuing commercial opportunities with companies and researchers who are interested in utilizing our biobank for their own discovery and development efforts; and +o +monetizing these commercial opportunities. +Our Diagnostic Tests in Development +With the goal of finding solutions for clinical unmet needs related to diagnosis, treatment and monitoring in lung disease, our diagnostic tests in development include the following: +Early-Stage NSCLC—Risk of Recurrence (ROR) +Currently, surgical resection of the tumor without systemic or radiation therapy is the standard of care for stage I NSCLC patients. However, 20 to 40% of surgically treated patients will suffer a recurrence within five years after surgery. From market research with +15 +pulmonologists, thoracic surgeons, and medical oncologists, we identified a significant clinical unmet need for a blood-based test to help identify stage I NSCLC patients who are at a higher risk of recurrence and may benefit from a more aggressive surgical procedure, or from neoadjuvant or adjuvant systemic treatment. Based on this unmet diagnostic need, we discovered the Risk of Recurrence (ROR) test, which is a pre-surgery blood-based proteomic test, designed with the Diagnostic Cortex platform to predict whether a stage I NSCLC patient has a higher risk of recurrence post-surgical resection. Knowing this information early and before surgery may change the surgical plan and/or support treatment decisions such as neoadjuvant or adjuvant therapy, which have the potential to reduce tumor volume and address micro-metastatic disease as early as possible. Our ROR test validated in an independent sample set, and we are currently working with major academic institutions across the United States to further validate the test. +Late-Stage NSCLC—Immunotherapy Treatment Guidance (PIR) +In 2015, the first immunotherapy-based treatment regimen was approved by the FDA for use in lung cancer. Currently, there are 9 immune checkpoint inhibitor (ICI) regimens (single agent or combinations) recommended by the NCCN guidelines for treatment of advanced NSCLC patients. For a portion of patients treated, these drugs can result in significant improvement in overall survival compared with platinum-based chemotherapy options. +The combination ICI regimens see some improvement in performance over single agent ICI, but side effect profiles are worse, and costs are higher than for single agent ICI. In addition, recent data have shown that a subset of patients experience more rapid disease progression on ICI compared with chemotherapy. We utilized the Diagnostic Cortex platform to discover our Primary Immune Response (PIR) test. PIR is a blood-based proteomic test designed to profile a patient's potential to mount an immune response to their cancer and predict those patients likely to respond to ICI monotherapy treatment, ICI + chemotherapy combination treatment, or who would be highly resistant to ICI therapy. Our PIR test has been validated in multiple independent sample sets for advanced stage NSCLC patients treated with single agent ICI, and we are currently working with major academic institutions across the United States to further validate the test. +Monitoring – Progression & Resistance +Blood-based monitoring with our ddPCR technology may offer a feasible method to non-invasively evaluate therapeutic mechanism of action, disease progression, and the emergence of resistance mutations in patients treated with targeted therapies. Our internal validation studies have shown the utility of the GeneStrat EGFR ddPCR test as an example in all three of these indications. The test can identify disease progression up to three months (median) in advance of standard imaging. Using ddPCR for longitudinal blood-based monitoring of EGFR cell-free DNA mutations is a cost-effective testing method while patients are being treated with targeted therapies. Additional utility for ddPCR may exist in early stage MRD (minimal residual disease) given the sensitivity of this technology. +Clinical Trials +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. We have participated in 27 clinical studies, three of which are ongoing, and have published over 300 peer-reviewed publications and presentations. The following are our ongoing clinical studies for our diagnostic testing solutions. +ORACLE Registry Study (NCT03766958) +The ORACLE registry study was designed to develop real-world clinical utility data for the Nodify XL2 test and is titled “An Observational Registry Study to Evaluate the Performance of the Nodify XL2 Test”. The study objectives are to show a reduction in invasive procedures on patients with benign nodules compared to a historical control obtained from chart review. The first patient enrolled on October 16, 2018. Study enrollment was closed on May 12, 2022, with 494 prospective registry patients enrolled and 348 retrospective chart review patients accrued. As of February 1, 2024 all ORACLE participants have completed the study, site closeout visits are being conducted on the last three open sites and the study will be officially closed by the March 31, 2024. +On July 12, 2023, we announced the prospective, real-world ORACLE study (An Observational Registry Study to Evaluate the Performance of the Nodify XL2 Test) achieved the primary endpoint of a statistically significant change in the proportion of benign lung nodules managed by the Nodify XL2 test experiencing invasive procedures. The ORACLE study showed patients with benign nodules managed with the Nodify XL2 test were 74% less likely to undergo an unnecessary invasive procedure compared to the control group. Additionally, the proportion of patients sent to CT surveillance with malignant nodules did not differ between the Nodify XL2 group and the control group. +ALTITUDE Clinical Utility Study (NCT04171492) +The ALTITUDE clinical utility study is designed to evaluate the performance of Nodify Lung testing (Nodify XL2 and Nodify CDT tests) in a randomized controlled study (RCT). The study is titled “A Multicenter, Randomized Controlled Trial, Prospectively Evaluating the Clinical Utility of the Nodify XL2 Proteomic Test in Incidentally Discovered Low to Moderate Risk Lung Nodules”. We received central institutional review board (IRB) approval in December 2019 and have an enrollment goal of 2,000 patients. The study objectives are to evaluate how the addition of the Nodify Lung test result impacts the clinical decision making for patients with new, incidentally identified solid lung nodules assessed as low to moderate risk of lung cancer. The trial has an adaptive study design with a +16 +blinded standard of care arm and 2:1 randomization for open-label results for the Nodify XL2 test. The study launched in December of 2020. Phase 1 of the study with only the Nodify XL2 test is expected to enroll 500 patients. Phase 2 of the adaptive study design will include an open-label arm for the Nodify CDT test, which is aligned with our commercial testing algorithm. +INSIGHT Observational Study (NCT03289780) +The INSIGHT observational study is designed to evaluate the real-world clinical utility and performance of the IQLung (GeneStrat ddPCR, GeneStrat NGS and VeriStrat tests) testing strategy. The title is “Observational Study Assessing the Clinical Effectiveness of VeriStrat and Validating Immunotherapy Tests in Subjects with Non-Small Cell Lung Cancer (INSIGHT)” and the first patient enrolled on May 11, 2016. On June 27, 2023, we completed enrollment of 5,000 patients with non-small cell lung cancer. Final analysis with 3-year follow-up is estimated to be completed by 2026. Results of an interim analysis were presented most recently at the World Conference on Lung Cancer 2023. Additionally, data on the first 2,000 patients with 1-year follow-up data was published in the Journal for ImmunoTherapy of Cancer in September 2021. The study rationale is to guide the adoption of the VeriStrat test and inform medical decision making, including treatment choice, and enable the validation of additional mass spectrometry-based proteomic tests. The primary study objective is to describe the impact of the VeriStrat test results on treatment decisions, including but not limited to the percentage change in treatment decision, differences in chosen treatments between patients classified as VeriStrat Good and those classified as VeriStrat Poor, and the percentage of patients receiving systemic therapy or supportive therapies only. +Commercialization +For our lung cancer and nodule management tests, commercial efforts are focused on the promotion of our testing strategies to healthcare professionals actively involved in the diagnosis and treatment of lung cancer. Primarily focusing on pulmonology, the commercial team, consisting of specialty sales representatives, medical affairs, marketing and customer care representatives, works to educate and inform the entire patient care group consisting of physicians, nurses, office staff, laboratory personnel, and administration as to the appropriate use and value provided by our testing. The team’s goal is to drive test adoption through articulating the scientific and clinical evidence behind our tests, how they impact the clinical care of a patient, and how the tests can ultimately help to improve patient outcomes. +Patients with pulmonary nodules are concentrated in the pulmonology sub-specialty, where additional resources such as lung cancer screening and nodule management clinics may exist to provide an increased level of care. We are also engaging large hospital systems in a “top-down” approach, with a goal of incorporating our tests into system-wide pathways and protocols. +After a physician orders our tests, blood is collected either in the physician office or laboratory, third-party “store front” patient service centers, or it can be collected in the patient’s home or workplace. We have contracted with a network of patient service centers and mobile phlebotomy services to be enable collection of blood samples outside of the physician office, at home or work for patients across the United States. +In addition, on November 14, 2023, the Company announced the validation and launch of a new method of collecting blood specimens for Nodify Lung Nodule Risk Assessment testing. The method uses the FDA-cleared Tasso+™ device, a single-use blood lancing device intended for obtaining capillary whole blood samples from a patient’s upper arm. Capillary blood draws using the Tasso+ device enable blood specimen collection for healthcare providers who do not have convenient access to phlebotomy services or a licensed phlebotomist on staff in the clinic or office. The Tasso+ device was validated by Biodesix to be administered in minutes by any healthcare provider at the time of lung nodule evaluation, creating efficiencies in the Nodify Lung workflow. Biodesix received approval from the New York State Clinical Laboratory Evaluation Program (NYS-CLEP) to use the Tasso+ device as a specimen collection method in support of Nodify Lung testing after entering into a supply agreement with Tasso, Inc. The device is now available for clinical use to collect specimens for Nodify Lung testing. +Our business development team is focused on selling our complete offering of tests and services to biopharmaceutical companies in the United States and internationally. Our team consists of customer facing business development associates that work with our biopharmaceutical customers to identify projects, draw up statements of work and negotiate service agreements. Alliance managers help to manage the contractual obligations and scope of the project, whereas our operations team assures the project is managed with adequate resources and delivers on time. We take a two-pronged approach generating business in this segment. Primarily, we leverage existing projects and relationships to expand sales in current accounts. We also actively map ongoing drug development projects in biopharmaceutical companies and target programs best suited to our platform for new test development. +Coverage and Reimbursement +The primary source of reimbursement for our tests in the United States is from third-party payers, including government payers, such as Medicare, and commercial payers, such as insurance companies. Reimbursement for laboratory tests in the United States is determined by various payers, including private third-party payers, managed care organizations, and state and federal health care programs, such as Medicare and Medicaid. In Medicare, coverage of an item or service depends on whether it is “reasonable and necessary” under Section 1862(a)(1)(A) of the Social Security Act (SSA). For single-source laboratory tests, this determination is typically made by the Medicare Administrative Contractor (MAC) with jurisdiction over the laboratory where the test is performed. Our Louisville, Colorado laboratory is currently under the jurisdiction of Novitas Solutions, Inc. Our De Soto, Kansas laboratory is under the jurisdiction of Wisconsin +17 +Physicians Service Insurance Corporation (WPS), which participates in the MolDX program (administered by another MAC, Palmetto GBA) to set coverage policy for molecular diagnostic tests. +Medicare pays for clinical diagnostic laboratory tests (CDLTs), on the Clinical Laboratory Fee Schedule (CLFS). Section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA) added Section 1834A to the SSA, which established the current CLFS rate setting processes and coding provisions for CDLTs, and created a new subcategory of CDLTs called Advanced Diagnostic Laboratory Tests (ADLTs), with separate reporting and payment requirements. +Under Section 1834A and its implementing regulations, clinical laboratories that receive the majority of their Medicare revenues from payments made under the CLFS and the Physician Fee Schedule report on a triennial basis (or annually for ADLTs), private payer rates and volumes for their tests with specific billing codes based on final payments made during a set data collection period. The payment rate for a test for the ensuing three-year period (or one year for ADLTs) is set at the weighted median of the rates reported under the specific billing code for that test. Newly established codes for CDLTs are priced until the next private payer rate reporting cycle either based on the payment rate of a comparable code on the CLFS, as determined by CMS ("crosswalking") or at the median of rates submitted by the individual MACs based on statutory and regulatory factors ("gapfilling"). New ADLTs are initially priced at “actual list charge” for a nine-month period, after which they are priced based on private payer rates, with a recoupment provision if actual list charge is more than 130% of the weighted median of private payer rates reported. +The various payers in the United States also determine their own billing rules. In December 2020, Medicare revised its billing rules for clinical laboratory tests to require cancer-related protein-based Multianalyte Assays with Algorithmic Analyses to be billed directly to Medicare by the performing laboratory in most cases when performed on a specimen collected from a hospital outpatient. Molecular pathology tests and most ADLTs are also generally required to be billed directly to Medicare by the laboratory under these circumstances. +On July 6, 2023, the Company announced that the Centers for Medicare & Medicaid Services (CMS) has designated the Nodify CDT Test as an Advanced Diagnostic Laboratory Test (ADLT) effective June 30, 2023. Obtaining ADLT status is a recognition that the Nodify CDT test meets the stringent criteria established under the Protecting Access to Medicare Act of 2014. ADLT status is reserved for innovative tests with Medicare coverage that are offered and furnished by a single laboratory and provide new clinical diagnostic information that cannot be obtained from any other test or combination of tests. The Nodify XL2 test was previously awarded ADLT status on May 17, 2019. We believe that our lung cancer tests can both improve patient outcomes and help guide cost-effective treatment choices for patients with and at-risk of lung cancer. Achieving broad coverage and adequate reimbursement for each of our tests is a key component of our financial success and will continue to be important over time. +Compliance with applicable laws and regulations, as well as internal compliance policies and procedures adds complexity to the billing process. The Centers for Medicare & Medicaid Services (CMS) is responsible for overseeing the establishment of new Healthcare Common Procedure Coding System (HCPCS) codes for billing the Medicare program and other payers. CMS continuously evaluates and implements changes to the Medicare billing, coding, and reimbursement processes. To receive reimbursement from third-party payers, we bill our tests using a variety of HCPCS codes or Current Procedural Terminology (CPT) codes, as defined by the American Medical Association. For some of the tests we conduct, there may not be a specific CPT or HCPCS code, in which case the test may be billed under a miscellaneous code for an unlisted molecular pathology procedure or unlisted multiple anolyte test with algorithmic analysis (MAAA) procedure. Because these miscellaneous codes do not describe a specific service, the third-party payer claim may be examined to determine the service provided, whether the service was appropriate and medically necessary and whether payment should be rendered. This process can result in a delay in processing the claim, a lower reimbursement amount, and/or denial of the claim. +Competitors +We primarily face competition from lung cancer diagnostic solutions companies in the United States, Europe and Asia seeking to answer clinical questions in the space, all of whom provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories, and other medical facilities. +Diagnosis—Nodule Management +We are not aware of any other company that offers two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. We are aware of efforts by Veracyte, Inc. to develop and validate a test that may be competitive to the Nodify XL2 and/or Nodify CDT tests in the future. Additionally, Veracyte currently markets a test that is used post-bronchoscopy that is not competitive with our pre-bronchoscopy nodule risk assessment tests. +Treatment Guidance and Monitoring—NSCLC +We are unaware of any other diagnostic test available, commercially or in development, that will compete with our VeriStrat immune profiling test. There is substantial interest and activity in tumor profiling through liquid biopsy. Our genomic test offerings, the GeneStrat ddPCR and GeneStrat NGS tests, face competition from academic hospital laboratories, and companies such as Guardant Health and Foundation Medicine. We believe that there are several companies and academic research institutions in the process of developing tests for monitoring patients or following treatment for recurrence or progression of lung cancer. +18 +Biopharmaceutical Diagnostic Discovery, Development & Testing Services +We are aware of a number of companies who compete with our diagnostic tests and services, including diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. From the perspective of tumor profiling, we believe Guardant Health and Foundation Medicine are our most significant competitors. Conversely, in the immune profiling market, we believe Adaptive Biotechnologies and Personalis are our most significant competitors. +Clinical Laboratory Operations +Throughout 2023, we performed the VeriStrat, GeneStrat ddPCR, and GeneStrat NGS tests in our Boulder, Colorado high-complexity CLIA certified clinical laboratory. The laboratory was College of American Pathology (CAP) accredited, New York State Department of Health (NYSDOH)—permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified, along with all other states that require licensing: California, Maryland, Pennsylvania, and Rhode Island. All aspects of the testing process from receipt of the test requisition form through to delivery of test results were performed in the Boulder, Colorado facility. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within three days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +In January 2024, we relocated our Boulder, Colorado clinical laboratory to Louisville, Colorado. Throughout this transition, we have ensured the maintenance and updating of all relevant certifications and licenses to accurately reflect our new location, guaranteeing our commitment to upholding the highest standards of quality and compliance. As a result, our laboratory operations continued seamlessly without delaying testing. +The Nodify XL2 and Nodify CDT tests are performed in our De Soto, Kansas high-complexity CLIA certified clinical laboratory. This clinical laboratory is also CAP-accredited, NYSDOH—permitted and licensed, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified and licensed by California, Maryland, Pennsylvania, and Rhode Island. Receipt of requisitions and testing is performed in our De Soto, Kansas clinical laboratory. Delivery of the test results is performed by personnel from our Louisville, Colorado headquarters. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery of greater than 90% of our tests within five days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. +Personnel in both facilities are responsible for quality assurance oversight, licensing, and regulation compliance and maintenance to ensure data integrity and consistent, validated processes. +Supply Chain +We rely on third-party suppliers to provide certain components of our diagnostic tests, including a select few (located in the United States, Europe and China), as critical single source providers of components. Bio-Rad, as described below, is the sole source supplier for our GeneStrat test. Oncimmune is also the sole source supplier for our Nodify CDT tests but there are known secondary suppliers for these materials. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test, but these supplies are able to be supplied by known suppliers. A disruption to this supply would negatively impact our ability to perform the GeneStrat tests until alternatives could be validated. +All materials for our VeriStrat test and Nodify XL2 test have alternative suppliers readily available, and a disruption in any single supplier would not materially impact our ability to deliver the test. +We have initiated the second source qualification process for the majority of these critical components, however, we may not be successful in securing second sourcing for all of them at all or on a timely basis. A disruption to this supply would negatively impact our ability to perform these tests until an alternative supplier could be validated. +Intellectual Property +Our success depends, in part, on our ability to obtain and maintain intellectual property and proprietary protection for our products and other know-how, to operate our business without infringing, misappropriating or otherwise violating the intellectual property and proprietary rights of others, and to defend and enforce our intellectual property and proprietary rights. We take efforts to protect our proprietary position using a variety of methods, which include pursuit of United States and foreign patent applications related to our proprietary technology, inventions and improvements that we determine are important to our business. We also may rely on trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities to develop and maintain our proprietary position. For more information regarding risks relating to intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property.” +19 +We have invested heavily in the protection of our key assets, namely the VeriStrat® and GeneStrat® tests, and we acquired a patent portfolio relating to the Nodify XL2® and Nodify CDT® tests in our acquisitions of Indi in June 2018, and of Oncimmune USA in October 2019 from Oncimmune Limited (Oncimmune). We own patents and patent applications as well as trade secrets relating to our products currently in development, a collection device for whole blood, our business strategy, client lists and business methods. Further, we have expanded our access to key intellectual property through license and co-development agreements, including our Non-Exclusive License Agreement with Bio-Rad (the Bio-Rad License), which allows us to use the Droplet Digital PCR™ technology developed by Bio-Rad and which we employ in our GeneStrat test. +Our patent strategy has focused on creating and acquiring protection for our VeriStrat and Nodify XL2 proteomic tests, while utilizing trade secret and some methods patent protection for our genomic test (the GeneStrat ddPCR and GeneStrat NGS® tests) and ELISA test (the Nodify CDT test). We have entered into a non-exclusive license agreement with Bio-Rad, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. Bio-Rad owns patents relating to ddPCR and to which we have a non-exclusive license to utilize for the performance of ddPCR in cancer detection testing for third parties as set forth in the Bio-Rad License Agreement. We have patent protection in the United States and other countries around the world for the primary use of the VeriStrat test for profiling of patients with NSCLC, and various other uses of the VeriStrat test, such as breast cancer, prostate cancer, head and neck cancer have received patent protection. We have also received patent protection relating to our core classifier development program, our Diagnostic Cortex platform and our approaches to using MALDI-ToF technology (DeepMALDI® techniques). Additionally, our first device patent was issued in 2019 for our internally designed blood collection device. +As of December 31, 2023, our patent portfolio includes 52 issued United States patents, 64 issued foreign patents, and 33 pending applications (including 19 foreign patent applications). With regard to our product development efforts, new applications have been filed around developments relating to COVID/micro-organisms diagnostics, new analytic methodologies using Shapley values and semi-quantitative spectra analysis in MALDI, and national stage applications are now in active prosecution to protect our pipeline ROR and PIR tests. +The patent portfolio can be broken down into five major categories: +1) +Issued patents and patent applications relating to the VeriStrat and Nodify tests and uses of these tests; +2) +Issued patents and patent applications relating to methods for developing classifiers, including using the Diagnostic Cortex and DeepMALDI technologies; +3) +Issued patents and patent applications relating to tests currently in development; +4) +Issued patents and patent applications relating to our novel blood collection device; and +5) +Issued patents and patent applications relating to tests developed for our third-party partners. +The patents relating to the VeriStrat test are scheduled to expire between 2026 and 2032. The patents relating to the Nodify XL2 test are scheduled to expire beginning in 2031 (excluding any patent term extension granted by the United States Patent and Trademark Office (USPTO)), and the patents relating to the Nodify CDT test are scheduled to expire in 2027. The patent related to the blood collection device is scheduled to expire in 2039. Should our current patent applications in prosecution in the United States issue, the resulting patents would be scheduled to have expiration dates between 2036 and 2040 (excluding any patent term extension(s) granted by the USPTO). +We currently have three pending Patent Cooperation Treaty (PCT) applications. PCT patent applications are not eligible to become issued patents until, among other things, we file such PCT applications as national stage patent application(s) within 30 months in the countries in which we seek patent protection. If we do not timely file any national stage patent applications, we may lose our priority date with respect to any such PCT patent applications and any patent protection on the inventions disclosed in such PCT patent applications. Provisional patent applications are not eligible to become issued patents but can become the basis of PCT foreign stage and United States non-provisional patent applications, if such applications are filed within 12 months of filing the related provisional patent application. If we do not timely file any non-provisional patent applications, we will lose our priority date and any patent protection on the inventions disclosed in any such provisional patent application. +In addition, the term of individual issued patents depends upon the legal term for patents in the countries in which they are obtained. In most countries in which we have filed, including the United States, the patent term is generally 20 years from the earliest filing date of a non-provisional patent application, assuming the patent has not been terminally disclaimed over a commonly-owned patent or a patent naming a common inventor, or over a patent not commonly owned but that was disqualified as prior art as the result of activities undertaken within the scope of a joint research agreement. The life of a patent, and the protection it affords, is therefore limited and once the patent lives of our issued patents have expired, we may face competition, including from other competing technologies. In the United States, the term of a patent may also be eligible for patent term adjustment for delays within the USPTO. The term of a patent that covers a biological product may also be eligible for patent term extension when FDA approval is granted for a portion of the term effectively lost as a result of the FDA regulatory review period, subject to certain limitations and provided statutory and regulatory +20 +requirements are met. Any such patent term extension can be for no more than five years, only one patent per approved product can be extended, the extension cannot extend the total patent term beyond 14 years from approval, and only those claims covering the approved biological product, a method for using it or a method for manufacturing it may be extended. We may not receive an extension if we fail to exercise due diligence during the testing phase or regulatory review process, fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. There can be no assurance that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. +Our ability to maintain and solidify our proprietary and intellectual property position will depend on our success in obtaining effective patent claims and maintaining and enforcing claims that are granted. However, our owned and licensed patents could be invalidated or narrowed or otherwise fail to adequately protect our proprietary and intellectual property position and our pending owned and licensed patent applications, and any patent applications that we may in the future file or license from third parties, may not result in the issuance of patents. +Because branding is as much a part of any intellectual property strategy as patent or trade secret protection we have a number of registered and pending trademarks relating to our company and products. We have received or filed for trademark protection in the United States for our trade name (Biodesix), the names of five of our commercial tests (namely the VeriStrat, GeneStrat ddPCR, GeneStrat NGS, Nodify XL2 and Nodify CDT tests), and a suite of research tests (ImmunoStrat® test), as well as having trademark protection for our core development and methodological platforms, such as our Diagnostic Cortex and DeepMALDI technologies. In all, as of December 31, 2023, we have 18 uniquely registered United States trademarks, 8 of which (including Biodesix, VeriStrat, and GeneStrat) have received foreign issuances as well, with four trademarks pending approval from the USPTO. We will continue to pursue protection in the United States and abroad for our branded assets and will continue to use branding to protect products currently in development, key Biodesix developments and non-trade secret methodologies. +We also rely on trade secrets, including know-how, confidential information, unpatented technologies and other proprietary information, to strengthen or enhance our competitive position, protect and maintain aspects of our business that are not amenable to, or that we do not presently consider appropriate for, patent protection, and prevent competitors from reverse engineering or copying our technologies. We have decided that some technologies, such as our laboratory methodologies (including sample preparation and assay development), and some information (such as client and billing information) are best kept as trade secrets. However, trade secrets and confidential know-how are difficult to protect. To avoid inadvertent and improper disclosure of trade secrets, and to avoid the risks of former employees using these trade secrets to future employment, it is our policy to require employees, consultants and independent contractors to assign all rights to intellectual property they develop in connection with their employment with or services for the Company to the Company. We also protect our existing and developing intellectual property expressly through confidentiality provisions in agreements with third parties. There can be no assurance, however, that these agreements will be self-executing or otherwise provide meaningful protection for our trade secrets or other intellectual property or proprietary information, or adequate remedies in the event of unauthorized use or disclosure of such trade secrets or other intellectual property or proprietary information. +We also seek to preserve the integrity and confidentiality of our trade secrets and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in the measures we take to protect and preserve our trade secrets, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. +We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives, which may include objectives within and outside the United States. Despite our efforts to protect our intellectual property rights, and despite the breadth of protection that has issued around our key assets, these rights may not be respected in the future or may be circumvented or challenged (and potentially invalidated) in a legal proceeding in any jurisdiction where we have intellectual property rights. In addition, the laws of various foreign countries where we have received intellectual property protection and where we may eventually distribute our products may not afford the same protections or assurances to the same extent as the laws in the United States. See “Risk Factors—Risks Related to Our Intellectual Property” for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on us. +Government Regulations +Clinical laboratory tests like our diagnostic tests are regulated under CLIA and state law. The FDA regulates medical devices pursuant to the FDCA, including many diagnostic test kits, such as in vitro diagnostic tests (IVDs). However, most Laboratory Developed Tests (LDTs) are not currently subject to the FDA’s regulation (although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to such regulation) because the FDA has historically exercised enforcement discretion over LDTs. LDTs are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. +21 +We currently market our GeneStrat, VeriStrat, Nodify XL2 and Nodify CDT tests as LDTs in the United States. As a result, we believe our diagnostic services are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDCA provisions. If the FDA disagrees with the LDT status of any of our tests, the FDA may consider the test to be an unapproved medical device and may subject us to FDA enforcement action, including, without limitation, requiring us to seek clearance, authorization or approval for the laboratory test. If the FDA were to begin enforcement with respect to our LDTs, we could incur substantial costs and delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market requirements. +FDA’s authority to regulate LDTs has been contested for many years, and there have been several legislative and administrative proposals regarding LDT regulation seeking to end or limit enforcement discretion and to bring LDTs under new or existing FDA regulatory frameworks. +We cannot predict the likelihood that Congress will pass legislation or the extent to which such legislation may affect the FDA’s plans to regulate certain LDTs as medical devices or pursuant to a new framework. It is also unclear at this time whether the FDA will finalize its plans to end enforcement discretion in the absence of legislation, via notice and comment rulemaking or otherwise. Until legislation is passed reforming the federal government’s regulation of LDTs or until the FDA finalizes its proposed rulemaking to end enforcement discretion, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval. Even if a new framework is not established via legislative or administrative action, the FDA may attempt to regulate and enforce against certain LDTs on a case-by-case basis at any time. +On September 29, 2023, FDA announced a proposed rule to amend its regulations to explicitly regulate LDTs as IVD tests in accordance with the agency’s regulatory authority over medical devices and to phase out its enforcement discretion policy for LDTs. If this rule is finalized, our tests that are currently offered as LDTs would become subject to statutory and regulatory provisions that are applicable to medical devices, including but not limited to, medical device reporting and correction and removal reporting requirements, quality systems regulations, registration and listing requirements, and premarket review requirements. +If the FDA finalizes its proposed rule and pre-market review is required, our business could be negatively impacted as a result of commercial delay that may be caused by the new requirements. The cost of conducting clinical trials and otherwise developing data and information to support pre-market applications may be significant. If we are required to submit applications for our currently marketed tests, we may be required to conduct additional studies, which may be time-consuming, costly and could result in our currently-marketed tests being withdrawn from the market. Continued compliance with the FDA’s regulations would increase the cost of conducting our business, and subject us to heightened regulation by the FDA including penalties for failure to comply with these requirements. Failure to comply with applicable regulatory requirements could result in an enforcement action by the FDA, such as fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal sanctions. There are other regulatory and legislative proposals that would increase general FDA oversight of clinical laboratories and LDTs. Until the FDA finalizes its regulatory position regarding LDTs, or the VALID Act or other legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate our tests in the future and what testing and data may be required to support any required clearance or approval. The outcome and ultimate impact of such proposals on the business is difficult to predict at this time and we are monitoring developments and anticipate that our products will be able to comply with requirements that may be imposed by the FDA. In the meantime, we maintain our CLIA accreditation, which permits the use of LDTs for diagnostics purposes. +Federal and State Laboratory Licensing Requirements +The Biodesix Boulder, Colorado clinical laboratory was a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, Biodesix’s Quality Management System (QMS) holds an ISO 13485:2016 certificate (successfully passed surveillance audit in March 2023). The Biodesix Boulder, Colorado clinical laboratory received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers, and Molecular and Cellular Tumor Markers and Virology as well as held state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +CLIA regulations establish standards for proficiency testing; facility administration; general laboratory systems; pre-analytic, analytic systems, post- analytic systems; personnel qualifications and responsibilities; quality control, quality assessment; and specific provisions for laboratories performing moderate to high complexity tests. Our Boulder, Colorado clinical laboratory was inspected biennially as part of its ongoing certification under CLIA certificate of accreditation by CAP. The Boulder, Colorado clinical laboratory most recently passed its CAP inspection in February April 2023. In January 2024, we relocated our Boulder, Colorado clinical laboratory to Louisville, Colorado. All certifications and licenses have been successfully updated to accurately reflect our new location. All laboratory operations continued seamlessly without delaying testing. +Under CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of or assessment of health. CLIA requires that a laboratory hold a certificate applicable to the type of laboratory examinations it performs and that it complies with, among other things, +22 +standards covering operations, personnel, facilities administration, quality systems and proficiency testing, which are intended to ensure, among other things, that clinical laboratory testing services are accurate, reliable and timely. +The Biodesix De Soto, Kansas clinical laboratory is a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, the De Soto, Kansas clinical laboratory passed its CAP inspection in May 2023. Biodesix’s QMS holds an ISO 13485:2016 certificate (recently passed surveillance audit in January 2024). The De Soto, Kansas clinical laboratory has received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers and Diagnostic Immunology as well as holding state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +The International Organization for Standardization (ISO) is an independent, non-governmental international organization that defines world-class specifications for products, services and systems, to ensure quality, safety and efficiency. ISO 13485:2016 is a harmonized, international regulatory benchmark for quality management systems that addresses most or all of the QMS requirements in markets including the United States, European Union, Australia, Japan and Canada. The ISO 13485:2016 certificate confirms that an organization operates a QMS that conforms to the standards established by ISO. On January 31, 2024, the FDA issued a final rule to harmonize and modernize its Quality System Regulation (QSR), which would supplant the existing requirements with ISO 13485:2016. The rule amends the current good manufacturing practice requirements of the QSR in 21 CFR 820. The QMSR rule emphasizes risk management activities and risk-based decision making and aims to reduce regulatory burdens on device manufacturers and importers by harmonizing domestic and international requirements. Device manufacturers and importers will have two years to modify their quality systems to meet the requirements of the QMSR rule by February 2, 2026. +To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Laboratories such as ours, which are performing high complexity testing, are required to meet more stringent CLIA requirements than laboratories performing less complex tests, and therefore our laboratories are also subject to random, unannounced survey and inspection at any time. In addition, a laboratory that is certified as “high complexity” under CLIA may develop, manufacture, validate and use proprietary LDTs. CLIA requires analytical validation including accuracy, precision, specificity, sensitivity and establishment of a reference range for any LDT used in clinical testing. The regulatory and compliance standards applicable to the testing we perform may change over time and any such changes could have a material effect on our business. +CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that out-of-state laboratories maintain an in-state laboratory license to perform tests on samples from patients who reside in that state. As a condition of licensure, certain states may require that laboratory personnel meet qualifications, quality control procedures, facility requirements, record maintenance requirements or other state-specific requirements. +Because our Louisville, Colorado clinical laboratory is located in the State of Colorado, we do not need a specific State of Colorado laboratory license, however, we maintain licenses to conduct testing in other states where nonresident laboratories are required to obtain state laboratory licenses. We maintain licenses for our Louisville, Colorado and De Soto, Kansas laboratories with the NYSDOH. We also hold licenses in other states in which we operate, including California, Maryland, Pennsylvania and Rhode Island, that require licensing of out-of-state laboratories under certain circumstances. Other states may currently have or adopt similar licensure requirements in the future, which may require us to modify, delay or stop its operations in those states until such requirements are met. +Failure to comply with CLIA certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate or license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions, and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. +CLIA and state laws and regulations, operating together, sometimes limit the ability of laboratories to offer consumer-initiated testing, also known as direct access testing. We do not offer direct access testing and instead require that our tests be ordered by licensed healthcare providers. +Our Louisville, Colorado and De Soto, Kansas laboratories are certified and adhere to the NYS CLEP, based on New York State Public Health Law, Article 5 Title 5. NYS CLEP is exempt from CLIA and establishes their own method of laboratory certification and test validation approval. To process New York State patient specimens a laboratory must submit a robust analytical and clinical validation package to demonstrate clinical utility of the test and receive approval prior to offering the test in the state of New York. All of our tests have obtained NYS CLEP approval including GeneStrat ddPCR, GeneStrat NGS, VeriStrat, Nodify XL2 and Nodify CDT tests. NYS CLEP requires semi-annual inspections to ensure the laboratory meets all general and specialty standards. Due to the pandemic, NYSDOH CLEP routine re-inspections were delayed by multiple years. Most recently the Boulder, Colorado laboratory successfully passed the NYS CLEP audit in October 2023. The De Soto, Kansas laboratory passed NYS CLEP inspection in May 2019 and still pending new audit assignment. +23 +Regulatory framework for medical devices in the United States and Internationally +Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, which are defined to include, among other things, IVDs. The FDA regulates the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. It is possible that one of our current, or future, tests will be subject to FDA authority and oversight as either an IVD or a CDx pursuant to the FDA’s authority to regulate medical devices under the FDCA. +Medical devices are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +product design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export +Many countries in which we may offer any of our diagnostic tests in the future have anti-kickback regulations prohibiting providers from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable under any national health care program. In situations involving physicians employed by state-funded institutions or national health care agencies, violation of the local anti-kickback law may also constitute a violation of the Foreign Corrupt Practices Act of 1997 (FCPA). +The FCPA prohibits any United States individual, business entity or employee of a United States business entity to offer or provide, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether or not such conduct violates local laws. In addition, it is illegal for a company that reports to the Securities and Exchange Commission (SEC) to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls. We will also be required to maintain accurate information and control over sales and distributors’ activities that may fall within the purview of the FCPA, its books and records provisions and its anti-bribery provisions. +The standard of intent and knowledge in anti-bribery cases is minimal. Intent and knowledge are usually inferred from that fact that bribery took place. The accounting provisions do not require intent. Violations of the FCPA’s anti-bribery provisions for corporations and other business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Other countries, including the United Kingdom and other OECD Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United Kingdom Anti-Bribery Act. +When marketing our diagnostic tests outside of the United States, we may be subject to foreign regulatory requirements governing human clinical testing, prohibitions on the import of tissue necessary for us to perform our diagnostic tests or restrictions on the export of tissue imposed by countries outside of the United States or the import of tissue into the United States, and marketing approval. These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required. +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the European Economic Area (EEA), a medical device must meet the Medical Devices Directive’s (MDD)/In Vitro Medical Devices Directive’s (IVDD) Essential Requirements or, applicable on May 26, 2021, the Medical Devices Regulation’s (MDR) / applicable on May 26, 2022, In Vitro Medical Devices Regulation’s (IVDR) General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are +24 +reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a clinical evaluation report (CER) the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia , of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia , that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. Initially, the government stated the CE mark will be accepted in the UK until July 1, 2023. However, on July 1, 2023, the government updated their guidance for regulating medical devices stating their intention to extend recognition and acceptance of the CE marking for placing most goods on the market in Great Britain, indefinitely, if the device was placed on the EU market before January 1, 2021. +Device classification +Under the FDCA, medical devices are classified into one of three classes: Class I, Class II or Class III, depending on the degree of risk to patients that is associated with each medical device and the amount of oversight needed to provide reasonable assurances with respect to safety and effectiveness of the medical device. +On January 31, 2024, the FDA’s Center for Devices and Radiological Health (CDRH) announced that the Center intends to initiate the reclassification process for most IVD tests that are currently Class III (high risk) into Class II (moderate risk). The majority of these tests are infectious disease and companion diagnostic IVDs. Reclassification would allow manufacturers of certain types of tests to seek marketing clearance through the less burdensome premarket notification (510(k)) pathway rather than the premarket approval pathway, the most stringent type of FDA medical device review. +Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to a set of FDA regulations, referred to as the General Controls for Medical Devices, which require compliance with the applicable portions of the FDA’s QSR, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements. +Class II devices are subject to the General Controls as well as any special controls deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, patient registries, FDA guidance documents and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process, although some Class II devices are exempt from the 510(k) requirements. +Class III devices include devices deemed by the FDA to pose the greatest risk: such as life-supporting or life-sustaining devices, implantable devices, or those deemed novel and not substantially equivalent to a predicate device following the 510(k) process. CDx tests are regularly considered Class III devices. +Premarket submission process +Unless a statutory or regulatory exemption or enforcement discretion policy applies, before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, the manufacturer must obtain the FDA’s: (1) permission for commercial distribution under section 510(k) of the FDCA (510(k) clearance); or (2) approval of a Premarket Approval (PMA); or (3) de novo classification and authorization. These processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees. +Under the 510(k)-clearance process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and therefore a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise +25 +different questions of safety or effectiveness than the predicate device. Premarket notifications typically include bench, analytical, and preclinical data. Clinical data is sometimes required to support substantial equivalence. If a manufacturer obtains a 510(k) clearance for its device and then makes a modification that could significantly affect the device’s safety or effectiveness or constitutes a major change or modification in the intended use of the device, a new clearance, authorization or approval may be required. +By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous, costly, and time-consuming PMA approval process or seek reclassification of the device through the De Novo process. +If a predicate device is not available, the FDA allows the submission of a direct De Novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. A De Novo request includes a description of the device, a discussion of the general controls and any specific controls recommended to provide reasonable assurance of the safety and effectiveness of the device, a description of the probable benefits of the device when compared to the probable risks when the device is used as intended, non-clinical data including bench performance and animal testing, technical information about the device, and clinical data (if applicable). FDA’s goal is to review a De Novo request within 150 review days after receiving the petition. As with a 510(k) submission or PMA, the length of the review can be prolonged if the FDA requests additional information from the applicant. +To obtain a PMA, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling, and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use. +Once filed as a PMA, the FDA has 180 days to review the filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. +Prior to approval of a PMA, the FDA may conduct inspections of any clinical trial data and clinical trial sites, as well as inspections of any manufacturing facility and processes. The FDA can delay, limit or deny approval of a PMA application for many reasons, including (1) the device may not be shown safe or effective to the FDA’s satisfaction; (2) the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval; (3) the manufacturing process or facilities may not meet applicable requirements; and (4) changes in FDA approval policies or adoption of new regulations may require additional data. +If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when data is available. The PMA process can be expensive, uncertain and lengthy. A number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing. New PMA applications or PMA supplements are required for any modifications to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, materials or design of a device that has been approved through the PMA process. +As a condition of PMA application approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer-term safety and effectiveness data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. +The 510(k), De Novo or PMA processes can be expensive, lengthy and unpredictable. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k)-clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be +26 +approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device. +Companion Diagnostics and the Premarket Process +We believe that one of our future product candidates may include a companion diagnostic or complementary diagnostic (collectively CDx). CDx’s can identify patients who are most likely to benefit from a particular therapeutic product, identify patients likely to be at increased risk for serious side effects as a result of treatment with a particular therapeutic product, or monitor response to treatment with a particular therapeutic product for the purpose of adjusting treatment to achieve improved safety or effectiveness. The use of the CDx will be stipulated in the labeling of both the CDx and the therapeutic product. The FDA may require an application for the CDx to be separate from the drug approval process, and this could potentially delay the approval of any new drug application or the CDx, or complicate the review process. CDx’s are generally regulated as Class III medical devices by the FDA and are therefore most often subject to the PMA approval process. +The FDA issued guidance in July 2016 for the co-development of CDx tests with a therapeutic product and issued another draft guidance in December 2018 specific to oncology CDx tests. The FDA finalized this draft guidance in April 2020 in “Developing and Labeling In vitro Companion Diagnostic Devices for a Specific Group of Oncology Therapeutic Products.” The guidance is meant to guide the development of CDx products, which are defined as IVDs that provide information that is essential for the safe and effective use of the therapeutic product. A CDx is often developed and approved or cleared contemporaneously with the therapeutic, and the use of the CDx is stipulated in the labeling of both the CDx and the corresponding therapeutic product. While it supports contemporaneous marketing authorizations, if there are any deficiencies in the submissions, the FDA may place a PMA review of a CDx on hold or request additional testing, which could potentially delay the approval of the corresponding new drug application or the marketing authorization of the CDx, or otherwise complicate the review process. Some oncology CDx tests can be developed in a way that results in labeling for a specific group of oncology therapeutic products, rather than a single therapeutic product. +Post-Market FDA Regulation +Even if regulatory clearance, authorization or approval of a device is granted, the FDA may impose limitations on the uses and indications for which the device may be labeled and promoted, and the device remains subject to significant regulatory requirements. Medical devices may be marketed only for the uses and indications for which they are cleared, authorized or approved. After a device, including a device exempt from FDA premarket review, is placed on the market, numerous post-market regulatory requirements apply, and the FDA has broad authority to enforce these requirements. Medical device manufacturers are subject to unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of any suppliers. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions such as: warning letters, fines, injunctions, consent decrees and civil penalties; unanticipated expenditures, including requirements to repair, replace, and/or refund the cost of the devices, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; the FDA’s refusal of our requests for 510(k) clearance, De Novo classification, or PMA of new products, new intended uses or modifications to existing products; the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries; and withdrawing 510(k) clearance or PMAs that have already been granted and criminal prosecution. In the event that a supplier fails to maintain compliance with the FDA’s or our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. +Federal and State Fraud and Abuse Laws +We are subject to federal fraud and abuse laws such as the federal Anti-Kickback Statute (AKS), the federal prohibition against physician self-referral (Stark Law), the Eliminating Kickbacks in Recovery Act (EKRA), and the federal False Claims Act (FCA). We are also subject to similar state and foreign fraud and abuse laws. +The AKS (Social Security Act § 1128B(b)) prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing or ordering, any item or service that may be reimbursable, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. There are a number of statutory exceptions and regulatory safe harbors to the AKS that provide protection from AKS liability to arrangements that fully satisfy the applicable requirements. +EKRA (18 USC § 220) prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program. The term “health care benefit program” is broadly defined such that EKRA extends to referrals reimbursed by both governmental and commercial third-party payers. EKRA includes a number of statutory exceptions that provide protection from EKRA liability if the applicable requirements are met. +27 +The Stark Law (Social Security Act § 1877) generally prohibits, among other things, clinical laboratories and other so-called “designated health services” entities from billing Medicare for any designated health services when the physician ordering the service, or any member of such physician’s immediate family, has a financial relationship, such as a direct or indirect investment interest in or compensation arrangement with the billing entity, unless the arrangement meets an exception to the prohibition. The Stark Law also prohibits physicians from making such referrals to a designated health services entity. There are also similar state laws that apply where Medicaid and/or commercial payers are billed. +The FCA (31 USC § 3729) imposes penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment to the government that are false or fraudulent, or knowingly making, using or causing to be made or used a false record or statement material to such a false or fraudulent claim, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. This statute also permits a private individual acting as a “qui tam” whistleblower to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $13,508 to $27,018 per false claim or statement for penalties assessed after January 30, 2023, with respect to violations occurring after November 2, 2015. +Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payer knows or should know is likely to influence the beneficiary to order or receive a reimbursable item or service from a particular provider, practitioner, or supplier, and contracting with an individual or entity that the person knows or should know is excluded from participation in a federal health care program. In addition, federal criminal statutes created by the Health Insurance Portability and Accountability Act (HIPAA) prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services. +In addition to these federal laws, there are often similar state anti-kickback and false claims laws that typically apply to arrangements involving reimbursement by a state-funded Medicaid or other health care program. Often, these laws closely follow the language of their federal law counterparts, although they do not always have the same exceptions or safe harbors. In some states, these anti-kickback laws apply with respect to all payers, including commercial payers. +A number of states have enacted laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and other healthcare providers, and, in some states, marketing expenditures. In addition, some state statutes impose outright bans on certain manufacturer gifts to physicians or other health care professionals. Some of these laws, referred to as “aggregate spend” or “gift” laws, carry substantial fines if they are violated. +Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs and extensive annual trainings for all of our employees and contractors. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from participation in government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Anti-Corruption +The FCPA and similar international bribery laws make it unlawful for persons or entities to make payments to foreign government officials to assist in obtaining and maintaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any offer, payment, promise to pay, or authorizing the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to do or omit to do an act in violation of his or her duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business, to any person. In addition to the anti-bribery provisions of the FCPA, the statute also contains accounting requirements designed to operate in tandem with the anti-bribery provisions. Covered companies are required to make and keep books and records that accurately and fairly reflect the transactions of the company and devise and maintain an adequate system of internal accounting controls. With our international operations through our third-party partnerships, we could incur significant fines and penalties, as well as criminal liability, if we fail to comply with either the anti-bribery or accounting requirements of the FCPA, or similar international bribery laws. Even an unsuccessful challenge of our compliance with these laws could cause us to incur adverse publicity and significant legal and related costs. We successfully passed our latest FCPA compliance review in 2023 with no findings. +28 +Privacy and Data Protection Laws +Numerous federal and state laws and regulations, including HIPAA, as amended by the Health Information Technology for Economic and Clinical Health (HITECH) Act, govern the collection, dissemination, security, use and confidentiality of protected health information (PHI) and personal information. In the course of performing our business we obtain personal information, including PHI. Laws and regulations relating to privacy, data protection, and consumer protection are evolving and, in some cases, particularly with regard to newer laws, may be subject to potentially differing interpretations. Under HIPAA and HITECH, the HHS issues regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of PHI, used or disclosed by CEs and their authorized business associates (BAs). Because we are a health care provider that electronically transmits health care information, and we also provide certain services to CEs and receive PHI from them, we are at times either a CE or a BA, as defined by HIPAA. Our subcontractors that create, receive, maintain, transmit or otherwise process PHI on our behalf are HIPAA BAs and must also comply with HIPAA, as applicable. +HIPAA and HITECH include the privacy and security rules, breach notification requirements and electronic transaction standards. The privacy rule governs the use and disclosure of PHI, generally prohibits the use or disclosure of PHI except as permitted under the rule, and mandates certain safeguards to protect the privacy of PHI. The privacy rule also sets forth individual rights, such as the right to access or amend certain records containing such individual’s PHI, or to request restrictions on the use or disclosure of such individual’s PHI. The security rule requires CEs and BAs to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI (also referred to as ePHI) by implementing administrative, physical and technical safeguards. Under HIPAA’s breach notification rule, a CE must notify individuals, the Secretary of HHS, and in some circumstances, the media of certain breaches of unsecured PHI or ePHI, and similar breach notification provisions apply to certain BAs under the HITECH Act. +Penalties for failure to comply with a requirement of HIPAA and HITECH vary depending on the number and nature of the violations and any history of prior violations, but can be significant and include civil monetary or criminal penalties. HIPAA is enforced by the Department of Health and Human Services, Office for Civil Rights, and HIPAA also authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in improper use, access to or disclosure of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA CEs, such as us, and their BAs for compliance with the HIPAA privacy and security standards and breach notification rules. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator. +In addition, we may be subject to state privacy, cybersecurity, and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information Act, which, in addition to HIPAA and HITECH, sets forth standards with which all California health care providers must abide. Colorado has enacted the Colorado Privacy Act, and Virginia has enacted the Consumer Data Protection Act, both of which also have standards that must be complied with that supplement Federal data protection requirements. State laws may be more stringent, broader in scope or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other in regards to personal information treatment, which may complicate compliance efforts. For instance, the California Consumer Privacy Act (CCPA) became effective on January 1, 2020 and was amended by the passage of the California Privacy Rights Act (CPRA) in November of 2020, which amendments came into force on January 1, 2023. The CCPA, among other things, gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA has been amended from time to time, and it remains unclear what, if any, further modifications will be made to this legislation or how it will be interpreted. Although there are certain exemptions for PHI and clinical trial data, the CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future and the CCPA may increase our compliance costs and potential liability. Additionally, the CPRA imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It also creates a new California data protection agency – the California Privacy Protection Agency – specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. Similar laws have been proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that could continue to make compliance challenging and costly. +Additionally, the Federal Trade Commission (FTC) and state attorneys general enforce consumer protection laws that prohibit unfair and deceptive acts and practices, including Section 5 of the FTC Act, which creates standards for the collection, use, dissemination and security of health-related and other personal information. Claims of unfair or deceptive trade practices regarding privacy and security can lead to significant liabilities and consequences, including regulatory investigations, penalties, fines and orders as well as civil claims, which could impact our data practices and operations or cause reputational damage. +29 +We may also be subject to laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may add additional compliance burden and complexity. For example, in the EEA, the collection and use of personal data is governed by the European Union's General Data Protection Regulation (GDPR). In the United Kingdom, the GDPR has been adopted in substantially the same form, however the UK may potentially make revisions in the coming years. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze, store, transfer and otherwise process personal data. European and United Kingdom data protection authorities may interpret the GDPR and national laws differently and impose additional requirements, which adds to the complexity of processing personal data in or from the EEA or United Kingdom. Guidance on implementation and compliance practices is often updated or otherwise revised. GDPR applies extra-territorially under certain circumstances and imposes stringent requirements on controllers and processors of personal data, including, for example, requirements to ensure a legal bases to process personal information, provide robust disclosures to individuals, facilitate data subject rights, provide data security breach notifications within 72 hours after discovering a breach in certain circumstances, limit retention of personal information and apply enhanced protections to health data and other categories of sensitive personal information. The GDPR also has requirements around international transfers of personal data. Requirements around transfers to the United States and other jurisdictions have increased since a July 2020 decision by the Court of Justice of the European Union invalidated the Privacy Shield as a basis to transfer personal data from Europe to the United States, and added requirements for reliance on Standard Contractual Clauses. Regulatory guidance on requirements for international transfers, and other GDPR compliance matters, continues to evolve; for example, in July 2023, the European Commission completed adoption of a new adequacy decision for data flows to the United States. However, it is widely expected that the new adequacy decision will itself face scrutiny from the Court of Justice, underscoring that GDPR compliance is an ongoing endeavor. Failure to comply with the requirements of the GDPR may result in fines of up to €20 million or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. To comply with the GDPR and other applicable international data protection laws and regulations, we may be required to put in place additional mechanisms ensuring compliance, which may result in other substantial expenditures. +Cybersecurity +Our business relies on secure and continuous processing of information and the availability of our IT networks and IT resources, as well as critical IT vendors that support our technology, research and other data processing operations. While we take steps to protect our systems and data, security incidents, data breaches, computer malware and computer hacking attacks have become more prevalent across industries, including the life sciences sector, and may occur on our systems or those of our third-party service providers. Unauthorized persons may in the future be able to exploit weaknesses in the security systems of our (or our third-party service providers) IT networks and gain access to PHI and other personal information, sensitive trade secrets, or other proprietary information. Any wrongful use or disclosure of PHI, other personal information, trade secrets or other proprietary information by us or our third-party service providers could subject us to regulatory fines or penalties, third-party claims or otherwise could adversely affect our business and results of operations. Although HIPAA and the regulations promulgated thereunder do not provide for a private right of action, failures to adequately protect PHI or our IT systems could be viewed as violations of the HIPAA security rule or violations of other applicable information security laws, regulations, contractual obligations or industry standards, and could further result in costly data breach notification obligations that negatively impact our reputation. +Moreover, data security incidents or data breaches, as well as attacks on our IT systems, could result in operational disruptions or data loss or corruption that could adversely impact our business and operations, resulting in substantial investment of resources to investigate, recover and remediate and subject us to heightened regulatory scrutiny. See Item 1C. "Cybersecurity" for additional information on our cybersecurity practices. +Healthcare Reform +In March 2010, the Patient Protection and Affordable Care Act (ACA) was enacted in the United States. The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private insurers. For example, the ACA requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices. The medical device tax was permanently repealed at the end of 2019. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters, and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict. +Beginning in 2017, the Trump administration sought to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. The Trump administration issued three executive orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. For example, on December 20, 2019, President Trump signed appropriations legislation for fiscal year 2020 that repealed certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high-cost employer-sponsored insurance plans, for tax years beginning after December 31, 2019; the annual fee imposed on certain health insurance providers based on market share, for calendar years beginning December 31, 2020; and the medical device excise tax on non-exempt medical devices, for sales after December 31, 2019. While Congress did not pass comprehensive legislation that would repeal all or part of the ACA, two bills affecting the implementation of certain taxes under the +30 +ACA have been signed into law. Specifically, the Tax Cuts and Jobs Act of 2017 (TCJA), among other things, included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment, or penalty, imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Beginning in 2021, the Biden administration has signaled its intent to pursue policies strengthening the ACA. +Other legislative changes have been proposed and adopted in the United States since the ACA was enacted to reduce healthcare expenditures. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions of Medicare payments to providers of up to 2% per fiscal year that started in 2013 and, due to subsequent statutory amendments, will remain in effect through 2030 unless additional Congressional action is taken. In 2020, the CARES Act temporarily suspended the 2% cut in Medicare payments from May 1, 2020 through December 31, 2020, and it extended the sequestration reductions through fiscal year 2030 to offset the cost of such temporary suspension. The Consolidated Appropriations Act of 2021 further extended the temporary suspension through March 31, 2021. On April 14, 2021, Congress enacted legislation that further extended the suspension through December 31, 2021. On December 10, 2021, further legislation was enacted to extend the suspension through March 31, 2022, after which a 1.0% sequestration applied for Medicare payments made between April 1, 2022 and June 30, 2022. +The American Taxpayer Relief Act of 2012 made other changes, including reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. If federal spending is reduced, anticipated budgetary shortfalls may also impact the ability of relevant agencies, such as the FDA or the National Institutes of Health to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve R&D, manufacturing, and marketing activities, which may delay our ability to develop, market and sell any products we may develop. Additionally, the Biden administration has already indicated a shift in direction from Trump administration policies by issuing orders and other documents rolling back regulations and Executive Orders from the Trump administration, and as noted, indicating that it will pursue policies strengthening the ACA. +In December 2020, in its enactment of the Consolidated Appropriations Act, Congress enacted the No Surprises Act. This law, which took effect January 1, 2022, bars out-of-network providers from billing patients in excess of the in-network cost sharing for services furnished with respect to a visit at certain in-network health care facilities. The law establishes an independent dispute resolution process between the provider and the payer to determine the appropriate payment rate to the provider. As written, the No Surprises Act may apply to laboratory tests furnished by an independent laboratory with respect to a hospital visit. The law establishes a notice and consent exception that generally does not apply to laboratory tests, although it allows HHS to apply this exception to certain advanced tests. Regulations and subregulatory guidance were issued by HHS, the Department of Labor, and the Department of the Treasury in 2021 and 2022, with the first set of regulations was issued as an Interim Final Rule on July 1, 2021, a second set issued as an Interim Final Rule on September 30, 2021, and a third set issued as a Final Rule on August 19, 2022. These regulations and subregulatory guidance have provided additional information on the applicability of the No Surprises Act, the rules governing the independent dispute resolution process, and specific provider requirements (including the obligation to furnish a “good faith estimates” of “expected charges” to uninsured or self-pay patients), as well as areas of temporary enforcement discretion. +Environmental, Health and Safety Regulations +We are subject to various federal, state, local, and foreign environmental, health and safety laws and regulations and permitting and licensing requirements. Such laws include those governing laboratory practices, the generation, storage, use, manufacture, handling, transportation, treatment, remediation, release and disposal of, and exposure to potential bloodborne pathogens, hazardous materials and associated wastes. Our operations involve the generation, use, storage and disposal of hazardous materials as well as regulated medical waste, and the risk of injury, contamination or non-compliance with environmental, health and safety laws and regulations or permitting or licensing requirements cannot be eliminated. Compliance with environmental laws and regulations has not had a material effect on our capital expenditures, earning or competitive position. The Boulder, Colorado clinical laboratory passed an on-site inspection from the CDC in June 2021 due to COVID testing, which the Company no longer provides commercially. To date, there has not been a for cause OSHA or EPA inspection. +Corporate Information +We were incorporated in Delaware in 2005 as Elston Technologies, Inc. Throughout 2023, our principal executive offices were located at 2970 Wilderness Place, Suite 100, Boulder, Colorado 80301. Effective December 11, 2023, we relocated our principal executive offices to 919 West Dillon Rd, Louisville, CO 80027, and our telephone number is (303) 417-0500. On June 20, 2006, we changed our name to Biodesix, Inc. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant +31 +to Section 404 of the Sarbanes-Oxley Act of 2002, certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.24 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) until December 31, 2025 (the last day of the fiscal year ending after the fifth anniversary of the completion of our initial public offering (IPO)). +Additionally, we are a “smaller reporting company ” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +For certain risks related to our status as an emerging growth company, see “Risk Factors—General Risk Factors—We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.” +Human Capital Resources +Our culture is underpinned by our cultural beliefs including an unwavering commitment to inclusion and diversity. We are committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent offering opportunities for our team members to grow and develop in their careers, supported by a competitive suite of benefits and health and wellness programs. We regularly engage our team members in monthly all-hands meetings to align and focus on the current state of affairs of our business, our partnerships, new products, clinical trials, and other pertinent information about our business. We engage our team members in programs such as peer recognition and recruitment that focuses on recognizing outstanding individual contributions to company performance, cultural fit of new team members and acknowledging the diversity of our team to ensure our team members feel valued and can do their best work. We have a national annual community service initiative, “Biodesix Gives Back” that allows each team member to invest ten hours of paid community service to organizations of their choosing. +As of December 31, 2023, we had approximately 217 full-time and part-time employees, all of whom are located in the United States. The majority of our team member base is located in proximity to our corporate office and testing facilities located in Louisville, Colorado and our laboratory in De Soto, Kansas. +Diversity, Equity and Inclusion +We believe that a diverse employee population, including cultural background, gender, ethnicity, sexual orientation and lived experiences, is critical to our success. Our employees are encouraged to leverage their personal strengths and experiences to continually innovate and contribute to the development of new ideas and process improvements that drive better experiences for our partners. +Employee Engagement +Our company culture emphasizes the satisfaction and well-being of our team members and a diverse, engaged workforce. We solicit the opinion and views of our team members through surveys and peer focus groups. We have an established and valued Peer Recognition Culture. Teammates recognize other teammates publicly for their support and contributions fostering collaboration, engagement and retention. We regularly review feedback we receive on our current cultural beliefs to determine if any modifications are needed. During 2021, we updated our cultural beliefs to align with our core values that reflect our current focus on Teamwork, Innovation, Making an Impact and Excel. Additionally, the Company annually celebrates our top sales performers through our President’s Club and other top company performers as nominated by fellow team members through our four (4) Performance Excellence Awards that recognize +32 +creativity and innovation, an entrepreneurial spirit, a strategic impact on the success of the Company and lastly, embodying the Biodesix cultural beliefs and goes “above and beyond” daily. +Training and Development +We invest in our team members' career growth and provide team members with a wide range of development opportunities, including face-to-face, virtual, and self-directed learning, mentoring, coaching, and external development. +Health, Safety and Wellness +The physical health, financial stability, life balance and mental health of each of our team members is vital to our success. We sponsor several cancer awareness activities in our local communities to bring engagement and awareness of health, safety and wellness to positively impact lives. We provide an Employee Assistance Program to enhance physical, financial, and mental well-being for all our team members. +Pay Equity +The main objective of our compensation program is to provide a compensation package that will attract, retain, motivate, and reward superior team members who operate in a highly competitive and technologically challenging environment. We emphasize overall Company performance and provide equity incentives for all team members to align their financial interests with the interests of shareholders. In addition, we offer an employee stock purchase plan to all employees in which participants are eligible to purchase shares at a discount to market. We think like customers and act like owners. +Biodesix seeks fairness in total compensation. We benchmark with external comparisons, internal comparisons and look at the relationship between team member roles within the organization. We also review our compensation practices, both in terms of our overall workforce and individual team members, to ensure our pay is fair and equitable. We currently have no pay disparities based on gender, race, or ethnicity. +Available Information +We file with, or furnish to, the SEC reports including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available free of charge on our corporate website ( www.biodesix.com ) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov . The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this Annual Report on Form 10-K. \ No newline at end of file diff --git a/raw/filings/0001439725/2023/0000950170-24-023513/item13.txt b/raw/filings/0001439725/2023/0000950170-24-023513/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..3ddccf74d1cb6b4ae2a31cd4ac26a73efddbd265 --- /dev/null +++ b/raw/filings/0001439725/2023/0000950170-24-023513/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this item is incorporated by reference from the information under the caption "Board and Corporate Governance Matters—Policies and Procedures for Related Party Transactions" and "—Director Independence" contained in the Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001439725/2023/0000950170-24-023513/item9a.txt b/raw/filings/0001439725/2023/0000950170-24-023513/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..a997d67408aeb4f8203f8fa8d54258cd4d428ebf --- /dev/null +++ b/raw/filings/0001439725/2023/0000950170-24-023513/item9a.txt @@ -0,0 +1,9 @@ +Item 9A. Controls and Procedures. +Evaluation of Disclosure Controls and Procedures +We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. +Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the criteria established in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), using the 2013 framework. Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2023, the Company's internal control over financial reporting was effective based on the criteria set forth by COSO. +This annual report does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2023, there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001439725/2023/0000950170-24-023513/rp_note.txt b/raw/filings/0001439725/2023/0000950170-24-023513/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001439725/2023/0000950170-24-023513/rpt_disclosure.txt b/raw/filings/0001439725/2023/0000950170-24-023513/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..a0d6d19896d27e4c2d60de821fb5ee0f3b1a2a78 --- /dev/null +++ b/raw/filings/0001439725/2023/0000950170-24-023513/rpt_disclosure.txt @@ -0,0 +1,150 @@ +reviewing related-party transactions; +• +approving, or as permitted, pre-approving, audit and permissible non-audit services to be performed by our independent registered public accounting firm; and +2024 Proxy Statement +15 +Table of Contents +• +reviewing and assessing, at least annually, the performance of the audit committee and adequacy of its charter. +Compensation Committee +Our compensation committee consists of Messrs. Massarany and Patience and Drs. Kayyem and Watts, and the chair of our compensation committee +is Mr. Massarany. Our board of directors has determined that each of Messrs. Massarany and Patience and Drs. Kayyem and Watts is independent under the applicable Nasdaq listing rules and is a +“non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act. The functions of this committee include: +• +reviewing, modifying and overseeing overall compensation strategy and policies; +• +reviewing and approving the compensation arrangements and other terms of employment of our chief executive +officer, other executive officers and senior management, as appropriate; +• +reviewing and recommending to the full board of directors the compensation of our directors; +• +appointing and overseeing the work of compensation consultants, legal counsel or any other advisors and +consultants engaged for the purpose of advising the compensation committee; +• +reviewing, recommending to the full board of directors, as appropriate, and administering equity award plans, +compensation plans and similar programs, as well as modification or termination of plans and programs; +• +establishing policies with respect to equity compensation arrangements; +• +reviewing and evaluating with the chief executive officer and the full board of directors the succession plans +for our executive officers; and +• +reviewing and assessing, at least annually, the performance of the compensation committee and the adequacy of its +charter. +Compensation Committee Interlocks and Insider Participation +None of the members of the compensation committee is currently, or has been at any time during 2023, one of our officers or +employees. None of our executive officers currently serve, or has served during 2023, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors +or compensation committee. +Nominating and Corporate Governance Committee +Our nominating and corporate governance committee consists of Ms. Franchi, Dr. Strobeck and Mr. Schuler, and the chair of our +nominating and corporate governance committee is Dr. Strobeck. Our board of directors has determined that Ms. Franchi, Dr. Strobeck and Mr. Schuler are independent under the applicable Nasdaq listing rules. The functions of this +committee include: +• +reviewing periodically and evaluating director performance of our board of directors and its applicable +committees, and recommending to our board of directors and management areas for improvement; +• +identifying, evaluating, nominating and recommending individuals for membership on our board of directors; +2024 Proxy Statement +16 +Table of Contents +• +reviewing with our chief executive officer the plans for succession to the offices of our executive officers and +make recommendations to our board of directors with respect to the selection of appropriate individuals to succeed to these positions; +• +reviewing and recommending to our board of directors any amendments to our corporate governance policies; +• +monitoring our cybersecurity risk profile, receiving periodic updates from management on all matters related to +cybersecurity, and reporting to our full Board of Directors on an annual or as necessary basis; and +• +reviewing and assessing, at least annually, the performance of the nominating and corporate governance committee +and the adequacy of its charter. +Director Nomination Process +Selection and Nomination Process +Our board of directors is responsible for nominating members for election to our board of directors by our stockholders at our annual meetings +of stockholders. Whenever a vacancy occurs on our board of directors, whether due to a newly created director position or the death, resignation, removal or retirement of an existing director, our board of directors is authorized to select a person +to fill the vacancy to serve as a director until the annual meeting of stockholders at which the director’s term expires and until the election and qualification of his or her successor or, if sooner, his or her death, resignation or removal. +Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. +Criteria for Board Membership +The board of directors and the nominating and corporate governance committee will determine the appropriate characteristics, skills and +experience for the board of directors as a whole and for its individual members. The board of directors and the nominating and corporate governance committee will consider the minimum general criteria set forth below, and may add any specific +additional criteria with respect to specific searches, in selecting candidates and existing directors for service on the board of directors. An acceptable candidate may not fully satisfy all of the criteria, but is expected to satisfy nearly all of +them. While the nominating and corporate governance committee does not have a formal policy in this regard, the diversity of the board of the directors is a consideration in evaluating candidates for director positions, among others. +The board of directors and the nominating and corporate governance committee believe that candidates for director should have certain minimum +qualifications, including being able to read and understand basic financial statements, being over 21 years of age and having the highest personal integrity and ethics. In considering candidates, the board of directors and the nominating and +corporate governance committee intend to consider such factors as possessing relevant expertise upon which to be able to offer advice and guidance to management, having sufficient time to devote to the affairs of the Company, demonstrated excellence +in his or her field, having the ability to exercise sound business judgment and having the commitment to rigorously represent the long-term interests of our stockholders. +The board of directors and the nominating and corporate governance committee review candidates for director nomination in the context of the +current composition of the board of directors, the operating requirements of the Company and the long-term interests of our stockholders. In conducting this assessment, the board of directors and the nominating and corporate governance committee +consider diversity, age, skills, and such other factors as it deems appropriate given the current needs of the board of directors and the Company to +2024 Proxy Statement +17 +Table of Contents +maintain a balance of knowledge, experience and capability. In the case of incumbent directors whose terms of office are set to expire, the board of directors and the nominating and corporate +governance committee review such directors’ overall service to the Company during their term, including the number of meetings attended, level of participation, quality of performance, and any other relationships and transactions that might +impair such directors’ independence. In the case of new director candidates, the board of directors and the nominating and corporate governance committee also determine whether the nominee must be independent for purposes of any stock exchange +on which any of the Company’s capital stock is listed. +Stockholder Recommendations and Nominations +Stockholders who wish to recommend candidates may contact the nominating and corporate governance committee in the manner described below +under “Board and Corporate Governance Matters—Stockholder Communications with our Board of Directors.” Stockholder nominations must be made according to the procedures required under our bylaws and described in this proxy statement +under the heading “Additional Information—Stockholder Proposals and Nominations for Next Year’s Annual Meeting of Stockholders.” Stockholder-recommended candidates and stockholder nominees whose nominations comply with these +procedures will be evaluated by our nominating and corporate governance committee in the same manner as other nominees. +Board Diversity Matrix +The table below provides certain highlights of the composition of our board of directors members and +nominees as of March 25, 2024. Nasdaq listing requirements require each listed company to have, or explain why it does not have, two diverse directors on the board, including at least one diverse director who self-identifies as female and at +least one diverse director who self-identifies as an underrepresented minority or LGBTQ+, or for smaller reporting companies, two female directors. Companies listed on the Nasdaq Global Market must have at least one diverse director by +December 31, 2023 and two diverse directors by December 31, 2025. As of March 25, 2024, our board of directors has one diverse director, and we intend to be fully compliant with Nasdaq’s diversity requirement by December 31, +2025. Each of the categories listed in the below table has the meaning as it is used in Nasdaq Listing Rule 5605(f). To see our Board Diversity Matrix as of March 24, 2023, please see our proxy statement filed with the SEC on April 12, +2023. +Board Diversity Matrix as of March 25, 2024 +Total Number of Directors +Female +Male +Non-Binary +Did Not Disclose Gender +Part I: Gender Identity +Directors +1 +8 +- +- +Part II: Demographic Background +African American or Black +- +- +- +- +Alaskan Native or Native American +- +- +- +- +Asian +- +- +- +- +Hispanic or Latinx +- +- +- +- +Native Hawaiian or Pacific Islander +White +1 +8 +- +- +Two or More Races or Ethnicities +LGBTQ+ +- +- +- +- +Did Not Disclose Demographic Background +- +- +- +- +2024 Proxy Statement +18 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0001439725/2024/0000950170-25-030835/filing.txt b/raw/filings/0001439725/2024/0000950170-25-030835/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..3b6a5e34a4592cfa9f53d193a7b3c6e30c4dac69 --- /dev/null +++ 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bdsx:TwoThousandTwentyEquityIncentivePlanMember 2024-12-31 0001439725 bdsx:PerceptiveTermLoanMember us-gaap:ShareBasedCompensationAwardTrancheThreeMember srt:MaximumMember 2022-11-16 0001439725 bdsx:PerceptiveTermLoanMember srt:MaximumMember 2022-11-16 0001439725 us-gaap:AdditionalPaidInCapitalMember 2024-01-01 2024-12-31 0001439725 us-gaap:SellingGeneralAndAdministrativeExpensesMember 2024-01-01 2024-12-31 bdsx:Test xbrli:pure utr:sqft xbrli:shares bdsx:Facility bdsx:Segment iso4217:USD iso4217:USD xbrli:shares bdsx:Installment bdsx:RenewalOption +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark One) +☒ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2024 +OR +☐ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO +Commission File Number 001-39659 +Biodesix, Inc. +(Exact name of Registrant as specified in its Charter) +Delaware +20-3986492 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer +Identification No.) +919 West Dillon Rd ., +Louisville , CO +80027 +(Address of principal executive offices) +(Zip Code) +Registrant’s telephone number, including area code: ( 303 ) 417-0500 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Trading +Symbol(s) +Name of each exchange on which registered +Common Stock, par value $0.001 per share +BDSX +The NASDAQ Global Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ +Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☒ No ☐ +Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ +Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +☐ +Accelerated filer +☐ +Non-accelerated filer +☒ +Smaller reporting company +☒ +Emerging growth company +☒ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ +As of June 28, 2024, the aggregate market value of common stock held by non-affiliates of the Registrant was $ 74.0 million, based on the closing price of the common stock as reported on the NASDAQ Global Market for that date. +The number of shares of Registrant’s Common Stock outstanding as of February 24, 2025 was 145,978,410 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the Company’s definitive Proxy Statement for its 2024 Annual Meeting of Shareholders are to be incorporated by reference into Part III, as specifically set forth in Part III. +Table of Contents +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +24 +Item 1B. +Unresolved Staff Comments +66 +Item 1C. +Cybersecurity +66 +Item 2. +Properties +66 +Item 3. +Legal Proceedings +67 +Item 4. +Mine Safety Disclosures +67 +PART II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +68 +Item 6. +[Reserved] +68 +Item 7. +Management’s Discussion and Analysis of Financial Condition and Results of Operations +69 +Item 7A. +Quantitative and Qualitative Disclosures About Market Risk +80 +Item 8. +Financial Statements and Supplementary Data +80 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +80 +Item 9A. +Controls and Procedures +81 +Item 9B. +Other Information +81 +Item 9C. +Disclosures Regarding Foreign Jurisdictions that Prevent Inspections +81 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +82 +Item 11. +Executive Compensation +82 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +82 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +82 +Item 14. +Principal Accountant Fees and Services +82 +PART IV +Item 15. +Exhibit and Financial Statement Schedules +83 +Item 16 +Form 10-K Summary +83 +i +SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS +This Annual Report on Form 10-K contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future financial condition, results of operations, business strategy and plans, and objectives of management for future operations, as well as statements regarding industry trends, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions. +We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, factors, and assumptions described under the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K, regarding, among other things: +• +our inability to achieve or sustain profitability; +• +our ability to attain significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies for our diagnostic tests; +• +difficulties managing our growth, which could disrupt our operations; +• +failure to retain sales and marketing personnel, and failure to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests to generate revenue growth; +• +failure to maintain our current relationships, or enter into new relationships, with biopharmaceutical companies; +• +significant fluctuation in our operating results, causing our operating results to fall below expectations or any guidance we provide; +• +product performance and reliability to maintain and grow our business; +• +third-party suppliers, including courier services and single source suppliers; making us vulnerable to supply problems and price fluctuations; +• +the impact of a pandemic, epidemic, or outbreak of an infectious disease in the United States (U.S.) or worldwide; +• +natural or man-made disasters and other similar events negatively impacting our business, financial condition, and results of operations; +• +failure to offer high-quality support for our diagnostic tests, which may adversely affect our relationships with providers and negatively impact our reputation among patients and providers; +• +our inability to continue to innovate and improve our diagnostic tests and services we offer; +• +security or data privacy breaches or other unauthorized or improper access; +• +significant disruptions in our information technology systems; +• +the incurrence of substantial liabilities and limiting or halting the marketing and sale of our diagnostic tests due to product liability lawsuits; +• +our inability to compete successfully with competition from many sources, including larger companies; +• +performance issues, service interruptions or price increases by our shipping carriers; +• +cost-containment efforts of our customers, purchasing groups and integrated delivery networks having a material adverse effect on our sales and profitability; +• +potential effects of litigation and other proceedings; +• +general economic and financial market conditions; +• +our ability to attract and retain key personnel; +• +current and future debt financing placing restrictions on our operating and financial flexibility; +• +our need to raise additional capital to fund our existing operations, develop our platform, commercialize new diagnostic tests, or expand our operations; +• +the acquisition of other businesses, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our results of operations; +1 +• +the uncertainty of the insurance coverage and reimbursement status of newly approved diagnostic tests; +• +future healthcare reform measures that could hinder or prevent the commercial success of our diagnostic tests; +• +compliance with anti-corruption, anti-bribery, anti-money laundering and similar laws; +• +compliance with healthcare fraud and abuse laws; +• +our ability to develop, receive regulatory clearance or approval or certification for, and introduce new diagnostic tests or enhancements to existing diagnostic tests that will be accepted by the market in a timely manner; +• +failure to comply with ongoing FDA or other domestic and foreign regulatory authority requirements, or unanticipated problems with our diagnostic tests, causing them to be subject to restrictions or withdrawal from the market; +• +future product recalls; +• +legal proceedings initiated by third parties alleging that we are infringing, misappropriating, or otherwise violating their intellectual property rights, the outcome of which would be uncertain; +• +the volatility of the trading price of our common stock; +• +inaccurate estimates or judgments relating to our critical accounting policies, which could cause our operating results to fall below the expectations of securities analysts and investors; and +• +other risks, uncertainties and factors, including those set forth under Item 1A. "Risk Factors". +These risks are not exhaustive. Other sections of this Annual Report on Form 10-K may include additional factors that could harm our business and financial performance. New risk factors may emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. +You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K or to conform these statements to actual results or to changes in our expectations. +In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. +You should read this Annual Report on Form 10-K and the documents that we reference and have filed as exhibits with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. +2 +PART I +Item 1. B usiness. +Business Overview +Biodesix, Inc. (“Biodesix”, “we,” “us,” “our” or the “Company”) is a leading diagnostic solutions company. Our mission at Biodesix is to transform patient care and improve outcomes through personalized diagnostics that are timely, accessible, and address immediate clinical needs. We envision a world where patient disease is conquered through the guidance of personalized diagnostics. +We derive our revenue from two sources: (i) Biodesix Lung Diagnostic Testing (Lung Diagnostic Testing), providing lung diagnostic testing services for healthcare providers associated with our five blood-based tests and (ii) Biodesix Development Services (Development Services) providing diagnostic testing services to biopharmaceutical, life sciences, and diagnostic companies. +During 2024, we achieved multiple milestones: +• +We delivered on our commercial and diagnostic services strengths resulting in an estimated $71.3 million in total revenue for the year, an increase of 45% over 2023; +o +Lung Diagnostic Testing - $64.7 million of revenue, an increase of 43%, from 54,300 tests delivered, an increase of 40%; +o +Development Services - $6.6 million in biopharmaceutical services revenue, an increase of 70%; +• +We continued to present and publish new clinical data supporting the adoption of our tests, increased reimbursement coverage for our Lung Diagnostic tests from private payors, and launched new research partnerships, including with the Memorial Sloan Kettering Cancer Center; +• +We launched the new CLARIFY study, which will collect patient outcomes and other clinical information on 4,000 patients who have received Nodify Lung® Nodule Risk Assessment testing in the clinical setting and have at least 1-2 years of follow-up. +• +We improved our operational efficiencies increasing gross margin percentage to 78% as compared to 73% in 2023; +• +We maintained our cost-disciplined approach limiting growth in full year Operating Expense, excluding Direct costs and expenses to 17% over 2023, including non-cash share-based compensation expenses, while growing revenue by 45%; and +• +We were awarded the prestigious 2024 Inc. Magazine Best Workplaces – a reflection of our strong team culture and employee engagement. +Our Strategy +At Biodesix, we have built a team with deep experience in diagnostics including commercialization, reimbursement, regulatory, medical affairs, research and development, technology, and operations to provide needed products and services to address critical clinical questions and help improve patient care. We believe that establishing a new standard of care utilizing personalized diagnostics requires a deep understanding of clinical needs, scientific expertise to develop tests using the optimal technology for each clinical question, development of clinical evidence to demonstrate benefits of the testing, a scalable operational infrastructure, and an established commercial channel to drive market adoption and payer coverage. +We employ multiple technologies, including genomics, proteomics, and radiomics, combined with artificial intelligence (AI), to discover, develop, and commercialize innovative diagnostic tests for physicians, biopharmaceutical, life science, and diagnostics companies to help improve patient care. +1. +Lung Diagnostic Tests - Drive increased awareness, adoption, and reimbursement coverage of our diagnostic tests by: +• +continuously educating health care providers key opinion leaders, hospital systems, advocacy groups, patients, payers, academic research organizations, and technology assessment and guideline organizations on the clinical data and benefits of our tests; +• +continuing to invest in the expansion and professional development of our lung-focused clinical sales force and commercial support teams; +• +extending our commercial reach in clinics specializing in the management of lung nodules and the diagnosis of lung disease and their referral networks; +• +investing in clinical studies and publish additional clinical data to continue to increase market adoption and reimbursement coverage for our tests; +3 +• +publishing health economics and outcomes research demonstrating the impact of our tests on the US healthcare system and overall costs; and +• +engaging key opinion leaders and partners to identify existing or emerging clinical needs in lung disease and to develop tests to address those questions to be provided to the market through our existing commercial channel. +2. +Diagnostic Development Services — Expand revenue-generating contracts with research institutions, biopharmaceutical clients, and life sciences customers by: +• +leveraging our team’s expertise and multi-omic offering to sell a comprehensive line of research, discovery, development, clinical trial testing, regulatory, reimbursement, commercialization, and logistics support services across cancer types and diseases; +• +adding new biopharmaceutical, life science, tools, and diagnostic customers and leveraging existing projects and relationships to expand sales with our current customers; +• +engaging with our customers, key opinion leaders, leading academic centers, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and to identify unmet clinical needs; and +• +entering strategic partnerships with biopharmaceutical companies, academic research organizations, technology providers, and other diagnostic companies. +Our Tests and Services +Biodesix Lung Diagnostic Tests +Our tests support clinical decisions to expedite personalized care and improve outcomes for patients with lung disease. We believe our diagnostic tests help healthcare providers meaningfully improve lung disease diagnosis, treatment, and monitoring as well as lower the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. We currently offer two tests that assess the risk of cancer in lung nodules and three tests that provide treatment guidance after a lung cancer diagnosis. +This is our clinical testing focus because lung cancer is the deadliest cancer in the United States with the majority of patients diagnosed with advanced disease. With the introduction of numerous treatment options, physicians need an ever-increasing amount of information in order to select the best treatment plan for each individual patient. We believe that the lung cancer continuum of care has a variety of clinical unmet needs ranging from initial diagnosis of lung cancer after discovery of a lung nodule to treatment guidance for early and advanced stage disease, and monitoring for disease progression. We estimate that in the United States, the lung cancer continuum of care represents over 10 million annual testing opportunities and represents greater than $27 billion market opportunity annually in the US. +• +Diagnosis : We estimate approximately 1.6 million new incidental lung nodules and potentially 4 million lung nodules from the adoption of screening could be identified annually in the United States. Following initial discovery of a nodule, patients are typically evaluated by a pulmonologist for risk of lung cancer before an invasive procedure is carried out to obtain a tissue sample to confirm diagnosis. This risk assessment is based on clinical factors such as the patient’s smoking history and age, and radiological features such as the size and location of the nodule, obtained from a computed tomography (CT) scan. On initial assessment, we estimate that approximately 80% of patients are identified as low to moderate risk (5-65%) where guideline recommendations for their care plan are unclear, often resulting in either overtreatment of patients with benign nodules or undertreatment in patients with cancer. An estimated 17% of patients initially scheduled for watchful waiting, or follow-up CT scans in intervals up to a year, are later diagnosed with malignant nodules, potentially delaying their diagnosis. Conversely, we estimate that 62% of biopsies and 35% of surgeries performed on lung nodules find benign disease, representing a significant overtreatment that incurs both risk and cost to the patient and their providers. We therefore believe that there is a clear clinical need for blood-based diagnostic testing to help improve the initial risk assessment of pulmonary nodules, helping direct patients to the relevant treatment pathway, and ultimately improving patient outcomes and saving costs to the system. +• +Treatment Guidance – Early Stage : We estimate that there are over 700 thousand testing opportunities annually in the United States in early-stage lung cancer to assess a patient’s risk of recurrence following curative-intent surgery, and to detect potential target mutations for therapeutics. Depending on a patient’s risk of recurrence, they may also receive chemotherapy, radiotherapy or chemoradiation post-surgery. The assessment of risk of recurrence is primarily based on the stage of cancer at diagnosis, with stage I patients typically receiving no additional treatment beyond surgery. However, 20 to 40% of patients with stage I disease do still recur within five years following surgery, representing a sub-group of patients who may have benefited from more intensive treatment protocol. We believe there is a clear clinical need for blood-based diagnostic testing prior to surgery to identify stage I patients who may benefit from a more intensive treatment protocol and we also believe there is the need for identifying stage II and IIIA patients who may benefit from a less intensive treatment protocol. There have also been recent advances in the use of targeted therapies in early-stage lung disease. These therapies typically target +4 +specific genomic mutations or alterations found in some tumors. We believe there is therefore an emerging need for testing designed specifically for mutation detection in early-stage disease. +• +Treatment Guidance – Advanced Stage: We estimate that there are over 3 million diagnostic testing opportunities annually in the United States to guide advanced stage lung cancer treatment decisions. With nearly 60 FDA-approved systemic treatment regimens listed in national treatment guidelines for non-small cell lung cancer (NSCLC), there is an elevated need for personalized biomarkers to help physicians identify the right patient for the right treatment. Multiple tissue-based diagnostic tests have been approved to identify patients eligible for targeted therapies and immunotherapy; however, about 50% of patients do not have sufficient tissue collected following diagnosis to facilitate testing. To compound the issue, different molecular tests take varying amounts of time (days versus weeks) to report results back to the ordering physician. Physicians are often left with a dilemma to either make treatment decisions prior to receiving critical diagnostic test results, or delay treatment initiation while waiting for the test results. Therefore, we believe there is an imminent need for a blood-based testing solution that measures tumor mutations and the patient’s immune profile, to provide physicians with more comprehensive and timely information to initiate personalized treatment as quickly as possible. +• +Monitoring : We estimate that there are over 800 thousand testing opportunities in the United States for blood-based tumor genomic and immune profiling to monitor for disease recurrence and progression in NSCLC patients. Unfortunately, advanced stage lung cancer is often terminal, so repeat tissue biopsy to assess the evolution of resistance mutations or to detect disease progression is not feasible from either a cost or risk perspective to the patient, which we believe demonstrates an important need for blood-based testing to help routinely monitor these patients. As a patient progresses through therapies, changes in their immune system occur and blood-based immune profiling could help physicians identify these changes prior to subsequent therapy selection. +Diagnosis – Nodule Management +Our blood-based tests for patients with a pulmonary nodule, Nodify Lung Nodule Risk Assessment, assists physicians in reclassifying a patient’s risk of lung cancer by incorporating their protein biomarker results with radiographic imaging and clinical characteristics. Nodify Lung testing consists of the Nodify CDT® and Nodify XL2® proteomic tests, which can be ordered separately or together from a single blood draw to help reclassify risk of cancer to aid physicians in stratifying patients into distinct nodule management pathways with the goal of earlier diagnosis of cancer and avoidance of unnecessary invasive procedures. +Nodify CDT Test +The Nodify CDT test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely malignant or at a higher risk of being cancerous. Results allow physicians to identify patients who may be better candidates for timely invasive diagnostic procedures such as bronchoscopy, transthoracic needle biopsy, or surgical resection, with the goal of diagnosing cancer earlier. The Nodify CDT test enhances lung nodule risk assessment to facilitate compliance with clinical treatment guidelines. The Nodify CDT test is validated for use in patients who are 40 years or older, have no history of cancer except non-melanomatous skin cancer, have nodules between 8 and 30mm, and pre-test risk of lung cancer of less than 65%. +The test measures the levels of seven circulating autoantibodies (P53, NY-ESO-1, CAGE, GBU4-5, SOX2, HuD, and MAGE A4) associated with lung cancer, combined with an algorithm to report out three potential results: High Level, Moderate Level, or No Significant Levels of Antibodies Detected (NSLAD). The seven autoantibodies have been shown to be elevated for all types of lung cancer, and from the earliest stage of the disease. +Unlike the tumor antigens themselves, the autoantibody levels can be measured accurately through a blood sample, based upon the signal amplification generated by the immune response to cancer. This mechanism of action likely reflects very early events in a tumor’s evolution; as the immune system initiates a response to the cancer, it can also trigger an expansion of self-reactive antibodies that can be measured in circulation. +The Nodify CDT test has an established average turnaround time of one business day from receipt of the blood sample, providing physicians with timely results to guide diagnostic planning. The clinical data for the test has been published in a number of peer-reviewed publications and presentations, including a clinical validation study published in late 2024 that confirmed the previously published performance of the test. +Nodify XL2 Test +The Nodify XL2 test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely benign or at a reduced risk of being cancerous. Results allow physicians to identify patients who may be better candidates for routine CT surveillance to monitor for growth or shrinkage of the nodule over time instead of an invasive diagnostic procedure. The Nodify XL2 test is used for patients who are 40 years or older, have no history of lung cancer or other recent cancer diagnoses, have nodules between 8 and 30mm, and have a pre-test risk of lung cancer of less than or equal to 50%. A body of clinical data has been published in peer-reviewed journals and presentations and recent data from the ORACLE clinical utility study was published demonstrating a 74% reduction in unnecessary invasive procedures with the use of the test. +5 +The Nodify XL2 test integrates peptides with clinical and radiological characteristics that are combined by an algorithm to report out three potential results: Likely Benign, Reduced Risk, or Indeterminate. Specifically, the Nodify XL2 test measures the relative abundance of two peptides (LG3BP and C163A) in circulation in the patient’s blood. The native proteins from which the peptides are derived have been associated with an inflammatory response to lung cancer. The clinical factors are patient age and smoking status, and radiological factors are nodule size, location, and edge characteristics. +If both tests are ordered for the patient and Nodify CDT returns a result of High or Moderate Level indicating an increased risk of malignancy, then the Nodify XL2 test is cancelled. If Nodify CDT returns a result of NSLAD, then the Nodify XL2 test is performed and both test results are typically available within four to five business days. +Lung Cancer Treatment & Monitoring +Profiling the tumor through blood-based genomic testing can help identify mutations in genes that may be driving growth of the tumor and may be targets for therapeutics. However, tumors also have intrinsic mechanisms that prevent the patient’s immune system from identifying and eliminating the cancer cells. Profiling the immune system can show if the patient’s immune system may have been subverted and therefore, is less likely to be responsive to immunotherapies. Our blood-based IQLung™ testing strategy consists of the VeriStrat® immune profiling test, and the GeneStrat® ddPCR and GeneStrat NGS® tumor profiling tests, which can be ordered together or separately for patients with NSCLC. Together, the tests have an established average turnaround time of three business days, providing physicians with timely results to facilitate treatment decisions. +VeriStrat Test +The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their cancer. Results help inform physicians whether their patient has a more aggressive cancer and can help with treatment planning. The VeriStrat test profiles the patient’s immune system by measuring eight protein features measured by MALDI-ToF mass spectrometry and interpreted by a proprietary machine learning-based algorithm to produce either a VeriStrat Good or VeriStrat Poor test result. +The presence of a VeriStrat Poor result indicates the presence of chronic inflammation and a chronic acute phase immune response. A chronic acute phase immune response can trigger the immune system to provide growth factors to the tumor to increase blood flow and tumor growth. The test has been studied in over 85 peer-reviewed and published clinical studies across many different types of therapies such as chemotherapy, targeted therapies, immune therapies, and combinations. The results consistently show the test to be predictive of outcomes, independent of other prognostic factors including PD-L1 expression and performance status. Patients who test as VeriStrat Poor, on average, have an overall survival that is less than half of those who test as VeriStrat Good, independent of treatment type, demonstrating that the test is strongly prognostic. Conversely, patients with a VeriStrat Good test result typically respond better to standard of care treatments than those patients that test as VeriStrat Poor. By using the VeriStrat test for immune profiling, physicians can help identify the patient's immune response to lung cancer to help guide treatment decisions. +GeneStrat ddPCR Test +The GeneStrat test is a blood-based tumor profiling test that detects the guideline recommended, actionable mutations in lung cancer: EGFR, KRAS, BRAF, EML4-ALK, ROS-1, and RET. Physicians can order one or any combination of the gene tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat test performance and potential clinical utility have been published in multiple peer reviewed studies. +GeneStrat NGS Test +The GeneStrat NGS test is a blood-based 52-gene tumor profiling test panel that detects the guideline recommended, actionable mutations in lung cancer including five gene classes (SNV, INDELS, CNA, fusions, and exon-skipping). Specific variants of relevance to NSCLC include EGFR, KRAS, BRAF, EML4-ALK, ROS-1, RET, MET, NTRK. The GeneStrat NGS test is used for late-stage, metastatic NSCLC and physicians can order one or any combination of the IQLung tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat NGS test performance and potential clinical utility have been published in multiple published studies. +We believe that rapid, blood-based tumor profiling with the GeneStrat ddPCR and GeneStrat NGS tests can be complementary to both targeted tissue-based testing and tissue-based broad genomic sequencing. Testing with GeneStrat ddPCR and GeneStrat NGS tests at diagnosis can help quickly identify patients who are eligible for targeted therapies. Additionally, blood-based testing upfront can help save valuable tissue for diagnostic evaluation, and broad genomic profiling for rare mutations to enroll in clinical trials. +Commercialization and Competitive Advantages +For our Biodesix Lung Diagnostic Tests, commercial efforts are focused on the promotion of our tests to healthcare professionals actively involved in the diagnosis and treatment of lung disease. Primarily focusing on pulmonology, the commercial team, consisting of specialty sales representatives, medical affairs, marketing and customer care representatives, works to educate and inform the entire +6 +patient care group consisting of physicians, nurses, office staff, laboratory personnel, and administration as to the appropriate use and value provided by our testing. The goal is to drive test adoption through articulating the scientific and clinical evidence behind our tests, how they impact the clinical care of a patient, and how the tests can ultimately help to improve patient outcomes. +Patients with pulmonary nodules are concentrated in the pulmonology specialty and referral networks, where additional resources such as lung cancer screening and nodule management clinics may exist to provide an increased level of care. We are also engaging large hospital systems in a “top-down” approach, with a goal of incorporating our tests into system-wide pathways and protocols. +We believe our continued growth drivers stem from our competitive advantages, including: +• +Our demonstrated success commercializing diagnostic tests in lung disease with unprecedented turnaround times. With five diagnostic tests launched and multiple improvements and several tests currently in development, our commercial portfolio of blood-based solutions currently addresses clinical unmet needs within diagnosis, treatment and monitoring of lung cancer. Our diagnostic tests provide rapid and actionable diagnostic information to help inform physicians on the next steps in a patient’s care plan to help diagnose lung cancer faster and expediting time to treatment. +• +Our broad test offering and continued development and publication of clinical data supports market adoption. We leverage a multi-omic approach to offer various technologies and testing that meet the variety of clinical testing needs for providers treating patients with lung disease. We continue to publish clinical data and health economics and outcomes research to support the ongoing adoption of our tests by physicians, healthcare systems, and payers. +• +Our commercial infrastructure and lung-focused sales channel, which includes our extensive knowledge and experience in sales, marketing, reimbursement and operations, provides us with the ability to efficiently launch and scale tests and drive revenue. We have built one of the only commercial teams in diagnostics focused on lung. By offering a broad menu of tests for current clinical use, and continuing to develop additional tests for lung, we can efficiently leverage the existing team and infrastructure to address more clinical needs for the same call point. +Biodesix Development Services +We enable the world’s leading biopharmaceutical, life sciences, and academic research institutions with scientific, technological, and operational capabilities that fuel the development of diagnostic tests, tools, and therapeutics. We provide development services to enable therapeutic clinical trials, the validation of life sciences tools and diagnostics, and the discovery, development, and commercialization of diagnostics. Biodesix Diagnostic Services has been utilized by over 65 industry clients and academic research partners. +We continuously revisit our technology strategy and roadmap to integrate new technologies into our evolving offering, which ultimately support the addition of new service and product revenue offerings. We believe that no single technology can interrogate the complexity of the human disease state to help solve all clinical questions. For that reason, we employ a multi-omic and collaborative approach to solving diagnostic challenges. +We offer end-to-end diagnostic solutions, including translational research, initial biomarker discovery, assay design, development, and validation, testing of clinical trial samples, regulatory, reimbursement, commercialization, and logistical support services (e.g., specimen collection and collection kits). We offer our existing on-market tests, a suite of other research tests and the capability to custom design novel tests for use by our customers. +While our biopharmaceutical discovery, diagnostic development and testing revenue continues to grow, it is important to note that we benefit greatly from these partnerships in many ways that expand beyond revenue. We are continuously expanding our knowledge and biological understanding of multiple diseases and the rapidly evolving treatment landscape, for example, by actively partnering in consortia including with the Friends of Cancer Research. +Pipeline +In order to continue to leverage our existing sales channel, we are developing additional tests to help address clinical unmet needs for patients with lung disease. +Risk of Recurrence (ROR) +Currently, surgical resection of the tumor without systemic or radiation therapy is the standard of care for stage I NSCLC patients. However, 20 to 40% of surgically treated patients will suffer a recurrence within five years after surgery. From market research with pulmonologists, thoracic surgeons, and medical oncologists, we identified a significant clinical unmet need for a blood-based test to help identify stage I NSCLC patients who are at a higher risk of recurrence and may benefit from a more aggressive surgical procedure, or from neoadjuvant or adjuvant systemic treatment. Based on this unmet diagnostic need, we discovered the Risk of Recurrence (ROR) test, which is a pre-surgery blood-based proteomic test, designed with the advanced Biodesix AI platform to predict whether a stage I NSCLC patient has a higher risk of recurrence post-surgical resection. Knowing this information early and before surgery may change the surgical plan and/or support treatment decisions such as neoadjuvant or adjuvant therapy, which have the potential to reduce tumor volume and address micro-metastatic disease as early as possible. Our ROR test was validated in an independent sample set, and we are currently working with major academic institutions across the United States to further validate the test. +7 +Immunotherapy Treatment Guidance (PIR) +In 2015, the first immunotherapy-based treatment regimen was approved by the FDA for use in lung cancer. Currently, there are 9 immune checkpoint inhibitor (ICI) regimens (single agent or combinations) recommended by the NCCN guidelines for treatment of advanced NSCLC patients. For a portion of patients treated, these drugs can result in significant improvement in overall survival compared with platinum-based chemotherapy options. +The combination ICI regimens see some improvement in performance over single agent ICI, but side effect profiles are worse, and costs are higher than for single agent ICI. In addition, recent data have shown that a subset of patients experience more rapid disease progression on ICI compared with chemotherapy. We utilized the advanced Biodesix AI platform to discover our Primary Immune Response (PIR) test. PIR is a blood-based proteomic test designed to profile a patient's potential to mount an immune response to their cancer and predict those patients likely to respond to ICI monotherapy treatment, ICI + chemotherapy combination treatment, or who would be highly resistant to ICI therapy. Our PIR test has been validated in multiple independent sample sets for advanced stage NSCLC patients treated with single agent ICI, and we are currently working with major academic institutions across the United States to further validate the test. +Monitoring – Progression & Resistance +Blood-based monitoring with our ddPCR technology and proteomics platform may offer a feasible method to non-invasively evaluate therapeutic mechanism of action, disease progression, and the emergence of resistance mutations in patients. Our internal validation studies have shown the utility of the GeneStrat EGFR ddPCR test as an example in all three of these indications. The test can identify disease progression up to three months (median) in advance of standard imaging. Using ddPCR for longitudinal blood-based monitoring of EGFR cell-free DNA mutations is a cost-effective testing method while patients are being treated with targeted therapies. Additional utility for ddPCR and our proteomics approach exists for minimal residual disease (MRD) testing given the sensitivity and specificity of these technologies. In March 2024, we announced a Master Collaborative Research Agreement with Memorial Sloan Kettering Cancer Center, under which the teams are collaborating on a development plan for diagnostic tests aimed at improving the treatment of cancer, including MRD. +Clinical Trials +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. The following are our ongoing clinical studies for our diagnostic testing solutions. +ALTITUDE Clinical Utility Study (NCT04171492) +The ALTITUDE clinical utility study is designed to evaluate the performance of Nodify Lung testing (Nodify XL2 and Nodify CDT tests) in a randomized controlled study (RCT). The study is titled “A Multicenter, Randomized Controlled Trial, Prospectively Evaluating the Clinical Utility of the Nodify XL2 Proteomic Test in Incidentally Discovered Low to Moderate Risk Lung Nodules”. The study objectives are to evaluate how the addition of the Nodify Lung test result impacts the clinical decision making for patients with new, incidentally identified solid lung nodules assessed as low to moderate risk of lung cancer. The trial has an adaptive study design with a blinded standard of care arm and 2:1 randomization for open-label results for the Nodify XL2 test. +CLARIFY Clinical Utility Study (NCT06728319) +CLARIFY is a large, retrospective study assessing the performance of the Nodify CDT and Nodify XL2 tests in a real-world patient population. The study is titled “A Multicenter, Retrospective, Chart Review Study Evaluating The Impact and Utility of the Blood-Based Proteomic Integrated Classifier and Auto-Antibody Tests in the Real World.” The study's primary objective is to assess the performance of the Nodify CDT and Nodify XL2 tests both individually and serially. The study will evaluate up to 4,000 patients who have at least 1-2 years of follow-up from high-volume community and academic practices that have integrated the testing into their management of lung nodules. Further evaluation of the performance of the tests in a large, real-world population will provide deeper insights into day-to-day clinical practice and diverse and understudied patient sub-populations. It received central IRB approval in August 2024 and began enrollment in September 2024. +INSIGHT Observational Study (NCT03289780) +The INSIGHT observational study is designed to evaluate the real-world clinical utility and performance of VeriStrat, GeneStrat ddPCR, and GeneStrat NGS. The title is “Observational Study Assessing the Clinical Effectiveness of VeriStrat and Validating Immunotherapy Tests in Subjects with Non-Small Cell Lung Cancer (INSIGHT)”. On June 27, 2023, we completed enrollment of 5,000 patients with non-small cell lung cancer. Final analysis with 3-year follow-up is estimated to be completed by 2026. +Reimbursement +The primary source of reimbursement for our tests in the United States is from third-party payers, including government payers, such as Medicare, and commercial payers, such as insurance companies. Reimbursement for laboratory tests in the United States is determined by various payers, including private third-party payers, managed care organizations, and state and federal health care programs, such as Medicare and Medicaid. In Medicare, coverage of an item or service depends on whether it is “reasonable and necessary” under Section +8 +1862(a)(1)(A) of the Social Security Act (SSA). For single-source laboratory tests, this determination is typically made by the Medicare Administrative Contractor (MAC) with jurisdiction over the laboratory where the test is performed. Our Louisville, Colorado laboratory is currently under the jurisdiction of Novitas Solutions, Inc. Our De Soto, Kansas laboratory is under the jurisdiction of Wisconsin Physicians Service Insurance Corporation (WPS), which participates in the MolDX program (administered by another MAC, Palmetto GBA) to set coverage policy for molecular diagnostic tests. +Medicare pays for clinical diagnostic laboratory tests (CDLTs), on the Clinical Laboratory Fee Schedule (CLFS). Section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA) added Section 1834A to the SSA, which established the current CLFS rate setting processes and coding provisions for CDLTs, and created a new subcategory of CDLTs called Advanced Diagnostic Laboratory Tests (ADLTs), with separate reporting and payment requirements. +Under Section 1834A and its implementing regulations, clinical laboratories that receive the majority of their Medicare revenues from payments made under the CLFS and the Physician Fee Schedule report on a triennial basis (or annually for ADLTs), private payer rates and volumes for their tests with specific billing codes based on final payments made during a set data collection period. The payment rate for a test for the ensuing three-year period (or one year for ADLTs) is set at the weighted median of the rates reported under the specific billing code for that test. Newly established codes for CDLTs are priced until the next private payer rate reporting cycle either based on the payment rate of a comparable code on the CLFS, as determined by CMS ("crosswalking") or at the median of rates submitted by the individual MACs based on statutory and regulatory factors ("gapfilling"). New ADLTs are initially priced at “actual list charge” for a nine-month period, after which they are priced based on private payer rates, with a recoupment provision if actual list charge is more than 130% of the weighted median of private payer rates reported. +The various payers in the United States also determine their own billing rules. In December 2020, Medicare revised its billing rules for clinical laboratory tests to require cancer-related protein-based Multianalyte Assays with Algorithmic Analyses to be billed directly to Medicare by the performing laboratory in most cases when performed on a specimen collected from a hospital outpatient. Molecular pathology tests and most ADLTs are also generally required to be billed directly to Medicare by the laboratory under these circumstances. +The Centers for Medicare & Medicaid Services (CMS) has designated three of the Biodesix tests as Advanced Diagnostic Laboratory Tests (ADLT). The designation was effective for the Nodify CDT test as of June 30, 2023, for the Nodify XL2 test as of May 17, 2019, and for the VeriStrat test as of December 21, 2018. Obtaining ADLT status is a recognition that the tests meet the stringent criteria established under the Protecting Access to Medicare Act of 2014. ADLT status is reserved for innovative tests with Medicare coverage that are offered and furnished by a single laboratory and provide new clinical diagnostic information that cannot be obtained from any other test or combination of tests. We believe that our lung cancer tests can both improve patient outcomes and help guide cost-effective treatment choices for patients with and at-risk of lung cancer. Achieving broad coverage and adequate reimbursement for each of our tests is a key component of our financial success and will continue to be important over time. +Compliance with applicable laws and regulations, as well as internal compliance policies and procedures adds complexity to the billing process. The Centers for Medicare & Medicaid Services (CMS) is responsible for overseeing the establishment of new Healthcare Common Procedure Coding System (HCPCS) codes for billing the Medicare program and other payers. CMS continuously evaluates and implements changes to the Medicare billing, coding, and reimbursement processes. To receive reimbursement from third-party payers, we bill our tests using a variety of HCPCS codes or Current Procedural Terminology (CPT) codes, as defined by the American Medical Association. For some of the tests we conduct, there may not be a specific CPT or HCPCS code, in which case the test may be billed under a miscellaneous code for an unlisted molecular pathology procedure or unlisted multiple anolyte test with algorithmic analysis (MAAA) procedure. Because these miscellaneous codes do not describe a specific service, the third-party payer claim may be examined to determine the service provided, whether the service was appropriate and medically necessary and whether payment should be rendered. This process can result in a delay in processing the claim, a lower reimbursement amount, and/or denial of the claim. +Competition +We primarily face competition from diagnostic companies, all of whom provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, and biopharmaceutical companies. +Diagnosis—Nodule Management +We are not aware of any other company that offers two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. We are aware of efforts by Veracyte, Inc. to develop and validate a test that may be competitive to the Nodify XL2 and/or Nodify CDT tests in the future. +Treatment Guidance and Monitoring—Non-Small Cell Lung Cancer +We are unaware of any other diagnostic test available, commercially or in development, that will compete with our VeriStrat immune profiling test. There is substantial interest and activity in tumor profiling through liquid biopsy. Our genomic test offerings, the GeneStrat ddPCR and GeneStrat NGS tests, face competition from academic hospital laboratories, and companies such as Guardant Health and +9 +Foundation Medicine. We believe that there are several companies and academic research institutions in the process of developing tests for monitoring patients or following treatment for recurrence or progression of lung cancer. +Biodesix Development Services +We are aware of a number of companies who compete with our Development Services for biopharmaceutical, life science and research partners, including in diagnostic research, clinical trial testing, and the discovery, development, and commercialization of tests. From the perspective of tumor profiling, we believe Guardant Health, Foundation Medicine, Tempus AI, and NeoGenomics are our most significant competitors. Conversely, in the immune profiling market, we believe Adaptive Biotechnologies and Personalis are our most significant competitors. +Clinical Laboratory Operations +Throughout 2024, all aspects of the testing process, from receipt of the test requisition form through delivery of test results, were performed for the VeriStrat, GeneStrat ddPCR, and GeneStrat NGS tests in our Louisville, Colorado facility. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery averaging 90% of our tests within three days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. Our Louisville facility is a high-complexity CLIA certified clinical laboratory. The laboratory is College of American Pathology (CAP) accredited, New York State Department of Health (NYSDOH)—permitted holding necessary Laboratory Director certifications and test approvals, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified, along with all other states that require licensing: California, Maryland, Pennsylvania, and Rhode Island. +Receipt of requisitions and testing for the Nodify CDT and Nodify XL2 tests are performed in our De Soto, Kansas clinical laboratory. Delivery of the test results is centralized to our Louisville, Colorado corporate headquarters. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery averaging 90% of our tests within five days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. Our De Soto, Kansas facility is a high-complexity CLIA certified clinical laboratory. This clinical laboratory is also CAP-accredited, NYSDOH—permitted holding necessary Laboratory Director certifications and test approvals, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified and licensed by California, Maryland, Pennsylvania, and Rhode Island. +Personnel in both laboratory facilities are responsible for quality assurance oversight, licensing, and regulation compliance and maintenance to ensure data integrity and consistent, validated processes. +Supply Chain +We rely on third-party suppliers to provide certain components of our diagnostic tests, including a select few (located in the United States, Europe and China), as critical single source providers of components. Bio-Rad, as described below, is the sole source supplier for our GeneStrat test. Freenome's United States operations (formerly "Oncimmune USA" or "Oncimmune") is also the sole source supplier for our Nodify CDT tests but there are known secondary suppliers for these materials. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test, but these supplies are able to be supplied by known suppliers. A disruption to this supply would negatively impact our ability to perform the GeneStrat tests until alternatives could be validated. +All materials for our VeriStrat test and Nodify XL2 test have alternative suppliers readily available, and a disruption in any single supplier would not materially impact our ability to deliver the test. +We have initiated the second source qualification process for the majority of these critical components, however, we may not be successful in securing second sourcing for all of them at all or on a timely basis. A disruption to this supply would negatively impact our ability to perform these tests until an alternative supplier could be validated. +Intellectual Property +Our success depends, in part, on our ability to obtain and maintain intellectual property and proprietary protection for our products and other know-how, to operate our business without infringing, misappropriating or otherwise violating the intellectual property and proprietary rights of others, and to defend and enforce our intellectual property and proprietary rights. We take efforts to protect our proprietary position using a variety of methods, which include pursuit of United States and foreign patent applications related to our proprietary technology, inventions and improvements that we determine are important to our business. We also may rely on trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities to develop and maintain our proprietary position. For more information regarding risks relating to intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property.” +We have invested heavily in the protection of our key assets, namely the VeriStrat and GeneStrat tests, and we acquired a patent portfolio relating to the Nodify XL2 and Nodify CDT tests in our acquisitions of Indi in June 2018, and of Oncimmune USA in October 2019 from Oncimmune Limited (Oncimmune). We own patents and patent applications as well as trade secrets relating to our products +10 +currently in development, a collection device for whole blood, our business strategy, client lists and business methods. Further, we have expanded our access to key intellectual property through license and co-development agreements, including our Non-Exclusive License Agreement with Bio-Rad (the Bio-Rad License), which allows us to use the Droplet Digital PCR technology developed by Bio-Rad and which we employ in our GeneStrat test. +Our patent strategy has focused on creating and acquiring protection for our VeriStrat and Nodify XL2 proteomic tests, while utilizing trade secret and some methods patent protection for our genomic test (the GeneStrat ddPCR and GeneStrat NGS tests) and ELISA test (the Nodify CDT test). We have entered into a non-exclusive license agreement with Bio-Rad, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. Bio-Rad owns patents relating to ddPCR and to which we have a non-exclusive license to utilize for the performance of ddPCR in cancer detection testing for third parties as set forth in the Bio-Rad License Agreement. We have patent protection in the United States and other countries around the world for the primary use of the VeriStrat test for profiling of patients with NSCLC, and various other uses of the VeriStrat test, such as breast cancer, prostate cancer, head and neck cancer have received patent protection. We have also received patent protection relating to our core classifier development program, our AI platform and our approaches to using MALDI-ToF technology (DeepMALDI® techniques). Additionally, our first device patent was issued in 2019 for our internally designed blood collection device. +As of December 31, 2024, our patent portfolio includes 59 issued United States patents, 79 issued foreign patents, and 22 pending applications (including 12 foreign patent applications). With regard to our product development efforts, new applications have been filed around developments relating to micro-organisms diagnostics, new analytic methodologies using Shapley values and semi-quantitative spectra analysis in MALDI, and national stage applications are now in active prosecution to protect our pipeline ROR and PIR tests. +The patent portfolio can be broken down into five major categories: +1) +Issued patents and patent applications relating to the VeriStrat and Nodify® tests and uses of these tests; +2) +Issued patents and patent applications relating to methods for developing classifiers, including using our AI platform and DeepMALDI technologies; +3) +Issued patents and patent applications relating to tests currently in development; +4) +Issued patents and patent applications relating to our novel blood collection device; and +5) +Issued patents and patent applications relating to tests developed for our third-party partners. +The patents relating to the VeriStrat test are scheduled to expire between 2026 and 2032 and are actively under review for additional protection. The patents relating to the Nodify XL2 test are scheduled to expire beginning in 2031 (excluding any patent term extension granted by the United States Patent and Trademark Office (USPTO)), and the patents relating to the Nodify CDT test are scheduled to expire in 2027. The patent related to the blood collection device is scheduled to expire in 2039. Should our current patent applications in prosecution in the United States issue, the resulting patents would be scheduled to have expiration dates between 2036 and 2040 (excluding any patent term extension(s) granted by the USPTO). +Patent Cooperation Treaty (PCT) applications are not eligible to become issued patents until, among other things, we file such PCT applications as national stage patent application(s) within 30 months in the countries in which we seek patent protection. If we do not timely file any national stage patent applications, we may lose our priority date with respect to any such PCT patent applications and any patent protection on the inventions disclosed in such PCT patent applications. Provisional patent applications are not eligible to become issued patents but can become the basis of PCT foreign stage and United States non-provisional patent applications, if such applications are filed within 12 months of filing the related provisional patent application. If we do not timely file any non-provisional patent applications, we will lose our priority date and any patent protection on the inventions disclosed in any such provisional patent application. As of December 31, 2024, we have no pending PCT applications. +In addition, the term of individual issued patents depends upon the legal term for patents in the countries in which they are obtained. In most countries in which we have filed, including the United States, the patent term is generally 20 years from the earliest filing date of a non-provisional patent application, assuming the patent has not been terminally disclaimed over a commonly-owned patent or a patent naming a common inventor, or over a patent not commonly owned but that was disqualified as prior art as the result of activities undertaken within the scope of a joint research agreement. The life of a patent, and the protection it affords, is therefore limited and once the patent lives of our issued patents have expired, we may face competition, including from other competing technologies. In the United States, the term of a patent may also be eligible for patent term adjustment for delays within the USPTO. The term of a patent that covers a biological product may also be eligible for patent term extension when FDA approval is granted for a portion of the term effectively lost as a result of the FDA regulatory review period, subject to certain limitations and provided statutory and regulatory requirements are met. Any such patent term extension can be for no more than five years, only one patent per approved product can be extended, the extension cannot extend the total patent term beyond 14 years from approval, and only those claims covering the approved biological product, a method for using it or a method for manufacturing it may be extended. We may not receive an extension if we fail +11 +to exercise due diligence during the testing phase or regulatory review process, fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. There can be no assurance that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. +Our ability to maintain and solidify our proprietary and intellectual property position will depend on our success in obtaining effective patent claims and maintaining and enforcing claims that are granted. However, our owned and licensed patents could be invalidated or narrowed or otherwise fail to adequately protect our proprietary and intellectual property position and our pending owned and licensed patent applications, and any patent applications that we may in the future file or license from third parties, may not result in the issuance of patents. +Branding is a part of any intellectual property strategy as patent or trade secret protection and we have a number of registered and pending trademarks relating to our company and products. We have received or filed for trademark protection in the United States for our trade name (Biodesix), the Biodesix logo, the names of five of our commercial tests (namely the VeriStrat, GeneStrat ddPCR, GeneStrat NGS, Nodify XL2 and Nodify CDT tests), and a suite of research tests (ImmunoStrat® test), as well as having trademark protection for our core development and methodological platforms, such as our AI platform and DeepMALDI technologies. In all, as of December 31, 2024, we have 16 uniquely registered United States trademarks, 8 of which (including Biodesix, VeriStrat, and GeneStrat) have received foreign issuances as well, with four trademarks pending approval from the USPTO. We will continue to pursue protection in the United States and abroad for our branded assets and will continue to use branding to protect products currently in development, key Biodesix developments and non-trade secret methodologies. +We also rely on trade secrets, including know-how, confidential information, unpatented technologies and other proprietary information, to strengthen or enhance our competitive position, protect and maintain aspects of our business that are not amenable to, or that we do not presently consider appropriate for, patent protection, and prevent competitors from reverse engineering or copying our technologies. We have decided that some technologies, such as our laboratory methodologies (including sample preparation and assay development), and some information (such as client and billing information) are best kept as trade secrets. However, trade secrets and confidential know-how are difficult to protect. To avoid inadvertent and improper disclosure of trade secrets, and to avoid the risks of former employees using these trade secrets to future employment, it is our policy to require employees, consultants and independent contractors to assign all rights to intellectual property they develop in connection with their employment with or services for the Company to the Company. We also protect our existing and developing intellectual property expressly through confidentiality provisions in agreements with third parties. There can be no assurance, however, that these agreements will be self-executing or otherwise provide meaningful protection for our trade secrets or other intellectual property or proprietary information, or adequate remedies in the event of unauthorized use or disclosure of such trade secrets or other intellectual property or proprietary information. +We also seek to preserve the integrity and confidentiality of our trade secrets and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in the measures we take to protect and preserve our trade secrets, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. +We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives, which may include objectives within and outside the United States. Despite our efforts to protect our intellectual property rights, and despite the breadth of protection that has issued around our key assets, these rights may not be respected in the future or may be circumvented or challenged (and potentially invalidated) in a legal proceeding in any jurisdiction where we have intellectual property rights. In addition, the laws of various foreign countries where we have received intellectual property protection and where we may eventually distribute our products may not afford the same protections or assurances to the same extent as the laws in the United States. See “Risk Factors—Risks Related to Our Intellectual Property” for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on us. +Government Regulations +Clinical laboratory tests like our diagnostic tests are regulated under CLIA and state law. The FDA regulates medical devices pursuant to the FDCA, including many diagnostic test kits, such as in vitro diagnostic tests (IVDs). However, most Laboratory Developed Tests (LDTs) are not currently subject to enforcement under the FDA’s regulation (although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to such enforcement) because the FDA has historically exercised enforcement discretion over LDTs. LDTs are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. +We currently market our GeneStrat, VeriStrat, Nodify XL2 and Nodify CDT tests as LDTs in the United States. As a result, we believe our diagnostic services are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDCA provisions. If the FDA disagrees with the LDT status of any of our tests, the FDA may consider the test to be an unapproved medical device and may subject us to FDA enforcement action, including, without limitation, requiring us to seek clearance, authorization or approval for the laboratory test. If the FDA were to begin enforcement with respect to our LDTs, we could incur substantial costs and +12 +delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market requirements. +FDA’s authority to regulate LDTs has been contested for many years, and there have been several legislative and administrative proposals regarding LDT regulation seeking to end or limit enforcement discretion and to bring LDTs under new or existing FDA regulatory frameworks. On September 29, 2023, FDA announced a proposed final rule (Final Rule on Laboratory Developed Tests). This rule clarifies that IVDs are devices under the Federal Food, Drug, and Cosmetic Act (FD&C Act) and amends FDA regulations to explicitly regulate laboratory developed tests (LDTs) as in vitro diagnostic tests in accordance with the agency’s regulatory authority over medical devices. The FDA finalized its rule on May 6, 2024 and announced that the agency will phase-out its LDT enforcement discretion policy in gradual stages over a total period of four years. LDTs that fall within targeted enforcement discretion policies may be exempt from some of these requirements. +Under the final rule, our tests that are currently offered as LDTs could become subject to certain statutory and regulatory provisions that are applicable to medical devices, including but not limited to, medical device reporting and correction and removal reporting requirements, quality systems regulations, registration and listing requirements, and premarket review requirements. Laboratories offering “high-risk” tests that will be subject to premarket authorization application requirements or licensure under Section 351 of the Public Health Service Act, will need to ensure that the appropriate submission is received by the FDA before November 6, 2027. Laboratories offering “moderate-risk” or “low-risk” tests that will be subject to De Novo authorization or premarket notification submissions will need to ensure that the appropriate submission is received by the FDA before May 6, 2028. Other regulatory requirements will be gradually phased in beginning on May 6, 2025. +Failure to comply with applicable requirements under the relevant timeframes could cause us to lose the ability to perform our tests, experience disruptions to our business, or become subject to administrative or judicial enforcement actions. Legal challenges have been filed in federal district court over the agency’s authority to regulate LDTs as medical devices, and the outcome of such litigation and its impact on FDA’s plan to implement the requirements are uncertain. Congress has also considered legislation to establish a new comprehensive regulatory framework that would provide oversight over LDTs. The incoming Trump Administration may also reverse the final rule. +Federal and State Laboratory Licensing Requirements +The Biodesix Louisville, Colorado clinical laboratory was a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, Biodesix’s Quality Management System (QMS) holds an ISO 13485:2016 certificate. The Biodesix Louisville, Colorado clinical laboratory received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers, and Molecular and Cellular Tumor Markers and Virology as well as held state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +CLIA regulations establish standards for proficiency testing; facility administration; general laboratory systems; pre-analytic, analytic systems, post- analytic systems; personnel qualifications and responsibilities; quality control, quality assessment; and specific provisions for laboratories performing moderate to high complexity tests. Our Louisville, Colorado clinical laboratory is inspected biennially as part of its ongoing certification under CLIA certificate of accreditation by CAP. +Under CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of or assessment of health. CLIA requires that a laboratory hold a certificate applicable to the type of laboratory examinations it performs and that it complies with, among other things, standards covering operations, personnel, facilities administration, quality systems and proficiency testing, which are intended to ensure, among other things, that clinical laboratory testing services are accurate, reliable and timely. +The Biodesix De Soto, Kansas clinical laboratory is a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. The De Soto, Kansas clinical laboratory has received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers and Diagnostic Immunology as well as holding state permits and licenses in California, Maryland, Pennsylvania, and Rhode Island. +The International Organization for Standardization (ISO) is an independent, non-governmental international organization that defines world-class specifications for products, services and systems, to ensure quality, safety and efficiency. ISO 13485:2016 is a harmonized, international regulatory benchmark for quality management systems that addresses most or all of the QMS requirements in markets including the United States, European Union, Australia, Japan and Canada. The ISO 13485:2016 certificate confirms that an organization operates a QMS that conforms to the standards established by ISO. On January 31, 2024, the FDA issued a final rule to harmonize and modernize its Quality System Regulation (QSR), which would supplant the existing requirements with ISO 13485:2016. The rule amends the current good manufacturing practice requirements of the QSR in 21 CFR 820. The QMSR rule emphasizes risk management activities and risk-based decision making and aims to reduce regulatory burdens on device manufacturers and importers by harmonizing domestic and international requirements. Device manufacturers and importers have one year to modify their quality systems to meet the requirements of the QMSR rule by February 2, 2026. +13 +To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Laboratories such as ours, which are performing high complexity testing, are required to meet more stringent CLIA requirements than laboratories performing less complex tests, and therefore our laboratories are also subject to random, unannounced survey and inspection at any time. In addition, a laboratory that is certified as “high complexity” under CLIA may develop, manufacture, validate and use proprietary LDTs. CLIA requires analytical validation including accuracy, precision, specificity, sensitivity and establishment of a reference range for any LDT used in clinical testing. The regulatory and compliance standards applicable to the testing we perform may change over time and any such changes could have a material effect on our business. +CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that out-of-state laboratories maintain an in-state laboratory license to perform tests on samples from patients who reside in that state. As a condition of licensure, certain states may require that laboratory personnel meet qualifications, quality control procedures, facility requirements, record maintenance requirements or other state-specific requirements. +Because our Louisville, Colorado clinical laboratory is located in the State of Colorado, we do not need a specific State of Colorado laboratory license, however, we maintain licenses to conduct testing in other states where nonresident laboratories are required to obtain state laboratory licenses. We maintain licenses for our Louisville, Colorado and De Soto, Kansas laboratories with the NYSDOH. We also hold licenses in other states in which we operate, including California, Maryland, Pennsylvania and Rhode Island, that require licensing of out-of-state laboratories under certain circumstances. Other states may currently have or adopt similar licensure requirements in the future, which may require us to modify, delay or stop its operations in those states until such requirements are met. +Failure to comply with CLIA certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate or license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions, and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. +CLIA and state laws and regulations, operating together, sometimes limit the ability of laboratories to offer consumer-initiated testing, also known as direct access testing. We do not offer direct access testing and instead require that our tests be ordered by licensed healthcare providers. +Our Louisville, Colorado and De Soto, Kansas laboratories are certified and adhere to the NYS CLEP, based on New York State Public Health Law, Article 5 Title 5. NYS CLEP is exempt from CLIA and establishes their own method of laboratory certification and test validation approval. To process New York State patient specimens a laboratory must submit a robust analytical and clinical validation package to demonstrate clinical utility of the test and receive approval prior to offering the test in the state of New York. All of our tests have obtained NYS CLEP approval including GeneStrat ddPCR, GeneStrat NGS, VeriStrat, Nodify XL2 and Nodify CDT tests. NYS CLEP requires semi-annual inspections to ensure the laboratory meets all general and specialty standards. Due to the pandemic, NYSDOH CLEP routine re-inspections were delayed by multiple years. +Regulatory Framework for Medical Devices in the United States and Internationally +Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, which are defined to include, among other things, IVDs. The FDA regulates the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. It is possible that one or more of our current, or future, tests will be subject to FDA authority and oversight as either an IVD or a CDx pursuant to the FDA’s authority to regulate medical devices under the FDCA. +Medical devices are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +product design, development, manufacturing assembly and release; +• +laboratory and clinical testing, labeling, packaging, storage and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations, including assay development and validation, clinical sample testing, clinical trial solutions, and quality and regulatory solutions; +• +record keeping; +• +product marketing, promotion and advertising, sales and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +14 +• +post-market approval studies; and +• +product import and export +Many countries in which we may offer any of our diagnostic tests in the future have anti-kickback regulations prohibiting providers from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable under any national health care program. In situations involving physicians employed by state-funded institutions or national health care agencies, violation of the local anti-kickback law may also constitute a violation of the Foreign Corrupt Practices Act of 1997 (FCPA). +The FCPA prohibits any United States individual, business entity or employee of a United States business entity to offer or provide, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether or not such conduct violates local laws. In addition, it is illegal for a company that reports to the Securities and Exchange Commission (SEC) to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls. We will also be required to maintain accurate information and control over sales and distributors’ activities that may fall within the purview of the FCPA, its books and records provisions and its anti-bribery provisions. +The standard of intent and knowledge in anti-bribery cases is minimal. Intent and knowledge are usually inferred from that fact that bribery took place. The accounting provisions do not require intent. Violations of the FCPA’s anti-bribery provisions for corporations and other business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Other countries, including the United Kingdom and other OECD Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United Kingdom Anti-Bribery Act. +When marketing our diagnostic tests outside of the United States, we may be subject to foreign regulatory requirements governing human clinical testing, prohibitions on the import of tissue necessary for us to perform our diagnostic tests or restrictions on the export of tissue imposed by countries outside of the United States or the import of tissue into the United States, and marketing approval. These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required. +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the European Economic Area (EEA), a medical device must meet the Medical Devices Directive’s (MDD)/In Vitro Medical Devices Directive’s (IVDD) Essential Requirements or, applicable on May 26, 2021, the Medical Devices Regulation’s (MDR) / applicable on May 26, 2022, In Vitro Medical Devices Regulation’s (IVDR) General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a clinical evaluation report (CER) the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia , of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia , that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. Initially, the government stated the CE mark will be accepted in the UK until July 1, 2023. However, on July 1, 2023, the government updated their guidance for regulating medical devices stating their intention to extend recognition and acceptance of the CE marking for placing most goods on the market in Great Britain, indefinitely, if the device was placed on the EU market before January 1, 2021. +Device Classification +Under the FDCA, medical devices are classified into one of three classes: Class I, Class II or Class III, depending on the degree of risk to patients that is associated with each medical device and the amount of oversight needed to provide reasonable assurances with respect to safety and effectiveness of the medical device. +15 +On January 31, 2024, the FDA’s Center for Devices and Radiological Health (CDRH) announced that the Center intends to initiate the reclassification process for most IVD tests that are currently Class III (high risk) into Class II (moderate risk). The majority of these tests are infectious disease and companion diagnostic IVDs. Reclassification would allow manufacturers of certain types of tests to seek marketing clearance through the less burdensome premarket notification (510(k)) pathway rather than the premarket approval pathway, the most stringent type of FDA medical device review. +Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to a set of FDA regulations, referred to as the General Controls for Medical Devices, which require compliance with the applicable portions of the FDA’s QSR, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements. +Class II devices are subject to the General Controls as well as any special controls deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, patient registries, FDA guidance documents and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process, although some Class II devices are exempt from the 510(k) requirements. +Class III devices include devices deemed by the FDA to pose the greatest risk: such as life-supporting or life-sustaining devices, implantable devices, or those deemed novel and not substantially equivalent to a predicate device following the 510(k) process. CDx tests are regularly considered Class III devices. +Premarket Submission Process +Unless a statutory or regulatory exemption or enforcement discretion policy applies, before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, the manufacturer must obtain the FDA’s: (1) permission for commercial distribution under section 510(k) of the FDCA (510(k) clearance); or (2) approval of a Premarket Approval (PMA); or (3) de novo classification and authorization. These processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees. +Under the 510(k)-clearance process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and therefore a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Premarket notifications typically include bench, analytical, and preclinical data. Clinical data is sometimes required to support substantial equivalence. If a manufacturer obtains a 510(k) clearance for its device and then makes a modification that could significantly affect the device’s safety or effectiveness or constitutes a major change or modification in the intended use of the device, a new clearance, authorization or approval may be required. +By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous, costly, and time-consuming PMA approval process or seek reclassification of the device through the De Novo process. +If a predicate device is not available, the FDA allows the submission of a direct De Novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. A De Novo request includes a description of the device, a discussion of the general controls and any specific controls recommended to provide reasonable assurance of the safety and effectiveness of the device, a description of the probable benefits of the device when compared to the probable risks when the device is used as intended, non-clinical data including bench performance and animal testing, technical information about the device, and clinical data (if applicable). FDA’s goal is to review a De Novo request within 150 review days after receiving the petition. As with a 510(k) submission or PMA, the length of the review can be prolonged if the FDA requests additional information from the applicant. +To obtain a PMA, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling, +16 +and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use. +Once filed as a PMA, the FDA has 180 days to review the filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. +Prior to approval of a PMA, the FDA may conduct inspections of any clinical trial data and clinical trial sites, as well as inspections of any manufacturing facility and processes. The FDA can delay, limit or deny approval of a PMA application for many reasons, including (1) the device may not be shown safe or effective to the FDA’s satisfaction; (2) the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval; (3) the manufacturing process or facilities may not meet applicable requirements; and (4) changes in FDA approval policies or adoption of new regulations may require additional data. +If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when data is available. The PMA process can be expensive, uncertain and lengthy. A number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing. New PMA applications or PMA supplements are required for any modifications to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, materials or design of a device that has been approved through the PMA process. +As a condition of PMA application approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer-term safety and effectiveness data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. +The 510(k), De Novo or PMA processes can be expensive, lengthy and unpredictable. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k)-clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device. +Companion Diagnostics and the Premarket Process +We believe that several of our future product candidates may include a companion diagnostic (CDx). CDx’s can identify patients who are most likely to benefit from a particular therapeutic product, identify patients likely to be at increased risk for serious side effects as a result of treatment with a particular therapeutic product, or monitor response to treatment with a particular therapeutic product for the purpose of adjusting treatment to achieve improved safety or effectiveness. The use of the CDx will be stipulated in the labeling of both the CDx and the therapeutic product. The FDA may require an application for the CDx to be separate from the drug approval process, and this could potentially delay the approval of any new drug application or the CDx, or complicate the review process. CDx’s are generally regulated as Class III medical devices by the FDA and are therefore most often subject to the PMA approval process. +The FDA issued guidance in July 2016 for the co-development of CDx tests with a therapeutic product and issued another draft guidance in December 2018 specific to oncology CDx tests. The FDA finalized this draft guidance in April 2020 in “Developing and Labeling In vitro Companion Diagnostic Devices for a Specific Group of Oncology Therapeutic Products.” The guidance is meant to guide the development of CDx products, which are defined as IVDs that provide information that is essential for the safe and effective use of the therapeutic product. A CDx is often developed and approved or cleared contemporaneously with the therapeutic, and the use of the CDx is stipulated in the labeling of both the CDx and the corresponding therapeutic product. While it supports contemporaneous marketing authorizations, if there are any deficiencies in the submissions, the FDA may place a PMA review of a CDx on hold or request additional testing, which could potentially delay the approval of the corresponding new drug application or the marketing authorization of the CDx, or otherwise complicate the review process. Some oncology CDx tests can be developed in a way that results in labeling for a specific group of oncology therapeutic products, rather than a single therapeutic product. +17 +Post-Market FDA Regulation +Even if regulatory clearance, authorization or approval of a device is granted, the FDA may impose limitations on the uses and indications for which the device may be labeled and promoted, and the device remains subject to significant regulatory requirements. Medical devices may be marketed only for the uses and indications for which they are cleared, authorized or approved. After a device, including a device exempt from FDA premarket review, is placed on the market, numerous post-market regulatory requirements apply, and the FDA has broad authority to enforce these requirements. Medical device manufacturers are subject to unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of any suppliers. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions such as: warning letters, fines, injunctions, consent decrees and civil penalties; unanticipated expenditures, including requirements to repair, replace, and/or refund the cost of the devices, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; the FDA’s refusal of our requests for 510(k) clearance, De Novo classification, or PMA of new products, new intended uses or modifications to existing products; the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries; and withdrawing 510(k) clearance or PMAs that have already been granted and criminal prosecution. In the event that a supplier fails to maintain compliance with the FDA’s or our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. +Federal and State Fraud and Abuse Laws +We are subject to federal fraud and abuse laws such as the federal Anti-Kickback Statute (AKS), the federal prohibition against physician self-referral (Stark Law), the Eliminating Kickbacks in Recovery Act (EKRA), and the federal False Claims Act (FCA). We are also subject to similar state and foreign fraud and abuse laws. +The AKS (Social Security Act § 1128B(b)) prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing or ordering, any item or service that may be reimbursable, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. There are a number of statutory exceptions and regulatory safe harbors to the AKS that provide protection from AKS liability to arrangements that fully satisfy the applicable requirements. +EKRA (18 USC § 220) prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program. The term “health care benefit program” is broadly defined such that EKRA extends to referrals reimbursed by both governmental and commercial third-party payers. EKRA includes a number of statutory exceptions that provide protection from EKRA liability if the applicable requirements are met. +The Stark Law (Social Security Act § 1877) generally prohibits, among other things, clinical laboratories and other so-called “designated health services” entities from billing Medicare for any designated health services when the physician ordering the service, or any member of such physician’s immediate family, has a financial relationship, such as a direct or indirect investment interest in or compensation arrangement with the billing entity, unless the arrangement meets an exception to the prohibition. The Stark Law also prohibits physicians from making such referrals to a designated health services entity. There are also similar state laws that apply where Medicaid and/or commercial payers are billed. +The FCA (31 USC § 3729) imposes penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment to the government that are false or fraudulent, or knowingly making, using or causing to be made or used a false record or statement material to such a false or fraudulent claim, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. This statute also permits a private individual acting as a “qui tam” whistleblower to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties per false claim or statement for penalties assessed. +Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payer knows or should know is likely to influence the beneficiary to order or receive a reimbursable item or service from a particular provider, practitioner, or supplier, and contracting with an individual or entity that the person knows or should know is excluded from participation in a federal health care program. In addition, federal criminal statutes created by the Health Insurance Portability and Accountability Act (HIPAA) prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services. +In addition to these federal laws, there are often similar state anti-kickback and false claims laws that typically apply to arrangements involving reimbursement by a state-funded Medicaid or other health care program. Often, these laws closely follow the language of +18 +their federal law counterparts, although they do not always have the same exceptions or safe harbors. In some states, these anti-kickback laws apply with respect to all payers, including commercial payers. +A number of states have enacted laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and other healthcare providers, and, in some states, marketing expenditures. In addition, some state statutes impose outright bans on certain manufacturer gifts to physicians or other health care professionals. Some of these laws, referred to as “aggregate spend” or “gift” laws, carry substantial fines if they are violated. +Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs and extensive annual trainings for all of our employees and contractors. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from participation in government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Anti-Corruption +The FCPA and similar international bribery laws make it unlawful for persons or entities to make payments to foreign government officials to assist in obtaining and maintaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any offer, payment, promise to pay, or authorizing the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to do or omit to do an act in violation of his or her duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business, to any person. In addition to the anti-bribery provisions of the FCPA, the statute also contains accounting requirements designed to operate in tandem with the anti-bribery provisions. Covered companies are required to make and keep books and records that accurately and fairly reflect the transactions of the company and devise and maintain an adequate system of internal accounting controls. With our international operations through our third-party partnerships, we could incur significant fines and penalties, as well as criminal liability, if we fail to comply with either the anti-bribery or accounting requirements of the FCPA, or similar international bribery laws. Even an unsuccessful challenge of our compliance with these laws could cause us to incur adverse publicity and significant legal and related costs. We successfully passed our latest FCPA compliance review in 2023 with no findings. +Privacy and Data Protection Laws +Numerous federal and state laws and regulations, including HIPAA, as amended by the Health Information Technology for Economic and Clinical Health (HITECH) Act, govern the collection, dissemination, security, use and confidentiality of protected health information (PHI) and personal information. In the course of performing our business we obtain personal information, including PHI. Laws and regulations relating to privacy, data protection, and consumer protection are evolving and, in some cases, particularly with regard to newer laws, may be subject to potentially differing interpretations. Under HIPAA and HITECH, the Department of HHS issues regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of PHI, used or disclosed by CEs and their authorized business associates (BAs). Because we are a health care provider that electronically transmits health care information, and we also provide certain services to CEs and receive PHI from them, we are at times either a CE or a BA, as defined by HIPAA. Our subcontractors that create, receive, maintain, transmit or otherwise process PHI on our behalf are HIPAA BAs and must also comply with HIPAA, as applicable. +HIPAA and HITECH include the privacy and security rules, breach notification requirements and electronic transaction standards. The privacy rule governs the use and disclosure of PHI, generally prohibits the use or disclosure of PHI except as permitted under the rule, and mandates certain safeguards to protect the privacy of PHI. The privacy rule also sets forth individual rights, such as the right to access or amend certain records containing such individual’s PHI, or to request restrictions on the use or disclosure of such individual’s PHI. The security rule requires CEs and BAs to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI (also referred to as ePHI) by implementing administrative, physical and technical safeguards. Under HIPAA’s breach notification rule, a CE must notify individuals, the Secretary of HHS, and in some circumstances, the media of certain breaches of unsecured PHI or ePHI, and similar breach notification provisions apply to certain BAs under the HITECH Act. +Penalties for failure to comply with a requirement of HIPAA and HITECH vary depending on the number and nature of the violations and any history of prior violations, but can be significant and include civil monetary or criminal penalties. HIPAA is enforced by the Department of Health and Human Services, Office for Civil Rights, and HIPAA also authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in improper use, access to or disclosure of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of +19 +HIPAA CEs, such as us, and their BAs for compliance with the HIPAA privacy and security standards and breach notification rules. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator. +In addition, we may be subject to state privacy, cybersecurity, and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information Act, which, in addition to HIPAA and HITECH, sets forth standards with which all California health care providers must abide. Colorado has enacted the Colorado Privacy Act, and Virginia has enacted the Consumer Data Protection Act, both of which also have standards that must be complied with that supplement Federal data protection requirements. State laws may be more stringent, broader in scope or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other in regards to personal information treatment, which may complicate compliance efforts. For instance, the California Consumer Privacy Act (CCPA) became effective on January 1, 2020 and was amended by the passage of the California Privacy Rights Act (CPRA) in November of 2020, which amendments came into force on January 1, 2023. The CCPA, among other things, gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA has been amended from time to time, and it remains unclear what, if any, further modifications will be made to this legislation or how it will be interpreted. Although there are certain exemptions for PHI and clinical trial data, the CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future and the CCPA may increase our compliance costs and potential liability. Additionally, the CPRA imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It also creates a new California data protection agency – the California Privacy Protection Agency – specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. Similar laws have been proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that could continue to make compliance challenging and costly. +Additionally, the Federal Trade Commission (FTC) and state attorneys general enforce consumer protection laws that prohibit unfair and deceptive acts and practices, including Section 5 of the FTC Act, which creates standards for the collection, use, dissemination and security of health-related and other personal information. Claims of unfair or deceptive trade practices regarding privacy and security can lead to significant liabilities and consequences, including regulatory investigations, penalties, fines and orders as well as civil claims, which could impact our data practices and operations or cause reputational damage. +We may also be subject to laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may add additional compliance burden and complexity. For example, in the EEA, the collection and use of personal data is governed by the European Union's General Data Protection Regulation (GDPR). In the United Kingdom, the GDPR has been adopted in substantially the same form, however the UK may potentially make revisions in the coming years. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze, store, transfer and otherwise process personal data. European and United Kingdom data protection authorities may interpret the GDPR and national laws differently and impose additional requirements, which adds to the complexity of processing personal data in or from the EEA or United Kingdom. Guidance on implementation and compliance practices is often updated or otherwise revised. GDPR applies extra-territorially under certain circumstances and imposes stringent requirements on controllers and processors of personal data, including, for example, requirements to ensure a legal bases to process personal information, provide robust disclosures to individuals, facilitate data subject rights, provide data security breach notifications within 72 hours after discovering a breach in certain circumstances, limit retention of personal information and apply enhanced protections to health data and other categories of sensitive personal information. The GDPR also has requirements around international transfers of personal data. Requirements around transfers to the United States and other jurisdictions have increased since a July 2020 decision by the Court of Justice of the European Union invalidated the Privacy Shield as a basis to transfer personal data from Europe to the United States, and added requirements for reliance on Standard Contractual Clauses. Regulatory guidance on requirements for international transfers, and other GDPR compliance matters, continues to evolve; for example, in July 2023, the European Commission completed adoption of a new adequacy decision for data flows to the United States. However, it is widely expected that the new adequacy decision will itself face scrutiny from the Court of Justice, underscoring that GDPR compliance is an ongoing endeavor. Failure to comply with the requirements of the GDPR may result in fines of up to €20 million or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. To comply with the GDPR and other applicable international data protection laws and regulations, we may be required to put in place additional mechanisms ensuring compliance, which may result in other substantial expenditures. +Cybersecurity +Our business relies on secure and continuous processing of information and the availability of our IT networks and IT resources, as well as critical IT vendors that support our technology, research and other data processing operations. While we take steps to protect our +20 +systems and data, security incidents, data breaches, computer malware and computer hacking attacks have become more prevalent across industries, including the life sciences sector, and may occur on our systems or those of our third-party service providers. Unauthorized persons may in the future be able to exploit weaknesses in the security systems of our (or our third-party service providers) IT networks and gain access to PHI and other personal information, sensitive trade secrets, or other proprietary information. Any wrongful use or disclosure of PHI, other personal information, trade secrets or other proprietary information by us or our third-party service providers could subject us to regulatory fines or penalties, third-party claims or otherwise could adversely affect our business and results of operations. Although HIPAA and the regulations promulgated thereunder do not provide for a private right of action, failures to adequately protect PHI or our IT systems could be viewed as violations of the HIPAA security rule or violations of other applicable information security laws, regulations, contractual obligations or industry standards, and could further result in costly data breach notification obligations that negatively impact our reputation. +Moreover, data security incidents or data breaches, as well as attacks on our IT systems, could result in operational disruptions or data loss or corruption that could adversely impact our business and operations, resulting in substantial investment of resources to investigate, recover and remediate and subject us to heightened regulatory scrutiny. See Item 1C. "Cybersecurity" for additional information on our cybersecurity practices. +Healthcare Reform +In March 2010, the Patient Protection and Affordable Care Act (ACA) was enacted in the United States. The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private insurers. For example, the ACA requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices. The medical device tax was permanently repealed at the end of 2019. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters, and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict. +Beginning in 2017, the Trump administration sought to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. The Trump administration issued three executive orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. For example, on December 20, 2019, President Trump signed appropriations legislation for fiscal year 2020 that repealed certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high-cost employer-sponsored insurance plans, for tax years beginning after December 31, 2019; the annual fee imposed on certain health insurance providers based on market share, for calendar years beginning December 31, 2020; and the medical device excise tax on non-exempt medical devices, for sales after December 31, 2019. While Congress did not pass comprehensive legislation that would repeal all or part of the ACA, two bills affecting the implementation of certain taxes under the ACA have been signed into law. Specifically, the Tax Cuts and Jobs Act of 2017 (TCJA), among other things, included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment, or penalty, imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Beginning in 2021, the Biden administration has signaled its intent to pursue policies strengthening the ACA. +Other legislative changes have been proposed and adopted in the United States since the ACA was enacted to reduce healthcare expenditures. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions of Medicare payments to providers of up to 2% per fiscal year that started in 2013 and, due to subsequent statutory amendments, will remain in effect through 2030 unless additional Congressional action is taken. In 2020, the CARES Act temporarily suspended the 2% cut in Medicare payments from May 1, 2020 through December 31, 2020, and it extended the sequestration reductions through fiscal year 2030 to offset the cost of such temporary suspension. The Consolidated Appropriations Act of 2021 further extended the temporary suspension through March 31, 2021. On April 14, 2021, Congress enacted legislation that further extended the suspension through December 31, 2021. On December 10, 2021, further legislation was enacted to extend the suspension through March 31, 2022, after which a 1.0% sequestration applied for Medicare payments made between April 1, 2022 and June 30, 2022. +The American Taxpayer Relief Act of 2012 made other changes, including reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. If federal spending is reduced, anticipated budgetary shortfalls may also impact the ability of relevant agencies, such as the FDA or the National Institutes of Health to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve R&D, manufacturing, and marketing activities, which may delay our ability to develop, market and sell any products we may develop. The Biden administration shifted direction from Trump administration policies by issuing orders and other documents rolling back regulations and Executive Orders from the Trump administration, and as noted, indicating that it will pursue policies strengthening the ACA. +In December 2020, in its enactment of the Consolidated Appropriations Act, Congress enacted the No Surprises Act. This law, which took effect January 1, 2022, bars out-of-network providers from billing patients in excess of the in-network cost sharing for services furnished with respect to a visit at certain in-network health care facilities. The law establishes an independent dispute resolution process between the provider and the payer to determine the appropriate payment rate to the provider. As written, the No Surprises Act may apply to laboratory tests furnished by an independent laboratory with respect to a hospital visit. The law establishes a notice and consent +21 +exception that generally does not apply to laboratory tests, although it allows HHS to apply this exception to certain advanced tests. Regulations and subregulatory guidance were issued by HHS, the Department of Labor, and the Department of the Treasury in 2021 and 2022, with the first set of regulations was issued as an interim final rule on July 1, 2021, a second set issued as an interim final rule on September 30, 2021, and a third set issued as a final rule on August 19, 2022. These regulations and subregulatory guidance have provided additional information on the applicability of the No Surprises Act, the rules governing the independent dispute resolution process, and specific provider requirements (including the obligation to furnish a “good faith estimates” of “expected charges” to uninsured or self-pay patients), as well as areas of temporary enforcement discretion. +Environmental, Health and Safety Regulations +We are subject to various federal, state, local, and foreign environmental, health and safety laws and regulations and permitting and licensing requirements. Such laws include those governing laboratory practices, the generation, storage, use, manufacture, handling, transportation, treatment, remediation, release and disposal of, and exposure to potential bloodborne pathogens, hazardous materials and associated wastes. Our operations involve the generation, use, storage and disposal of hazardous materials as well as regulated medical waste, and the risk of injury, contamination or non-compliance with environmental, health and safety laws and regulations or permitting or licensing requirements cannot be eliminated. Compliance with environmental laws and regulations has not had a material effect on our capital expenditures, earning or competitive position. To date, there has not been a for cause OSHA or EPA inspection. +Corporate Information +We were incorporated in Delaware in 2005 as Elston Technologies, Inc. Our principal executive offices are located at 919 West Dillon Rd, Louisville, CO 80027, and our telephone number is (303) 417-0500. On June 20, 2006, we changed our name to Biodesix, Inc. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.24 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) until December 31, 2025 (the last day of the fiscal year ending after the fifth anniversary of the completion of our initial public offering (IPO)). +Additionally, we are a “smaller reporting company ” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +For certain risks related to our status as an emerging growth company, see “Risk Factors—General Risk Factors—We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.” +Human Capital Resources +Our culture is underpinned by our cultural beliefs including an unwavering commitment to inclusion and diversity. We are committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent offering opportunities for our team members to +22 +grow and develop in their careers, supported by a competitive suite of benefits and health and wellness programs. We regularly engage our team members in monthly all-hands meetings to align and focus on the current state of affairs of our business, our partnerships, new products, clinical trials, and other pertinent information about our business. We engage our team members in programs such as peer recognition and recruitment that focuses on recognizing outstanding individual contributions to company performance, cultural fit of new team members and acknowledging the diversity of our team to ensure our team members feel valued and can do their best work. We have a national annual community service initiative, “ Biodesix Gives Back ” that allows each team member to invest ten hours of paid community service to organizations of their choosing. +As of December 31, 2024, we had approximately 273 full-time and part-time employees, all of whom are located in the United States. The majority of our team member base is located in proximity to our corporate office and testing facilities located in Louisville, Colorado and our laboratory in De Soto, Kansas. +Diversity, Equity and Inclusion +We believe that a diverse employee population, including cultural background, gender, ethnicity, sexual orientation and lived experiences, is critical to our success since we need to represent our patients, providers, and partners. Our employees are encouraged to leverage their personal strengths and experiences to continually innovate and contribute to the development of new ideas and process improvements that drive better experiences for our partners. +Employee Engagement +Our company culture emphasizes the satisfaction and well-being of our team members and a diverse, engaged workforce. We solicit the opinion and views of our team members through surveys and peer focus groups. We have an established and valued peer recognition culture. Teammates recognize other teammates publicly for their support and contributions fostering collaboration, engagement and retention. We regularly review feedback we receive on our operating principles to determine if any modifications are needed. During 2021, we updated our cultural beliefs to align with our core values that reflect our current focus on Teamwork, Innovation, Making an Impact and Excel. In 2025, we transitioned our cultural beliefs into Operating Principles to reflect a renewed focus and commitment on Team, Impact, and Excellence . Additionally, the Company annually celebrates our top sales performers through our President’s Club and other top company performers as nominated by fellow team members through our four (4) Performance Excellence Awards that recognize creativity and innovation, an entrepreneurial spirit, a strategic impact on the success of the Company and lastly, embodying the Biodesix cultural beliefs and goes “above and beyond” daily. +Training and Development +We invest in our team members' career growth and provide team members with a wide range of development opportunities, including face-to-face, virtual, and self-directed learning, mentoring, coaching, and external development. +Health, Safety and Wellness +The physical health, financial stability, life balance and mental health of each of our team members is vital to our success. We sponsor several cancer awareness activities in our local communities to bring engagement and awareness of health, safety and wellness to positively impact lives. We provide an Employee Assistance Program to enhance physical, financial, and mental well-being for all our team members. +Pay Equity +The main objective of our compensation program is to provide a compensation package that will attract, retain, motivate, and reward superior team members who operate in a highly competitive and technologically challenging environment. We emphasize overall Company performance and provide equity incentives for all team members to align their financial interests with the interests of shareholders. In addition, we offer an employee stock purchase plan to all employees in which participants are eligible to purchase shares at a discount to market. We think like customers and act like owners. +Biodesix seeks fairness in total compensation. We benchmark with external comparisons, internal comparisons and look at the relationship between team member roles within the organization. We also review our compensation practices, both in terms of our overall workforce and individual team members, to ensure our pay is fair and equitable. We currently have no pay disparities based on gender, race, or ethnicity. +Available Information +We file with, or furnish to, the SEC reports including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available free of charge on our corporate website ( www.biodesix.com ) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov . The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this Annual Report on Form 10-K. +23 +Item 1A. Risk Factors. +Risk Factors Summary +The following is a summary of the principal risks that could adversely affect our business, operations and financial results. This summary does not address all of the risk that we face and should be read in conjunction with the entire Risk Factors section below beginning at “Risks Related to Our Business and Industry” within this Item 1A. "Risk Factors." +• +We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we achieve profitability, we may not be able to sustain it; +• +The commercial success of our current and future diagnostic tests and services and our revenue growth depends upon attaining significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies; +• +We may encounter difficulties in managing our growth, which could disrupt our operations; +• +If we fail to retain sales and marketing personnel and, as we grow, fail to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests in a cost-effective manner, we may not be able to generate revenue growth; +• +If we cannot maintain our current relationships, or enter into new relationships, with biopharmaceutical companies, our revenue prospects could be reduced; +• +Our commercial success and revenue growth are highly dependent on the demand for, and increased adoption of, our diagnostic tests, which are subject to a number of risks and uncertainty; +• +We need to ensure strong product performance and reliability to maintain and grow our business; +• +We depend upon third-party suppliers, including single source suppliers, making us vulnerable to supply problems and price fluctuations; +• +Natural or man-made disasters or other similar events may significantly disrupt our business, and negatively impact our business, financial condition and results of operations; +• +Our industry is subject to rapid change, which could make our solutions and the diagnostic tests we develop and services we offer obsolete. If we are unable to continue to innovate and improve our diagnostic tests and services we offer, we could lose customers or market share; +• +Any failure to offer high-quality support for our diagnostic tests and services may adversely affect our relationships with providers and negatively impact our reputation among patients and providers, which may adversely affect our business, financial condition and results of operations; +• +We may face additional costs, loss of revenue, significant liabilities, harm to our brand, decreased use of our products or services and business disruption if there are any security or data privacy breaches or other unauthorized or improper access. +24 +Risk Factors +Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and cash flows. All of the risks described below should be carefully considered together with the other information contained and incorporated by reference in this report. +Risks Related to our Business and Industry +We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we achieve profitability, we may not be able to sustain it. +We have incurred losses since our inception and expect to continue to incur losses for the foreseeable future. We reported net losses of $42.9 million and $52.1 million for the years ended December 31, 2024 and 2023, respectively. As a result of these losses, as of December 31, 2024, we had an accumulated deficit of approximately $462.5 million. +We expect that our sales and marketing, research and development, regulatory and other expenses will continue to increase as we expand our marketing efforts for our diagnostic tests and services, expand existing relationships with our customers, obtain regulatory clearances or approvals or certifications for future enhancements to our existing diagnostic tests and services and conduct further clinical trials. In addition, we expect our general and administrative expenses to increase due to the additional costs associated with scaling our business operations and testing capacity as well as being a public company, including due to legal, accounting, insurance, exchange listing and compliance, investor relations and other expenses. As a result, we expect to continue to incur operating losses and may never achieve profitability. We will need to generate significant additional revenue in order to achieve and sustain profitability. Even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. If we do not achieve or sustain profitability, it will be more difficult for us to finance our business and accomplish our strategic objectives, either of which would have a material adverse effect on our business, financial condition and results of operations. +The commercial success of our current and future diagnostic tests and services and our revenue growth depends upon attaining significant market acceptance among payers, providers, clinics, patients, and biopharmaceutical companies. +Our commercial success depends, in part, on the acceptance of our diagnostic tests and services as being safe and relatively simple for medical personnel to learn and use, clinically flexible, operationally versatile and, with respect to providers and payers, cost effective. We cannot predict how quickly, if at all, payers, providers, clinics and patients will accept future diagnostic tests and services or, if accepted, how frequently they will be used. These constituents must believe that our diagnostic tests offer benefits over other available alternatives. +The degree of market acceptance of our current and future diagnostic tests and services depends on a number of factors, including: +• +whether there is adequate utilization of our tests by clinicians, biopharmaceutical companies and other target groups based on the potential and perceived advantages of our diagnostic tests over those of our competitors; +• +the convenience and ease of use of our diagnostic tests relative to those currently on the market; +• +the effectiveness of our sales and marketing efforts; +• +our ability to provide incremental data that show the clinical benefits and cost effectiveness, and operational benefits, of our diagnostic tests; +• +the coverage and reimbursement acceptance of our products and services; +• +pricing pressure, including from group purchasing organizations (GPOs), seeking to obtain discounts on our diagnostic tests based on the collective bargaining power of the GPO members; +• +negative publicity regarding our or our competitors’ diagnostic tests resulting from defects or errors; +• +the accuracy of our tests relative to those of our competitors; +• +product labeling or product insert requirements by the FDA or other regulatory authorities or conformity assessment bodies; and +• +limitations or warnings contained in the labeling cleared or approved by the FDA or other regulatory authorities or conformity assessment bodies. +Additionally, even if our diagnostic tests achieve widespread market acceptance, they may not maintain that market acceptance over time if competing diagnostic tests or technologies, which are more cost effective or are received more favorably, are introduced. Failure to achieve or maintain market acceptance and/or market share would limit our ability to generate revenue and would have a material adverse effect on our business, financial condition and results of operations. +25 +We may encounter difficulties in managing our growth, which could disrupt our operations. +As of December 31, 2024, we had approximately 273 full and part-time employees. Over the next several years, we expect to continue to significantly increase the number of our employees and the scope of our operations, particularly in the areas of sales, marketing and reimbursement, product development, regulatory affairs and other functional areas, including finance, accounting, quality and legal. Additionally, we expect to expand our testing capacity as we commercialize additional diagnostic tests. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational quality and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources, we may not be able to manage the expansion of our operations or recruit and train additional qualified personnel in an effective manner. Any inability to manage growth could delay the execution of our business plans or disrupt our operations and have a material and adverse effect on our business, financial condition, and results of operations. +Since our inception, we have experienced multiple cycles of growth and anticipate further growth in our business operations. This future growth could put strain on our organizational, administrative and operational infrastructure, including laboratory operations, quality control, customer service and sales organization management. We expect to continue to increase headcount and to hire more specialized personnel in the future as we grow our business. We will need to continue to hire, train and manage additional qualified scientists, laboratory personnel, client and account services personnel, and sales and marketing staff and improve and maintain our technology to properly manage our growth. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees or if we are not successful in retaining our existing employees, our business may be harmed. +We may not be able to maintain the quality or expected turnaround times of our diagnostic tests and services, or satisfy customer demand as it grows. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures. The time and resources required to implement these new systems and procedures is uncertain, and failure to complete this in a timely and efficient manner could materially adversely affect our operations. Additionally, if we are required to reduce expenses substantially to sustain our operations, we may not have the human resources to maintain growth in our business operations. +If we fail to retain sales and marketing personnel and, as we grow, fail to increase our sales and marketing capabilities or develop broad awareness of our diagnostic tests in a cost-effective manner, we may not be able to generate revenue growth. +We currently rely on our direct sales force to sell our diagnostic tests in the United States, and any failure to maintain and grow our direct sales force will negatively affect our business, financial condition and results of operations. The members of our direct sales force are highly trained and possess substantial technical expertise, which we believe is critical in increasing adoption of our diagnostic tests. The members of our United States sales force are at-will employees. The loss of these personnel to competitors, or otherwise, will negatively affect our business, financial condition and results of operations. If we are unable to retain our direct sales force personnel or replace them with individuals of equivalent technical expertise and qualifications, or if we are unable to successfully instill such technical expertise in replacement personnel, it may negatively affect our business, financial condition and results of operations. +In order to generate future growth, we plan to continue to expand and leverage our sales and marketing infrastructure. Identifying and recruiting qualified sales and marketing personnel and training them on how to promote our diagnostic tests, on applicable federal and state laws and regulations and on our internal policies and procedures requires significant time, expense and attention. It often takes several months or more before a sales representative is fully trained and productive. Our sales force may subject us to higher fixed costs than those of companies with competing techniques or diagnostic tests that utilize independent third parties, which could place us at a competitive disadvantage. It will negatively affect our business, financial condition and results of operations if our efforts to expand and train our sales force do not generate a corresponding increase in revenue, and our higher fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand for our diagnostic tests. Any failure to hire, develop and retain talented sales personnel, to achieve desired productivity levels in a reasonable period of time, or timely reduce fixed costs, could negatively affect our business, financial condition and results of operations. Our ability to increase our customer base and achieve broader market acceptance of our diagnostic tests will depend to a significant extent on our ability to expand our marketing efforts. We plan to dedicate significant resources to our marketing programs. It will negatively affect our business, financial condition and results of operations if our marketing efforts and expenditures do not generate a corresponding increase in revenue. In addition, we believe that developing and maintaining broad awareness of our diagnostic tests in a cost-effective manner is critical to achieving broad acceptance of our diagnostic tests. Promotion activities may not generate patient or physician awareness or increase revenue, and even if they do, any increase in revenue may not offset the costs and expenses we incur in building our brand. If we fail to successfully promote, maintain and protect our brand, we may fail to attract or retain the physician acceptance necessary to realize a sufficient return on our brand building efforts, or to achieve the level of brand awareness that is critical for broad use of our diagnostic tests, which in turn could have a material adverse effect on our business, financial condition and results of operations. +If we cannot maintain our current relationships, or enter into new relationships, with biopharmaceutical companies, our revenue prospects could be reduced. +We collaborate with biopharmaceutical companies to analyze patient samples for multiple applications primarily to support clinical trials, including patient identification, companion or complementary diagnostics and retrospective testing. The revenue attributable to +26 +our biopharmaceutical customers may also fluctuate in the future, which could have a material adverse effect on our financial condition and results of operations. In addition, the termination of these relationships could result in a temporary or permanent loss of revenue. +Our future success depends in part on our ability to maintain these relationships and to establish new relationships. Many factors have the potential to impact such collaborations, including the type of biomarker support required and our ability to deliver it and our biopharmaceutical customers’ satisfaction with our tests or services and other factors that may be beyond our control. Furthermore, our biopharmaceutical customers may decide to decrease or discontinue their use of our tests due to changes in research and product development plans, failures in their clinical trials, financial constraints, or utilization of internal testing resources or tests performed by other parties, or other circumstances outside of our control. In addition to reducing our revenue, the loss of one or more of these relationships may reduce our exposure to research and clinical trials that facilitate the collection and incorporation of new information into our biobank. +We engage in conversations with biopharmaceutical companies regarding potential commercial opportunities on an ongoing basis. There is no assurance that any of these conversations will result in a commercial agreement, or if an agreement is reached, that the resulting relationship will be successful or that clinical or research studies conducted as part of the engagement will produce successful outcomes. Speculation in the industry about our existing or potential relationships with biopharmaceutical companies can also be a catalyst for adverse speculation about us, our tests and our technology, which can adversely affect our reputation and our business. +Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide. +Our quarterly and annual revenue and operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. Our quarterly and annual operating results may fluctuate as a result of a variety of factors, many of which are outside our control and, as a result, may not fully reflect the underlying performance of our business. These fluctuations may occur due to a variety of factors, including, but not limited to: +• +the level of demand for our diagnostic tests, which may vary significantly; +• +the timing and cost of manufacturing our diagnostic tests, which may vary depending on the quantity of production and the terms of our agreements with third-party suppliers and manufacturers; +• +expenditures that we may incur to acquire, develop, or commercialize additional tests and technologies; +• +unanticipated pricing pressures; +• +the rate at which we grow our sales force and the speed at which newly hired salespeople become effective, and the cost and level of investment therein; +• +the degree of competition in our industry and any change in the competitive landscape of our industry, including consolidation among our competitors or future partners; +• +coverage and reimbursement policies with respect to lung cancer treatment equipment, and potential future diagnostic tests that compete with our diagnostic tests; +• +the timing and success or failure of clinical trials for our diagnostic tests or any enhancements to such tests we develop or competing diagnostic tests; +• +positive or negative coverage, or public perception, of our diagnostic tests or those of our competitors or broader industry trends; +• +the timing and cost of, and level of investment in, research, development, licenses, regulatory approval, conformity certification, commercialization activities, acquisitions and other strategic transactions, or other significant events relating to our diagnostic tests, which may change from time to time; +• +the timing and cost of obtaining regulatory approvals, conformity certifications or clearances for planned or future improvements or enhancements to our diagnostic tests; +• +changes in regulatory requirements or in the status of regulatory approvals or applications or conformity certifications; +• +pricing, discounts, and incentives for our diagnostic tests; +• +future accounting pronouncements or changes in our accounting policies; and +• +general market conditions. +The cumulative effects of these factors has resulted in large fluctuations and unpredictability in our quarterly and annual financial results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Further, our historical results are not +27 +necessarily indicative of results expected for any future period, and quarterly results are not necessarily indicative of the results to be expected for the full year or any other period, and accordingly should not be relied upon as indicative of future performance. +This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any guidance we may provide, or if the guidance we provide is below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any publicly stated guidance we may provide, and could in turn negatively impact our business, financial condition and results of operations. +We need to ensure strong product performance and reliability to maintain and grow our business . +We need to maintain and continuously improve the performance and reliability of our diagnostic tests to achieve our profitability objectives. Poor product performance and reliability could lead to customer dissatisfaction, adversely affect our reputation and revenues, and increase our service and distribution costs and working capital requirements. Our diagnostic tests may contain errors or defects, and while we have made efforts to test them extensively, we cannot assure that our current diagnostic tests, or those developed in the future, will not have performance problems. Performance issues with our diagnostic tests will increase our costs in the near-term and accordingly adversely affect our business, financial condition and results of operations. +We depend upon third-party suppliers, including single source suppliers, making us vulnerable to supply problems and price fluctuations. +We rely on third-party suppliers to provide certain components of our diagnostic tests, including a select few (located in the United States, Europe and China), as critical single source providers of components. Bio-Rad, as described below, is the sole source supplier for our GeneStrat test. Freenome is also the sole source supplier for our Nodify CDT tests but there are known secondary suppliers for these materials. While we have initiated the second source qualification process for the majority of these critical components, we may not be successful in securing second sourcing for all of them at all or on a timely basis. +Many of our suppliers are not obligated to perform services or supply diagnostic testing materials for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. We depend on our suppliers and to provide us and our customers with materials in a timely manner that meet our and their quality, quantity and cost requirements. These suppliers may encounter problems during manufacturing for a variety of reasons, any of which could delay or impede their ability to meet our demand. These suppliers may cease producing the components we purchase from them or otherwise decide to cease doing business with us. Further, we maintain limited volumes of inventory from most of our suppliers. If we inaccurately forecast demand for finished goods, we may be unable to meet customer demand which could harm our competitive position and reputation. In addition, if we fail to effectively manage our relationships, we may be required to change suppliers. While we believe replacement suppliers exist for all materials, components and services necessary to manufacture our diagnostic tests, establishing additional or replacement suppliers for any of these materials, components or services, if required, could be time-consuming and expensive, may result in interruptions in our operations and product delivery, may affect the performance of our diagnostic tests or could require that we modify their processes. Even if we are able to find replacement suppliers, we will be required to verify that the new supplier maintains facilities, procedures and operations that comply with our quality expectations and applicable regulatory requirements. Any of these events could require that we obtain a new regulatory authority approval before we implement the change, which we may not obtain on a timely basis or at all. +If our third-party suppliers fail to deliver the required commercial quantities of materials on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality on a timely basis, the continued commercialization of our diagnostic tests, the supply of our diagnostic tests to customers and the development of any future diagnostic tests will be delayed, limited or prevented, which could have material adverse effect on our business, financial condition and results of operations. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test. Under the terms of this arrangement, we were granted non-exclusive rights to utilize the intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. We agreed to purchase all of the necessary supplies and reagents for such testing exclusively from Bio-Rad. For more information regarding this license and supply agreement and the permission granted to us by Bio-Rad with respect to such tests, please see “Business—Material Agreements—Agreements with Bio-Rad” filed with our Form S-1 on October 23, 2020 and “First Amendment to the Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated May 24, 2021” filed with our Form 10-Q on August 10, 2021. +This relationship may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. We cannot be certain that, following the realization of this relationship, we will achieve the revenue or specific net income that justifies our entry into it. Any termination of this relationship, or delays in entering into new strategic partnership agreements with Bio-Rad, could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +28 +We may not be able to sufficiently reduce costs in the performance, manufacturing and production of our diagnostic tests to achieve sustainable gross margins. +We partner with suppliers in the development and production of supplies for our diagnostic tests. While we are undertaking a number of initiatives designed to reduce the cost of performing our diagnostic tests, including reducing the costs of supplies, there is no guarantee that we will be able to achieve planned cost reductions from our various cost savings initiatives. There may also be unforeseen occurrences that increase our costs, such as increased prices of the components of our diagnostic tests, changes to labor costs or less favorable terms with third-party suppliers. If we are unable to reduce our costs, or if cost reductions are less significant or less timely than projected, we will not be able to achieve sustainable gross margins, which would adversely affect our ability to invest in and grow our business and adversely impact our business, financial condition and results of operations. +Natural or man-made disasters and other similar events may significantly disrupt our business, and negatively impact our business, financial condition and results of operations. +A significant portion of our employee base, operating facilities and infrastructure are centralized in Louisville, Colorado and we operate a laboratory facility in De Soto, Kansas. Any of our facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, wildfires, floods, nuclear disasters, riots, acts of terrorism, government shutdowns or other criminal activities, infectious disease outbreaks or pandemic events power outages and other infrastructure failures, which may render it difficult or impossible for us to operate our business for some period of time. Our facilities would likely be costly to repair or replace, and any such efforts would likely require substantial time. Any disruptions in our operations could adversely affect our business, financial condition and results of operations and harm our reputation. Moreover, although we have disaster recovery plans, they may prove inadequate. We may not carry sufficient business insurance to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on our business, financial condition and results of operations. In addition, the facilities of our suppliers and manufacturers may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or otherwise materially and adversely affect our business. +Any failure to offer high-quality support for our diagnostic tests and services may adversely affect our relationships with providers and negatively impact our reputation among patients and providers, which may adversely affect our business, financial condition and results of operations. +In implementing and using our diagnostic tests and services, providers depend on our support to resolve issues in a timely manner. We may be unable to respond quickly enough to accommodate short-term increases in demand for customer support. Increased customer demand for support could increase costs and adversely affect our business, financial condition and results of operations. Our sales are highly dependent on our reputation and on positive recommendations from our existing patients, care partners, providers and clinics. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could adversely affect our reputation, our ability to sell our diagnostic tests and services, and in turn our business, financial condition and results of operations. +The sizes of the markets for our diagnostic tests and services and any future diagnostic tests and services may be smaller than we estimate and may decline. +Our estimates of the annual total addressable market for our diagnostic tests and services are based on a number of internal and third-party estimates and assumptions, including, without limitation, the assumed prices at which we can sell our diagnostic tests and services in the market. While we believe our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be correct and the conditions supporting our assumptions or estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. +As a result, our estimates of the annual total addressable market for our diagnostic tests and services in different market segments may prove to be incorrect. If the actual number of patients who would benefit from our diagnostic tests, the price at which we can sell them or the annual total addressable market for them is smaller than we have estimated, it may impair our sales growth and negatively affect our business, financial condition and results of operations. +Our industry is subject to rapid change, which could make our solutions and the diagnostic tests we develop and services we offer, obsolete. If we are unable to continue to innovate and improve our diagnostic tests and services we offer, we could lose customers or market share. +Our industry is characterized by rapid changes, including technological and scientific breakthroughs, frequent new product introductions and enhancements and evolving industry standards, all of which could make our current diagnostic tests and others we are developing obsolete. Our future success will depend on our ability to keep pace with the evolving needs of our customers on a timely and cost-effective basis and to pursue new market opportunities that develop as a result of scientific and technological advances. In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. There have also been advances in methods used to analyze very large amounts of molecular information. We must continuously enhance our offerings and develop new and improved diagnostic tests to keep pace with evolving standards of care. If we do not leverage or scale our sample and data biobank to discover new diagnostic tests or applications or update our diagnostic tests to reflect new scientific knowledge, including about lung +29 +cancer biology, information about new cancer therapies or relevant clinical trials, our diagnostic tests could become obsolete and sales of our current diagnostic tests and any new tests we develop could decline or fail to grow as expected. This failure to make continuous improvements to our diagnostic tests to keep ahead of those of our competitors could result in the loss of customers or market share that would adversely affect our business, financial condition and results of operations. +We may face additional costs, loss of revenue, significant liabilities, harm to our brand, decreased use of our products or services and business disruption if there are any security or data privacy breaches or other unauthorized or improper access. +In connection with various facets of our business, we collect and use a variety of personal data, such as names, mailing addresses, email addresses, mobile phone numbers, location information, prescription information and other medical information. Any failure to prevent or mitigate security breaches or improper access to, use, disclosure or other misappropriation of our data or consumers’ personal data could result in significant liability under state, (e.g., state breach notification and privacy laws such as the CCPA) federal (e.g., HIPAA), and the HITECH Act and laws in other jurisdictions (e.g., the GDPR). Such an incident may also cause a material loss of revenue from the potential adverse impact to our reputation and brand, affect our ability to retain or attract new users of our diagnostic tests and services and potentially disrupt our business. +Unauthorized disclosure of sensitive or confidential patient or employee data, including personally identifiable information, whether through a breach of computer systems, systems failure, employee negligence, fraud or misappropriation, or otherwise, or unauthorized access to or through our information systems and networks, whether by our employees or third parties, could result in negative publicity, legal liability and damage to our reputation. Unauthorized disclosure of personally identifiable information could also expose us to sanctions for violations of data privacy laws and regulations around the world. To the extent that any disruption or security breach resulted in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed. For example, the loss of or damage to clinical trial data, such as from completed or ongoing clinical trials, for any of our product candidates would likely result in delays in our marketing approval efforts and significantly increased costs in an effort to recover or reproduce the data. +As we become more dependent on information technologies to conduct our operations, cyber incidents, including deliberate attacks and attempts to gain unauthorized access to computer systems and networks, may increase in frequency and sophistication. These threats pose a risk to the security of our systems and networks, the confidentiality and the availability and integrity of our data and these risks apply both to us, and to third parties on whose systems we rely for the conduct of our business. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we and our partners may be unable to anticipate these techniques or to implement adequate preventative measures. We have in the past experienced, and may in the future, experience security incidents. While no security incidents in the past have had a material adverse effect on our business, financial condition and results of operations, we cannot predict the impact of any such future events. Further, we do not have any control over the operations of the facilities or technology of our cloud and service providers, including any third-party vendors that collect, process and store personal data on our behalf. Our systems, servers and platforms and those of our service providers may be vulnerable to computer viruses or physical or electronic break-ins that our or their security measures may not detect. Individuals able to circumvent such security measures may misappropriate our confidential or proprietary information, disrupt our operations, damage our computers or otherwise impair our reputation and business. We may need to expend significant resources and make significant capital investments to protect against security breaches or to mitigate the impact of any such breaches. In addition, to the extent that our cloud and other service providers, experience security breaches that result in the unauthorized or improper use of confidential data, employee data or personal data, we may not be indemnified for any losses resulting from such breaches. There can be no assurance that we or our third-party providers will be successful in preventing cyber-attacks or successfully mitigating their effects. Recent cyber-attacks purportedly originated by Russian controlled entities have exacerbated in the wake of Russia’s invasion of Ukraine and our systems may be infiltrated by foreign actors. If we are unable to prevent or mitigate the impact of such security breaches, our ability to attract and retain new customers, patients and other partners could be harmed as they may be reluctant to entrust their data to us, and we could be exposed to litigation and governmental investigations, which could lead to a potential disruption to our business or other adverse consequences. +We have significant payer concentration, with a limited number of customers accounting for a substantial portion of our revenues. +For the years ended December 31, 2024 and 2023, Medicare reimbursed 39% and 43%, respectively, of our total revenue to us. For the years ended December 31, 2024 and 2023, one customer accounted for 7% and 10%, respectively, of our total revenue. There are risks whenever a large percentage of total revenues are concentrated with a limited number of payers and customers. It is not possible for us to predict the level of demand for our diagnostic tests and services that will be generated by any of these customers in the future. In addition, revenues from these larger customers may fluctuate from time to time based on these customers’ business needs, the timing of which may be affected by market conditions or other factors outside of our control. These payers and customers could also potentially pressure us to reduce the prices we charge for our diagnostic tests and services, which could have an adverse effect on our margins and financial position and could negatively affect our revenues and results of operations. If any of our largest payers terminates its relationship with us or our tests are no longer reimbursable by such payer, such termination could negatively affect our revenues and results of operations. +30 +Our results of operations will be materially harmed if we are unable to accurately forecast customer demand for, and utilization of, our diagnostic tests and manage our inventory. +To ensure adequate inventory supply, we must forecast inventory needs and manufacture our diagnostic tests based on our estimates of future demand for our diagnostic tests. Our ability to accurately forecast demand for them could be negatively affected by many factors, including our failure to accurately manage our expansion strategy, product introductions by competitors, an increase or decrease in customer demand for our diagnostic tests or for those of our competitors, our failure to accurately forecast customer acceptance of new diagnostic tests, unanticipated changes in general market conditions or regulatory matters and weakening of economic conditions or consumer confidence in future economic conditions. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs, which would cause our gross margin to be adversely affected and could impair the strength of our brand. Conversely, if we underestimate customer demand for our diagnostic tests, our supply chain partners and/or internal manufacturing team may not be able to deliver components and diagnostic tests to meet our requirements, and this could result in damage to our reputation, sales growth and customer relationships. In addition, if we experience a significant increase in demand, additional supplies of raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, or suppliers may not be able to allocate sufficient capacity in order to meet our increased requirements, which will adversely affect our business, financial condition and results of operations. +If we experience significant disruptions in our information technology systems, our business may be adversely affected. +We depend on our information technology systems for the efficient functioning of our business, including the performance, distribution and maintenance of our diagnostic tests and services, as well as for accounting, data storage, compliance, purchasing and inventory management. We do not have redundant information technology in all aspects of our systems at this time. Our information technology systems may be subject to computer viruses, ransomware or other malware, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, damage or interruption from fires or other natural disasters, hardware failures, telecommunication failures and user errors, among other malfunctions. We could be subject to an unintentional event that involves a third party gaining unauthorized access to our systems, which could disrupt our operations, corrupt our data or result in release of our confidential information. Technological interruptions would disrupt our operations, including our ability to timely ship and track diagnostic test orders and results, project inventory requirements, manage our supply chain and otherwise adequately service our customers or disrupt our customers’ ability to use our diagnostic tests. In the event we experience significant disruptions, we may be unable to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our business, financial condition and results of operations. +Currently, we carry business interruption coverage to mitigate certain potential losses but this insurance is limited in amount, and we cannot be certain that such potential losses will not exceed our policy limits. The successful assertion of one or more large claims against us that exceed or are not covered by our insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations. We are increasingly dependent on complex information technology to manage our infrastructure. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance our existing systems. Failure to maintain or protect our information systems and data integrity effectively could have a material adverse effect on our business, financial condition and results of operations. +If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit or halt the marketing and sale of our diagnostic tests and services. The expense and potential unavailability of insurance coverage for liabilities resulting from issues with our diagnostic tests and services could harm us and negatively impact sales. +We face an inherent risk of product liability as a result of the marketing and sale of our diagnostic tests and services. For example, we may be sued if our diagnostic tests or services cause or are perceived to cause injury or are found to be otherwise unsuitable during manufacturing, marketing or sale. Any such product liability claim may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. In addition, we may be subject to claims against us even if the apparent injury is due to the actions of others or the pre-existing health of the patient. For example, medical personnel, care partners and patients collect samples for our diagnostic tests. If these medical personnel, care partners or patients are not properly trained, are negligent or use our diagnostic tests incorrectly, the capabilities of such tests may be diminished or the patient may suffer critical injury. We may also be subject to claims that are caused by the activities of our suppliers, such as those who provide us with components and sub-assemblies for our diagnostic tests. +If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or halt the marketing and sale of our diagnostic tests and services. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in: +• +decreased demand for our diagnostic tests and services; +• +harm to our reputation; +• +initiation of investigations by regulators; +31 +• +costs to defend the related litigation; +• +a diversion of management’s time and our resources; +• +substantial monetary awards to trial participants or patients; +• +product recalls, withdrawals, or labeling, marketing, or promotional restrictions; +• +loss of revenue; +• +adverse impact on the market price of our common stock; and +• +exhaustion of any available insurance and our capital resources. +We believe we have adequate product liability insurance, but it may not prove to be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive and costs may continue to rise. We may not be able to maintain or obtain insurance at a reasonable cost or in an amount adequate to satisfy any liability that may arise. Our insurance policy contains various exclusions, and we may be subject to a product liability claim for which we have no coverage. The potential inability to obtain sufficient product liability insurance at an acceptable cost to protect against product liability claims could prevent or inhibit the marketing and sale of our diagnostic tests and services. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts, which would have a material adverse effect on our business, financial condition and results of operations. In addition, any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, harm our reputation in the industry, significantly increase our expenses and reduce product sales. +We face competition from many sources, including larger companies, and we may be unable to compete successfully. +There are a number of lung cancer diagnostic solutions companies in the United States, Europe and Asia. Notable competitors in the United States include Veracyte, Inc., Guardant Health, Inc. and Foundation Medicine, Inc. These competitors all provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, laboratories and other medical facilities. Many of these organizations are significantly larger with greater financial and personnel resources than us, and enjoy significantly greater market share and have greater resources than we do. As a consequence, they may be able to spend more on product development, marketing, sales and other product initiatives than we can. Some of our competitors have: +• +substantially greater name recognition; +• +broader, deeper, or longer-term relations with healthcare professionals, customers, and third-party payers; +• +more established distribution networks; +• +additional lines of diagnostic tests and the ability to offer rebates or bundle them to offer greater discounts or other incentives to gain a competitive advantage; +• +greater experience in conducting research and development, manufacturing, clinical trials, marketing and obtaining regulatory clearance or approval or certification for diagnostic tests; and +• +greater financial and human resources for product development, sales and marketing and patent litigation. +Our continued success depends on our ability to: +• +further penetrate the lung disease diagnostic solutions market and increase utilization of our diagnostic tests; +• +maintain and widen our technology lead over competitors by continuing to innovate and deliver new product enhancements on a continuous basis; and +• +cost-effectively manufacture our diagnostic tests and their component parts as well as drive down the cost of service. +In addition, competitors with greater financial resources than ours could acquire other companies to gain enhanced name recognition and market share, as well as new technologies or diagnostic tests that could effectively compete with our existing diagnostic tests, which may cause our revenue to decline and would harm our business. +Our competitors also compete with us in recruiting and retaining qualified scientific, management and commercial personnel, as well as in acquiring technologies complementary to, or necessary for, development of our diagnostic tests. Because of the complex and technical nature of diagnostic testing and the dynamic market in which we compete, any failure to attract and retain a sufficient number of qualified employees could materially harm our ability to develop and commercialize our diagnostic tests, which would have a material adverse effect on our business, financial condition and results of operations. +As we attain greater commercial success, our competitors are likely to develop diagnostic tests that offer features and functionality similar to our diagnostic tests that are currently on the market. Improvements in existing competitive diagnostic tests or the introduction +32 +of new competitive diagnostic tests may make it more difficult for us to compete for sales, particularly if those competitive diagnostic tests demonstrate better reliability, convenience or effectiveness or are offered at lower prices. +Performance issues, service interruptions or price increases by our shipping carriers and warehousing providers could adversely affect our business and harm our reputation and ability to provide our services on a timely basis. +Expedited, reliable shipping and delivery services and secure warehousing are essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point transport of our diagnostic tests to our customers and for tracking of these shipments, and from time to time require warehousing for our diagnostic tests, sample collection kits and supplies. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any systems, it would be costly to replace such systems in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our diagnostic tests and increased cost and expense to our business. In addition, any significant increase in shipping or warehousing rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters, government shutdowns, civil unrest and disturbances or other service interruptions affecting delivery or warehousing services we use would adversely affect our ability to process orders for our diagnostic tests on a timely basis. +We rely on commercial courier delivery services to transport samples to our laboratory facility in a timely and cost-efficient manner and if these delivery services are disrupted, our business will be harmed. Our business depends on our ability to quickly and reliably deliver test results to our customers. Blood samples are typically received within days from the United States and outside the United States for analysis at our Louisville, Colorado and De Soto, Kansas facilities. Disruptions in delivery service, whether due to labor disruptions, bad weather, natural disaster, civil unrest or disturbances, terrorist acts or threats or for other reasons could adversely affect specimen integrity and our ability to process samples in a timely manner and to service our customers, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected. +Cost-containment efforts of our customers, purchasing groups and governmental purchasing organizations could have a material adverse effect on our sales and profitability. +In an effort to reduce costs, many hospitals in the United States have become members of GPOs and Integrated Delivery Networks (IDNs). GPOs and IDNs negotiate pricing arrangements with medical device companies and distributors on behalf of their members, which may include hospitals and other providers. GPOs and IDNs typically award contracts on a category-by-category basis through a competitive bidding process. Bids are generally solicited from multiple providers with the intention of driving down pricing or reducing the number of vendors. Due to the highly competitive nature of the GPO and IDN contracting processes, we may not be able to obtain new, or maintain existing, contract positions with major GPOs and IDNs. Furthermore, the increasing leverage of organized buying groups may reduce market prices for our diagnostic tests, thereby reducing our revenue and margins. +While having a contract with a GPO or IDN for a given product category can facilitate sales to members of that GPO or IDN, such contract positions can offer no assurance that any level of sales will be achieved, as sales are typically made pursuant to individual purchase orders. Even when a provider is the sole contracted supplier of a GPO or IDN for a certain product category, members of the GPO or IDN are generally free to purchase from other suppliers. Furthermore, GPO and IDN contracts typically are terminable without cause by the GPO or IDN upon 60 to 90 days’ notice. Accordingly, the members of such groups may choose to purchase alternative diagnostic tests due to the price or quality offered by other companies, which could result in a decline in our revenue. +Pricing and reimbursement of medical devices is not harmonized at the European level, but is the exclusive competence of the EU Member States. In Europe, pricing and reimbursement decisions are generally made by regional or centralized bodies based on an assessment of the efficacy and clinical effectiveness of the devices or broad device types or procedures. There is a general trend for EU Member States to adopt cost containment measures to control public spend on medical devices. Due to the competitive nature of product offers and prices, we may not be able to obtain new, or maintain existing, contract positions with the EU Member States. +Litigation and other legal proceedings may adversely affect our business. +From time to time, we may become involved in legal proceedings relating to patent and other intellectual property matters, product liability claims, employee claims, tort or contract claims, federal regulatory investigations, securities class action and other legal proceedings or investigations, which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. Litigation is inherently unpredictable and can result in excessive or unanticipated verdicts and/or injunctive relief that affect how we operate our business. We could incur judgments or enter into settlements of claims for monetary damages or for agreements to change the way we operate our business, or both. There may be an increase in the scope of these matters or there may be additional lawsuits, claims, proceedings or investigations in the future, which could have a material adverse effect on our business, financial condition and results of operations. Adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our diagnostic tests and services, even if the regulatory or legal action is unfounded or not material to our operations. +33 +We maintain product and professional liability insurance, but this insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims. Any product liability or professional liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. +General economic and financial market conditions may exacerbate our business risks. +Global macroeconomic conditions and the world’s financial markets remain susceptible to significant stresses, resulting in reductions in available credit and government spending, economic downturn or stagnation, foreign currency fluctuations and volatility in the valuations of securities generally. As a result of uncertainties with respect to financial institutions and the global credit markets and other macroeconomic challenges such as inflationary pressures currently or potentially affecting the economy of the United States and other parts of the world, customers and distributors may experience serious cash flow problems and other financial difficulties, decreasing demand for our products. Our customers and distributors may respond to such economic pressures by reducing or deferring their capital spending or reducing staff. +Global macroeconomic conditions, including political, military and security conflicts, may also impact the global economy and capital markets. If, due to these events, our customers and distributors are not successful in generating sufficient revenue or are precluded from securing financing, their businesses will suffer, which may materially and adversely affect our business, financial condition and results of operations. +We may not realize the benefits or costs of our Co-Development and Collaboration Agreement with AVEO Oncology. +In 2014, we entered into a Co-Development and Collaboration Agreement with AVEO Oncology (formerly known as AVEO Pharmaceuticals, Inc.) (AVEO) whereby the two parties agreed to various terms and conditions necessary for the co-development of AVEO’s compound ficlatuzumab (the Collaboration Agreement). We were granted a limited legal interest in ficlatuzumab and may not have the right to control the development and exploitation of ficlatuzumab. As consideration for the grant, we agreed to cover the first $15.0 million of ficlatuzumab’s clinical development costs, with both parties then sharing all costs equally after the cap was reached. +In October of 2016, the Collaboration Agreement was amended to eliminate the requirement that we cover all of the initial costs. Under the amended terms, we agreed to allow AVEO to recapture its cost that it otherwise would not have been responsible for said recapture to occur out of any royalties or revenues eventually derived from the Collaboration Agreement. As part of the Collaboration Agreement, unless we or AVEO exercised our right to opt-out of co-development, we would equally share in any income received from licensing rights to ficlatuzumab to any third parties. In September 2020, we exercised our opt-out right for the payment of half of the development and regulatory costs for ficlatuzumab which became effective as of December 2, 2020. Following the effective date, we are entitled to a 10% royalty of net sales of ficlatuzumab and 25% of license income generated from the licensing of ficlatuzumab. Ficlatuzumab is currently being evaluated in squamous cell carcinoma of the head and neck (SCCHN), metastatic pancreatic ductal cancer (PDAC), and acute myeloid leukemia (AML). +Our relationship with AVEO may require us to incur non-recurring and other charges, increase our near and long-term expenditures, or disrupt our management and business. We cannot be certain that, following the realization of this relationship, we will achieve the revenue or specific net income that justifies our entry into it. Any termination of this relationship, or delays in entering into new strategic partnership agreements with AVEO, could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +We are exposed to significant future payments and other obligations associated with our acquisition of Oncimmune, U.S.A., and may not realize the advantages we expect from this acquisition. +On October 31, 2019 we completed an acquisition of Freenome's United States operations (formerly "Oncimmune USA" or "Oncimmune") including its CLIA lab in De Soto, Kansas and its incidental pulmonary nodule (IPN) malignancy test, then marketed in the United States as the EarlyCDT Lung® test. We renamed and relaunched the test on February 28, 2020 as the Nodify CDT test and the De Soto, Kansas lab is the sole United States provider of the Nodify CDT test. +As part of the acquisition, we and Oncimmune entered into several agreements to govern the relationship between the parties and to allow us to provide the Nodify CDT test. The overarching umbrella Purchase and Commercialization Agreement (PCA) defines the general relationship between the parties. Included under the PCA was (a) an APA whereby we acquired all of the United States assets associated with the De Soto, Kansas clinical laboratory, as well as the trademarks and patent application associated with the test; (b) an intellectual property license granting us the rights necessary under Oncimmune’s background intellectual property rights to perform the Nodify CDT test; (c) a supply agreement for supplying us with the necessary materials and reagents needed to run the Nodify CDT test; and (d) a development agreement where Oncimmune agrees to assist us in further developing the Nodify CDT test. We agreed to a revenue share payment of 8% of recognized revenue for non-screening tests up to an annual minimum volume and 5% thereafter, with an escalating minimum through the first four years of sales. +Our acquisition may require us to incur non-recurring and other charges, increase our near and long-term expenditures, or disrupt our management and business. We cannot be certain that, following the realization of this acquisition, we will achieve the revenue or specific +34 +net income that justifies our entry into it. This could delay our sales and marketing efforts, which would harm our business prospects, financial condition and results of operations. +We are highly dependent on our senior management team and key personnel, and our business could be harmed if we are unable to attract and retain personnel necessary for our success. +We are highly dependent on our senior management and other key personnel. Our success will depend on our ability to retain senior management and to attract and retain qualified personnel in the future, including sales and marketing professionals, scientists, clinical specialists, and other highly skilled personnel and to integrate current and additional personnel in all departments. The loss of members of our senior management, sales and marketing professionals, scientists, clinical and regulatory specialists could result in delays in product development and harm our business. If we are not successful in attracting and retaining highly qualified personnel, it would have a material adverse effect on our business, financial condition and results of operations. +Our research and development programs and laboratory operations depend on our ability to attract and retain highly skilled scientists and technicians. +We may not be able to attract or retain qualified scientists and technicians in the future due to the competition for qualified personnel among life science businesses, particularly near our headquarters in Louisville, Colorado and our laboratory facility in De Soto, Kansas. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. We may have difficulties locating, recruiting, or retaining qualified salespeople. Recruiting and retention difficulties can limit our ability to support our research and development and sales programs. To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have issued and may continue to issue equity awards that vest over time. The value to employees of equity awards that vest over time may be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Our employment arrangements with our employees provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We also do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. +Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture and our business may be harmed. +We believe that our culture has been and will continue to be a critical contributor to our success. We expect to continue to hire aggressively as we expand, and we believe our corporate culture has been crucial in our success and our ability to attract highly skilled personnel. If we do not continue to develop our corporate culture or maintain and preserve our core values as we grow and evolve, we may be unable to foster the innovation, curiosity, creativity, focus on execution, teamwork and the facilitation of critical knowledge transfer and knowledge sharing we believe we need to support our growth. Moreover, liquidity available to our employee securityholders could lead to disparities of wealth among our employees, which could adversely impact relations among employees and our culture in general. Our anticipated headcount growth may result in a change to our corporate culture, which could harm our business. +Our ability to utilize our net operating loss carryforwards and research and development credit may be limited. +In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code) a corporation that undergoes an ownership change, generally defined as a greater than 50% change by value in its equity ownership by certain shareholders over a three-year period, is subject to limitations on its ability to utilize its pre-change net operating losses (NOLs) and its research and development credit carryforwards to offset future taxable income. The applicable rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning, directly or indirectly, 5% or more of the stock of a company, as well as changes in ownership arising from new issuances of stock by the company. We believe that our NOLs are currently not subject to limitation under these rules. However, if we undergo an ownership change now or in the future, our ability to utilize NOLs and research and development credit carryforwards could be limited by Sections 382 and 383 of the Code. Future changes in stock ownership may be beyond our control. In addition, our ability to deduct net interest expense may be limited if we have insufficient taxable income for the year during which the interest is incurred, and any carryovers of such disallowed interest would be subject to the limitation rules similar to those applicable to NOLs and other attributes. For these reasons, in the event we experience a change of control, we may not be able to utilize a material portion of the NOLs, research and development credit carryforwards or disallowed interest expense carryovers, even if we attain profitability. +The terms of the Perceptive Term Loan Facility require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business. +On November 16, 2022 (Closing Date), we entered into a credit agreement and guaranty (the Credit Agreement) with Perceptive Credit Holdings IV, LP as the lender and administrative agent (the Lender) that provides for a senior secured delayed draw term loan facility with Perceptive Advisors LLC (Perceptive), in an aggregate principal amount of up to $50.0 million (the Perceptive Term Loan Facility) +35 +to refinance long-term debt. The Perceptive Term Loan Facility provides for an “interest-only” period during the term of the loan with principal due at the maturity date, which will be November 21, 2027. +The Perceptive Term Loan Facility may be prepaid at any time, subject to a prepayment premium equal to 2% to 10% of the aggregate outstanding principal amount being prepaid, depending on the date of prepayment. The Perceptive Term Loan Facility contains customary affirmative and negative covenants for a loan, requires us to comply with a minimum cash requirement covenant, and has a trailing twelve month net revenue requirement. Failure to comply with the covenants and loan requirements may result in an event of default. +On May 10, 2023, the Company entered into the First Amendment with the Lender, whereby, subject to the terms and conditions of the First Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold of each fiscal quarter commencing on the fiscal quarter ending June 30, 2023 through and including the fiscal quarter ending March 31, 2024. As consideration for the First Amendment, the Company agreed to issue to Perceptive a warrant to purchase up to 500,000 shares of the Company’s common stock which are equity classified at a per share exercise price equal to $1.6254. +On August 4, 2023, the Company entered into the Second Amendment to the Credit Agreement and Guaranty (the Second Amendment) with Perceptive as lender and administrative agent and the Company, as borrower, whereby, subject to the terms and conditions of the Second Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing with the fiscal quarter ending June 30, 2024 through and including the fiscal quarter ending December 31, 2025. +On February 29, 2024 (the Third Amendment Effective Date), the Company entered into the Third Amendment to the Credit Agreement and Guaranty (the Third Amendment) with Perceptive as lender and administrative agent and the Company, as borrower, whereby subject to the terms and conditions of the Third Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing on the fiscal quarter ending March 31, 2024 through and including the fiscal quarter ending December 31, 2025. +On October 30, 2024 (the Fourth Amendment Effective Date), the Company entered into the Fourth Amendment to the Credit Agreement and Guaranty (the Fourth Amendment) with Perceptive, as lender and administrative agent, and the Company, as borrower, whereby subject to the terms and conditions of the Fourth Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing on the fiscal quarter ending June 30, 2025 through and including the fiscal quarter ending December 31, 2027. +The Perceptive Term Loan Facility contains certain covenants limiting our ability to, among other things, engage in certain corporate changes, make certain restricted payments, repay other certain indebtedness or enter into, amend or terminate any other agreements that have the impact of restricting our ability to make loan repayments. +The Credit Agreement also contains certain customary events of default, the occurrence of which could result in the declaration that all outstanding principal and interest under the Perceptive Term Loan Facility is immediately due and payable in whole or in part, which could have a material adverse effect on our business, financial condition, and results of operations. +We will need to raise additional capital to fund our existing operations, develop our platform, commercialize new diagnostic tests or expand our operations. +We will need to raise additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, including to: +• +increase our sales and marketing efforts to drive market adoption of and address competitive developments; +• +fund development and marketing efforts of our diagnostic tests or any other future diagnostic tests; +• +expand our technologies into other types of cancer management and lung disease detection diagnostic tests; +• +acquire, license, or invest in technologies; +• +acquire or invest in complementary businesses or assets; and +• +finance capital expenditures and general and administrative expenses. +Our present and future funding requirements will depend on many factors, including: +• +our ability to achieve revenue growth; +• +our rate of progress in establishing payer coverage and reimbursement arrangements with domestic and international commercial third-party payers and government payers; +• +the cost of expanding our laboratory operations and offerings, including our sales and marketing efforts; +36 +• +our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of and reimbursement for our diagnostic tests; +• +our rate of progress in, and cost of research and development activities associated with, diagnostic tests in research and early development; +• +the effect of competing technological and market developments; +• +costs related to international expansion; and +• +the potential cost of and delays in product development as a result of any regulatory oversight applicable to our diagnostic tests. +The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, our stockholders could experience dilution. Any preferred equity securities issued also could provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our platform technologies or diagnostic tests, pay a portion of our royalties, or grant licenses on terms that are not favorable to us. +We may acquire other businesses, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our results of operations. +As part of our business strategy, we may in the future make additional acquisitions or investments in complementary companies, diagnostic tests or technologies that we believe fit within our business model and can address the needs of our customers and potential customers. In the future, we may not be able to acquire and integrate other companies, diagnostic tests or technologies in a successful manner. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. In addition, the pursuit of potential acquisitions may divert the attention of management and cause us to incur additional expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, including increases in revenue, and any acquisitions we complete could be viewed negatively by our customers, investors and industry analysts. +Future acquisitions may reduce our cash available for operations and other uses and could result in amortization expense related to identifiable assets acquired. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our common stock. The sale or issuance of equity to finance any such acquisitions would result in dilution to our stockholders. The incurrence of indebtedness to finance any such acquisition would result in fixed obligations and could also include covenants or other restrictions that could impede our ability to manage our operations. In addition, our future results of operations may be adversely affected by the dilutive effect of an acquisition, performance earn-outs or contingent bonuses associated with an acquisition. Furthermore, acquisitions may require large, one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based compensation expenses and the recording and subsequent amortization of amounts related to certain purchased intangible assets, any of which items could negatively affect our future results of operations. We may also incur goodwill impairment charges in the future if we do not realize the expected value of any such acquisitions. +Additionally, future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results. +A pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide and its variants could adversely affect our business. +If a pandemic, epidemic or outbreak of an infectious disease occurs in the United States or worldwide, our business may be adversely affected. Disruptions due to prior pandemics or potential disruptions due to the government imposed restrictions have included, and in the future may continue to include: the inability of our suppliers to manufacture components and parts and to deliver these to us on a timely basis, or at all; disruptions in our production schedule and ability to assemble diagnostic tests; inventory shortages or obsolescence; delays in actions of regulatory bodies; diversion of or limitations on employee resources that would otherwise be focused on the operations of our business; delays in growing or reductions in our sales organization, including through delays in hiring, lay-offs, furloughs or other losses of sales representatives; business adjustments or disruptions of certain third parties, including suppliers, medical institutions and clinical investigators with whom we conduct business; and additional government requirements or other incremental mitigation efforts that may further impact our or our suppliers’ capacity to manufacture our diagnostic tests. +37 +The extent to which a future pandemic or epidemic impacts our business will depend on future facts and circumstances, which are highly uncertain and cannot be predicted. While the potential economic impact brought by, and the duration of, any pandemic, epidemic or outbreak of an infectious disease may be difficult to assess or predict, it may result in, significant disruption of global financial markets and a reduction in our ability to access capital, which could adversely affect our liquidity. In addition, a recession or market correction resulting from the spread of an infectious disease, could materially affect our business. Such economic recession could have a material adverse effect on our long-term business. To the extent a pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section. +Risks Related to our Governmental Regulation +The insurance coverage and reimbursement status of newly approved diagnostic tests, particularly in a new category of diagnostics and therapeutics, is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for current or future diagnostic tests could limit our ability, and that of our collaborators, to fully commercialize our diagnostic tests and decrease our ability to generate revenue. +The availability and extent of reimbursement by governmental and private payers is essential for most patients to be able to afford the clinical diagnostic tests and cellular therapeutics that we and our collaborators currently or in the future plan to develop and sell. In addition, because our clinical diagnostics and diagnostic tests represent new approaches to the research, diagnosis, detection and treatment of diseases, we cannot accurately estimate how our diagnostic tests, and those jointly created with our collaborators, would be priced, whether reimbursement could be obtained or any potential revenue generated. Sales of our diagnostic tests will depend substantially, both domestically and internationally, on the extent to which the costs of our diagnostic tests are paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payers. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize some of our diagnostic tests or services. Even if coverage is provided, the available reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize an adequate return on our investment in any of our diagnostic tests or services. Changes in the reimbursement landscape may occur, which are outside of our control, and may impact the commercial viability of our diagnostic tests. +There is significant uncertainty related to the insurance coverage and reimbursement of newly launched, cleared, authorized or approved diagnostic tests. In the United States, many significant decisions about reimbursement for new diagnostics and medicines are typically made by the CMS, an agency within HHS. CMS decides whether and to what extent a new diagnostic or medicine will be covered and reimbursed under Medicare, although it frequently delegates this authority to local Medicare Administrative Contractors (MACs). Private payers tend to follow Medicare to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for novel diagnostic tests such as ours. Additionally, reimbursement authorities or bodies in Europe may be more conservative than CMS. For example, a number of cancer drugs have been approved for reimbursement in the United States and have not been approved for reimbursement, or have been approved under restricted conditions, in certain European countries. +Outside the United States, the reimbursement process and timelines vary significantly. In Europe, pricing and reimbursement of medical devices is the exclusive competence of the European Union (EU) Member States. However, the European Commission is facilitating a voluntary corporation between the EU Member States on health technology assessments (HTA) which consists of a network of the EU Member States’ national authorities and bodies responsible for HTA and a joint action to support cooperation at scientific and technical level between the HTA bodies. We cannot be sure that such prices and reimbursement decisions will be acceptable to us or our collaborators. If the regulatory authorities in these foreign jurisdictions set prices or make reimbursement criteria that are not commercially attractive for us or our collaborators, our revenues and the potential profitability of our products in those countries would be negatively affected. An increasing number of countries are taking initiatives to control the healthcare budget by focusing cost-cutting efforts on medicinal products, and to a lesser extent, medical devices, provided under their state-run healthcare systems. These price control efforts have impacted all regions of the world, but have been most prominent in the EU. Additionally, some countries require approval of the sale price of a product before it can be marketed or mandatory discounts or profit caps may be applied. Further, after the sale price is approved, it remains subject to review during the product lifecycle. In many countries, the pricing review period begins after marketing or product licensing approval is granted or the CE mark is obtained. As a result, we or our collaborators might obtain marketing approval for a product or service in a particular country, but then may experience delays in the reimbursement approval or be subject to price regulations that would delay the commercial launch of our product or service, possibly for lengthy time periods, which could negatively impact the revenues we are able to generate from the sale of that product or service in that particular country. +Moreover, increasing efforts by governmental and third-party payers, in the United States and abroad, to cap or reduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for newly cleared, authorized, certified or approved devices and medicines and, as a result, they may not cover or provide adequate payment for our clinical diagnostics to be sold by us or our collaborators. For example, in May 2018 the United States government released a “blueprint,” or plan, to reduce the cost of drugs. This blueprint contains certain measures that HHS has been working to implement, although it is possible that HHS’s regulatory priorities may change under the Biden administration. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological pricing, including price or patient reimbursement +38 +constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, which are, in some cases, designed to encourage importation from other countries and bulk purchasing. +We expect to experience pricing pressures on our clinical diagnostics sold by us and our collaborators due to the trend toward value-based pricing and coverage, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs, surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new diagnostic tests. +Measures to reduce healthcare costs may hurt our business. +Biodesix is dependent on reimbursement by government and commercial insurance payers when we bill directly for our lung cancer diagnostic solutions services. When we sell our lung cancer diagnostic solutions services to customers, the majority of our customers are healthcare providers who depend upon reimbursement by government and commercial insurance payers for lung cancer diagnostic solutions services. With a majority of United States patients with lung cancer covered by Medicare, the Medicare reimbursement rate is an important factor both in our revenues from direct claims submission and in a customer’s decision to use our diagnostic tests, limiting the prices we may charge for them. Commercial insurance payers may also exert downward pressure on payment rates for lung cancer treatment services. A reduction in reimbursement rates for lung cancer treatments may adversely affect our customers’ businesses and cause them to enact cost reduction measures that may include reducing the scope of their programs, thereby potentially reducing demand for our diagnostic tests. +Healthcare reform measures could hinder or prevent the commercial success of our diagnostic tests. +In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system in ways that may harm our future revenues and profitability and the demand for our diagnostic tests. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. Current and future legislative proposals to further reform healthcare or reduce healthcare costs may limit coverage of or lower reimbursement for the procedures associated with the use of our diagnostic tests. The effect of any healthcare reform initiative implemented in the future could impact our revenue from the sale of our diagnostic tests. For example, the ACA, contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. +There have been judicial challenges to certain aspects of the ACA, as well as efforts by the Trump administration and Congress to repeal, replace or alter the implementation of certain aspects of the ACA. For example, as part of the TCJA, Congress eliminated the tax penalty, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance. The Further Consolidated Appropriations Act of 2020, Pub. L. No. 116-94, signed into law December 20, 2019, fully repealed the ACA’s “Cadillac Tax” on certain high-cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share (repeal effective in 2021), and the medical device excise tax on non-exempt medical devices. +In addition, other legislative changes have been proposed and adopted since the ACA was enacted. For example, the Budget Control Act of 2011, among other things, included reductions to CMS payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030 unless additional Congressional action is taken, with the exception of a temporary suspension of the 2% cut in Medicare payments from May 1, 2020 through March 31, 2022, and a reduction of the cut to 1% from April 1, 2022 through June 30, 2022. Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced CMS payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover Medicare overpayments to providers from three to five years. +The Biden administration took steps to strengthen the ACA and focus on reducing the cost of healthcare. We face uncertainties that might result from modifications or repeal of any of the provisions of the ACA, including as a result of current and future executive orders and legislative actions. The impact of those changes on us and potential effect on the medical device industry as a whole is currently unknown. Any changes to the ACA are likely to have an impact on our results of operations, and may negatively affect our business, financial condition and results of operations. We cannot predict what other healthcare programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the United States on our business, financial condition and results of operations. +The continuing efforts of the government, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce costs of healthcare may harm: +• +our ability to set a price that we believe is fair for our diagnostic tests; +• +our ability to generate revenue and achieve or maintain profitability; and +• +the availability of capital. +39 +The ACA substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacts our industry. Future changes in healthcare policy could increase our costs and subject us to additional regulatory requirements that may interrupt commercialization of our current and future solutions. Future changes in healthcare policy could also decrease our revenue and impact sales of and reimbursement for our current and future diagnostic tests. +We must comply with anti-corruption, anti-bribery, anti-money laundering and similar laws. +We are subject to the FCPA, which generally prohibits companies in the United States from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business and requires companies to maintain accurate books and records and internal controls. We are also subject to requirements under the United States Treasury Department’s Office of Foreign Assets Control, United States domestic bribery laws and other anti-corruption, anti-bribery and anti-money laundering laws. While we have policies and procedures in place designed to promote compliance with such laws, our employees or other agents may nonetheless engage in prohibited conduct under these laws for which we or our executives might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have an adverse effect on our business, financial condition and results of operations. +Furthermore, international customers may currently order our diagnostic tests, either directly from us or through a potential joint venture, and we are subject to the FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non-United States government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent distributors to sell our diagnostic tests internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents and we could be held responsible for their actions. Other United States companies in the medical device and biopharmaceutical field have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including laws promulgated by OECD countries in which we operate, such as Israel. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees and could result in a material adverse effect on our business, prospects, financial condition and results of operations. We could also suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures. +We must comply with healthcare fraud and abuse laws. +Various federal and state laws, as well as the laws of foreign countries, prohibit payments to induce the referral, purchase, order or use of healthcare products or services and require medical device companies to limit prevent, and/or monitor, and report certain payments to third-party payers, health care professionals, and other individuals. These healthcare fraud and abuse, anti-kickback, public reporting and aggregate spend laws affect our sales, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with lung cancer treatment providers, hospitals, physicians or other potential purchasers or users, including patients, of medical devices and services. They also impose additional administrative and compliance burdens on us. In particular, these laws influence, among other things, how we structure our sales offerings, including discount practices, customer support, education and training programs and physician consulting and other service arrangements. These laws prohibit certain marketing initiatives that are commonplace in other industries. If we were to offer or pay inappropriate inducements for the purchase, order or use of our diagnostic tests or our services, or our arrangements are perceived as inappropriate inducements, we could be subject to claims under various healthcare fraud and abuse laws. +Restrictions under applicable United States federal and state healthcare laws and regulations include the following: +• +the federal Anti-Kickback Statute, a criminal law, prohibits, among other things, persons and entities from knowingly and willfully offering, paying, soliciting or receiving any remuneration, directly or indirectly, in cash or in kind, to induce or reward purchasing, leasing, ordering, or arranging for, referring, or recommending the purchase, lease, order of any good or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid; +• +the Eliminating Kickbacks in Recovery Act, which prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program; +• +the Beneficiary Inducement Statute, which prohibits any person, organization, or entity from giving anything of value to a federal health care program beneficiary that is likely to induce or influence the beneficiary’s choice of provider, practitioner, or supplier for covered services; +• +the federal civil False Claims Act, which may be enforced through civil whistleblower or qui tam actions and is often used to enforce the federal Anti-Kickback Statute and other healthcare laws and regulations, imposes civil penalties and potential exclusion from federal healthcare programs, against individuals or entities for, among other things, knowingly presenting, or +40 +causing to be presented, to the federal government, claims for payment that are false or fraudulent or for making a false record or statement material to an obligation to pay the federal government or for knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the federal government; +• +federal criminal statutes created by HIPAA impose criminal liability for, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program, including private insurance plans, or, in any matter involving a healthcare benefit program, for knowingly and willfully making materially false, fictitious, or fraudulent statements in connection with the delivery of or payment for health care benefits; and +• +analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers, including private insurers. +Other federal and state laws, as well as the laws of foreign countries, generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payments to government or commercial payers that are false or fraudulent, or for items or services that were not provided as claimed. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of product candidates and medical devices from government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations. Moreover, any investigation into our practices could cause adverse publicity and require a costly and time-consuming response. If any physicians or other healthcare providers or entities with whom we expect to do business are found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Manufacturers or laboratories that sell testing services to customers can also be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by providing inaccurate billing or coding information to customers, by providing improper financial inducements, or through certain other activities. We attempt to ensure that any billing and coding information we provide for our diagnostic tests emphasizes the need for physicians and other providers to make independent judgments, use accurate and appropriate billing and coding that complies with all applicable payer policies, and document the medical need for their patients as appropriate. Nevertheless, the government may not regard any billing errors that may be made by our customers as inadvertent and may examine our role in providing information to our customers, physicians and patients concerning the benefits and potential coverage of more frequent therapy. +FDA regulation of our industry generally or our tests specifically could be disruptive to our business. +Our operations are subject to extensive federal, state, local and foreign laws and regulations, including FDA laws and regulations, all of which are subject to change. These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. We believe that we are in material compliance with all statutory and regulatory requirements applicable to us, but there is a risk that one or more government agencies could take a contrary position, or that a private party could file suit under the qui tam provisions of the federal False Claims Act or a similar state law. Such occurrences, regardless of their outcome, could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations, and other private third-party payers. +The FDA has recently increased its attention to marketing of pharmacogenetic tests. For example, in late 2018, the FDA issued a safety communication regarding genetic laboratory tests with claims to predict a patient’s response to specific medications that have not been reviewed by the FDA and may not be supported by clinical evidence. Among other tests, the FDA notice cited genetic tests that claim results can be used to help physicians identify which antidepressant medication would have increased effectiveness or side effects compared to other antidepressant medications. As explained by the FDA in its update to this safety communication, the FDA sent notices to several firms marketing such pharmacogenetic tests where the FDA believes the relationship between genetic variations and the medication’s effects has not been established, including a warning letter sent to a laboratory, in part, for failing to obtain premarket review of its test. +If the FDA’s May 6, 2024 Final Rule to end enforcement discretion is implemented or the FDA otherwise issues new rules, policies, or guidance, due to new legislation or on its own accord, or otherwise determines that our tests are not subject to enforcement discretion, our tests may become subject to FDA requirements, including pre-market review. If this were to happen, it may impact our marketing practices relating to the relevant tests, which in turn may have an adverse impact on our business, financial condition and results of operations. +41 +Failure to comply with federal, state and foreign laboratory licensing requirements and the applicable requirements of the FDA or any other regulatory authority, could cause us to lose the ability to perform our tests, experience disruptions to our business, or become subject to administrative or judicial sanctions. +The diagnostic testing industry is subject to extensive laws and regulations, many of which have not been interpreted by the courts. Tests without FDA clearance, approval, or authorization would not be considered covered countermeasures under the Public Readiness and Emergency Preparedness Act (PREP Act), which authorizes HHS to provide limited liability immunity protection to certain individuals and entities against a claim of loss under federal and state law “caused by, arising out of, relating to, or resulting from” the manufacture, distribution, administration, or use of a covered medical countermeasure, except for claims involving willful misconduct. Consequently, any violations of applicable laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees and could result in a material adverse effect on our business, prospects, financial condition and results of operations. +We are also subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA requires virtually all laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality and proficiency testing requirements intended to ensure that testing services are accurate, reliable and timely. CLIA certification is also a prerequisite to be eligible to bill state and federal health care programs, as well as many private third-party payers, for laboratory testing services. As a condition of CLIA certification, each of our laboratories is subject to survey and inspection every other year, in addition to being subject to additional random inspections. The biennial survey is conducted by CMS, a CMS agent (typically a state agency), or, if the laboratory holds a CLIA certificate of accreditation, a CMS-approved accreditation organization. +Sanctions for failure to comply with CLIA requirements, including proficiency testing violations, may include suspension, revocation, or limitation of a laboratory’s CLIA certificate, which is necessary to conduct our business, as well as the imposition of significant fines or criminal penalties. +Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing licensure, or our failure to renew a CLIA certificate, a state or foreign license, or accreditation, could have a material adverse effect on our business. If the CLIA certificate of any one of our laboratories is revoked, CMS could seek revocation of the CLIA certificates of our other laboratories based on their common ownership or operation, even though they are separately certified. +In addition, we are subject to state laws and regulations governing laboratory licensure. Some states have enacted state licensure laws that are more stringent than CLIA. Although we have obtained licenses from states where we believe we are required to be licensed, we may become aware of other states that require out-of-state laboratories to obtain licensure in order to accept specimens from the state, and it is possible that other states currently have such requirements or will have such requirements in the future. +We may also be subject to regulation in foreign jurisdictions as we seek to expand international utilization of our tests or such jurisdictions adopt new licensure requirements, which may require review of our tests in order to offer them or may have other limitations that may limit our ability to make our tests available outside of the United States. Complying with licensure requirements in new jurisdictions may be expensive, time-consuming and subject us to significant and unanticipated delays. Changes in state or foreign licensure laws that affect our ability to offer and provide diagnostic services across state or foreign country lines could materially and adversely affect our business. In addition, state and foreign requirements for laboratory certification may be costly or difficult to meet and could affect our ability to receive specimens from certain states or foreign countries. +Failure to comply with applicable clinical laboratory licensure requirements may result in a range of enforcement actions, including suspension, limitation or revocation of our CLIA certificate and/or state licenses, imposition of a directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing clinical laboratory licensure or our failure to renew our CLIA certificate, a state or foreign license or accreditation, could have a material adverse effect on our business, financial condition and results of operations. Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so. +Our Louisville, Colorado and De Soto, Kansas laboratories are both CAP-accredited clinical laboratories regulated by CMS pursuant to CLIA. We also have a current CLIA certificate for each facility. To maintain these certificates, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our laboratory from time to time. Furthermore, our diagnostic tests are categorized as LDTs and are not currently subject to FDA enforcement, although certain components provided by third parties and used to create and/or administer the test may be. LDTs are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. Failure to adhere to any new FDA regulation would result in fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal penalties. +42 +FDA is phasing out its general policy of enforcement discretion and will regulate laboratory developed tests as medical devices. +The laws and regulations governing the marketing of diagnostic products are evolving, extremely complex and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, including in vitro diagnostics and, therefore, potentially our clinical laboratory tests. +Pursuant to the FDCA and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion, and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. Although the FDA has asserted that it has authority to regulate the development and use of LDTs, such as our and many other laboratories’ tests, as medical devices, it has generally exercised enforcement discretion and is currently not otherwise regulating most tests developed and performed within a single high complexity CLIA-certified laboratory. Pursuant to this enforcement discretion policy, FDA does not require laboratories that furnish LDTs to comply with the agency’s requirements for medical devices (e.g., establishment registration, device listing, quality systems regulations, premarket clearance or premarket approval, and post-market controls). +We believe that our tests, as utilized in our clinical laboratory, are and would be considered LDTs and that as a result, the FDA does not require that we obtain regulatory clearances or approvals for our LDTs or their components pursuant to the FDA’s current policies and guidance. +On September 29, 2023, FDA announced a proposed rule to amend its regulations to explicitly regulate laboratory developed tests (LDTs) as in vitro diagnostic tests in accordance with the agency’s regulatory authority over medical devices. The FDA finalized its rule on May 6, 2024 and announced that the agency will phase-out its LDT enforcement discretion policy in gradual stages over a total period of four years. LDTs that fall within targeted enforcement discretion policies may be exempt from some of these requirements. +Under the final rule, our tests that are currently offered as LDTs could become subject to certain statutory and regulatory provisions that are applicable to medical devices, including but not limited to, medical device reporting and correction and removal reporting requirements, quality systems regulations, registration and listing requirements, and premarket review requirements. Laboratories offering “high-risk tests that will be subject to premarket authorization application requirements or licensure under Section 351 of the Public Health Service Act, will need to ensure that the appropriate submission is received by the FDA before November 6, 2027. Laboratories offering “moderate-risk” or “low-risk” tests that will be subject to De Novo authorization or premarket notification submissions will need to ensure that the appropriate submission is received by the FDA before May 6, 2028. Other regulatory requirements will be gradually phased in beginning on May 6, 2025. +Failure to comply with applicable requirements under the relevant timeframes could cause us to lose the ability to perform our tests, experience disruptions to our business, or become subject to administrative or judicial enforcement actions, which in turn may have an adverse impact on our business, financial condition, and results of operations. +Legal challenges have been filed in federal district court over the agency’s authority to regulate LDTs as medical devices, and the outcome of such litigation and its impact on FDA’s plan to implement the requirements are uncertain. Congress has also considered legislation to establish a new comprehensive regulatory framework that would provide oversight over LDTs. +Even if the obligations that could be imposed by the final rule do not become applicable to our tests, Congress could take action to amend the law to change the current regulatory framework for in vitro diagnostics and LDTs to require premarket review of LDTs and other regulatory requirements. New requirements, whether imposed through legislation or administratively, could result in delay or additional expense in offering our tests and tests that we may develop in the future. Moreover, failure to comply with applicable requirements under the relevant timeframes could cause us to lose the ability to perform our tests, experience disruptions to our business, or become subject to administrative or judicial enforcement actions, which in turn may have an adverse impact on our business, financial condition, and results of operations. +Our operations, therefore, are or may become subject to extensive regulation by the FDA in the United States. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +test design, development, manufacture, and release; +• +laboratory and clinical testing, labeling, packaging, storage, and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations; +• +record keeping; +• +product marketing, promotion and advertising, sales, and distribution; +43 +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +• +post-market approval studies; and +• +product import and export. +The premarket submission process for medical devices can be expensive, lengthy and unpredictable. The FDA can delay, limit, or deny clearance or approval of a device for many reasons, including: +• +our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or conformity assessment body that the diagnostic tests are safe or effective for their proposed intended uses; +• +the disagreement of the FDA with the design or implementation of our clinical trials or the interpretation of data from clinical trials; +• +serious and unexpected adverse device effects experienced by participants in our clinical trials; +• +the data from our clinical trials may be insufficient to support clearance or approval, where required; +• +our inability to demonstrate that the clinical and other benefits of the device outweigh the risks; +• +the manufacturing process or facilities we use may not meet applicable requirements; and +• +the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance or approval. +The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by any such agency, which may include any of the following sanctions: +• +adverse publicity, warning letters, untitled letters, it has come to our attention letters, fines, injunctions, consent decrees and civil penalties; +• +repair, replacement, refunds, recall or seizure of our diagnostic tests; +• +operating restrictions, partial suspension, or total shutdown of production; +• +denial of our requests for regulatory clearance or premarket approval of new diagnostic tests or services, new intended uses, or modifications to existing diagnostic tests or services; +• +withdrawal of regulatory clearance or premarket approvals that have already been granted; or +• +criminal prosecution. +As discussed above, we believe that our current line of diagnostic tests and their components are LDTs, which are subject to state licensing requirements and federal regulation by CMS under CLIA, which may cause us to be subject to additional FDA regulations discussed above. +While we believe that we are currently in material compliance with applicable laws and regulations, it is possible that the FDA, or other regulatory agencies, would not agree with our determinations. If our products became become subject to premarket submission and other FDA requirements, we would need to comply with the applicable regulations or face significant civil and criminal penalties. In addition, IVDs and CDx tests are widely considered to be Class III devices, and it is possible that in the future, we may develop tests that fall into this category. CDx tests in particular may require further administrative procedures in the PMA process. Exposure to these additional regulatory requirements would also affect our business, financial condition and results of operations. +Our future success depends on our ability to develop, receive regulatory clearance or approval or certification for, and introduce new diagnostic tests or enhancements to existing diagnostic tests that will be accepted by the market in a timely manner. There is no guarantee that the FDA will grant 510(k) clearance, De Novo authorization, or PMA approval of our future diagnostic tests and failure to obtain necessary clearances or approvals for our future diagnostic tests would adversely affect our ability to grow our business. +It is important to our business that we build a pipeline of diagnostic test offerings that address limitations of current lung disease diagnostic tests. As such, our success will depend in part on our ability to develop and introduce new diagnostic tests. However, we may not be able to successfully develop and obtain regulatory clearance or approval or certification for enhancements to our existing diagnostic tests, or new diagnostic tests for any number of reasons, including due to the cost associated with certain regulatory approval requirements, or these diagnostic tests may not be accepted by physicians or users. +44 +The success of any new diagnostic test or enhancement to an existing diagnostic test will depend on a number of factors, including our ability to, among others: +• +identify and anticipate physician and patient needs properly; +• +develop and introduce new diagnostic tests or enhancements to our existing diagnostic tests in a timely manner; +• +avoid infringing upon, misappropriating, or violating the intellectual property rights of third parties; +• +demonstrate, if required, the safety and efficacy of new diagnostic tests with data from clinical studies; +• +obtain the necessary regulatory clearances or approvals or certifications for new diagnostic tests or enhancements to existing diagnostic tests; +• +comply fully with FDA and foreign regulations on marketing of new diagnostic tests or modified diagnostic tests; and +• +provide adequate training to potential users of our diagnostic tests. +If we do not develop new diagnostic tests or enhancements to our existing diagnostic tests in time to meet market demand or if there is insufficient demand for these diagnostic tests or enhancements, or if our competitors introduce new diagnostic tests with functionalities that are superior to ours, our results of operations will suffer. +Some of our future diagnostic tests may require FDA clearance of a 510(k) submission. Other diagnostic tests may require the approval of a PMA. In addition, some of our future diagnostic tests may require clinical trials to support regulatory approval and we may not successfully complete these clinical trials. The FDA may not approve or clear these diagnostic tests for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance, De Novo authorization, or premarket approval of new diagnostic tests. Failure to receive clearance or approval for our new diagnostic tests would have an adverse effect on our ability to expand our business. +Modifications to our marketed tests may require new 510(k) clearances, De Novo authorizations, or PMA approvals, or may require us to cease marketing or recall the modified tests until clearances or approvals are obtained. +Modifications to our diagnostic tests may require new regulatory approvals or clearances, including 510(k) clearances, De Novo authorizations, or premarket approvals, or require us to recall or cease marketing the modified systems until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new submission is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We have made modifications to our diagnostic tests in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our diagnostic tests as modified, which could require us to redesign our diagnostic tests and harm our operating results. In these circumstances, we may be subject to significant enforcement actions. +Where we determine that modifications to our diagnostic tests require a new premarket submission, we may not be able to obtain the additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. Obtaining clearances and approvals can be a time-consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced diagnostic tests in a timely manner, which in turn would harm our future growth. +If we or our suppliers fail to comply with ongoing FDA or other domestic and foreign regulatory authority or conformity assessment body requirements, or if we experience unanticipated problems with our diagnostic tests, they could be subject to restrictions or withdrawal from the market. +Any medical device that we manufacture, including those for which we obtain regulatory clearance or approval or certification, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such diagnostic test, will be subject to continued regulatory review, oversight, and periodic inspections by the FDA and other domestic and foreign regulatory bodies or conformity assessment bodies. In particular, we and our suppliers may be required to comply with FDA’s QSR (QSR codified at 21 C.F.R. § 820) for medical devices and ISO regulations for the manufacture of our diagnostic tests and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any diagnostic test for which we obtain clearance or approval. Regulatory bodies, such as the FDA, and conformity assessment bodies enforce the QSR and other regulations through periodic inspections and audits. The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies or conformity assessment bodies, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, one or more of the following enforcement actions: +• +untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; +45 +• +unanticipated expenditures to address or defend such actions; +• +customer notifications for repair, replacement, or refunds; +• +recall, detention, or seizure of our diagnostic tests; +• +operating restrictions or partial suspension or total shutdown of production; +• +refusing or delaying our requests for 510(k) clearance, De Novo authorization, or premarket approval of new diagnostic tests or modified versions of current diagnostic tests; +• +operating restrictions; +• +withdrawing 510(k) clearances, De Novo authorization, or PMA approvals that have already been granted; +• +revocation of EUAs that have been authorized previously; +• +refusal to grant export approval for our diagnostic tests; and +• +criminal prosecution. +If any of these actions were to occur it would harm our reputation and cause our diagnostic test sales and profitability to suffer and may prevent us from generating revenue. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements which could result in our failure to produce our diagnostic tests on a timely basis and in the required quantities, if at all. +In addition, we are required to conduct surveillance to monitor the safety or effectiveness of our diagnostic tests, and we must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our diagnostic tests. Later discovery of previously unknown problems with our diagnostic tests, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such diagnostic tests or manufacturing processes, withdrawal of the diagnostic tests from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties which would adversely affect our business, operating results and prospects. +Our diagnostic tests and services may in the future be subject to product recalls that could harm our reputation, business and financial results. +Medical devices can experience performance problems in the field that require review and possible corrective action. The occurrence of component failures, manufacturing errors, software errors, design defects or labeling inadequacies affecting a medical device could lead to a government-mandated or voluntary recall by the device manufacturer, in particular when such deficiencies may endanger health. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our diagnostic tests and services in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. Product recalls may divert management attention and financial resources, expose us to product liability or other claims, harm our reputation with customers and adversely impact our business, financial condition and results of operations. Other jurisdictions have similar recall requirements. +Legislative or regulatory reforms may make it more difficult and costly for us to obtain regulatory clearance or approval or certification of any future diagnostic tests and to manufacture, market and distribute our diagnostic tests after clearance or approval is obtained. +From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. For example, the Verifying Accurate, Leading-edge IVCT Development (VALID) Act introduced in Congress would codify into law the term “in vitro clinical test” in order to create a new medical product category separate from medical devices that would include products currently regulated as in vitro diagnostics as well as LDTs. +In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our diagnostic tests. For example, On September 29, 2023, FDA announced a proposed rule to amend its regulations to explicitly regulate laboratory developed tests (LDTs) as in vitro diagnostic tests in accordance with the agency’s regulatory authority over medical devices. The FDA finalized its rule on May 6, 2024 and announced that the agency will phase-out its LDT enforcement discretion policy in gradual stages over a total period of four years. LDTs that fall within targeted enforcement discretion policies may be exempt from some of these requirements. +Under the final rule, our tests that are currently offered as LDTs could become subject to certain statutory and regulatory provisions that are applicable to medical devices, including but not limited to, medical device reporting and correction and removal reporting +46 +requirements, quality systems regulations, registration and listing requirements, and premarket review requirements. Laboratories offering "high-risk" tests that will be subject to premarket authorization application requirements or licensure under Section 351 of the Public Health Service Act, will need to ensure that the appropriate submission is received by the FDA before November 6, 2027. Laboratories offering “moderate-risk” or “low-risk” tests that will be subject to De Novo authorization or premarket notification submissions will need to ensure that the appropriate submission is received by the FDA before May 6, 2028. Other regulatory requirements will be gradually phased in beginning on May 6, 2025. +Failure to comply with applicable requirements under the relevant timeframes could cause us to lose the ability to perform our tests, experience disruptions to our business, or become subject to administrative or judicial enforcement actions, which in turn may have an adverse impact on our business, financial condition, and results of operations. +Legal challenges have been filed in federal district court over the agency’s authority to regulate LDTs as medical devices, and the outcome of such litigation and its impact on FDA’s plan to implement the requirements are uncertain. Congress has also considered legislation to establish a new comprehensive regulatory framework that would provide oversight over LDTs. The incoming Trump Administration may also reverse the final rule. +Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of planned or future diagnostic tests. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. +Any change in the laws or regulations that govern the clearance and approval processes relating to our current, planned and future diagnostic tests could make it more difficult and costly to obtain clearance or approval for new diagnostic tests or to produce, market and distribute existing diagnostic tests. Significant delays in receiving clearance or approval or the failure to receive clearance or approval for any new diagnostic tests would have an adverse effect on our ability to expand our business. +Clinical trials may be necessary to support future product submissions to FDA. These clinical trials are expensive and will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new diagnostic tests and will adversely affect our business, operating results and prospects. +Initiating and completing clinical trials necessary to support any future PMA applications, De Novo requests, and additional safety and efficacy data beyond that typically required for a 510(k) clearance, for our possible future product candidates, will be time consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical trials may not have favorable results in later clinical trials. +Conducting successful clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our diagnostic tests or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. +Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required and we may not adequately develop such protocols to support clearance and approval. Further, the FDA may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our diagnostic tests or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, the FDA may not consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects. +If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval or certification for or commercialize our diagnostic tests and services. +We may not have the ability to independently conduct our pre-clinical and clinical trials for our future diagnostic tests and services and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct such trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our diagnostic tests and services on a timely basis, if at all, and our business, operating results and prospects +47 +may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control. +Our use, disclosure, and other processing of personally identifiable information, including health information, is subject to HIPAA and other federal, state, and foreign privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our business, operating results and prospects. +We maintain and process, and our third-party vendors, collaborators, contractors and consultants maintain and process on our behalf, a large quantity of sensitive information, including confidential business, personal and patient health information in connection with our clinical studies and our employees, and are subject to data privacy and protection laws and regulations that apply to the collection, transmission, storage and use of personally identifying information, which among other things, impose certain requirements relating to the privacy, security and transmission of personal information. Failure by us or our third-party vendors, collaborators, contractors and consultants to comply with any of these laws and regulations could result in notification obligations or enforcement actions against us, which could result in fines, imprisonment of company officials and public censure, claims for damages by affected individuals, damage to our reputation and loss of goodwill, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects. These laws, rules and regulations evolve frequently and their scope may continually change, through new legislation, amendments to existing legislation and changes in enforcement, and may be inconsistent from one jurisdiction to another. The interpretation and application of consumer, health-related and data protection laws, especially with respect to genetic samples and data, in the United States, the EU and elsewhere, are often uncertain, contradictory and in flux. As a result, implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. +In the United States, numerous federal and state laws and regulations, including federal health information privacy laws, state data breach notification laws, state health information privacy laws and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), that govern the collection, use, disclosure and protection of health-related and other personal information could apply to our operations or the operations of our collaborators. +Domestic laws in this area are complex and developing rapidly. Many state legislatures have adopted legislation relating to privacy, data security and data breaches. Laws in all 50 states require businesses to provide notice to customers whose personally identifiable information has been disclosed as a result of a data breach. The laws are not consistent, and compliance in the event of a widespread data breach is costly. States are also frequently amending existing laws, requiring attention to frequently changing regulatory requirements. For example, California recently enacted the CCPA, which became effective on January 1, 2020. The CCPA, among other things, requires new disclosures to California consumers and affords such consumers new abilities to access and delete their personal information, opt-out of certain sales of personal information and receive detailed information about how their personal information is used. The CCPA provides for fines of up to $7,500 per violation, as well as a private right of action for data breaches that is expected to increase the frequency of data breach litigation. While the CCPA has already been amended multiple times, it is unclear how this legislation will be further modified or how it will be interpreted. Interpretations of the CCPA may continue to evolve with regulatory guidance and the CCPA continue to be amended, including through a ballot initiative, adopted by voters in November 2020, known as the California Privacy Rights Act, or CPRA. The CPRA imposes additional data protection obligations on companies doing business in California, including additional consumer rights, including regarding certain uses of sensitive data. It also creates a new California data protection agency - the California Privacy Protection Agency - specifically tasked to enforce the law, which may likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. The effects of this legislation potentially are far-reaching, however, and may require us to modify our data processing practices and policies and incur substantial compliance-related costs and expenses. The CCPA and other changes in state and federal laws or regulations relating to privacy, data protection and information security, particularly any new or modified laws or regulations that require enhanced protection of certain types of data or new obligations with regard to data retention, transfer or disclosure, could increase the cost of providing our offerings, require significant changes to our operations or even prevent us from providing certain offerings in jurisdictions in which we currently operate and in which we may operate in the future. +Because of the breadth of these data protection laws and the narrowness of their exceptions and safe harbors, it is possible that our business or data protection policies could be subject to challenge under one or more of such laws. The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of heightened regulatory focus on data privacy and security issues. Although we endeavor to comply with our published policies and documentation and ensure their compliance with current laws, rules and regulations, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policy and other documentation that provide promises and assurances about privacy and security can subject us to potential state and federal action in the United States if they are found to be deceptive, unfair, or misrepresentative of our actual practices. Any failure by us or other parties with whom we do business to comply with this documentation or with federal, state, local or international regulations could result in proceedings against us by governmental entities, private parties or others. In many jurisdictions, enforcement actions and consequences for noncompliance are rising. +If our operations are found to be in violation of any of the data protection laws described above or any other laws that apply to us, we may be subject to penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, +48 +individual imprisonment, possible exclusion from participation in government healthcare programs, injunctions, private qui tam actions brought by individual whistleblowers in the name of the government, class action litigation and the curtailment or restructuring of our operations, as well as additional reporting obligations and oversight if we become subject to a corrective action plan or other agreement to resolve allegations of non-compliance with these laws, any of which could adversely affect our ability to operate our business and our results of operations. +In addition, numerous state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability, integrity, and other processing of PHI and PII. These laws and regulations include HIPAA. HIPAA establishes a set of national privacy and security standards for the protection of protected health information (as defined in HIPAA, PHI) by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities (CE), and the business associates (BA) with whom such covered entities contract for services. We are a CE under HIPAA when we are conducting our clinical trials. We are a CE with regard to our observational studies and clinical trials, and also a BA under HIPAA for certain other business activities, and we execute BA agreements with our clients. +HIPAA requires CEs and BAs, such as us, to develop and maintain policies with respect to the protection of, use and disclosure of electronic PHI, including the adoption of administrative, physical and technical safeguards to protect such information, and certain notification requirements in the event of a data breach. +HIPAA imposes mandatory penalties for certain violations. Penalties for violations of HIPAA and its implementing regulations start at $119 per violation and are subject to a cap of $1,785,651 for violations of the same standard in a single calendar year. However, a single breach incident can result in violations of multiple standards. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. +In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA CEs and BAs. With regard to BAs, those audits assess the business associate’s compliance with the HIPAA Privacy and Security Standards. Such audits are conducted randomly and after an entity experiences a breach affecting more than 500 individuals’ data. Undergoing an audit can be costly, can result in fines or onerous obligations, and can damage a BAs reputation. +In addition to HIPAA, numerous other federal, state, and foreign laws and regulations protect the confidentiality, privacy, availability, integrity and security of PHI and other types of PII. Some of these laws and regulations may be preempted by HIPAA with respect to PHI, or may exclude PHI from their scope but impose obligations with regard to PII that is not PHI, and in some cases, can impose additional obligations with regard to PHI. These laws and regulations are often uncertain, contradictory, and subject to changing or differing interpretations, and we expect new laws, rules and regulations regarding privacy, data protection, and information security to be proposed and enacted in the future. HHS is also proposing amendments to the HIPAA Privacy Rule to modernize certain data sharing provisions and enhance patient access to their information. This complex, dynamic legal landscape regarding privacy, data protection, and information security creates significant compliance issues for us and our clients and potentially exposes us to additional expense, adverse publicity and liability. While we have implemented data privacy and security measures in an effort to comply with applicable laws and regulations relating to privacy and data protection, some PHI and other PII or confidential information is transmitted to us by third parties, who may not implement adequate security and privacy measures, but it is possible that laws, rules and regulations relating to privacy, data protection, or information security may be interpreted and applied in a manner that is inconsistent with our practices or those of third parties who transmit PHI and other PII or confidential information to us. If we or these third parties are found to have violated such laws, rules or regulations, it could result in government-imposed fines, orders requiring that we or these third parties change our or their practices, or criminal charges, which could adversely affect our business. +Complying with these various laws and regulations could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business. +We may eventually operate in a number of countries outside of the United States whose laws, including data privacy laws, may in some cases be more stringent than the requirements in the United States. For example, EU and UK data privacy laws have specific requirements relating to cross-border transfers of personal data to certain jurisdictions, including to the United States, have strict requirements relating to personal data collection, use or sharing, and have more stringent requirements relating to organizations’ privacy programs and provide stronger individual rights. Moreover, we may also be subject to evolving international privacy and data security regulations which could result in greater compliance costs and in turn lead to penalties, where such compliance programs are not implemented correctly. +Certain of our processing activities are subject to the EU General Data Protection Regulation and the UK General Data Protection Regulation (collectively, the “GDPR”) – including, those involving pseudonymised / key-coded data - as the GDPR applies extra-territorially. The GDPR imposes strict requirements on controllers and processors processing personal data, including, for example, requirements to: (i) identify a legal basis for the processing of personal data, (ii) provide robust disclosures to individuals, (iii) respond to requests from individuals to exercise their data subject rights, (iv) provide personal data breach notifications within 72 hours after discovering the breach, (v) limit the collection and retention of personal data, (vi) impose specific contractual obligations on processors +49 +engaged to process personal data on the instructions of the controller, and (vii) apply enhanced protections to health data and other special categories of personal data. +The EU GDPR also provides that EU Member States may make their own further laws and regulations limiting the processing of personal data, including genetic, biometric or health data, which could limit our ability to use and share such personal data and cause our costs to increase and harm our financial condition. +Failure to comply with the requirements of the GDPR may result in fines of up to €20 million (£17.5 million in the case of the UK GDPR) or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. GDPR compliance may require us to put in place additional mechanisms, which may result in compliance costs and other substantial expenditures. This may be onerous and adversely affect our business, financial condition, results of operations and the profitability of our platform of diagnostic tests. Failure to comply with the GDPR and other countries’ privacy or data security-related laws, rules or regulations could result in material penalties imposed by regulators, affect our compliance with contracts entered into with our collaborators and other third-party payers, and have an adverse effect on our business and financial condition. Currently, the GDPR is only applicable to us as a processor, but as we continue to expand into the European market, the GDPR will have direct applicability to us as a controller. +The GDPR also prohibits the transfer of personal data from the EEA/UK to a country outside of the EEA/UK (e.g., the United States) unless made to a country deemed to have adequate data privacy laws by the European Commission (or UK Government in case of the UK GDPR) or a data transfer mechanism has been put in place. Until recently, one such data transfer mechanism was the EU-US Privacy Shield. However, in July 2020 the Court of Justice of the European Union (CJEU) declared the Privacy Shield to be invalid. Following an executive order on trans-Atlantic data flows issued by President Biden in October 2022, the European Commission in December 2022 announced that it had initiated the process of drafting a new adequacy decision based on a modified data transfer framework that would replace the Privacy Shield, which it completed in July 2023. Though adoption of a new adequacy decision may have the effect of making data transfers to the United States easier, it is widely expected that the updated transfer framework and the adequacy decision will also be reviewed by the CJEU. The CJEU also upheld the validity of standard contractual clauses (SCCs) as a legal mechanism to transfer personal data but companies relying on SCCs will need to carry out a transfer privacy impact assessment, which among other things, assesses laws governing access to personal data in the recipient country and considers whether supplementary measures that provide privacy protections additional to those provided under SCCs will need to be implemented to ensure an essentially equivalent level of data protection to that afforded in the EEA. In turn, the findings of the CJEU will have significant implications for cross-border data flows and may lead to increased transaction, compliance, and technological costs to support international data transfers. +Organizations operating in Canada and covered by the Personal Information Protection and Electronic Documents Act (PIPEDA), or equivalent Canadian provincial laws, must obtain an individual’s consent when they collect, use or disclose that individual’s personal information. Individuals have the right to access and challenge the accuracy of their personal information held by an organization, and personal information may only be used for the purposes for which it was collected. If an organization intends to use personal information for another purpose, it must again obtain that individual’s consent. +We regularly monitor, defend against and respond to attacks to our networks and other information security incidents. Despite our information security efforts, our facilities, systems, and data, as well as those of our third-party service providers, may be vulnerable to privacy and information security incidents such as data breaches, viruses or other malicious code, coordinated attacks, data loss, phishing attacks, ransomware, denial of service attacks, or other security or IT incidents caused by threat actors, technological vulnerabilities or human error. If we, or any of our vendors that support our IT or have access to our data, including any third-party vendors that collect, process and store personal data on our behalf, fail to comply with laws requiring the protection of personal information, or fail to safeguard and defend personal information or other critical data assets or IT systems, we may be subject to regulatory enforcement and fines as well as private civil actions. We may be required to expend significant resources in the response, containment, mitigation of cybersecurity incidents as well as in defense against claims that our information security was unreasonable or otherwise violated applicable laws or contractual obligations. +Our employees, collaborators, independent contractors and consultants may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements. +We are exposed to the risk that our employees, collaborators, independent contractors and consultants may engage in fraudulent or other illegal activity with respect to our business. Misconduct by these employees could include intentional, reckless and/or negligent conduct or unauthorized activity that violates: +• +FDA regulations, including those laws requiring the reporting of true, complete, and accurate information to the FDA authorities; +• +federal and state healthcare fraud and abuse laws and regulations; or +• +laws that require the true, complete and accurate reporting of financial information or data. +50 +In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Misconduct by these parties could also involve individually identifiable information, including, without limitation, the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. Any incidents or any other conduct that leads to an employee, contractor, or other agent, or our company, receiving an FDA debarment or exclusion by the HHS Office of Inspector General (OIG) could result in penalties, a loss of business from third parties, and severe reputational harm. +We have adopted a Code of Business Conduct and Ethics and compliance policies to govern and deter such behaviors, but it is not always possible to identify and deter misconduct by our employees and other agents, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, treble damages, monetary fines, disgorgement, imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and curtailment of our operations. +Clinical development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results. +Our ongoing research and development and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. We are currently conducting pre-and post-market clinical studies of some of our tests. In the future we may conduct clinical trials to support approval of new diagnostic tests and services, or new indications. Clinical studies may need to be conducted in compliance with FDA regulations or the FDA may take enforcement action. The data collected from these clinical studies may ultimately be used to support marketing authorization for these diagnostic tests and services. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims or that the FDA or foreign authorities and conformity assessment bodies will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our tests are safe and effective for the proposed indicated uses, which could cause us to abandon development of our tests and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, may impact our ability to commercialize our tests and generate revenues. +Many of the factors that may cause or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval or certification. The commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial. +We may find it necessary to engage contract research organizations to perform data collection and analysis and other aspects of our clinical trials, which might increase the cost and complexity of our trials. We may also depend on clinical investigators, medical institutions, and contract research organizations to perform the trials, and would control only certain aspects of their activities. Nevertheless, we would be responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on these third parties would not relieve us of our regulatory responsibilities. We and our third-party contractors are required to comply with good clinical practices (GCPs) which are regulations and guidelines enforced by the FDA, and comparable regulations enforced by foreign regulatory authorities for products in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any third-party contractor fails to comply with applicable GCPs, the clinical data generated in clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities or conformity assessment bodies may require us to perform additional clinical trials before clearing or approving our marketing applications. A failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory clearance or approval or certification process. In addition, if these parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality, completeness or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical trials may have to be extended, delayed or terminated. +Many of these factors could be beyond our control. We may not be able to undertake additional trials, repeat trials or enter into new arrangements with third parties without undue delays or considerable expenditures. If there are delays in testing or clearances or approvals as a result of the failure to perform by third parties, our research and development costs would increase and we may not be able to obtain regulatory clearance or approval or certification for our tests. In addition, we may not be able to establish or maintain +51 +relationships with these parties on favorable terms, if at all. Each of these outcomes would harm our ability to market our tests, or to achieve sustained profitability. +The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects. +We cannot be certain that the results of our future clinical trials will support our future product claims or that the FDA or comparable foreign regulatory authorities or conformity assessment bodies will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the future product’s profile. +Our billing, collections and claims processing activities are complex and time-consuming, and any delay in transmitting and collecting claims or failure to comply with applicable billing requirements, could have an adverse effect on our future revenue. +Billing for our tests is complex, time-consuming and expensive. Depending on the billing arrangement and applicable law, we bill various payers, such as government payers, insurance companies and patients, all of which may have different billing requirements. We may face increased risk in our collection efforts, including long collection cycles and the risk that we may never collect at all, either of which could adversely affect our business, financial condition and results of operations. Several factors make the billing process complex, including: +• +differences between the list price for our tests and the reimbursement rates of payers; +• +compliance with complex federal and state regulations related to billing government healthcare programs, including Medicare and Medicaid, to the extent our tests are covered by such programs; +• +differences in coverage among payers and the effect of patient co-payments or co-insurance; +• +differences in information and billing requirements among payers; +• +changes to codes and coding instructions governing our tests; +• +incorrect or missing billing information; and +• +the resources required to manage the billing and claims appeals process. +These billing complexities and the related uncertainty in obtaining payment for our tests could negatively affect our revenue and cash flow, our ability to achieve profitability and the consistency and comparability of our results of operations. In addition, if claims for our tests are not submitted to payers on a timely basis, or if we fail to comply with applicable billing requirements, it could have an adverse effect on our revenue and our business. +Third-party payers require us to identify the test for which we are seeking reimbursement using a Current Procedural Terminology (CPT) code. The CPT code set is maintained by the American Medical Association (AMA). In cases where there is not a specific CPT code to describe a test, such as with the GeneStrat NGS test, the test may be billed under an unlisted molecular pathology procedure code or through the use of a combination of single gene CPT codes, depending on the payer. The Protecting Access to Medicare Act of 2014 (PAMA) authorized the adoption of new, temporary billing codes and unique test identifiers for FDA-cleared or approved tests as well as advanced diagnostic laboratory tests. The AMA has created a new section of CPT codes, Proprietary Laboratory Analyses codes to facilitate implementation of this section of PAMA. In addition, CMS may assign unique level II Healthcare Common Procedure Coding System codes to tests that are not already described by a unique CPT code. The VeriStrat, Nodify XL2, and Nodify CDT tests have test specific CPT codes, but the GeneStrat NGS test does not at this time. +In the instance where a code used does not describe a specific test, the insurance claim must be examined to determine what test was provided. Additionally, in some cases the third party payer determines that the insurance claim must be examined to determine whether the test was appropriate and medically necessary, and whether payment should be rendered, which may require a letter of medical necessity from the ordering physician. This process can result in a delay in processing the claim, a lower reimbursement amount or denial of the claim. As a result, obtaining approvals from third-party payers to cover our tests and establishing adequate reimbursement levels is an unpredictable, challenging, time-consuming and costly process and we may never be successful. +We and our third-party manufacturers and suppliers must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do, or interrupt our, business. +Our research and development activities and our third-party manufacturers’ and suppliers’ activities involve the generation, use, storage and disposal of hazardous materials. We work with materials, including chemicals, biological agents and compounds and samples that could be hazardous to human health and safety or the environment. Our operations also produce hazardous and biological waste products. +52 +Accordingly, we and our third-party manufacturers and suppliers are subject to federal, state, local and foreign environmental, health and safety laws and regulations, and permitting and licensing requirements, including those governing the generation, use, manufacture, storage, handling, transportation, release and disposal of, and exposure to, these materials, and worker health and safety. +We cannot eliminate the risk of contamination or injury resulting from such hazardous materials. We also cannot guarantee that the procedures utilized by our third-party manufacturers for handling and disposing of hazardous materials and wastes comply with all applicable environmental, health and safety laws and regulations. As a result, we may be held liable for any resulting damages, costs or liabilities, including cleanup costs and liabilities, which could be significant, or our commercialization, research and development efforts and business operations may be restricted or interrupted. +Environmental, health and safety laws and regulations are complex, change frequently and have tended to become more stringent. Compliance with such laws and regulations is expensive, and current or future environmental, health and safety laws and regulations may restrict our operations. If we do not comply with applicable environmental health and safety laws and regulations, and permitting and licensing requirements, we may be subject to fines, penalties, a suspension of our business or other sanctions. +Risks Related to our Intellectual Property +Our success may be impaired if we are unable to obtain, maintain and protect our intellectual property rights. +Our commercial success will depend in part on our ability to obtain and maintain patent and other intellectual property protection in the United States and other countries with respect to our diagnostic tests, products and services and technology. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, to protect our proprietary technology and prevent others from duplicating our suite of diagnostic tests and products. However, these means may afford only limited protection and may not: +• +prevent our competitors from duplicating our diagnostic tests and products, including our Nodify XL2, Nodify CDT, GeneStrat, GeneStrat NGS and VeriStrat tests; +• +prevent our competitors from gaining access to our proprietary information and technology, including our AI platform, tech platforms such as the DeepMALDI analysis and intellectual property covering technologies that allow us to develop “test algorithms”; or +• +allow us to gain or maintain a competitive advantage. +Any of our patents, including those we may license, may be challenged, invalidated, rendered unenforceable or circumvented. Consequently, we do not know whether any of our diagnostic tests, products and services will be protectable or remain protected by valid and enforceable patents. We may not prevail if our patents are challenged by competitors or other third parties. The United States federal courts or equivalent national courts or patent offices elsewhere may invalidate our patents, find them unenforceable, or narrow their scope. Furthermore, competitors may be able to design around our patents by developing similar or alternative technologies or products in a non-infringing manner, or obtain patent protection for more effective technologies, designs or methods, including for treating lung cancer. If these developments were to occur, our diagnostic tests and products may become less competitive and sales may decline. +We have filed numerous patent applications seeking protection of diagnostic tests and other inventions originating from our research and development. Our patent applications may not result in issued patents, and any patents that are issued may not provide meaningful protection against competitors or competitive technologies. Further, the examination process may require us to narrow the claims for our pending patent applications, which may limit the scope of patent protection that may be obtained if these applications issue. The scope of a patent may also be reinterpreted and significantly reduced after issuance. Even if patent applications we license or own currently or in the future issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with the protection or competitive advantages we are seeking. +Moreover, some of our owned and in-licensed patents and patent applications are, and may in the future be, co-owned with third parties. If we are unable to obtain or maintain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products and technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects. +The patent position of biotechnology companies generally is highly uncertain, involves complex legal and factual questions, and has been the subject of much litigation in recent years. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the determination of patent rights with respect to pharmaceutical compounds and technologies commonly involves complex legal and factual questions, which has in recent years been the subject of much litigation. Various courts, including the United States Supreme Court have rendered decisions that affect the scope of patentability of certain inventions or discoveries relating to biotechnology. These decisions state, among other +53 +things, that a patent claim that recites an abstract idea, natural phenomenon, or law of nature (for example, the relationship between particular genetic variants and cancer) are not themselves patentable. Precisely what constitutes a law of nature or abstract idea is uncertain, and it is possible that certain aspects of our technology could be considered unpatentable under applicable law. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. Depending on decisions by the United States Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our and our licensors’ ability to obtain new patents or to enforce our existing owned or in-licensed patents and patents that we might obtain or in-license in the future. Additionally, our pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. The scope of patent protection outside of the United States is also uncertain. Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain, and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property rights or narrow the scope of our owned and licensed patents. +If we are unable to obtain and maintain patent protection for our technology, or if the scope of the patent protection obtained is not sufficient, our competitors could develop and commercialize diagnostic tests, products and services similar or superior to ours, and our competitive position may be adversely affected. It is also possible that we will fail to identify patentable aspects of inventions made in the course of our development and commercialization activities before it is too late to obtain patent protection on them. Therefore, we may miss potential opportunities to strengthen our patent position. In addition, the patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. +Additionally, while software and other of our proprietary works may be protected under copyright law, we have chosen not to register any copyrights in these works, and instead, primarily rely on protecting our software as a trade secret. In order to bring a copyright infringement lawsuit in the United States, the copyright must be registered. Accordingly, the remedies and damages available to us for unauthorized use of our copyrights may be limited. +If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed. +In addition to seeking patent protection for the patents underlying our diagnostic tests, products and services, we also rely upon unpatented trade secrets, know-how and continuing technological innovation to develop and maintain a competitive position. Trade secrets and know-how can be difficult to protect. We seek to protect such proprietary information, in part, through confidentiality agreements with our employees, collaborators, contractors, advisors, consultants and other third parties and invention assignment agreements with our employees. We also have agreements with some of our consultants that require them to assign to us any inventions created as a result of their working with us. The confidentiality agreements are designed to protect our proprietary information and, in the case of agreements or clauses containing invention assignment, to grant us ownership of technologies that are developed through a relationship with employees or third parties. +We cannot guarantee that we have entered into such agreements with each party that has or may have had access to our trade secrets or proprietary information. Additionally, despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to, or independently developed by, a competitor or other third party, our competitive position would be materially and adversely harmed. Furthermore, we expect these trade secrets, know-how and proprietary information to over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology and the movement of personnel from academic to industry scientific positions. Consequently, we may be unable to prevent our proprietary technology from being exploited in the United States and abroad, which could affect our ability to expand in domestic and international markets or require costly efforts to protect our technology. +We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known, or be independently discovered by, competitors. To the extent that our employees, consultants, contractors or collaborators use intellectual property rights owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions, which could have a material adverse effect on our business, financial condition and results of operations. +54 +We may be subject to claims that we or our employees have misappropriated the intellectual property rights of a third party, including trade secrets or know-how, or are in breach of non-competition or non-solicitation agreements with our competitors, and third parties may claim an ownership interest in intellectual property we regard as our own. +Many of our employees and consultants were previously employed at or engaged by universities or other medical device, diagnostic, biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees, consultants and contractors, may have executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees, consultants and independent contractors do not use the intellectual property rights, proprietary information, know-how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, used, infringed, misappropriated or otherwise violated the intellectual property rights or disclosed the alleged trade secrets or other proprietary information, of these former employers, competitors or other third parties, or to claims that we have improperly used or obtained such trade secrets. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Any litigation or the threat of litigation may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize potential diagnostic tests, products and services, which could harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management and other employees. +Additionally, we may be subject to claims from third parties challenging our ownership interest in intellectual property rights we regard as our own, based on claims that our employees or consultants have breached an obligation to assign inventions to another employer, to a former employer, or to another person or entity. Litigation may be necessary to defend against any other claims, and it may be necessary or we may desire to enter into a license to settle any such claim; however, there can be no assurance that we would be able to obtain a license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our diagnostic tests or products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. +An inability to incorporate technologies or features that are important or essential to our diagnostic tests or products could have a material adverse effect on our business, financial condition and results of operations, and may prevent us from selling our rights to either of the Nodify XL2 and Nodify CDT tests, or the VeriStrat, GeneStrat, and GeneStrat NGS tests. +In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property rights to execute agreements assigning such intellectual property rights to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property rights that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property rights. Such claims could have a material adverse effect on our business, financial condition, results of operations, and prospects. +Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future diagnostic tests, products and services. +Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. In 2011, the Leahy-Smith America Invents Act (Leahy-Smith Act) was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and also may affect patent litigation. These also include provisions that switched the United States from a first-to-invent system to a first-inventor-to-file system, allow third-party submission of prior art to the USPTO during patent prosecution and set forth additional procedures to attack the validity of a patent by the USPTO administered post grant proceedings, including post-grant review, inter partes review and derivation proceedings. Under a first-inventor-to-file system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor was the first to invent the claimed invention. The USPTO recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective in 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition and results of operations. +In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the United States Supreme Court and the United States Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Recent United States Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents, once obtained. Similarly, foreign courts have made, and will likely continue to +55 +make, changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by United States and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future. +If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets and our business may be adversely affected. +Our trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be violating or infringing on other marks. We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these trademarks or trade names, which we need to build name recognition among potential partners and customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement or dilution claims brought by owners of other trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. +We have not yet registered certain of our trademarks in all of our potential markets, although we have registered several connected to our diagnostic tests, products and services in the United States. If we apply to register these and trademarks in the United States and other countries, our applications may not be allowed for registration in a timely fashion or at all, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademark applications and registrations, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would. +Our efforts to enforce or protect our rights related to trademarks, trade secrets, domain names or other intellectual property rights may be ineffective, could result in substantial costs and diversion of resources and could adversely affect our business, financial condition and results of operations. +We may become involved in lawsuits to protect or enforce our patents, the patents of our licensors or other intellectual property rights, which could be expensive, time consuming and unsuccessful. +Competitors or other third parties may infringe, misappropriate or otherwise violate our patents, the patents of our licensors or other intellectual property rights, or we may be required to defend against claims of infringement, misappropriation or other violations. In addition, our patents also may become involved in inventorship, priority or validity disputes. To counter or defend against such claims can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke those parties to assert counterclaims against us alleging that we infringe their patents or other intellectual property. In any such proceeding, a court or other administrative body may decide that a patent or other intellectual property right owned by us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover such technology. Grounds for a validity challenge could include an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, written description, non-enablement or failure to claim patent-eligible subject matter. Grounds for an unenforceability assertion could include an allegation that someone connected with prosecution of the patent withheld information material to patentability from the USPTO, or made a misleading statement, during prosecution. Third parties also may raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include reexamination, post-grant review, inter partes review, interference proceedings, derivation proceedings and equivalent proceedings in foreign jurisdictions, including opposition proceedings. Such proceedings could result in the revocation or cancellation of or amendment to our patents in such a way that they no longer cover our diagnostic tests, products and services or prevent third parties from competing with our diagnostic tests, products and services. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which the patent examiner and we or our licensing partners were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we could lose at least part, and perhaps all, of the patent protection on our diagnostic tests, products and services. An adverse result in any litigation or other proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. +Moreover, some of our owned and in-licensed patents and patent applications are, and may in the future be, co-owned with third parties. If we are unable to obtain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing diagnostic tests, products, services or technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations. +56 +Even if resolved in our favor, litigation or other proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our management and other personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on our common stock price. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations. +Third parties may initiate legal proceedings alleging that we are infringing, misappropriating, or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business. +The intellectual property landscape in the field of precision oncology is in flux, and it may remain uncertain for the coming years. There may be significant intellectual property related litigation and proceedings relating to our owned and in-licensed, and other third party, intellectual property and proprietary rights in the future. As we move into new markets and applications for our diagnostic tests, products or services, incumbent participants in such markets may assert their patents and other intellectual property rights against us as a means of slowing our entry into such markets or as a means to extract substantial license and royalty payments from us. Our competitors and others may now and, in the future, have significantly larger and more mature patent portfolios than we currently have. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product or service revenue and against whom our own patents may provide little or no deterrence or protection. Therefore, our commercial success depends in part on our non-infringement of the patents or other intellectual property rights of third parties. +However, we may in the future be subject to claims that we, or other parties we have agreed to indemnify, infringe, misappropriate or otherwise violate patents or other intellectual property rights owned or controlled by third parties. Because patent applications are published sometime after filing, and because applications can take several years to issue, there may be additional currently pending third-party patent applications that are unknown to us, which may later result in issued patents. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. We may not have sufficient resources to bring these actions to a successful conclusion. +There is a substantial amount of litigation and other patent challenges, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology industry, including patent infringement lawsuits, interferences, oppositions and inter partes review proceedings before the USPTO, and corresponding foreign patent offices. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, including our competitors, exist in the fields in which we are developing diagnostic tests and in which we may develop future diagnostic tests, products and services. As the precision oncology industry expands and more patents are issued, the risk increases that our diagnostic tests may be subject to claims of infringement of the patent rights of third parties. Numerous significant intellectual property issues have been litigated, are being litigated and will likely continue to be litigated, between existing and new participants in our existing and targeted markets, and competitors have and may assert that our diagnostic tests or services infringe their intellectual property rights as part of a business strategy to impede our successful entry into or growth in those markets. +We could incur substantial costs and divert the attention of our management and technical personnel in defending against any of these claims. Parties making claims against us may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. +Because of the inevitable uncertainty in intellectual property litigation, we could lose a patent infringement or other action asserted against us regardless of our perception of the merits of the case. There is no assurance that a court would find in our favor on questions of infringement, validity, enforceability, or priority. A court of competent jurisdiction could hold that these third-party patents are valid, enforceable, and infringed, which could materially and adversely affect our ability to commercialize any product candidates we may develop and any other product candidates or technologies covered by the asserted third-party patents. In order to successfully challenge the validity of any such United States patent in federal court, we would need to overcome a presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such United States patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such United States patent. +Parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell diagnostic tests, products or services, and could result in the award of substantial damages against us, including treble damages, attorney’s fees, costs, and expenses if we are found to have willfully infringed. In the event of a successful claim of infringement against us, we may be required to pay damages and ongoing royalties, which could be significant, and obtain one or more licenses from third parties, or be prohibited from selling certain diagnostic tests, products or services. We may not be able to obtain these licenses on acceptable or commercially reasonable terms, if at all, or these licenses may be non-exclusive, which could result in our competitors gaining access to the same intellectual property. In addition, we could encounter delays in diagnostic test introductions while we attempt +57 +to develop alternative diagnostic tests, products or services to avoid infringing third-party patents or intellectual property rights. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing diagnostic tests, products or services, and the prohibition of sale of any of our diagnostic tests, products or services could materially affect our business and our ability to gain market acceptance for our diagnostic tests, products and services. +Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. +In addition, our agreements with some of our customers, suppliers or other entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims, including the types of claims described above. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results or financial condition. +We may be subject to claims challenging the priority or inventorship of our patents and other intellectual property rights. +We or our licensors may be subject to claims that former employees, collaborators or other third parties have an interest in our owned or in-licensed patents, trade secrets or other intellectual property rights as an inventor or co-inventor. For example, we or our licensors may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or our or our licensors’ ownership of our owned or in-licensed patents, trade secrets or other intellectual property rights. If we or our licensors fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property rights that are important to our product candidates. +If we or our licensors are unsuccessful in any interference proceeding or other priority or inventorship dispute, we may be required to obtain and maintain licenses from third parties, including parties involved in any such interference proceedings or other priority or inventorship disputes. Such licenses may not be available on commercially reasonable terms or at all, or may be non-exclusive. If we are unable to obtain and maintain such licenses, we may need to cease the development, manufacture, and commercialization of one or more of our diagnostic tests, products or services. The loss of exclusivity or the narrowing of our owned and licensed patent claims could limit our ability to stop others from using or commercializing similar or identical technology and products. Any of the foregoing could result in a material adverse effect on our business, financial condition, results of operations, or prospects. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. +Obtaining and maintaining our patent protection depends on compliance with various required procedures, document submissions, fee payments and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. +Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States at several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees due to non-United States patent agencies. We are also dependent on our licensors to take the necessary action to comply with these requirements with respect to our licensed intellectual property rights. The USPTO and various non-US governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors may be able to enter the market without infringing our patents and this circumstance would have a material adverse effect on our business. +Issued patents covering our diagnostic tests and any other or future diagnostic tests, products or services could be found invalid or unenforceable if challenged. +The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability and some of our patents or patent applications, including licensed patents, may be challenged, in courts or patent offices in the United States and abroad, in opposition, derivation, reexamination, inter partes review, post-grant review or interference. Additionally, if we and our licensing partners initiate or become involved in legal proceedings against a third party to enforce a patent covering one of our diagnostic tests, products, services or technologies, the defendant could counterclaim that the patent covering our diagnostic tests, products or services is invalid or unenforceable. In patent litigation in the United States, counterclaims alleging invalidity or unenforceability are commonplace. Grounds +58 +for a validity challenge could be an alleged failure to meet any of several statutory requirements, including patent eligible subject matter, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement during prosecution. In addition, the United States now awards patent priority to the first party to file a patent application, and others may submit patent claims covering our inventions prior to us. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our diagnostic tests or any diagnostic tests, products and services that we may develop. +A successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights, which could have a material adverse impact on our business. Furthermore, if the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the outcome, it could dissuade companies from collaborating with us to license, develop or commercialize current or future diagnostic tests, products or services. +We may not be aware of all third-party intellectual property rights potentially relating to our current or future diagnostic tests, products or services. +Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until approximately 18 months after filing or, in some cases, not until such patent applications issue as patents. We, or our current or future license partners or collaborators, might not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings, derivation proceedings or other post-grant proceedings declared by the USPTO. The outcome of such proceedings is uncertain, and other patent applications may have priority over our patent applications. Such proceedings could also result in substantial costs to us and divert our management’s attention and resources. +We rely on licenses from third parties in relation to certain diagnostic tests, products and services and if we lose these licenses then we may be subjected to future litigation. +We are a party to license agreements that grant us rights to use certain intellectual property rights, including patents and patent applications, typically in certain specified fields of use, in connection with our diagnostic tests, products and services. Some of those licensed rights could provide us with freedom to operate for aspects of our diagnostic tests, products and services. We may need to obtain additional licenses from others to advance our research, development and commercialization activities. +The in-licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to in-license or acquire third-party intellectual property rights that we may consider attractive or necessary. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. +Furthermore, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. In addition, we expect that competition for the in-licensing or acquisition of third-party intellectual property rights for product candidates that are attractive to us may increase in the future, which may mean fewer suitable opportunities for us as well as higher acquisition or licensing costs. We may be unable to in-license or acquire the third-party intellectual property rights for product candidates on terms that would allow us to make an appropriate return on our investment. If we are unable to successfully obtain rights to suitable product candidates, our business, financial condition, results of operations and prospects for growth could suffer. +Our existing license agreements impose, and we expect that our future license agreements will impose, various diligence, royalty payment, milestone payment, insurance and other obligations on us. If we fail to comply with these obligations or other obligations in our license agreements, our licensors may have the right to terminate these agreements, in which event we may not be able to develop and market any product or use any technology that is covered by these agreements. If our license agreements terminate, or we experience a reduction or elimination of licensed rights under these agreements, we may have to negotiate new or reinstated licenses with less favorable terms or we may not have sufficient intellectual property rights to operate our business. The occurrence of such events could materially harm our business. +Our success may depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for our licensed intellectual property rights. Our licensors may not successfully prosecute the patent applications we license. Even if patents issue in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents or may pursue such litigation less aggressively than we would. Without protection for the intellectual property rights we license, other companies might be able to offer substantially identical diagnostic tests for sale, which could adversely affect our competitive business position and harm our business prospects. +59 +Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations and prospects. +Moreover, disputes may also arise between us and our current or future licensors regarding intellectual property rights subject to a license agreement, including those relating to: +• +the scope of rights granted under the license agreement and other interpretation-related issues; +• +whether, and the extent to which, our diagnostic tests, products, services, technology, and processes infringe on intellectual property rights of the licensor that is not subject to the licensing agreement; +• +whether our licensor or its licensor had the right to grant the license agreement; +• +whether third parties are entitled to compensation or equitable relief, such as an injunction, for our use of the intellectual property rights without their authorization; +• +our involvement in the prosecution of licensed patents and our licensors’ overall patent enforcement strategy; +• +the amounts of royalties, milestones, or other payments due under the license agreement; +• +our right to sublicense patent and other rights to third parties under collaborative development relationships; +• +our diligence obligations under the license agreement and what activities satisfy those diligence obligations; +• +the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property rights by our licensors and us and our collaborators; and +• +the priority of invention of patented technology. +If we do not prevail in such disputes, we may lose any or all of our rights under such license agreements. +In addition, the agreements under which we currently license intellectual property rights or technology from third parties are complex and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property rights or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Moreover, if disputes over intellectual property rights that we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, or are insufficient to provide us the necessary rights to use the intellectual property rights, we may be unable to successfully develop and commercialize any affected diagnostic tests, products or services, which could have a material adverse effect on our business, financial conditions, results of operations and prospects. +Absent the license agreements, we may infringe patents subject to those agreements, and if the license agreements are terminated, we may be subject to litigation by the licensor. Litigation could result in substantial costs to us and distract our management. If we do not prevail, we may be required to pay damages, including treble damages, attorneys’ fees, costs and expenses and royalties or be enjoined from selling our diagnostic tests, products or services, which could adversely affect our ability to offer diagnostic tests, products or services, our ability to continue operations and our financial condition. +Some intellectual property that we in-license may have been developed through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements and a preference for companies based in the United States. Compliance with such regulations may limit our exclusive rights, and limit our ability to contract with manufacturers that are not based in the United States. +Certain of the intellectual property that we license may have been developed through the use of United States government funding and therefore may be subject to certain federal regulations. As a result, the United States government may have certain rights to intellectual property embodied in our diagnostic tests, products and services pursuant to the Bayh-Dole Act of 1980 (Bayh-Dole Act). These United States government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the United States government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). To date, none of our commercialized products are subject to march-in rights. The United States government also has the right to take title to these inventions if we, or the applicable licensor, fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us or the applicable licensor to expend substantial resources. In addition, the United States government requires that any products of the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be +60 +waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for United States manufacturers may limit our ability to contract with product manufacturers outside of the United States for products covered by such intellectual property. To the extent any of our current or future owned or licensed intellectual property is generated through the use of United States government funding, the provisions of the Bayh-Dole Act may similarly apply. Any failure by us to comply with federal regulations regarding intellectual property rights that were developed through the use of United States government funding could have a material adverse effect on our business, financial condition, results of operations, and prospects. +Patent terms may be inadequate to protect our competitive position on our diagnostic tests, products and services for an adequate amount of time. +Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest United States non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. +Even if patents covering our diagnostic tests, products and services are obtained, once the patent life has expired, we may be open to competition from competitive diagnostic tests, products and services. Given the amount of time required for the development, testing and regulatory review of potential new diagnostic tests, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing diagnostic tests, products or services similar or identical to ours. +We may not be able to protect our intellectual property rights throughout the world. +Third parties may attempt to commercialize competitive diagnostic tests, products or services in foreign countries where we do not have any patents or patent applications and/or where legal recourse may be limited. This may have a significant commercial impact on our foreign business operations. +Filing, prosecuting and defending patents on our diagnostic tests, products and services in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing diagnostic tests or products made using our inventions in and into the United States or other jurisdictions. Competitors may use our diagnostic tests, products, services and technologies in jurisdictions where we have not obtained patent protection to develop their own diagnostic tests and, further, may export otherwise infringing diagnostic tests or products to territories where we have patent protection but enforcement is not as strong as that in the United States. These diagnostic tests and products may compete with our diagnostic tests, products or services and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. +Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing diagnostic tests, products and services in violation of our intellectual property rights generally. Proceedings to enforce our intellectual property rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license. +Many countries, including India, China, and certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our current or future licensors are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition and results of operations may be adversely affected. +Intellectual property rights do not necessarily address all potential threats. +The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example: +• +others may be able to make diagnostic tests or products that are similar to our Nodify XL2, Nodify CDT, GeneStrat, GeneStrat NGS or VeriStrat tests or utilize similar technology that is not covered by the claims of our patents or that incorporates certain technology in our Nodify XL2, Nodify CDT, GeneStrat, GeneStrat NGS or VeriStrat tests; +61 +• +we, or our current or future licensors or collaborators, might not have been the first to make the inventions covered by the applicable issued patent or pending patent application that we own or license now or may own or license in the future; +• +we, or our current or future licensors or collaborators, might not have been the first to file patent applications covering certain of our or their inventions; +• +others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights; +• +it is possible that our current or future pending patent applications will not lead to issued patents; +• +issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties; +• +our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive diagnostic tests, products and services for sale in our major commercial markets; +• +we may not develop additional proprietary technologies that are patentable; +• +the patents of others may harm our business; and +• +we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property rights. +Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. +General Risk Factors +We expect that the price of our common stock will fluctuate substantially and you may not be able to sell your shares at or above the price you paid for them. +The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including: +• +volume and customer mix for our Nodify XL2, Nodify CDT, GeneStrat ddPCR, GeneStrat NGS, and VeriStrat testing; +• +the introduction of new diagnostic tests or enhancements to such tests by us or others in our industry; +• +disputes or other developments with respect to our or others’ intellectual property rights; +• +our ability to develop, obtain regulatory clearance or approval or certification for, and market new and enhanced diagnostic tests on a timely basis; +• +product liability claims or other litigation; +• +quarterly variations in our results of operations or those of others in our industry; +• +media exposure of our diagnostic tests or of those of others in our industry; +• +changes in governmental regulations or in the status of our regulatory approvals or applications; +• +changes in earnings estimates or recommendations by securities analysts; and +• +general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors. +In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may significantly affect the market price of our common stock, regardless of our actual operating performance, and you may not realize any return on your investment in us and may lose some or all of your investment. +In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert management’s attention and resources from our business. +Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline. +The trading market for our common stock develops is influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a small reporting company and emerging growth company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had +62 +relatively little experience with us, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. +We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors. +We are an “emerging growth company,” as defined in the JOBS Act. We may take advantage of certain exemptions and relief from various public reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act. We will be exempt from any rules that could be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements; we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved. +Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. When we are no longer eligible to take advantage of the corresponding exemptions, we expect our management and other personnel to devote more time and the Company to incur additional costs to comply with the more stringent reporting requirements applicable to companies that are not emerging growth companies. +We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.24 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) until December 31, 2025 (the year ended December 31st following the fifth anniversary of our IPO). +We are also a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our common shares held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common shares held by nonaffiliates exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +Investors may find our common stock less attractive to the extent we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline or become more volatile. +If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. +The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. It is possible that interpretation, industry practice and guidance may evolve over time. If our assumptions change or if actual circumstances differ from our assumptions, our operating results may be adversely affected and could fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. +Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders. +Our officers, directors and principal stockholders each holding more than 5% of our common stock collectively control approximately 44.0% of our outstanding common stock as of December 31, 2024. As a result, these stockholders, if they act together, could control the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change +63 +of control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of our other stockholders. +Operating as a public company requires us to incur substantial costs and requires substantial management attention. +As a public company, we have incurred and will continue to incur costs associated with corporate governance requirements that are applicable to us as a public company, including rules and regulations of the SEC, under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Securities Exchange Act of 1934, as amended (the Exchange Act), as well as the rules of NASDAQ. Compliance with these rules and regulations have significantly increased our accounting, legal and financial compliance costs and make some activities more time-consuming. These rules and regulations could make it more expensive for us to maintain directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers. Accordingly, increases in costs incurred as a result of being a publicly traded company may adversely affect our business, financial condition and results of operations. +If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock. +As a result of being a public company, we are required, under Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis. +During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. The effectiveness of our controls and procedures may be limited by a variety of factors, including: +• +faulty human judgment and simple errors, omissions, or mistakes; +• +fraudulent action of an individual or collusion of two or more people; +• +inappropriate management override of procedures; and +• +the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial control. +When we cease to be an “emerging growth company” under the federal securities laws, our auditors will be required to express an opinion on the effectiveness of our internal controls. If we are unable to confirm that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline. +Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud. +We are subject to the periodic reporting requirements of the Exchange Act. We have designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected. +Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management. +Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. +Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining +64 +with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. +Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees. +Our amended and restated certificate of incorporation specifies that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders. Notwithstanding the foregoing, the exclusive forum provision will not apply to any claim to enforce any liability or duty created by the Exchange Act or the Securities Act and for which the federal courts have exclusive jurisdiction. We believe this exclusive forum provision benefits us by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in such action. +Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us. +Our amended and restated articles of incorporation provide that we will indemnify our directors and officers to the fullest extent permitted by Section 145 of the Delaware General Corporate Law. +In addition, as permitted by the Delaware General Corporate Law, our amended and restated articles of incorporation and our indemnification agreements that we have entered into with our directors and officers provide that: +• +we will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by applicable law. Such law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful; +• +we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law; +• +we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification; +• +the rights conferred in our amended and restated articles of incorporation are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and +• +we may not retroactively amend our amended and restated articles of incorporation provisions to reduce our indemnification obligations to directors, officers, employees and agents. +We have never paid dividends on our capital stock, and we do not anticipate paying dividends in the foreseeable future. +We have never paid dividends on any of our capital stock and currently intend to retain any future earnings to fund the growth of our business. We may enter into credit agreements or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our common stock. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on our financial condition, results of operations and other factors that our board of directors may deem relevant. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future. +65 +1B. Unresolved S taff Comments. +None. +1C. Cyberse curity. +Risk Management and Strategy +Our business depends on the secure and continuous processing of information, supported by a resilient IT infrastructure and trusted critical vendors. Cybersecurity is a fundamental pillar of our risk management framework, seamlessly integrated into our decision-making at every level. Our IT department proactively identifies, evaluates, and mitigates cybersecurity risks to ensure alignment with our business objectives and operational needs. We maintain robust security policies and procedures, including comprehensive security and data privacy training for staff, stringent physical security measures, and advanced electronic data protection. Our cybersecurity program strictly adheres to HIPAA, GDPR, and SEC guidelines, incorporating strong data access controls, privacy safeguards, password protocols, encryption, and a structured incident response process with a thorough materiality assessment. +Beyond policies, our network is fortified with a multi-layered defense strategy, including firewalls and advanced cyber-threat monitoring. We employ 24/7 vulnerability scanning and extended detection and response (XDR) to continuously detect, analyze, and neutralize potential threats in real time. We recognize the importance of securing our extended digital ecosystem, including third-party service providers . To mitigate associated risks, we conduct rigorous security assessments before onboarding any third-party vendors and enforce ongoing monitoring to ensure continuous compliance with our cybersecurity standards. +To further strengthen our security posture, we collaborate with top-tier external experts who conduct rigorous evaluations and stress tests of our cybersecurity infrastructure. Through audits, threat assessments, and strategic consultations, we ensure that our security measures remain at the forefront of industry best practices. Our unwavering commitment to cybersecurity safeguards the integrity, confidentiality, and availability of our critical information assets, ensuring operational resilience and trust in our business. +Current Cybersecurity Risks +As of the date of this Annual Report on Form 10-K, the Company has not experienced any cybersecurity threats or incidents that have materially affected or are reasonably likely to materially affect the Company. In the event of a cybersecurity incident, the Company is equipped with a well-defined incident response plan. This plan includes immediate actions to mitigate the impact and long-term strategies for remediation and prevention of future incidents. See "Risk Factors— We may face additional costs, loss of revenue, significant liabilities, harm to our brand, decreased use of our products or services and business disruption if there are any security or data privacy breaches or other unauthorized or improper access." +Management and Board Oversight +Our management is responsible for day-to-day risk management activities. Our Board of Directors, acting directly and through its committees, is responsible for the oversight of our risk management. The Nominating and Governance Committee monitors our cybersecurity risk profile, receives periodic updates from management on all matters related to cybersecurity and reports to our full Board of Directors on an annual basis or as necessary . The Nominating and Governance Committee is composed of members with diverse expertise that allows them to oversee cybersecurity risks effectively. +Management is involved in assessing and managing material cybersecurity risks and incidents through dialogue with our Information Security Officer. Our Information Security Officer brings expertise to this role through his in-depth knowledge and experience in technology management and cybersecurity. Our Information Security Officer is continually informed about the latest developments in cybersecurity. This is crucial for the effective prevention, detection, mitigation and remediation of cybersecurity incidents, and allows him to regularly inform our Chief Executive Officer and Chief Financial Officer of any and all aspects of our business related to cybersecurity and information technology. +Our Chief Executive Officer, Chief Financial O fficer and Information Security Officer re gularly report to the Nominating and Governance Committee to ensure effective and efficient oversight of our cybersecurity threats and material risks, and to assist in proper risk management. Significant cybersecurity matters and strategic risk management decisions will be escalated from the Nominating and Governance Committee to the Board of Directors, ensuring that there is comprehensive oversight and the full Board of Directors can provide guidance on critical cybersecurity issues. +Item 2. Pro perties. +In March 2022, the Company entered into a lease agreement (the CVP Lease) with Centennial Valley Properties I, LLC, a Colorado limited liability company for office and laboratory space in Louisville, Colorado. In August 2022, CVP assigned the lease to CVP I Owner LLC, within the terms allowing for the assignment of the lease. The Company relocated its corporate headquarters to Louisville, Colorado in December 2023. We also lease office and laboratory space located in De Soto, Kansas, under an operating lease agreement +66 +that expires in October 2026. A portion of our employees are located outside of Colorado and Kansas, and others work from home. Our properties are suitable for our current business operations. +Location +Use +Square Feet +Expiration +Louisville, Colorado +Office and laboratory +79,980 +March 31, 2035 +De Soto, Kansas +Office and laboratory +9,066 +October 31, 2026 +Item 3. Legal Proceedings. +From time to time, we may become involved in legal proceedings or investigations which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition, or cash flows. +Item 4. Mine Saf ety Disclosures. +None. +67 +PART II +Item 5. Market for Registrant’s Common Equity, Related Stock holder Matters and Issuer Purchases of Equity Securities. +Market Information +Our common stock is traded on The NASDAQ Global Market under the symbol “BDSX”. The high and low closing prices for our common stock on The NASDAQ Global Market from January 1, 2023 to December 31, 2024 were $2.12 and $1.19, respectively. +Holders of our Common Stock +As of February 24, 2025, there were approximately 222 holders of our common stock. +Dividend Policy +We have never declared or paid dividends on our common stock and do not expect to pay dividends on our common stock for the foreseeable future. We anticipate that all of our liquidity in the foreseeable future will be used for the operation and growth of our business. Any future determination to declare dividends will be subject to the discretion of our Board of Directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects, and any other factors deemed relevant by our Board of Directors. In addition, the terms of our term loan restrict our ability to pay dividends on our common stock, and we may also enter into credit agreements or other borrowing arrangements in the future that will further restrict our ability to declare or pay dividends on our common stock. +Recent Sales of Unregistered Securities and Use of Proceeds +On April 5, 2024, we entered into the Securities Purchase Agreements, pursuant to which we sold 760,857 shares of our Series A Preferred Stock, which, subject to stockholder approval and certain beneficial ownership limitations set by each holder pursuant to the Series A Certificate of Designation, would automatically convert into 40 shares of Common Stock for each share of Series A Preferred Stock, for an aggregate of up to 30,434,280 shares of our common stock and an aggregate purchase price of $35.0 million. The Private Placement Preferred Shares were offered and sold in transactions exempt from registration under the Securities Act, in reliance on Section 4(a)(2) thereof. Each of the investors represented that it was an “accredited investor,” as defined in Regulation D, and acquired the securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The Private Placement Preferred Shares have not been registered under the Securities Act and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws. +In connection with the Concurrent Private Placement, the Company also entered into a Registration Rights Agreement, dated April 5, 2024 (the Registration Rights Agreement), with the Investors, which provides that the Company will register the resale of the shares of Common Stock issuable upon conversion of the Preferred Stock. Pursuant to the Registration Rights Agreement, the Company was required to prepare and file an initial registration statement with the SEC as soon as reasonably practicable, but in no event later than April 23, 2024 (the Filing Deadline), and to use reasonable best efforts to have the registration statement declared effective within 50 days after the closing of the Concurrent Private Placement, subject to the approval of the conversion of the Concurrent Private Placement Shares being received at the Company’s 2024 annual meeting of stockholders. +The Company used the proceeds from the Concurrent Private Placement for commercial expansion of sales, supporting its product pipeline, research and development and for general corporate purposes (see – Item 8. "Financial Statements and Supplementary Data"). +On May 21, 2024, the Company held its 2024 annual meeting of stockholders in which the Conversion Proposal and Issuance Proposal were approved by the Company's stockholders. Upon approval, each share of Series A Preferred Stock automatically converted into 40 shares of Common Stock and, on May 23, 2024, the Company issued 30,434,280 shares of Common Stock in exchange for all Series A Preferred Stock. +On August 3, 2023, the Company entered into subscription agreements (the August 2023 Subscription Agreements) with all of the members of our Board of Directors, all Section 16 officers, and additional members of the Biodesix leadership team (together, the Investors) for the issuance and sale by the Company of an aggregate of 16,975,298 shares of the Company’s common stock at a purchase price (determined in accordance with NASDAQ rules relating to the “Minimum Value” of the Company’s common stock) of $1.62 per share for an aggregate purchase price of approximately $27.5 million. The Subscription Agreements did not include any registration rights. +The Company used the proceeds for the commercial expansion of sales, research and development, and for general corporate purposes (see – Item 8. "Financial Statements and Supplementary Data"). +Purchases of Equity Securities by the Issuer and Affiliated Purchasers +None. +Item 6. [ Reserved] +68 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +Biodesix, Inc. is referred to throughout this Annual Report on Form 10-K for the period ended December 31, 2024 (Form 10-K) as “we”, “us”, “our” or the “Company.” +The following discussion of our financial condition and results of operations should be read together with our audited financial statements and related notes and other financial information included elsewhere in this Annual Report on Form 10-K. +In addition to historical financial information, this discussion and other parts of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part I, Item 1A above. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ from those anticipated. +These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. +The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), is provided to supplement the audited financial statements and the related notes in Part II - Item 8 of this Annual Report on Form 10-K. We intend for this discussion to provide you with information that will assist you in understanding our financial statements, the changes in key items in those financial statements from year to year and the primary factors that accounted for those changes. Data for the years ended December 31, 2024 and 2023 has been derived from our audited financial statements included in this Annual Report on Form 10-K. +Overview +We are a leading diagnostic solutions company and our mission is to transform patient care and improve outcomes through personalized diagnostics that are timely, accessible, and address immediate clinical needs. We envision a world where patient disease is conquered through the guidance of personalized diagnostics. +At Biodesix, we have built a team with deep experience in diagnostics including commercialization, reimbursement, regulatory, medical affairs, research and development, technology, and operations to provide needed products and services to address critical clinical questions and help improve patient care. We believe that establishing a new standard of care utilizing personalized diagnostics requires a deep understanding of clinical needs, scientific expertise to develop tests using the optimal technology for each clinical question, development of clinical evidence to demonstrate benefits of the testing, a scalable operational infrastructure, and an established commercial channel to drive market adoption and payer coverage. +We employ multiple technologies, including genomics, proteomics, and radiomics, combined with artificial intelligence (AI), to discover, develop, and commercialize innovative diagnostic tests for physicians, biopharmaceutical, life science, and diagnostics companies to help improve patient care. +Our Biodesix Lung Diagnostic Tests support clinical decisions to expedite personalized care and improve outcomes for patients with lung disease. We believe our diagnostic tests help healthcare providers meaningfully improve lung disease diagnosis, treatment, and monitoring as well as lower the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. We currently offer two tests that assess the risk of cancer in lung nodules and three tests that provide treatment guidance after a lung cancer diagnosis. +Diagnosis - Nodule Management +• +Nodify CDT ® and Nodify XL2 ® tests, marketed as Nodify Lung® Nodule Risk Assessment, assess a suspicious lung nodule's risk of lung cancer to help identify the most appropriate treatment pathway. The Nodify CDT and XL2 tests have an established average turnaround time of one and five business days, respectively, from receipt of the blood sample, providing physicians with timely results to guide diagnostic planning. The Nodify CDT test is a blood-based test that detects the presence of seven autoantibodies associated with the presence of tumors. Elevated levels of the autoantibodies in patients with lung nodules indicate an increased risk of lung cancer to help identify patients that may benefit from timely intervention. The Nodify XL2 test is a blood-based proteomic test that evaluates the likelihood that a lung nodule is benign to help identify patients that may benefit from surveillance imaging. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +69 +Lung Cancer Treatment & Monitoring +• +GeneStrat ® ddPCR, GeneStrat NGS ® and VeriStrat ® tests, marketed as part of our IQLung™ testing strategy, are used following diagnosis of lung cancer to detect the presence of mutations in the tumor and the state of the patient’s immune system to help guide treatment decisions. The GeneStrat ddPCR tumor genomic profiling test and the VeriStrat immune profiling test have an established average turnaround time of two business days from receipt of the blood sample, and the GeneStrat NGS test has an established average turnaround time of three business days from receipt of the blood sample, providing physicians with timely results to facilitate treatment decisions. The GeneStrat ddPCR test evaluates the presence of actionable mutations in lung cancer. The test is covered independent of stage and can be used multiple times per patient to monitor changes in mutation status. The GeneStrat NGS test is a broad 52 gene panel, including guideline recommended mutations that help identify advanced stage patients eligible for targeted therapy or clinical trial enrollment. The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. +In addition, our Biodesix Development Services enable the world’s leading biopharmaceutical, life sciences, and research institutions with scientific, technological, and operational capabilities that fuel the development of diagnostic tests, tools, and therapeutics. We provide development services to enable therapeutic clinical trials, the validation of life sciences tools and diagnostics, and the discovery, development, and commercialization of diagnostics. Biodesix Diagnostic Services has been utilized by over 65 industry clients and academic partners. +We continuously revisit our technology strategy and roadmap to integrate new technologies into our evolving offering, which ultimately support the addition of new service and product revenue offerings. We believe that no single technology can interrogate the complexity of the human disease state to help solve all clinical questions. For that reason, we employ a multi-omic approach to solving diagnostic challenges. +We offer end-to-end diagnostic solutions, including translational research, initial biomarker discovery, assay design, development, and validation, testing of clinical trial samples, regulatory, reimbursement, commercialization, and logistical support services. We offer our existing on-market tests, a suite of other research tests and the capability to custom design novel tests for use by our customers. +While our biopharmaceutical discovery, diagnostic development and testing revenue continues to grow, it is important to note that we benefit greatly from these partnerships in many ways that expand beyond revenue. We are continuously expanding our knowledge and biological understanding of multiple diseases and the rapidly evolving treatment landscape. +Factors Affecting Our Performance +We believe there are several important factors that have impacted our operating performance and results of operations, including: +• +Testing volume and customer mix. Our revenues and costs are affected by the volume of testing and mix of customers from period to period. We evaluate both the volume of our commercial tests, or the number of tests that we perform for patients on behalf of clinicians, as well as tests for biopharmaceutical companies. Our performance depends on our ability to retain and broaden adoption with existing customers, as well as attract new customers. We believe that the test volume we receive from clinicians and biopharmaceutical companies are indicators of growth in each of these customer verticals. Customer mix for our tests has the potential to significantly impact our results of operations, as the average selling price for biopharmaceutical sample testing is currently significantly greater than our average selling price for clinical tests since we are not a contracted provider for, or our tests are not covered by all clinical patients’ insurance. We evaluate our average selling price for tests that are covered by Medicare, Medicare Advantage and commercial payers to understand the trends in reimbursement and apply those trends to our revenue recognition policies. +• +Reimbursement for clinical diagnostic testing. Our revenue depends on achieving broad coverage and reimbursement for our tests from third-party payers, including both commercial and government payers. All five Biodesix blood-based lung diagnostic tests within Nodify Lung Nodule Risk Assessment testing and IQLung strategy for lung cancer patients are covered by Medicare. Payment from third-party payers differs depending on whether we have entered into a contract with the payers as a “participating provider” or do not have a contract and are considered a “non-participating provider.” Payers will often reimburse non-participating providers, if at all, at a lower rate than participating providers. +Historically, we have experienced situations where commercial payers proactively reduced the amounts they were willing to reimburse for our tests, and in other situations, commercial payers have determined that the amounts they previously paid were too high and have sought to recover those perceived excess payments by deducting such amounts from payments otherwise being made. When we contract to serve as a participating provider, reimbursements are made pursuant to a negotiated fee schedule and are limited to only covered indications. Becoming a participating provider generally results in higher reimbursement for covered indications and lack of reimbursement for non-covered indications. As a result, the impact of becoming a participating provider with a specific payer will vary. If we are not able to obtain or maintain coverage and adequate reimbursement from third-party payers, we may not be able to effectively increase our testing volume and revenue +70 +as expected. Additionally, retrospective reimbursement adjustments can negatively impact our revenue and cause our financial results to fluctuate. +On July 6, 2023, the Company announced that the Centers for Medicare & Medicaid Services (CMS) has designated the Nodify CDT Test as an Advanced Diagnostic Laboratory Test (ADLT) effective June 30, 2023. Obtaining ADLT status is a recognition that the Nodify CDT test meets the stringent criteria established under the Protecting Access to Medicare Act of 2014. ADLT status is reserved for innovative tests with Medicare coverage that provide new clinical diagnostic information that cannot be obtained from any other test or combination of tests. Nodify CDT joins our Nodify XL2 and VeriStrat tests with the ADLT designation. +• +Investment in clinical studies and product innovation to support growth. A significant aspect of our business is our investment in research and development, including the development of new products and our investments in clinical studies for our on-market and pipeline products. Our studies focus on generating evidence to support expanded payer coverage, commercial adoption, and regulatory approvals. Current efforts are focused primarily on clinical utility as well as understanding the economic impact of our tests in assisting with decisions related to patient management and the potential impact of our tests in reducing overall healthcare costs. +The ongoing INSIGHT study was designed to expand our clinical understanding of the predictive and prognostic value of the VeriStrat test. On June 27, 2023, we completed enrollment of 5,000 patients with non-small cell lung cancer. All study participants currently enrolled in the study are expected to complete study follow-up by 2026. The participant data will be monitored, and sites will be closed accordingly throughout 2025. +On July 12, 2023, we announced the prospective, real-world ORACLE study (An Observational Registry Study to Evaluate the Performance of the Nodify XL2 Test) achieved the primary endpoint of a statistically significant change in the proportion of benign lung nodules managed by Nodify XL2 experiencing invasive procedures. The ORACLE study showed patients with benign nodules managed with the Nodify XL2 test were 74% less likely to undergo an unnecessary invasive procedure compared to the control group. Additionally, the proportion of patients sent to CT surveillance with malignant nodules did not differ between the Nodify XL2 group and the control group. The ORACLE study officially closed on May 28, 2024. +The ALTITUDE study is a randomized control study, launched during the fourth quarter 2020, seeking to further demonstrate the utility of the Nodify CDT and XL2 tests. +On October 8, 2024, at the CHEST Annual Meeting, the Company presented the experience of healthcare providers using the Nodify Lung Nodule Risk Assessment in over 35,000 patients consecutively tested in a real-world clinical setting. The Company also announced a new clinical study, CLARIFY, that will collect patient outcomes and other clinical information on a subset of the patients featured in the CHEST presentation. CLARIFY is designed to confirm performance of the Nodify CDT and Nodify XL2 tests in diverse patient subgroups through a retrospective chart review of up to 4,000 patients that were tested in a real-world clinical setting. The study's intent is to expand the extensive evidence characterizing the validation and utility of Nodify Lung testing. +Our clinical research has resulted in approximately 90 peer-reviewed publications for our tests. In addition to clinical studies, we are collaborating with investigators from multiple academic cancer centers. On June 3, 2022, we announced the intent to develop a new novel molecular minimal residual disease (MRD) test as a part of a master sponsored research agreement (MSRA) with Memorial Sloan Kettering Cancer Center (MSK). In addition, the MSRA between MSK and the Company also includes the potential future development of other diagnostic tests aimed at improving the treatment of cancer. On March 25, 2024, we announced a new master collaborative research agreement (MCRA) with MSK under which the teams will collaborate on a development plan for diagnostic tests aimed at improving the treatment of cancer. Biodesix will utilize its array of genomics, proteomics, and data mining capabilities with the aim of developing and commercializing oncology biomarker assays in collaboration with MSK. Bio-Rad will provide its industry-leading digital PCR assay technology in support of this important work. We believe these studies and collaborative arrangements are critical to gaining physician adoption and driving favorable coverage decisions by payers and expect our investments in research and development to increase. Further we also expect to increase our research and development expenses to fund further innovation and develop new clinically relevant tests. +• +Ability to attract new biopharmaceutical customers and maintain and expand relationships with existing customers. Our business development team promotes the broad utility of our products for biopharmaceutical companies in the United States and internationally. Our revenue, business opportunities and growth depend in part on our ability to attract new biopharmaceutical customers and to maintain and expand relationships with existing biopharmaceutical customers. We expect to increase our sales and marketing expenses in furtherance of this as we continue to develop these relationships, and we expect to support a growing number of investigations and clinical trials. If our relationships expand, we believe we may have opportunities to offer our platform for companion diagnostic development, novel target discovery and validation efforts, and to grow into other commercial opportunities. For example, we believe our multi-omic data including genomic and proteomic +71 +data, in combination with clinical outcomes or claims data, has revenue-generating potential, including for novel target identification and companion diagnostic discovery and development. +• +Motivating and expanding our field sales force and customer support team. Our field sales force is the primary point of contact in the clinical setting. These representatives of the Company must cover expansive geographic regions which limits their time for interaction and education of our products in the clinical setting. We plan to continue investing in the field sales force through select expansion and provide them with tools that maximize their education and selling efforts in order to achieve greater returns. Additionally, we plan to invest in the marketing and customer support teams to continue to provide the field sales force with the resources to be successful. +While each of these areas present significant opportunities for us, they also pose significant risks and challenges that we must address. See Part I, Item 1A. “Risk Factors” for more information. +Fourth Quarter and Full Year 2024 Financial and Operational Highlights +The following were significant developments affecting our business, capital structure and liquidity during the year ended December 31, 2024 as compared to the same period in 2023 unless otherwise noted: +• +Total revenue of $20.4 million and $71.3 million for the fourth quarter and fiscal 2024, respectively, an increase of 39% and 45% over the respective prior year comparable periods; +o +Lung Diagnostic Testing revenue of $17.2 million and $64.7 million for the fourth quarter and fiscal 2024, respectively, an increase of 34% and 43% over the respective prior year comparable periods; primarily driven by an increase in total tests delivered; +o +Development Services revenue of $3.2 million and $6.6 million for the fourth quarter and fiscal 2024, respectively, an increase of 72% and 70% over the respective prior year comparable periods; +• +Gross margin was $16.1 million, or 79%, and $55.8 million, or 78%, for the fourth quarter and fiscal 2024, respectively, as a percentage of revenue compared to 77% and 73% in the prior year comparable periods, primarily driven by growth in Lung Diagnostic testing and optimization of testing workflows that resulted in improvements in costs per test and the ongoing expansion of our Diagnostic Services business; +• +Operating expenses (excluding direct costs and expenses) of $22.7 million and $90.2 million for the fourth quarter and fiscal 2024, an increase of 25% and 17% over the respective prior year comparable periods; +o +Increase in operating expenses is primarily attributed to an increase in sales and marketing costs to support Lung Diagnostic sales growth, as well as to enhance Biodesix awareness and drive product adoption; +o +Includes non-cash stock compensation expense of $1.3 million and $6.6 million during fourth quarter and fiscal 2024, respectively, an increase of 17% and 24% over the respective prior year comparable periods; +• +Net loss of $8.3 million and $42.9 million for the fourth quarter and fiscal 2024, respectively, an improvement of 10% and 18% over the respective prior year comparable periods; +• +Cash and cash equivalents of $26.2 million as of December 31, 2024. Subsequent to quarter end, we amended our term loan facility with Perceptive Advisors to extend the availability of the $10 million Tranche C loan. +Components of Operating Results +Revenues +We derive our revenue from two sources: (i) Biodesix Lung Diagnostic Testing (Lung Diagnostic Testing), providing lung diagnostic testing services for healthcare providers associated with our five blood-based tests and (ii) Biodesix Development Services (Development Services) providing diagnostic testing services to biopharmaceutical, life sciences, and diagnostic companies. +Lung Diagnostic Testing +Lung Diagnostic test revenue is generated from delivery of results from our diagnostic tests. In the United States, we performed tests as both an in-network and out-of-network service provider depending on the test performed and the contracted status of the insurer. We consider diagnostic testing to be completed upon the delivery of test results to our customer, either the prescribing physician or third-party to which we contracted for services to be performed, which is considered the performance obligation. The fees for such services are billed either to a third party such as Medicare, medical facilities, commercial insurance payers, or to the patient. We determine the transaction price related to our contracts by considering the nature of the payer, test type, the historical amount of time until payment by a payer and historical price concessions granted to groups of customers. +72 +Development Services +Development Services revenue is generated from the delivery of our on-market tests, pipeline tests, custom diagnostic testing, and other scientific services for a purpose as defined by any individual customer. At times we collaborate with large biopharmaceutical companies in an attempt to discover biomarkers that would be helpful in their drug development or marketing. The performance obligations and related revenue for these sales is defined by a written agreement between us and our customer. These services are generally completed upon the delivery of testing results, or other contractually defined milestone(s), to the customer, which is considered the performance obligation. Customers for these services are typically large pharmaceutical companies where collectability is reasonably assured and therefore revenue is accrued upon completion of the performance obligations. Revenue derived from services is often unpredictable and can cause significant swings in our overall net revenue line from quarter to quarter. +In addition, Development Services also include amounts derived from licensing our digital sequencing technologies to our international laboratory partners. We are compensated through royalty-based payments for the licensed technology, and depending on the nature of the technology licensing arrangements, and considering factors including, but not limited to: enforceable right to payment and payment terms, and if an asset with alternative use is created, these revenues are recognized in the period when royalty-bearing sales occur. +Operating Expenses +Direct costs and expenses +Cost of diagnostic testing generally consists of cost of materials, direct labor, including bonuses, employee benefits, share-based compensation, equipment and infrastructure expenses associated with acquiring and processing test samples, including sample accessioning, test performance, quality control analyses, charges to collect and transport samples; curation of test results for physicians; and in some cases, license or royalty fees due to third parties. Costs associated with performing our tests are recorded as the tests are processed regardless of whether revenue was recognized with respect to the tests. Infrastructure expenses include allocated depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs. Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents. While we do not believe the technologies underlying these licenses are necessary to permit us to provide our tests, we do believe these technologies are potentially valuable and of possible strategic importance to us or our competitors. Under these license agreements, we are obligated to pay aggregate royalties ranging from 1% to 8% of sales in which the patents or know-how are used in the product or service sold, sometimes subject to minimum annual royalties or fees in certain agreements. +We expect the aggregate cost of diagnostic testing to increase in line with the increase in the number of tests we perform, but the cost per test to decrease modestly over time due to the efficiencies we may gain as test volume increases, and from automation and other cost reductions. Cost of services includes costs incurred for the performance of development services requested by our customers. Costs of development services will vary depending on the nature, timing and scope of customer projects. +Research and development +Research and development expenses consist of costs incurred to develop technology and include salaries, share-based compensation and benefits, reagents and supplies used in research and development laboratory work, clinical trials infrastructure expenses, including allocated facility occupancy and information technology costs, contract services, quality and regulatory support, other outside costs and costs to develop our technology capabilities. Research and development expenses account for a significant portion of our operating expenses and consist primarily of external and internal costs incurred in connection with the discovery and development of our product candidates. +External expenses include: (i) payments to third parties in connection with the clinical development of our product candidates, including contract research organizations and consultants; (ii) the cost of manufacturing products for use in our preclinical studies and clinical trials, including payments to contract manufacturing organizations (CMOs) and consultants; (iii) scientific development services, consulting research fees and for sponsored research arrangements with third parties; (iv) laboratory supplies; and (v) allocated facilities, depreciation and other expenses, which include direct or allocated expenses for IT, rent and maintenance of facilities. External expenses are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers or our estimate of the level of service that has been performed at each reporting date. We track external costs by the stage of program, clinical or preclinical. +Internal expenses include employee-related costs, including salaries, share-based compensation and related benefits for employees engaged in research and development functions. We do not track internal costs by product candidate because these costs are deployed across multiple programs and, as such, are not separately classified. +Research and development costs are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or services are rendered. Costs to develop our technology capabilities are recorded as research and development. +73 +We expect our research and development expenses to increase as we continue to innovate and develop additional products and expand our data management resources. As our services revenue grows, an increasing portion of research and development dollars are expected to be allocated to cost of services for biopharmaceutical service contracts. This expense, though expected to increase in dollars, is expected to decrease as a percentage of revenue in the long term, though it may fluctuate as a percentage of our revenues from period to period due to the timing and extent of these expenses. +Sales, marketing, general and administrative +Our sales and marketing expenses are expensed as incurred and include costs associated with our sales organization, including our direct sales force and sales management, client services, marketing, public relations, communications and reimbursement, as well as business development personnel who are focused on our biopharmaceutical customers. These expenses consist primarily of salaries, commissions, bonuses, employee benefits, share-based compensation, and travel, as well as marketing and educational activities and allocated overhead expenses. We expect our sales and marketing expenses to increase in dollars as we expand our sales force, increase our presence within the United States, and increase our marketing activities to drive further awareness and adoption of our tests and our future products and services. These expenses, though expected to increase in dollars, are expected to decrease as a percentage of revenue in the long term, though they may fluctuate as a percentage of our revenues from period to period due to the timing and nature of these expenses. +Our general and administrative expenses include costs for our executive, accounting, finance, legal and human resources functions. These expenses consist principally of salaries, bonuses, employee benefits, share-based compensation, and travel, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. We expect that our general and administrative expenses will continue to increase in dollars, primarily due to increased headcount and costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, maintaining compliance with exchange listing and requirements of the SEC, director and officer insurance premiums and investor relations. These expenses, though expected to increase in dollars, are expected to decrease as a percentage of revenue in the long term, though they may fluctuate as a percentage from period to period due to the timing and extent of these expenses. +Non-Operating Expenses +Interest Expense and Interest Income +For the years ended December 31, 2024 and December 31, 2023, interest expense consists of cash and non-cash interest from the Perceptive Term Loan Facility, contingent consideration, and changes in the fair value of our contingent consideration associated with the passage of time subsequent to the achievement of the gross margin target in the second quarter 2021. Interest income, which is included in ‘Other income, net’ in the statements of operations consists of income earned on our cash and cash equivalents. +Results of Operations +The following table sets forth the significant components of our results of operations for the periods presented (in thousands, except percentages): +Year Ended December 31, +Change +2024 +2023 +$ +% +Revenues +$ +71,323 +$ +49,087 +$ +22,236 +45 +% +Operating expenses +Direct costs and expenses +15,573 +13,010 +2,563 +20 +% +Research and development +9,559 +9,988 +(429 +) +(4 +)% +Sales, marketing, general and administrative +80,451 +67,387 +13,064 +19 +% +Impairment loss on intangible assets +238 +44 +194 +441 +% +Total operating expenses +105,821 +90,429 +15,392 +17 +% +Loss from operations +(34,498 +) +(41,342 +) +6,844 +17 +% +Other (expense) income +Interest expense +(8,258 +) +(9,536 +) +1,278 +13 +% +Loss on extinguishment of liabilities +(248 +) +— +(248 +) +(100 +)% +Change in fair value of warrant liability, net +— +(1,274 +) +1,274 +100 +% +Other income, net +73 +6 +67 +1,117 +% +Total other expense +(8,433 +) +(10,804 +) +2,371 +22 +% +Net loss +$ +(42,931 +) +$ +(52,146 +) +$ +9,215 +18 +% +Share-based compensation (1) +$ +6,638 +$ +5,373 +$ +1,265 +24 +% +(1) Amounts represent share-based compensation expense reported in the Company’s results of operations above. +74 +Revenues +We generate revenue by providing laboratory testing of our diagnostic tests and services. Our revenues for the periods indicated were as follows (in thousands, except percentages): +Year Ended December 31, +Change +2024 +2023 +$ +% +Revenues +Lung Diagnostic Testing +64,708 +45,192 +19,516 +43 +% +Development Services +6,615 +3,895 +2,720 +70 +% +Total revenues +$ +71,323 +$ +49,087 +$ +22,236 +45 +% +Total revenue increased $22.2 million or 45% for the year ended December 31, 2024 compared to the year ended December 31, 2023. +Lung Diagnostic Testing revenue increased $19.5 million or 43% for the year ended December 31, 2024 compared to the same period in 2023. The increase for the year ended December 31, 2024 compared to the same period in 2023 is due to an increase of $20.7 million in the Nodify Lung Nodule Risk Assessment testing strategy driven by an increase in tests delivered, partially offset by a $1.1 million decrease in the IQLung testing strategy as a result of a decrease in tests delivered as our sales efforts continue to focus on Nodify CDT and XL2 tests. The Company’s Lung Diagnostic Testing sales efforts continued to gain momentum during the year ended December 31, 2024 as the number of tests delivered reached the highest in Company history for eight consecutive quarters. +Development Services revenue increased $2.7 million or 70% for the year ended December 31, 2024 compared to the same period in 2023. The increase in revenue for the year ended December 31, 2024 was primarily a result of delivering against our expanding book of business and securing new agreements. +Operating Expenses +Direct costs and expenses +Direct costs and expenses related to revenue increased $2.6 million or 20% for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase in costs for the year ended December 31, 2024 was primarily driven by the increase in testing volume compared to the same period in 2023, partially offset by the optimization of testing workflows that resulted in improvements in costs per test. +Research and development +Research and development expenses decreased $0.4 million or 4% for the year ended December 31, 2024 compared to the year ended December 31, 2023. The decrease in cost was primarily a result of a decrease in external costs associated with clinical trials and data acquisition costs. +The following table summarizes our external and internal costs for the years ended December 31, 2024 and 2023 (in thousands, except percentages): +Year Ended December 31, +Change +2024 +2023 +$ +% +External expenses: +Clinical trials and associated costs +$ +1,180 +$ +1,663 +$ +(483 +) +(29 +)% +Other external costs +2,778 +2,822 +(44 +) +(2 +)% +Total external costs +3,958 +4,485 +(527 +) +(12 +)% +Internal expenses +5,601 +5,503 +98 +2 +% +Total research and development expenses +$ +9,559 +$ +9,988 +$ +(429 +) +(4 +)% +Sales, marketing, general and administrative +Sales, marketing, general and administrative expenses increased $13.1 million or 19% for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was driven primarily by increases in employee compensation and benefits associated with an increase in headcount and variable compensation as well as increases in non-employee costs associated with increased spending on various sales meetings and sales fulfillment during 2024 as compared to 2023. Of the $13.1 million increase, $2.6 million is associated with the increase in depreciation and amortization expense primarily related to the leasehold improvements in our new Louisville headquarters and laboratory. +75 +Non-Operating Expenses +Interest expense +Interest expense decreased $1.3 million or 13% for the year ended December 31, 2024 compared to the year ended December 31, 2023. The interest expense for the year ended December 31, 2024 is primarily related to interest and amortization of debt issuance costs associated with the Perceptive Term Loan Facility of $7.0 million and interest associated with the contingent consideration of $1.1 million. The interest expense for the year ended December 31, 2023 is primarily related to interest and amortization of debt issuance costs associated with the Perceptive Term Loan Facility of $5.5 million and interest associated with the contingent consideration of $3.9 million. The decrease in interest expense for the year ended December 31, 2024 was primarily related to the interest associated with the declining contingent consideration balance as the remaining Milestone Payments and final exit fee payment were made. +Loss on extinguishment of liabilities, net +Loss on extinguishment of liabilities increased $0.2 million or 100% for the year ended December 31, 2024, compared to the same period in 2023. On April 22, 2024, the Company obtained consent from Perceptive and prepaid the July 1, 2024 contingent consideration Milestone Payment of $8.4 million to Indi. As a result of prepaying the Milestone Payment, the Company performed a fair value analysis through April 22, 2024 and recorded a loss on early extinguishment of $0.2 million. +Change in fair value of warrant liability, net +During the year ended December 31, 2024, the Company recorded no change in fair value of warrant liability in the statements of operations. The Tranche C loan had a commitment date through September 30, 2024 and, as of that date, the Company did not exercise its ability to draw the Tranche C loan. Therefore, the associated Tranche C Warrants expired and are no longer exercisable. During the year ended December 31, 2023, the Company recorded a $1.3 million net loss as a change in fair value through the statement of operations due to changes in unobservable inputs. This was a result of changes in the probability of our ability to draw on Tranche B and C loans. On December 15, 2023 (the Tranche B Borrowing Date), the Company exercised its ability to draw the Tranche B loan. In connection with the Tranche B draw, the Company remeasured the Tranche B Warrants through the Tranche B Borrowing Date and recorded the change in fair value through the statement of operations, and subsequently, reclassified the fair value to additional paid-in capital. +Other income, net +During the year ended December 31, 2024, the Company recorded other income, net of $0.1 million. The other income, net for the year ended December 31, 2024 was comprised of $0.8 million of interest and other income, offset by approximately $0.7 million of deferred offering costs as a result of changes in the probability of our ability to fully utilize the LPC Facility prior to the termination date. +Liquidity and Capital Resources +We are an emerging growth company and, as such, have yet to generate positive cash flows from operations. We have funded our operations to date principally from net proceeds from the sale of our common stock, the sale of convertible preferred stock, revenue from Lung Diagnostic Testing and Development Services, and the incurrence of indebtedness. +The Company amended the Indi APA agreement in April 2022 in which all parties agreed to restructure the Milestone Payments whereby the Company will make five quarterly installments of $2.0 million each beginning in April 2022, three quarterly installments of $3.0 million beginning in July 2023, one installment of $5.0 million in April 2024, and one installment of approximately $8.4 million in July 2024. In addition, the Company agreed to an exit fee of approximately $6.1 million in October 2024. Interest shall accrue on the difference between the payment schedule as agreed in the August 2021 amendment and the April 2022 amended payment schedule, at an aggregate per annum rate equal to 10%, with such interest to be payable quarterly on the following installment payment date. Our ability to make these payments is subject to ongoing compliance under the Perceptive Term Loan and commencing January 1, 2024, consent from Perceptive. On April 22, 2024, the Company obtained consent from Perceptive and prepaid the July 1, 2024 Milestone Payment of $8.4 million to Indi. On September 30, 2024, the Company obtained consent from Perceptive and prepaid the October 1, 2024 exit fee of $6.1 million to Indi. The Company has no remaining obligations to Indi. +On November 21, 2022, the Company entered into a Credit Agreement and Guaranty (the Credit Agreement) with Perceptive Credit Holdings IV, LP (Perceptive) as lender and administrative agent (the Lender) for up to $50.0 million, with funding of $30.0 million and the issuance of warrants exercisable into 3,000,000 shares of the Company’s common stock occurring on November 21, 2022, and two additional contingently issuable tranches of $10.0 million each subject to certain terms and conditions, including revenue milestones. The Tranche C loan had a commitment date through September 30, 2024 and, as of that date, the Company did not exercise its ability to draw the Tranche C loan. +On April 7, 2023, the Company entered into a limited waiver under which the Lender agreed to waive the minimum revenue requirement for the three months ended March 31, 2023 (Limited Waiver). In addition, on May 10, 2023, the Company entered into the First Amendment to the Credit Agreement (First Amendment) with Perceptive as lender and administrative agent and the Company, as +76 +borrower, whereby subject to the terms and conditions of the First Amendment, the Minimum Net Revenue Covenant, as defined in the Credit Agreement, was modified to reduce the threshold through the twelve month period ended March 31, 2024. +On August 3, 2023, the Company entered into subscription agreements (the Subscription Agreements) with all of the members of our Board of Directors, all Section 16 officers, and additional members of the Biodesix leadership team for the issuance and sale by the Company of an aggregate of 16,975,298 of the Company’s common stock for an aggregate purchase price of approximately $27.5 million. During the three months ended September 30, 2023, the Company received $15.3 million in proceeds and issued 9,454,927 shares of common stock. On September 27, 2023, the Company entered into an amendment to delay final closing on one subscription agreement. The remaining $12.2 million in proceeds was received and 7,520,371 shares of common stock was issued during the three months ended December 31, 2023. +On August 4, 2023, the Company entered into the Second Amendment to the Credit Agreement (the Second Amendment) with Perceptive as lender and administrative agent and the Company, as borrower, whereby subject to the terms and conditions of the Second Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing on the fiscal quarter ending June 30, 2024 through and including the fiscal quarter ending December 31, 2025. +Pursuant to the original terms of the Credit Agreement entered into on November 21, 2022, the Perceptive Term Loan Facility includes an additional Tranche B Loan, in an aggregate amount of up to $10.0 million, which is accessible by the Company so long as the Company satisfies certain customary conditions precedent, including revenue milestones. Under the terms of the Second Amendment, the conditions precedent for drawing on the Tranche B Loan were amended to (i) reduce the trailing twelve-month revenue milestone and (ii) add the receipt of aggregate cash proceeds of at least $27.5 million from an equity offering of the Company's common stock. During the three months ended December 31, 2023, the Company met the remaining conditions precedent associated with the Tranche B Loan and, on December 15, 2023, the Company exercised its ability to draw the Tranche B loan for $10.0 million (the Tranche B Loan). +On February 29, 2024 (the Third Amendment Effective Date), the Company entered into the Third Amendment to the Credit Agreement (the Third Amendment) with Perceptive as lender and administrative agent and the Company, as borrower, whereby subject to the terms and conditions of the Third Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing on the fiscal quarter ending March 31, 2024 through and including the fiscal quarter ending December 31, 2025. +On April 9, 2024, the Company closed an underwritten offering of common stock and a concurrent private placement. Collectively, the Company raised net proceeds of approximately $51.3 million (the April 2024 Offering). +On October 30, 2024, the Company entered into the Fourth Amendment to the Credit Agreement (the Fourth Amendment), whereby, subject to the terms and conditions of the Fourth Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing on the fiscal quarter ending June 30, 2025 through and including the fiscal quarter ending December 31, 2027. +The Company maintained two facilities that enable equity financing on an ongoing basis at the Company’s discretion, our at-the-market (ATM) offering and our common stock purchase agreement with Lincoln Park Capital Fund, LLC (LPC). As of December 31, 2024, the Company had remaining available capacity for share issuances of up to $46.9 million under the LPC Facility, subject to the restrictions and limitations of the underlying facility. Effective February 5, 2025, the Company terminated the LPC Facility. +On April 5, 2024, the Company filed Supplement No. 1 to the ATM Prospectus Supplement dated December 22, 2021. To comply with volume limitations under applicable SEC rules and regulations, Supplement No. 1 reduced the aggregate offering price to up to $100,000 of shares in order to maximize the amount the Company could offer under the April 2024 Offering. Following the successful completion of the Company’s April 2024 Offering, the Company is no longer subject to volume limitations under applicable SEC rules and regulations that limit their availability as sources of funding. On August 7, 2024, the Company filed Supplement No. 2 to the ATM Prospectus Supplement dated December 22, 2021 to increase the aggregate offering price under the ATM facility up to the original $50.0 million of shares. On November 1, 2024, the Company filed a shelf registration statement on Form S-3 and entered into a new sales agreement with a financial institution, pursuant to which the Company may issue and sell, from time to time, shares of its common stock having an aggregate offering price of up to $50.0 million, subject to terms and conditions (the 2024 ATM Program). The shares of common stock offered pursuant to the 2024 ATM Program will be offered and sold by the Company pursuant to its registration statement on Form S-3 which became effective with the SEC on November 12, 2024. Sales of common stock under the 2024 ATM Program, if any, will be made at market prices by methods deemed to be an “at-the-market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on the NASDAQ Global Market, or any other existing trading market for our common stock. In connection with establishing the 2024 ATM Program, the Company terminated its prior $50.0 million ATM program established in November 2021, and no additional stock can be issued thereunder. As of December 31, 2024, the Company had remaining available capacity for share issuances of up to $50.0 million under the ATM facility. +77 +The Company assesses liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. The Company’s cash requirements for 2024 and beyond include expenses related to sales and marketing, research and development, regulatory and other expenses as we expand our marketing efforts for our diagnostic tests and services, expand existing relationships with our customers, obtain regulatory clearances or approvals or certifications for future enhancements to our existing diagnostic tests and services and conduct further clinical trials. In addition, we expect to incur general and administrative expenses associated with scaling our business operations and testing capacity as well as the requirements of being a public company operating in a highly regulated industry. As of December 31, 2024, we maintained cash and cash equivalents of $26.2 million. +We have incurred losses since our inception and have reported net losses of $42.9 million and $52.1 million for the years ended December 31, 2024 and 2023, respectively. As a result of these losses, as of December 31, 2024, we had an accumulated deficit of approximately $462.5 million. We have funded our operations to date primarily through our two revenue sources: (i) Lung Diagnostic Testing and (ii) Development Services, the sale of convertible preferred stock, the sale of common stock, and the issuance of notes payable, including through our current Perceptive Term Loan Facility. Additionally, on February 28, 2025, the Company entered into a fifth amendment to the Perceptive Term Loan Facility, whereby, subject to the terms and conditions of the fifth amendment, the Tranche C Loan revenue milestone was eliminated and the Commitment Termination Date (as defined in the Credit Agreement) was extended, providing continued availability to the Tranche C Loan in an aggregate amount equal to $10.0 million through December 31, 2025. +The Company believes the prior conditions and events raising substantial doubt about its ability to continue as a going concern no longer exist following the amended debt agreement in October 2024, continued improvement in operations, as well as the amendment to extend availability to the Tranche C Loan noted above. Accordingly, its current cash and cash equivalents as of the issuance date of these financial statements will be sufficient to fund its operations at the current levels for at least the next 12 months. Management continues to monitor the Company’s liquidity position and has the flexibility to adjust spending as needed in order to preserve and extend liquidity. As of December 31, 2024, the Company was in compliance with all restrictive and financial covenants associated with its borrowings and expects to remain in compliance for more than one year from when these financial statements are issued. While the Company’s ability to execute its business objectives and achieve profitability over the long term cannot be assured, the Company's current plans and projections, existing cash and cash equivalents, and expense management activities provide liquidity for the Company to satisfy our liquidity requirements for more than one year from when these financial statements are issued. +Cash Flows +The following summarizes our cash flows for the periods indicated (in thousands): +Year Ended December 31, +2024 +2023 +Net cash flows (used in) provided by : +Operating activities +$ +(48,649 +) +$ +(22,870 +) +Investing activities +(3,440 +) +(23,062 +) +Financing activities +52,050 +29,129 +Net decrease in cash and cash equivalents and restricted cash +$ +(39 +) +$ +(16,803 +) +Our cash flows resulted in a net decrease in cash and cash equivalents and restricted cash of $39 thousand during the year ended December 31, 2024 as compared to the net decrease in cash of $16.8 million for the year ended December 31, 2023. For the year ended December 31, 2024, net cash used in operating activities totaled $48.6 million, an increase of approximately $25.8 million compared to the same period in 2023 primarily due to unfavorable changes in net working capital of $33.0 million, which includes an increase of $20.7 million in payments made for contingent consideration and an $18.3 million decrease in tenant improvement allowances received for capital expenditures and leasehold improvements related to the CVP Lease. This is partially offset by a year-over-year decrease in net loss from operations of $9.2 million. +Net cash used in investing activities during the year ended December 31, 2024 totaled $3.4 million, a decrease of $19.6 million compared to the same period in 2023. The decrease in net cash used in investing activities was primarily due to decreases in purchases of property and equipment and capital expenditures primarily for leasehold improvements related to the CVP Lease. These leasehold improvements were tenant improvements and were reimbursed from the Landlord. +Net cash provided by financing activities during the year ended December 31, 2024 totaled $52.1 million, an increase of $22.9 million compared to the same period in 2023. The net cash provided by financing activities for the year ended December 31, 2024 primarily resulted from $51.3 million in net proceeds from the issuance of common stock from an underwritten offering of common stock and a concurrent private placement and $0.6 million from the issuance of common stock under the ESPP. The net cash provided by financing activities for the year ended December 31, 2023 primarily resulted from $28.0 million net proceeds from the issuance of common stock, $10.0 million net proceeds from the issuance of Tranche B under the Perceptive Term Loan Facility, and $0.7 million in proceeds from the issuance of common stock under the ESPP and exercise of stock options. These proceeds were partially offset by milestone payments to Indi of $8.6 million. +78 +Contractual Obligations and Commitments +The following table summarizes our non-cancelable contractual obligations and commitments as of December 31, 2024 (in thousands): +Payments due by period (1) +Total +Less than +1 year +1 to 3 +years +4 to 5 +years +More than +5 years +Borrowings and interest (2) +$ +55,800 +$ +5,433 +$ +50,367 +$ +— +$ +— +Operating lease obligations +44,079 +3,580 +8,235 +8,394 +23,870 +Finance lease obligations +1,407 +758 +649 +— +— +Total +$ +101,286 +$ +9,771 +$ +59,251 +$ +8,394 +$ +23,870 +(1) +Royalty payments that we may owe are not included as the amount and timing of such payments is uncertain. +(2) +Includes the Perceptive Term Loan payments of principal and interest. Interest amounts associated with the Perceptive Term Loan are variable and estimated based on the interest rate in effect at December 31, 2024. +Off-Balance Sheet Arrangements +As of December 31, 2024, we have not entered into any off-balance sheet arrangements. +Critical Accounting Policies and Significant Judgments and Estimates +In accordance with accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Certain of these estimates significantly influence the portrayal of our financial condition and results of operations and require us to make difficult, subjective or complex judgments. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recognized revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions. Our critical accounting policies are described in greater detail below and in Note 2 to our financial statements in Item 8 of this Annual Report on Form 10-K. +Revenue Recognition +We recognize revenue when our customers obtain control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for our goods or services. To determine revenue recognition for our arrangements with our customers, we perform a five-step process, which includes: (i) identifying the contract(s) with a customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations in the contract; and (v) recognizing revenue when (or as) we satisfy our performance obligations. The Company generates revenues from (i) Lung Diagnostic Tests and (ii) assay development, testing services, and licensing our technologies (Development Services). +The Company recognizes revenues related to blood-based lung diagnostic billings based on estimates of the amounts ultimately expected to be collected from customers on a portfolio approach. In determining the amount to accrue for a delivered test, the Company considers factors such as test type, payment history, payer coverage, whether there is a reimbursement contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. Variable consideration, if any, is estimated based on an analysis of historical experience and adjusted as better estimates become available. These estimates require significant judgment by management. +The Company also provides services to patients with whom the Company does not have contracts as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification 606 (ASC 606). The Company recognizes revenue for these patients when contracts, as defined in ASC 606, are established at the amount of consideration to which it expects to be entitled, or when the Company receives substantially all of the consideration subsequent to satisfaction and delivery of the performance obligations. +Development Services revenue consists of various types of tests or other scientific services for a purpose as defined by any individual customer, which are often larger biopharmaceutical companies, as defined by a written agreement between the Company and the customer. These services are generally completed upon the delivery of testing results, achievement of contractual milestone(s) as defined in the customer agreements, or over the term of the contract which is generally expected to be completed in one year or less. Customers for these services are typically large biopharmaceutical companies where collectability is reasonably assured and therefore revenue is accrued upon completion of the performance obligations. Revenue for these services is recognized upon delivery of the completed test results, upon completion of the contractual milestone(s), or over the term of the contract. +Recent Accounting Pronouncements +See Note 3 to our financial statements in Item 8 of this Annual Report on Form 10-K. +79 +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.24 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) until December 31, 2025 (the year ended December 31st following the fifth anniversary of our initial public offering). +Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which: (i) the market value of our common shares held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common shares held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. +Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk. +We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. +Interest Rate Risk +We are exposed to market risk for changes in interest rates related primarily to our cash and cash equivalents, marketable securities and our indebtedness, including our outstanding Perceptive Term Loan. As of December 31, 2024, we had $40.0 million outstanding on the Perceptive Term Loan Facility which has an annual rate equal to the greater of (a) forward-looking one-month term SOFR as posted by CME Group Inc. and (b) 3.0% per annum, plus an applicable margin of 9.0%. Historically, we have not entered into derivative agreements such as interest rate caps and swaps to manage our floating interest rate exposure. +Periodically throughout the year, we have maintained balances in various operating accounts in excess of federally insured limits. Our cash and cash equivalents are funds held in checking and bank savings accounts, primarily at one U.S. financial institutions. We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. We continually monitor our positions with, and the credit quality of, the financial institutions with which we invest. +As of December 31, 2024, a hypothetical 100 basis point increase in interest rates would have an estimated $0.4 million impact per year on our financial position and results of operations, based on the current Perceptive Term Loan principal remaining outstanding through maturity. +Item 8. Financial Statement s and Supplementary Data. +The financial statements and supplementary data are as set forth in the index to the financial statements on page F-1. +Item 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure. +None. +80 +Item 9A. Controls and Procedures. +Evaluation of Disclosure Controls and Procedures +We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. +Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2024 based on the criteria established in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), using the 2013 framework. Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2024, the Company's internal control over financial reporting was effective based on the criteria set forth by COSO. +This annual report does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2024, there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information. +None of our directors or officers adopted , modified , or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K, during the quarter ended December 31, 2024. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. +Not Applicable. +81 +PART III +Item 10. Directors, Executive Off icers and Corporate Governance. +The information required by this item with respect to directors is incorporated by reference from the information under the captions "Board and Corporate Governance Matters—Proposal One: Election of Directors" and "—Director Independence" contained in our Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2024 in connection with the solicitation of proxies for our 2025 Annual Meeting of Stockholders (the Proxy Statement). Certain information required by this item concerning executive officers is set forth in the Proxy Statement under the caption "Executive Compensation—Compensation of Named Executive Officers" and is incorporated herein by reference. +Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16(a) of the Exchange Act. This disclosure is contained in the section entitled "Stock Ownership—Delinquent Section 16(a) Reports" in the Proxy Statement and is incorporated herein by reference. +We have adopted a Code of Business Conduct and Ethics that applies to all of our officers and employees, including our President and Chief Executive Officer, our Chief Financial Officer and other employees who perform financial or accounting functions. The Code of Business Conduct and Ethics sets forth the basic principles that guide the business conduct of our employees. Stockholders may request a free copy of our Code of Business Conduct and Ethics by contacting Biodesix, Inc., Attention: Chief Financial Officer, 919 West Dillon Rd, Louisville, Colorado 80027. +To date, there have been no waivers under our Code of Business Conduct and Ethics. We intend to disclose future amendments to certain provisions of our Code of Business Conduct and Ethics or waivers of such Codes granted to executive officers and directors on our website at http://www.biodesix.com within four business days following the date of such amendment or waiver. +The Company has a Policy Relating to Insider Trading governing the purchase, sale, and disposition of the Company’s securities by directors and officers that is reasonably designed to promote compliance with U.S. insider trading laws, rules and regulations, and applicable listing standards. In addition, with regard to the Company’s trading in its own securities, it is the Company’s policy to comply with the federal securities laws and the applicable exchange listing requirements. For more information, please refer to the Policy Relating to Insider Trading filed herewith as Exhibit 19.1. +Our Board of Directors has appointed an Audit Committee, comprised of Ms. Jean Franchi, as Chairwoman, Messrs. Hany Massarany, Lawrence T. Kennedy, Jr., and Dr. Matthew Strobeck. The Board of Directors has determined that Ms. Franchi qualifies as an Audit Committee Financial Expert under the definition outlined by the Securities and Exchange Commission. In addition, each of the members of the Audit Committee qualifies as an "independent director" under the current rules of The NASDAQ Stock Market and Securities and Exchange Commission rules and regulations. +Item 11. Executiv e Compensation. +The information required by this item is incorporated by reference from the information under "Executive Compensation" contained in the Proxy Statement and is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Own ers and Management and Related Stockholder Matters. +The information required by this item is incorporated by reference from the information under the captions "Stock Ownership—Security Ownership of Certain Beneficial Owners and Management", "Executive Compensation", and "Equity Compensation Plan Information" contained in the Proxy Statement and is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this item is incorporated by reference from the information under the caption "Board and Corporate Governance Matters—Policies and Procedures for Related-Party Transactions" and "—Director Independence" contained in the Proxy Statement and is incorporated herein by reference. +Item 14. Principal Accoun tant Fees and Services. +The information required by this item is incorporated by reference from the information under the caption "Audit Matters—Principal Accountant Fees and Services" contained in the Proxy Statement and is incorporated herein by reference. +82 +PART IV +Item 15. Exhibit and Financ ial Statement Schedules. +(a) +Documents filed as a part of the report. +1. +Financial Statements +Reference is made to the Index to Financial Statements of Biodesix, Inc. included in Item 8 of Part II hereof. +2. +Financial Statement Schedules +All schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto. +3. +See Item 15(b) below. Each management contract or compensating plan or arrangement required to be filed has been identified. +(b) +Exhibits. +Item 16. Form 10-K Summary. +Not applicable. +83 +Exhibit Index +Exhibit +Number +Description +3.1** +Amended and Restated Certificate of Incorporation of Biodesix, Inc., dated October 30, 2020 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on December 10, 2020). +3.2** +Amended and Restated Bylaws of Biodesix, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on October 12, 2020). +3.3** +Certificate of Designations of Series A Non-Voting Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on April 9, 2024). +4.1** +Specimen stock certificate evidencing shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 21, 2020). +4.2** +Eleventh Amended and Restated Investor Rights Agreement, by and among Biodesix, Inc. and the investors listed on Exhibit A thereto, dated October 10, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +4.3** +Warrant held by Innovatus Life Sciences Lending Fund I, LP, to Purchase Series G Preferred Stock, dated February 23, 3018 (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +4.4** +Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.5 to the Company's Form 10-K filed with the SEC on March 16, 2021). +4.5** +Form of Note, dated November 21, 2022, issued by the Company to Perceptive Credit Holdings IV, LP. (incorporated by reference to Exhibit 4.1 and Exhibit 10.1 in the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +4.6** +Warrant to Purchase Stock, dated November 21, 2022, issued by the Company to Perceptive Credit Holdings IV, LP. (incorporated by reference to Exhibit 4.2 in the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +4.7** +Warrant to Purchase Stock, dated May 10, 2023, issued by the Company to Perceptive Credit Holdings IV, LP (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 11, 2023). +4.8* +First Amendment to Warrant Certificate, dated February 28, 2025, issued by the Company to Perceptive Credit Holdings IV, LP. +10.1+** +Biodesix, Inc. Amended and Restated 2006 Employee, Director and Consultant Stock Plan, as amended to date (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.1+** +Form of Stock Option Grant Notice under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.2+** +Form of Option Agreement under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.2.3+** +Form of Notice of Exercise under the Amended and Restated 2006 Employee, Director and Consultant Stock Plan (incorporated by reference to Exhibit 10.2.3 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.3+** +Biodesix, Inc. 2016 Equity Incentive Plan, as amended to date (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.4.1+** +Form of Stock Option Grant Notice under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +84 +10.4.2+** +Form of Option Agreement under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.4.3+** +Form of Notice of Exercise under the 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.4.3 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.5+** +Biodesix, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 26, 2020). +10.5.1+** +Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5.1 to the Company's Form 10-K filed with the SEC on March 16, 2021). +10.5.2+** +Forms of Restricted Stock Unit Award Grant Notice and Award Agreement under the 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.5.2 to the Company's Form 10-Q filed with the SEC on August 10, 2021). +10.6+** +Biodesix, Inc. 2020 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 26, 2020). +10.7.1+** +Biodesix, Inc., First Amended Bonus-to-Options Program, adopted by the Board of Directors on October 15, 2010 (incorporated by reference to Exhibit 10.5.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.7.2+** +Biodesix, Inc., Second Amended Bonus-to-Options Program, adopted by the Board of Directors on June 21, 2011 (incorporated by reference to Exhibit 10.5.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.7.3+** +Biodesix, Inc., Third Amended Bonus-to-Options Program, adopted by the Board of Directors on December 31, 2015 (incorporated by reference to Exhibit 10.5.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.8.1+** +Biodesix, Inc. 2021 Senior Management Bonus to Equity Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 4, 2022). +10.8.2+** +Amendment No. 1 to the Biodesix, Inc. 2021 Senior Management Bonus to Equity Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 4, 2022). +10.8.3+** +Amendment No. 2 to the Biodesix, Inc. 2021 Senior Management Bonus to Equity Plan (incorporated by reference to Exhibit 10.8.3 to the Company’s Annual Report on Form 10-K filed with the SEC on March 6, 2023). +10.9.1+** +Form of Stock Option Grant Notice under the Biodesix, Inc. Bonus-To-Options Program (incorporated by reference to Exhibit 10.6.1 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.9.2+** +Form of Option Agreement under the Biodesix, Inc. Bonus-To-Options Program (incorporated by reference to Exhibit 10.6.2 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.10+** +Form of Indemnification Agreement, by and between Biodesix, Inc. and each of its directors and executive officers (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 14, 2020). +10.11†+** +Form of Executive Severance and Change in Control Agreement, dated April 23, 2024 by and among the Company and each of its executive officers (incorporated by reference to Exhibit 10.42 to the Company's Registration Statement on Form S-1 filed with the SEC on April 23, 2024). +10.12.1†** +Lease Assignment of De Soto Facility, dated November 1, 2019 (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.12.2** +De Soto Amendment to Commercial Lease Agreement, effective April 4, 2023, by and between Biodesix, Inc. and De Soto Investments, LLC (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 11, 2023). +85 +10.13.1** +Lease agreement by and between Centennial Valley Properties I, LLC and Biodesix, Inc. dated March 11, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2022). +10.13.2** +First Amendment to Lease Agreement by and between Centennial Valley Properties I, LLC and Biodesix, Inc. dated March 11, 2022 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2022). +10.14** +Patent Assignment between Biodesix, Inc., and Integrated Diagnostics, Inc., dated June 30, 2018 (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.15†** +IP Assignment Agreement between Oncimmune Limited, and Biodesix, Inc., dated October 31, 2019 (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.16†** +IP License Agreement between Oncimmune Limited, and Biodesix, Inc., dated October 31, 2019 (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.17†** +Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated August 1, 2019 (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.18†** +Supply Agreement between Biodesix, Inc., and Oncimmune, dated October 31, 2019 (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.19†** +Supply Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated August 1, 2019 (incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.20†** +Co-Development and Collaboration Agreement between AVEO Pharmaceuticals, Inc., and Biodesix, Inc., dated April 9, 2014, as amended October 14, 2016 (incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-1/A filed with the SEC on October 9, 2020). +10.21.1†** +Asset Purchase Agreement among Biodesix, Inc., Integrated Diagnostics, Inc., and the stockholders of Integrated Diagnostics, Inc., listed therein, dated June 30, 2018 (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.21.2** +Amendment No. 2 to Asset Purchase Agreement and Plan of Reorganization (incorporated by reference to Exhibit 10.38 to the Company's Form 10-Q filed with the SEC on August 10, 2021). +10.21.3** +Amendment No. 3 to Asset Purchase Agreement and Plan of Reorganization (incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q filed with the SEC on May 11, 2022). +10.22†** +Asset Purchase Agreement between Oncimmune Limited and Biodesix, Inc., dated June 27, 2019, as amended to date (incorporated by reference to Exhibit 10.24 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 2, 2020). +10.23** +First Amendment to the Non-Exclusive License Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated May 24, 2021 (incorporated by reference to Exhibit 10.37 to the Company's Form 10-Q filed with the SEC on August 10, 2021). +10.24** +Second Amendment to Supply Agreement between Bio-Rad Laboratories, Inc., and Biodesix, Inc., dated May 22, 2024 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 7, 2024). +10.25** +Purchase Agreement, dated March 7, 2022, by and between Biodesix, Inc. and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on March 7, 2022). +10.26** +Registration Rights Agreement, dated March 7, 2022, by and between Biodesix, Inc. and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K filed with the SEC on March 7, 2022). +86 +10.27** +Form of Subscription Agreement with resale registration rights provision, dated April 7, 2022 (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on April 11, 2022). +10.28** +Form of Subscription Agreement without registration rights, entered by the three members of our Board of Directors, dated April 7, 2022 (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K filed with the SEC on April 11, 2022). +10.29** +Credit Agreement and Guaranty, dated as of November 16, 2022, by and among the Company and Perceptive Credit Holdings IV, LP. (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +10.30** +Limited Waiver, dated April 7, 2023, by and between Biodesix, Inc. and Perceptive Credit Holdings IV, LP (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 11, 2023). +10.31** +First Amendment to Credit Agreement and Guaranty, dated May 10, 2023, by and among the Company and Perceptive Credit Holdings IV, LP (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 11, 2023). +10.32** +Second Amendment to Credit Agreement and Guaranty, dated August 4, 2023, by and among the Company and Perceptive Credit Holdings IV, LP (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 7, 2023). +10.33** +Limited Waiver, dated February 14, 2024, by and between Biodesix, Inc. and Perceptive Credit Holdings IV, LP (incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2023). +10.34** +Third Amendment to Credit Agreement and Guaranty, dated February 29, 2024, by and among the Company and Perceptive Credit Holdings IV, LP (incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2023). +10.35** +Fourth Amendment to Credit Agreement and Guaranty, dated October 30, 2024, by and between the Company and Perceptive Credit Holdings IV, LP (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on November 1, 2024). +10.36* +Fifth Amendment to Credit Agreement and Guaranty, dated February 28, 2025, by and between the Company and Perceptive Credit Holdings IV, LP. +10.37** +Security Agreement, dated as of November 21, 2022, by and among the Company and Perceptive Credit Holdings IV, LP (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +10.38** +Form of Subscription Agreement, dated November 21, 2022 (incorporated by reference to Exhibit 10.3 to the Company's current report on Form 8-K filed with the SEC on November 21, 2022). +10.39** +Form of Subscription Agreement, dated August 3, 2023 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 7, 2023). +10.40** +Securities Purchase Agreement, dated as of April 5, 2024 between Biodesix, Inc. and certain of the Investors (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on April 9, 2024). +10.41** +Securities Purchase Agreement, dated as of April 5, 2024 between Biodesix, Inc. and certain members of management, certain of its directors and funds affiliated with those directors (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on April 9, 2024). +10.42** +Registration Rights Agreement, dated as of April 5, 2024 between Biodesix, Inc. and the Investors (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on April 9, 2024). +19.1* +Policy Relating to Insider Trading. +23.1* +Consent of independent registered public accounting firm. +24.1* +Power of Attorney (included on the signature page of this Form 10-K). +31.1* +Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +87 +31.2* +Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1*** +Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2*** +Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +97.1** +Policy Relating to Recovery of Erroneously Award Compensation (incorporated by reference to Exhibit 97.1 to the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2023). +101.INS* +Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. +101.SCH* +Inline XBRL Taxonomy Extension Schema with Embedded Linkbase Documents +104 +Cover Page Interactive Data File (embedded within the Inline XBRL document) +† Portions of this exhibit have been omitted as the Registrant has determined that the omitted information (i) is not material and (ii) would likely cause competitive harm to the Registrant if publicly disclosed. ++ Indicates management contract or compensatory plan. +* Filed herewith. +** Previously filed. +*** Furnished herewith. +88 +SIGNAT URES +Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized . +Biodesix, Inc. +Date: March 3, 2025 +By: +/s/ CHRISTOPHER C. VAZQUEZ +Christopher C. Vazquez +Chief Accounting Officer +(Principal Accounting Officer) +POWER OF ATTORNEY +Each person whose signature appears below constitutes and appoints Scott Hutton and Robin Harper Cowie, and each of them, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to file with the Securities and Exchange Commission this Form 10-K and any and all amendments and exhibits thereto, and all documents in connection therewith, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and purposes as he or she might or could do in person, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his or her substitutes may lawfully do or cause to be done by virtue hereof. +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. +Name +Title +Date +/s/ SCOTT HUTTON +President, Chief Executive Officer (Principal Executive Officer) +March 3, 2025 +Scott Hutton +/s/ ROBIN HARPER COWIE +Chief Financial Officer, Secretary and Treasurer +March 3, 2025 +Robin Harper Cowie +/s/ CHRISTOPHER C. VAZQUEZ +Chief Accounting Officer +March 3, 2025 +Christopher C. Vazquez +/s/ JOHN PATIENCE +Chairman and Director +March 3, 2025 +John Patience +/s/ JEAN FRANCHI +Director +March 3, 2025 +Jean Franchi +/s/ JON FAIZ KAYYEM +Director +March 3, 2025 +Jon Faiz Kayyem, Ph.D. +/s/ LAWRENCE T. KENNEDY, JR. +Director +March 3, 2025 +Lawrence T. Kennedy, Jr. +/s/ HANY MASSARANY +Director +March 3, 2025 +Hany Massarany +/s/ JACK SCHULER +Director +March 3, 2025 +Jack Schuler +/s/ MATTHEW STROBECK +Director +March 3, 2025 +Matthew Strobeck, Ph.D. +/s/ CHARLES WATTS +Director +March 3, 2025 +Charles Watts, M.D. +89 +Item 8. Financial Statements and Supplementary Data +BIODESIX, Inc. +INDEX TO FINANCIAL STATEMENTS +Report of Independent Registered Public Accounting Firm ( KPMG LLP , Denver, CO , Auditor Firm ID: 185 ) +F- 2 +Balance Sheets as of December 31, 2024 and 2023 +F- 3 +Statements of Operations for the Years Ended December 31, 2024 and 2023 +F- 4 +Statements of Stockholders’ Equity for the Years Ended December 31, 2024 and 2023 +F- 5 +Statements of Cash Flows for the Years Ended December 31, 2024 and 2023 +F- 6 +Notes to Financial Statements +F- 8 +F- 1 +Report of Independent Regist ered Public Accounting Firm +To the Stockholders and the Board of Directors +Biodesix, Inc.: +Opinion on the Financial Statements +We have audited the accompanying balance sheets of Biodesix, Inc. (the Company) as of December 31, 2024 and 2023, the related statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. +Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ KPMG LLP +We have served as the Company’s auditor since 2016. +Denver, Colorado +March 3, 2025 +F- 2 +BIODESIX, INC. +Balance Sheets +(in thousands, except share data) +December 31, 2024 +December 31, 2023 +Assets +Current assets +Cash and cash equivalents +$ +26,245 +$ +26,284 +Accounts receivable, net of allowance for credit losses of $ 481 and $ 65 +8,603 +7,679 +Other current assets +4,636 +5,720 +Total current assets +39,484 +39,683 +Non‑current assets +Property and equipment, net +27,828 +27,867 +Intangible assets, net +5,874 +7,911 +Operating lease right-of-use assets +1,767 +1,745 +Goodwill +15,031 +15,031 +Other long-term assets +7,260 +6,859 +Total non‑current assets +57,760 +59,413 +Total assets +$ +97,244 +$ +99,096 +Liabilities and Stockholders' Equity +Current liabilities +Accounts payable +$ +2,194 +$ +2,929 +Accrued liabilities +10,064 +7,710 +Deferred revenue +678 +324 +Current portion of operating lease liabilities +719 +252 +Current portion of contingent consideration +— +21,857 +Current portion of notes payable +21 +51 +Other current liabilities +641 +293 +Total current liabilities +14,317 +33,416 +Non‑current liabilities +Long‑term notes payable, net of current portion +36,408 +35,225 +Long-term operating lease liabilities +24,828 +25,163 +Other long-term liabilities +815 +712 +Total non‑current liabilities +62,051 +61,100 +Total liabilities +76,368 +94,516 +Commitments and contingencies +Stockholders' equity +Preferred stock, $ 0.001 par value, 5,000,000 authorized; +0 (2024 and 2023) issued and outstanding +— +— +Common stock, $ 0.001 par value, 200,000,000 authorized; +145,491,569 (2024) and 96,235,883 (2023) shares issued and outstanding +145 +96 +Additional paid‑in capital +483,228 +424,050 +Accumulated deficit +( 462,497 +) +( 419,566 +) +Total stockholders' equity +20,876 +4,580 +Total liabilities and stockholders' equity +$ +97,244 +$ +99,096 +The accompanying Notes are an integral part of these financial statements. +F- 3 +BIODESIX, INC. +Statements of Operations +(in thousands, except per share data) +Year Ended December 31, +2024 +2023 +Revenues +$ +71,323 +$ +49,087 +Operating expenses: +Direct costs and expenses +15,573 +13,010 +Research and development +9,559 +9,988 +Sales, marketing, general and administrative +80,451 +67,387 +Impairment loss on intangible assets +238 +44 +Total operating expenses +105,821 +90,429 +Loss from operations +( 34,498 +) +( 41,342 +) +Other (expense) income: +Interest expense +( 8,258 +) +( 9,536 +) +Loss on extinguishment of liabilities +( 248 +) +— +Change in fair value of warrant liability, net +— +( 1,274 +) +Other income, net +73 +6 +Total other expense +( 8,433 +) +( 10,804 +) +Net loss +$ +( 42,931 +) +$ +( 52,146 +) +Net loss per share, basic and diluted +$ +( 0.33 +) +$ +( 0.64 +) +Weighted-average shares outstanding, basic and diluted +129,670 +82,113 +The accompanying Notes are an integral part of these financial statements. +F- 4 +BIODESIX, INC. +Statements of Stockholders' Equity +(in thousands) +Common Stock +Additional Paid‑In +Accumulated +Total Stockholders' +Shares +Amount +Capital +Deficit +Equity +Balance - December 31, 2022 +77,614 +$ +78 +$ +387,948 +$ +( 367,420 +) +$ +20,606 +Issuance of common stock, net +17,352 +17 +27,986 +— +28,003 +Issuance of common stock under employee stock purchase plan +437 +— +643 +— +643 +Exercise of stock options +123 +— +91 +— +91 +Release of restricted stock units +710 +1 +— +— +1 +Issuance of First Amendment warrants +— +— +674 +— +674 +Reclassification of Tranche B warrants to additional paid-in capital +— +— +1,335 +— +1,335 +Share‑based compensation +— +— +5,373 +— +5,373 +Net loss +— +— +— +( 52,146 +) +( 52,146 +) +Balance - December 31, 2023 +96,236 +96 +424,050 +( 419,566 +) +4,580 +Issuance of common stock, net +17,706 +18 +18,772 +— +18,790 +Issuance of common stock under employee stock purchase plan +471 +— +625 +— +625 +Exercise of stock options +31 +— +25 +— +25 +Release of restricted stock units +613 +1 +( 1 +) +— +— +Conversion of Series A preferred stock to common stock, net +30,435 +30 +33,119 +— +33,149 +Share‑based compensation +— +— +6,638 +— +6,638 +Net loss +— +— +— +( 42,931 +) +( 42,931 +) +Balance - December 31, 2024 +145,492 +$ +145 +$ +483,228 +$ +( 462,497 +) +$ +20,876 +The accompanying Notes are an integral part of these financial statements. +F- 5 +BIODESIX, INC. +Statements of Cash Flows +(in thousands) +Year Ended December 31, +2024 +2023 +Cash flows from operating activities +Net loss +$ +( 42,931 +) +$ +( 52,146 +) +Adjustments to reconcile net loss to net cash, cash equivalents, and restricted +cash used in operating activities +Depreciation and amortization +5,773 +3,328 +(Accretion) reduction of lease right-of-use assets +( 317 +) +2,179 +Loss on extinguishment of liabilities +248 +— +Share‑based compensation expense +6,638 +5,373 +Change in fair value of warrant liability, net +— +1,274 +Provision for credit losses +887 +497 +Accrued interest, amortization of debt issuance costs and other +2,462 +5,111 +Inventory excess and obsolescence +22 +166 +Impairment loss on intangible assets +238 +44 +Changes in operating assets and liabilities: +Accounts receivable +( 1,811 +) +( 4,718 +) +Other current assets +716 +905 +Other long-term assets +68 +33 +Accounts payable and other accrued liabilities +1,637 +513 +Deferred revenue +248 +( 755 +) +Contingent consideration +( 23,242 +) +( 2,494 +) +Tenant improvement allowances received +— +18,323 +Current and long-term operating lease liabilities +715 +( 503 +) +Net cash and cash equivalents and restricted cash used in operating activities +( 48,649 +) +( 22,870 +) +Cash flows from investing activities +Purchase of property and equipment +( 3,230 +) +( 22,919 +) +Patent costs and intangible asset acquisition, net +( 210 +) +( 143 +) +Net cash and cash equivalents and restricted cash used in investing activities +( 3,440 +) +( 23,062 +) +Cash flows from financing activities +Proceeds from the issuance of common stock +55,625 +28,126 +Proceeds from issuance of common stock under employee stock purchase plan +625 +643 +Proceeds from exercise of stock options +25 +91 +Payment of contingent consideration +— +( 8,581 +) +Proceeds from term loan and notes payable +— +10,000 +Repayment of term loan and notes payable +( 51 +) +( 49 +) +Payment of debt issuance costs +( 44 +) +( 833 +) +Equity financing costs +( 3,685 +) +( 80 +) +Other +( 445 +) +( 188 +) +Net cash and cash equivalents and restricted cash provided by financing activities +52,050 +29,129 +Net decrease in cash and cash equivalents and restricted cash +( 39 +) +( 16,803 +) +Cash, cash equivalents, and restricted cash ‑ beginning of period +26,371 +43,174 +Cash, cash equivalents, and restricted cash ‑ end of period +$ +26,332 +$ +26,371 +The accompanying Notes are an integral part of these financial statements. +F- 6 +BIODESIX, INC. +Statements of Cash Flows +(in thousands) +(Continued from the previous page) +Supplemental cash flow information : +Year Ended December 31, +2024 +2023 +Debt issuance costs included in accounts payable and other accrued liabilities +$ +— +$ +18 +Equity financing costs included in accounts payable and other accrued liabilities +— +43 +Issuance of Perceptive Warrants +— +674 +Operating lease right-of-use asset obtained in exchange for lease liabilities +583 +797 +Finance lease right-of-use assets obtained in exchange for lease liabilities +999 +773 +Cash paid for interest +7,024 +3,994 +Reclassification of warrant liability to additional paid-in capital +— +1,335 +Purchases of property & equipment included in accounts payable and accrued liabilities +— +793 +The accompanying Notes are an integral part of these financial statements. +F- 7 +BIODESIX, INC. +Notes to Financ ial Statements +Note 1 – Organization and Description of Business +Biodesix, Inc. (the “Company”, “Biodesix”, “we” “us” and “our”), formerly Elston Technologies, Inc., was incorporated in Delaware in 2005. The Company’s headquarters are in Colorado and the Company performs its blood-based diagnostic tests in its laboratory facilities which are located in Louisville, Colorado and De Soto, Kansas. The Company conducts all of its operations within a single legal entity. Biodesix is a leading diagnostic solutions company with a focus in lung disease. The Company develops diagnostic tests using a multi-omic approach to harness the strengths of different technologies that are best suited to address important clinical questions. We derive our revenue from two sources: (i) Biodesix Lung Diagnostic Testing (Lung Diagnostic Testing), providing lung diagnostic testing services for healthcare providers associated with our five blood-based tests and (ii) Biodesix Development Services (Development Services) providing diagnostic testing services to biopharmaceutical, life sciences, and diagnostic companies. +Blood-Based Lung Tests +The Company offers five blood-based lung cancer tests across the lung cancer continuum of care: +Diagnosis - Nodule Management +• +Nodify CDT ® and Nodify XL2 ® tests, marketed as Nodify Lung® Nodule Risk Assessment, assess a suspicious lung nodule's risk of lung cancer to help identify the most appropriate treatment pathway. The Nodify CDT and XL2 tests have an established average turnaround time of one and five business days, respectively, from receipt of the blood sample, providing physicians with timely results to guide diagnostic planning. The Nodify CDT test is a blood-based test that detects the presence of seven autoantibodies associated with the presence of tumors. Elevated levels of the autoantibodies in patients with lung nodules indicate an increased risk of lung cancer to help identify patients that may benefit from timely intervention. The Nodify XL2 test is a blood-based proteomic test that evaluates the likelihood that a lung nodule is benign to help identify patients that may benefit from surveillance imaging. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. +Lung Cancer Treatment & Monitoring +• +GeneStrat ® ddPCR, GeneStrat NGS ® and VeriStrat ® tests, marketed as part of our IQLung™ testing strategy, are used following diagnosis of lung cancer to detect the presence of mutations in the tumor and the state of the patient’s immune system to help guide treatment decisions. The GeneStrat ddPCR tumor genomic profiling test and the VeriStrat immune profiling test have an established average turnaround time of two business days from receipt of the blood sample, and the GeneStrat NGS test has an established average turnaround time of three business days from receipt of the blood sample, providing physicians with timely results to facilitate treatment decisions. The GeneStrat ddPCR test evaluates the presence of actionable mutations in lung cancer. The test is covered independent of stage and can be used multiple times per patient to monitor changes in mutation status. The GeneStrat NGS test is a broad 52 gene panel, including guideline recommended mutations that help identify advanced stage patients eligible for targeted therapy or clinical trial enrollment. The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their lung cancer. +In developing the Company's products, we have developed or designed a regulatory strategy resulting in approvals, product development and clinical acumen, biorepositories, proprietary and patented technologies, specimen collection kit manufacturing capabilities, and bioinformatics methods that it believes are important to the development of new targeted therapies, determining clinical trial eligibility, and guiding treatment selection. The Company’s testing services are made available through its clinical laboratories. +Note 2 – Summary of Significant Accounting Policies +Basis of Presentation and Estimates +The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates include: revenue recognition; the estimation of the fair value of goodwill and other intangible assets pursuant to the Company's annual impairment analysis; fair value of stock options; income tax uncertainties, including a valuation allowance for deferred tax assets; fair value of warrant liabilities; leases, including the estimated incremental borrowing rates ; and contingencies. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments +F- 8 +about the carrying values of assets and liabilities and recognized revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions. +Liquidity and Capital Resources +The Company assesses liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. The Company’s cash requirements for 2024 and beyond include expenses related to sales and marketing, research and development, regulatory and other expenses as we expand our marketing efforts for our diagnostic tests and services, expand existing relationships with our customers, obtain regulatory clearances or approvals or certifications for future enhancements to our existing diagnostic tests and services and conduct further clinical trials. In addition, we expect to incur general and administrative expenses associated with scaling our business operations and testing capacity as well as the requirements of being a public company operating in a highly regulated industry. As of December 31, 2024, we maintained cash and cash equivalents of $ 26.2 million. +We have incurred losses since our inception and have reported net losses of $ 42.9 million and $ 52.1 million for the years ended December 31, 2024 and 2023, respectively. As a result of these losses, as of December 31, 2024, we had an accumulated deficit of approximately $ 462.5 million. We have funded our operations to date primarily through our two revenue sources: (i) Lung Diagnostic Testing and (ii) Development Services, the sale of convertible preferred stock, the sale of common stock, and the issuance of notes payable, including through our current Perceptive Term Loan Facility (see Note 8 – Debt ). Additionally, on February 28, 2025, the Company entered into a fifth amendment to the Perceptive Term Loan Facility, whereby, subject to the terms and conditions of the fifth amendment, the Tranche C Loan revenue milestone was eliminated and the Commitment Termination Date (as defined in the Credit Agreement) was extended, providing continued availability to the Tranche C Loan in an aggregate amount equal to $ 10.0 million through December 31, 2025 (see Note 17 – Subsequent Events ). +The Company believes the prior conditions and events raising substantial doubt about its ability to continue as a going concern no longer exist following the amended debt agreement in October 2024, continued improvement in operations, as well as the amendment to extend availability to the Tranche C Loan noted above. Accordingly, its current cash and cash equivalents as of the issuance date of these financial statements will be sufficient to fund its operations at the current levels for at least the next 12 months. Management continues to monitor the Company’s liquidity position and has the flexibility to adjust spending as needed in order to preserve and extend liquidity. As of December 31, 2024, the Company was in compliance with all restrictive and financial covenants associated with its borrowings and expects to remain in compliance for more than one year from when these financial statements are issued. While the Company’s ability to execute its business objectives and achieve profitability over the long term cannot be assured, the Company's current plans and projections, existing cash and cash equivalents, and expense management activities provide liquidity for the Company to satisfy our liquidity requirements for more than one year from when these financial statements are issued. +Segment Reporting +Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker (CODM) in deciding how to allocate resources and assess performance. The Company's chief executive officer and chief financial officer, as a group, represents the entity's chief operating decision makers. The Company’s CODM views the Company’s operations and manages its business as a single operating segment focused on providing diagnostic testing in the clinical setting and providing services to biopharmaceutical companies. +See Note 15 — Segment Reporting for additional information. +Revenue Recognition +We derive our revenue from two sources: (i) Lung Diagnostic Testing, providing lung diagnostic testing services for healthcare providers associated with our five blood-based tests and (ii) Development Services, providing diagnostic testing services to biopharmaceutical, life sciences, and diagnostic companies. +Lung Diagnostic Testing revenues consist of blood-based lung tests and are recognized in the amount expected to be received in exchange for diagnostic tests when the diagnostic tests are delivered. The Company determines the transaction price and amount to accrue related to its blood-based lung diagnostic test contracts using a portfolio approach by considering: +• +the nature of the payer and payer coverage; +• +payment history; +• +test type; +• +the historical amount of time until payment by a payer; +• +historical price concessions granted to groups of customers; +• +whether there is a reimbursement contract between the payer and the Company; +• +payment as a percentage of agreed upon rate (if applicable); +F- 9 +• +amount paid per test; and +• +any current developments or changes that could impact reimbursement. +Variable consideration, if any, is estimated based on an analysis of historical experience and adjusted as better estimates become available. These estimates require significant judgment by management. +The Company also provides services to patients with whom the Company does not have contracts as defined Accounting Standards Codification (ASC) 606, Revenue from contracts with customers . The Company recognizes revenue for these patients when contracts are established at the amount of consideration to which it expects to be entitled, or when the Company receives substantially all of the consideration subsequent to satisfaction and delivery of the performance obligations. +Development Services revenue consists of various types of tests or other scientific services for a purpose as defined by any individual customer, which are often larger biopharmaceutical companies, as defined by a written agreement between the Company and the customer. These services are generally completed upon the delivery of testing results, achievement of contractual milestone(s) as defined in the customer agreements, or over the term of the contract which is generally expected to be completed in one year or less. Customers for these services are typically large biopharmaceutical companies where collectability is reasonably assured and therefore revenue is accrued upon completion of the performance obligations. Revenue for these services is recognized upon delivery of the completed test results, upon completion of the contractual milestone(s), or over the term of the contract. +In addition, Development Services also include amounts derived from licensing our digital sequencing technologies to our international laboratory partners. We are compensated through royalty-based payments for the licensed technology, and depending on the nature of the technology licensing arrangements, and considering factors including, but not limited to: enforceable right to payment and payment terms, and if an asset with alternative use is created, these revenues are recognized in the period when royalty-bearing sales occur. +Deferred revenue consists of payments received for research, development, and testing services fees received prior to the completion of performance of these tests and services. +See Note 11 — Revenue and Accounts Receivable Credit Concentration for additional information. +Direct Costs and Expenses +The components of our cost of diagnostic tests and testing services consist of cost of materials, direct labor, including bonuses, benefit and share-based compensation, depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs associated with acquiring and processing test samples, including sample accessioning, test performance, quality control analyses, charges to collect and transport samples; curation of test results for physicians; and in some cases, license or royalty fees due to third parties. +Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents. Costs associated with performing tests are expensed as the test is processed regardless of whether and when revenue is recognized with respect to that test. +Research and Development Expenses +Research and development expenses include external and internal costs incurred to develop our technology, collect clinical samples, and conduct clinical studies to develop and support our products. External costs consist primarily of payments to clinical trial sites, sample acquisition costs and laboratory supplies purchased in connection with the Company’s discovery and preclinical activities, process development and clinical development activities, infrastructure expenses, including allocated facility occupancy and information technology costs. Internal expenses include employee-related costs, including salaries, share-based compensation, and related benefits for employees engaged in research and development functions. +The Company estimates and accrues its expenses resulting from its obligations under contracts with vendors and consultants in connection with conducting research and development activities. The financial terms of these contracts vary from contract to contract and may result in payments that do not match the periods over which materials or services are provided under such contracts. The Company’s estimates depend on the timeliness and accuracy of the data provided by consultants and vendors regarding the status of each activity. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information received. Research and development costs are expensed as incurred. +Sales, Marketing, General and Administrative Expenses +Selling expenses consist primarily of costs associated with our sales organization, including our direct sales force and sales management, client services, marketing, and reimbursement, as well as business development personnel who are focused on our biopharmaceutical customers. These expenses consist primarily of salaries, commissions, bonuses, employee benefits, travel, and share-based compensation, as well as marketing and educational activities and allocated overhead expenses. +F- 10 +Sales, marketing, general and administrative expenses also include costs for our marketing and sales organizations, and other functions including finance, legal, human resources, and information technology. These expenses consist principally of salaries, bonuses, employee benefits, travel, share-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. +Concentrations of Credit Risk and Other Uncertainties +Substantially all of the Company’s cash and cash equivalents are deposited with one major financial institution in the United States. The Company continually monitors its positions with, and the credit quality of, the financial institution with which it holds cash. Periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. +Several of the components for certain of the Company's sample collection kits, test reagents, and test systems are obtained from single-source suppliers. If these single-source suppliers fail to satisfy the Company's requirements on a timely basis, the Company could suffer delays in being able to deliver its diagnostic solutions, a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results. +For a discussion of credit risk concentration of accounts receivable as of December 31, 2024 and 2023, see Note 11 — Revenue and Accounts Receivable Credit Concentration . +Cash and Cash Equivalents +Cash equivalents consist of short-term, highly-liquid instruments with an original maturity of three months or less from the date of purchase. +Restricted Cash +Restricted cash consists of deposits related to the Company’s corporate credit card. As of December 31, 2024 and 2023, the Company had $ 0.1 million restricted cash , respectively, which was included in ‘ Other current assets ’ in the accompanying balance sheets. +Accounts Receivable and Allowance for Doubtful Accounts +Accounts receivable are stated at the amount management expects to collect from customers based on their outstanding invoices. Management reviews accounts receivable quarterly to determine if any receivable will potentially be uncollectible and to estimate the amount of allowance for credit losses necessary to reduce accounts receivable to its estimated net realizable value based on historical experience, customer creditworthiness, facts, and circumstances specific to outstanding balances, and payment terms. +Inventory +Inventory consists primarily of material supplies, which are consumed in the performance of testing services and charged to ‘Direct c osts and expenses’. Inventory is stated at cost and reported within ‘Other current assets’ in the balance sheet and was $ 1.0 million and $ 1.4 milli on for the years ended December 31, 2024 and 2023, respectively. The Company recorded a reserve for excess inventory of an insignificant amount for the year ended December 31, 2024 and $ 0.1 million for 2023. During the year ended December 31, 2024 , the Company recorded an insignificant amount to the statement of operations for excess and obsolete inventory and $ 0.2 million for 2023 . +Property and Equipment +Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between three and five years . Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the statements of operations in the period realized. +Long-lived assets to be held and used are evaluated for impairment when events or circumstances indicate the carrying value of a long-lived asset or asset group is less than the undiscounted cash flows from the use and eventual disposition over its remaining useful life. The Company assesses recoverability by comparing the sum or projected undiscounted cash flows from the use and eventual disposition of the asset or asset group to its carrying value, and records an impairment loss if the carrying value is greater than the undiscounted future cash flows. There were no impairments for the years ended December 31, 2024 and 2023 . +Intangible Assets +Intangible assets primarily consist of intangible assets acquired as part of business combinations, external costs associated with patent applications that are probable of future economic benefits, and trademark costs. Finite-lived intangibles are stated at cost, net of accumulated amortization. The Company amortizes finite-lived intangible assets using the straight-line method over their estimated +F- 11 +useful lives of 10 years , based on management's estimate of the period over which their economic benefits will be realized, product life and patent life. Trademarks are considered indefinite lived and are not amortized. +Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate a reduction to fair value below their carrying amo unts. The Company recorded $ 0.2 million and an insignificant amount for impairments during the years ended December 31, 2024 and 2023, respectively, related to patents the Company is no longer pursuing . +Goodwill +Goodwill represents the excess of purchase price over amounts allocated to acquired assets and liabilities assumed in business combinations. The carrying value of goodwill is evaluated for impairment at least annually or more frequently when events or circumstances occur indicate a potential for impairment. The annual impairment test is performed on the last day of our fourth quarter. Prior to performing a quantitative evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of the reporting unit exceeds its carrying value. In the event the Company determines that it is more likely than not the carrying value of our single reporting unit is higher than its estimated fair value, quantitative testing is performed comparing recorded values to estimated fair values. If impairment is present, the impairment loss is measured as the excess of the recorded goodwill over its implied fair value. Through December 31, 2024, there were no accumulated impairment losses. +Leases +The Company acts as a lessee under all its lease agreements and holds various real estate leases for its headquarters and laboratory facilities in Colorado and Kansas and other various copier leases. +The Company elected the following practical expedients as part of the adoption of ASC 842, Leases : +• +Package of practical expedients which allows the Company to carry forward the historical lease classification; +• +Hindsight practical expedient which allows the Company to use hindsight in determining the lease term, in assessing purchase options, and in assessing impairment of right-of-use (ROU) assets; +• +Short-term lease practical expedient which allows the Company to capitalize only those leases with an initial term of twelve months or more; and +• +The practical expedient to account for lease and non-lease components (such as common area maintenance, utilities, insurance and taxes) as a single lease component for all classes of underlying assets. +Management determines if an arrangement is a lease at inception or upon modification of a contract. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the statements of operations. When determining whether a lease is a finance lease or an operating lease, ASC 842 does not specifically define criteria to determine the “major part of remaining economic life of the underlying asset” and “substantially all of the fair value of the underlying asset.” For lease classification determination, Management continues to use (i) 75% or greater to determine whether the lease term is a major part of the remaining economic life of the underlying asset and (ii) 90% or greater to determine whether the present value of the sum of lease payments is substantially all of the fair value of the underlying asset. +ROU assets represent the Company's right to use an underlying asset for the lease term. Lease liabilities represent the Company's obligation to make lease payments under the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses either the rate implicit in the lease or its incremental borrowing rate, as applicable, based on the information available at lease commencement date. The Company applies the estimated incremental borrowing rates on a lease-by-lease level based on the economic environment associated with the lease. The operating lease ROU asset also includes any lease prepayments, net of lease incentives. Certain of the Company's leases include options to extend or terminate the lease. As leases approach maturity, the Company considers various factors such as market conditions and the terms of any renewal and termination options that may exist to determine whether we will renew or terminate the lease, as such, we generally do not include renewal or termination options in our lease terms for calculating our lease liability, as the options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options at the time of the lease commencement. The Company's lease agreements do not contain any material residual value guarantees or restrictive covenants. Lease expense for lease payments of operating leases is recognized on a straight-line basis over the term of the lease. The Company uses the long-lived assets impairment guidance to determine recognition and measurement of an ROU asset impairment, if any. The Company monitors for events or changes in circumstances that require a reassessment. +The Company has a $ 5.0 million cash refundable deposit to secure the performance of the Company’s obligations associated with the operating lease agreement with Centennial Valley Properties I, LLC (see Note 9 – Leases ). As of December 31, 2024 and 2023 , the $ 5.0 million refundable deposit is reported within 'Other long-term assets' in the balance sheets. +The Company holds and acts as a lessee under various finance lease agreements for laboratory equipment in Colorado and Kansas. As of December 31, 2024 and 2023 , the Company had $ 2.2 million and $ 1.1 million recorded as net finance lease ROU assets within 'Other long-term assets' in the balance sheets. +F- 12 +Additional information and disclosures required by this standard are contained in Note 9 — Leases . +Fair Value of Financial Instruments +U.S. GAAP for fair value establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). We utilize a combination of market and income approaches to value our financial instruments. Our financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. Fair value measurements are categorized within the fair value hierarchy based upon the lowest level of the most significant inputs used to determine fair value. +The three levels of the hierarchy and the related inputs are as follows: +Level +Inputs +1 +Unadjusted quoted prices in active markets for identical assets and liabilities. +2 +Unadjusted quoted prices in active markets for similar assets and liabilities; +Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or +Inputs other than quoted prices that are observable for the asset or liability. +3 +Unobservable inputs for the asset or liability. +The carrying amounts of certain financial instruments including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, other long-term assets, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. +See Note 4 — Fair Value for further discussion related to estimated fair value measurements. +Contingent Consideration +The fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value are recorded as ‘Interest expense’ in the statements of operations. +Warrant Liability +The fair value of warrant liabilities is assessed at each balance sheet date and changes, if any, to the fair value are recorded as 'Change in fair value of warrant liability, net' in the statements of operations . +Share‑Based Compensation +Stock Options +The Company grants service condition and performance condition stock options. Stock options are granted with exercise prices equal to the fair market value of our common stock on the date of grant. The grant date fair value of each employee stock option is estimated on the date of grant using the Black-Scholes option-pricing model, which requires the use of assumptions, including the expected term of the option, expected volatility of our stock price, expected dividend yield, and the risk-free interest rate, among others. We estimate forfeitures and adjust these estimates to actual forfeitures as they occur. These assumptions involve inherent uncertainties including market conditions and employee behavior that are generally outside of the Company’s control. Service condition stock options are expensed based on the grant date fair value of the awards using the straight-line method over the requisite service period. Performance-condition stock options, if granted, vest based on achievement of multiple weighted performance goals, certification of performance achievement by the Compensation Committee of the Board of Directors, and continued service. For performance-condition stock options, compensation expense is updated for our expected performance level against performance goals at the end of each reporting period, which involves judgment as to achievement of certain performance metrics. +Restricted Stock Units (RSUs) +The Company grants service-condition RSUs. The grant date fair values of these RSUs are based on the closing market price of our common stock on the grant date. We estimate forfeitures and adjust these estimates to actual forfeitures as they occur. The service-condition RSUs vest based on continued service with compensation expense recognized on a straight-line basis over the requisite service period. +See Note 12 — Share-Based Compensation for additional information related to share-based compensation. +Income Taxe s +The Company accounts for income taxes in accordance with ASC 740, Income Taxes , under which deferred income taxes are recognized based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results, or the ability to implement +F- 13 +tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. The recorded valuation allowance is based on significant estimates and judgments and if the facts and circumstances change, the valuation allowance could materially change. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. +See Note 14 — Income Taxes for additional information related to income taxes. +Net Loss per Common Share +Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the period, if dilutive, using the treasury stock method. Potentially dilutive securities consisting of options to purchase common stock, warrants to purchase common stock, RSUs and shares subject to purchase under our employee stock purchase plan were excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive for all periods presented. +Note 3 – Recent Issued Accounting Standards +Recently adopted accounting standards +In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting: Improvements to Reportable Segment Disclosures (ASC Topic 280). This ASU requires all public entities to provide additional disclosures about the entity's reportable segments and more detailed information about a reportable segment's expenses. This guidance became effective for the Company for the annual period beginning on January 1, 2024, and interim periods beginning on January 1, 2025. The Company evaluated this guidance and determined the adoption of this new standard did not have an impact on the Company's balance sheets, statements of operations, shareholders' equity or cash flows, however, the Company is required to provide additional disclosures. +See Note 15 — Segment Reporting for additional information. +Standards being evaluated +In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . This ASU improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid by jurisdiction. This guidance will become effective for the Company for the annual period beginning on January 1, 2025, and interim periods beginning on January 1, 2026. The Company is currently evaluating this guidance and assessing the overall impact on its financial statements. +In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses . This ASU improves the transparency of a public business entity's expense disclosures by requiring more detailed information about the types of expenses (including purchases of inventory, employee compensation, depreciation, amortization, and depletion) in commonly presented expense captions (such as cost of sales, SG&A, and research and development). This guidance will become effective f or the Company for the annual period beginning on January 1, 2027, and interim periods beginning on January 1, 2028, with early adoption permitted. The Company is currently evaluating this guidance and assessing the overall impact on its financial statements. +Note 4 - Fair Value +Recurring Fair Value Measurements +Our borrowing instruments are recorded at their carrying values in the balance sheets, which may differ from their respective fair values. The fair value of borrowings as of December 31, 2024 and 2023 is primarily associated with the Perceptive Term Loan Facility entered into with Perceptive Credit Holdings IV, LP in November 2022 and was determined using a discounted cash flow analysis, excluding the fair value of the Perceptive Warrant (as defined below) issued in conjunction with the transaction. The difference between the carrying value and fair value of outstanding borrowings as of December 31, 2024 is due to an increase in the fair value of debt as a result of improved credit markets. The carrying value of outstanding borrowings approximates the fair value as of December 31, 2023 . T he table below presents the carrying and fair values of outstanding borrowings, which are classified as Level 2, as of the dates indicated (in thousands): +F- 14 +As of +December 31, 2024 +December 31, 2023 +Carrying Value +Fair Value +Carrying Value +Fair Value +Borrowings +$ +36,429 +$ +37,484 +$ +35,276 +$ +35,506 +The financial liabilities that are measured and recorded at estimated fair value on a recurring basis consist of our contingent consideration associated with our previous acquisition of Indi, the warrant liabilities granted as consideration for the Perceptive Term Loan Facility (see Note 8 - Debt ), and contingent value rights granted to certain holders of our previously converted Series F Preferred Stock, which were accounted for as liabilities and remeasured through our statements of operations. +The table below presents the reported fair values of contingent consideration, warrant liabilities, and contingent value rights, which are classified as Level 3 in the fair value hierarchy, as of the dates indicated (in thousands): +As of +Description +December 31, 2024 +December 31, 2023 +Contingent consideration +$ +— +$ +21,857 +Warrant liabilities +$ +— +$ +— +Contingent value rights +$ +— +$ +— +The following table presents the changes in contingent consideration and warrant liabilities for the dates indicated (in thousands): +Level 3 Rollforward +Contingent Consideration +Warrant Liabilities +Balance - December 31, 2022 +$ +28,986 +$ +61 +Changes in fair value, net +— +1,274 +Interest expense +3,946 +— +Payments +( 11,075 +) +— +Reclassification of Tranche B Warrants to additional paid-in capital +— +( 1,335 +) +Balance - December 31, 2023 +21,857 +— +Interest expense +1,137 +— +Loss on extinguishment of liabilities +248 +— +Payments +( 23,242 +) +— +Balance - December 31, 2024 +$ +— +$ +— +Contingent consideration +In connection with the acquisition of Indi in 2018, the Company recorded contingent consideration for amounts contingently payable to Indi's selling shareholders pursuant to the terms of the asset purchase agreement (the Indi APA). The contingent consideration arrangement required additional consideration to be paid by the Company to such shareholders upon attainment of a three-consecutive month gross margin target of $ 2.0 million within the seven-year period after the acquisition date, which was achieved during the three months ended June 30, 2021. Under the terms of the original agreement, when the gross margin target was achieved, the Company was required to issue 2,520,108 shares of common stock. For the six months following the achievement of the gross margin target, Indi had the option to require the Company to redeem these common shares for $ 37.0 million in cash over eight equal quarterly installments. If Indi elected to not exercise its option, the Company had 12 months to repurchase the common stock in two equal and consecutive quarterly cash installments totaling $ 37.0 million. +In August 2021, the Company entered into an amendment to the original agreement in which all parties agreed to forgo the issuance of common stock and agreed that the Company would, in lieu thereof, make six quarterly installments of approximately $ 4.6 million each beginning in January 2022 and a final payment of approximately $ 9.3 million in July 2023 for a total of $ 37.0 million (the Milestone Payments and each individually a Milestone Payment). The aggregate amount of payments owed by the Company under this amendment was the same as if Indi had exercised the put right or the Company had exercised the call right provided for in the original agreement. +On April 7, 2022, the Company entered into Amendment No. 3 to the Indi APA, in which the parties agreed to restructure the Milestone Payments. The Company made five quarterly installments of $ 2.0 million each beginning in April 2022, three quarterly installments of $ 3.0 million which began in July 2023, one installment of $ 5.0 million in April 2024, and one installment of $ 8.4 million in July 2024. In addition, the Company agreed to an exit fee of approximately $ 6.1 million to be paid in October 2024. Interest accrued on the difference between the payment schedule as agreed in the August 2021 amendment and the April 2022 amended payment schedule, at an aggregate per annum rate equal to 10 %, with such interest to be payable quarterly on the following installment payment date. Our +F- 15 +ability to make these payments was subject to ongoing compliance under the Perceptive Term Loan Facility. On September 30, 2024, the Company obtained consent from Perceptive and prepaid the October 1, 2024 exit fee of $ 6.1 million to Indi. +The contingent consideration liability was accounted for at fair value and subject to certain unobservable inputs. The significant unobservable inputs used in the measurement of the fair value included the probability of successful achievement of the specified product gross margin targets, the period in which the targets were expected to be achieved, and discount rates which ranged from 11 % to 16 %. As a result of the achievement of the gross margin target, the only remaining significant unobservable input used in the measurement of fair value included the discount rate since all other inputs became fixed and determinable. Subsequent changes to the contingent consideration following the achievement of the gross margin target were recorded as ‘Interest expense’ in the statements of operations resulting from the passage of time and fixed payment schedule. +During the years ended December 31, 2024 and 2023, the Company recor ded $ 1.1 million and $ 3.9 million, r espectively, in interest expense due to the passage of time and fixed payment schedule. +In accordance with ASC 230, Statement of Cash Flows , cash paid to settle the contingent consideration liability recognized at fair value as of the acquisition date (including measurement-period adjustments) should be reflected as a cash outflow for financing activities while the remaining portion of the amount paid should be reflected as a cash outflow from operating activities in the statements of cash flows. All 2024 Milestone Payments are classified as cash outflows from operating activities in the Company's statements of cash flows. +Warrant Liabilities +On November 21, 2022, as consideration for the Perceptive Term Loan Facility (see Note 8 - Debt ), the Company issued Perceptive a warrant to purchase up to 5,000,000 shares of the Company's common stock (the Perceptive Warrant), including Initial Warrants (as defined in Note 10 - Equity below) and Tranche B and C Warrants. The Initial Warrants are equity classified (see Note 10 - Equity ) while the Tranche B and C Warrants were initially classified as liabilities and recognized at fair value. On December 15, 2023 (the Tranche B Borrowing Date), the Company exercised its ability to draw the Tranche B loan (see Note 8 – Debt ). In connection with the Tranche B draw, the Company remeasured the Tranche B Warrants through the Tranche B Borrowing Date and recorded the change in fair value through the statements of operations and, subsequently, reclassified the fair value to additional paid-in capital (see Note 10 – Equity ). The fair value of the Tranche C Warrants was determined using a Black-Scholes model and subject to certain unobservable inputs. The significant unobservable inputs used in the measurement of the fair value included the risk-free rate, the volatility of common stock, and the probability of the expected borrowing. The Tranche C loan had a commitment date through September 30, 2024 and, as of that date, the Company did not exercise its ability to draw the Tranche C loan. Therefore, the associated Tranche C Warrants expired and are no longer exercisable. +During the year ended December 31, 2024, the Company recorded no change in fair value through the statements of operations. During the year ended December 31, 2023 , the Company recorded a $ 1.3 million loss as a change in fair value through the statement of operations due to changes in unobservable inputs. This is a result of changes in the probability of our ability to draw on Tranche B and C loans. +Contingent Value Rights +In January 2016, the Company issued shares of Series F Preferred Stock (the Series F Offering) that were subsequently converted into common stock in connection with the Company's initial public offering in October 2020. In connection with the Series F Offering, investors who purchased more than their pro-rata amount in the financing received a calculated number of contingent value rights (CVRs). One CVR represents 0.00375 % of the Company’s interest in the drug ficlatuzumab, which began a Phase 3 clinical trial in January 2024 (see Note 16 - Commitments and Contingencies below). In January 2016, the Company issued 3,999 CVRs, or 15 % interest in the drug ficlatuzumab, originally valued at $ 0.5 million. The initial estimated value of the CVRs were recorded as a liability and as a reduction to the Series F proceeds. Subsequent to recoupment of our initial co-development costs, upon receipt of a milestone, royalty, or any other type of payment from the Company’s ownership rights in the drug, the Company is required to make a cash payment to the CVR holders equal to 15 % of net proceeds, as defined. During the years ended December 31, 2024 and 2023, the Company recorded no change in fair value through the statements of operations due to the probability of receiving net proceeds in excess of our initial co-development costs. +F- 16 +Note 5 – Property and Equipment +Property and equipment consist of the following (in thousands): +As of +December 31, 2024 +December 31, 2023 +Lab equipment +$ +5,854 +$ +6,089 +Leasehold improvements +28,192 +24,713 +Computer equipment +1,305 +1,221 +Furniture and fixtures +1,100 +1,034 +Software +325 +325 +Vehicles +97 +97 +Construction in process +89 +— +36,962 +33,479 +Less accumulated depreciation +( 9,134 +) +( 5,612 +) +Total property and equipment, net +$ +27,828 +$ +27,867 +Depreciation expense related to pr operty and equipment was (in thousands): +Year Ended December 31, +2024 +2023 +Direct costs and expenses +$ +413 +$ +460 +Selling, marketing, general and administrative +3,352 +885 +Total +$ +3,765 +$ +1,345 +Note 6 – Goodwill and Intangible Assets +Intangible assets, excluding goodwill, consist of the following (in thousands): +December 31, 2024 +December 31, 2023 +Cost +Accumulated +Amortization +Net Carrying Value +Cost +Accumulated +Amortization +Net Carrying Value +Intangible assets subject to amortization +Patents +$ +1,940 +$ +( 877 +) +$ +1,063 +$ +1,975 +$ +( 752 +) +$ +1,223 +Purchased technology +16,900 +( 12,206 +) +4,694 +16,900 +( 10,328 +) +6,572 +Intangible assets not subject to +amortization +Trademarks +117 +— +117 +116 +— +116 +Total +$ +18,957 +$ +( 13,083 +) +$ +5,874 +$ +18,991 +$ +( 11,080 +) +$ +7,911 +Amortization expense related to definite-lived intangible assets was (in thousands): +Year Ended December 31, +2024 +2023 +Direct costs and expenses +$ +2 +$ +2 +Sales, marketing, general and administrative +2,006 +1,981 +Total +$ +2,008 +$ +1,983 +F- 17 +Future estimated amortization expense of intangible assets is (in thousands): +As of +December 31, 2024 +2025 +$ +2,015 +2026 +1,994 +2027 +1,036 +2028 +87 +2029 +78 +2030 and thereafter +547 +Total +$ +5,757 +Note 7 – Accrued Liabilities +Accrued liabilities consist of the following (in thousands): +As of December 31, +2024 +2023 +Compensation related accruals +$ +6,770 +$ +3,855 +Accrued clinical trial expense +919 +983 +Other expenses +2,375 +2,872 +Total accrued liabilities +$ +10,064 +$ +7,710 +Note 8 – Debt +Our long-term debt primarily consists of notes payable associated with our Perceptive Term Loan Facility which is described in further detail below. Long-term notes payable were as follows (in thousands): +As of +December 31, 2024 +December 31, 2023 +Perceptive Term Loan Facility +$ +40,000 +$ +40,000 +Other +26 +78 +Unamortized debt discount and debt issuance costs +( 3,597 +) +( 4,802 +) +36,429 +35,276 +Less: current maturities +21 +51 +Long-term notes payable +$ +36,408 +$ +35,225 +Perceptive Term Loan Facility +On November 16, 2022 (the Closing Date), the Company entered into a Credit Agreement and Guaranty (the Credit Agreement) with Perceptive Credit Holdings IV, LP as lender and administrative agent (the Lender). The Credit Agreement provides for a senior secured delayed draw term loan facility with Perceptive Advisors LLC (Perceptive) (the Perceptive Term Loan Facility). The Tranche A Loan, in an aggregate amount of up to $ 30.0 million (the Tranche A Loan), was funded under the Perceptive Term Loan Facility on November 21, 2022 (the Funding Date). The Company's net proceeds from the Tranche A Loan were approximately $ 27.9 million, after deducting debt issuance costs and expenses. In addition to the Tranche A Loan, the Perceptive Term Loan Facility included an additional Tranche B Loan, in an aggregate amount of up to $ 10.0 million, and an additional Tranche C Loan, in an aggregate amount of up to $ 10.0 million, which were accessible by the Company so long as the Company satisfied certain customary conditions precedent, including revenue milestones. On December 15, 2023, the Company exercised its ability to draw the Tranche B loan for $ 10.0 million. The Tranche C loan had a commitment date through September 30, 2024 and, as of that date, the Company did no t exercise its ability to draw the Tranche C loan. The Perceptive Term Loan Facility has a maturity date of November 21, 2027 (the Maturity Date) and provides for an interest-only period during the term of the loan with principal due at the Maturity Date. +Interest Rate +The Perceptive Term Loan Facility will accrue interest at an annual rate equal to the greater of (a) forward-looking one-month term SOFR as posted by CME Group Inc. and (b) 3.0 % per annum, plus an applicable margin of 9.0 %. As of December 31, 2024, the stated interest rate was approximately 13.3 % . +F- 18 +Amortization and Prepayment +On the Maturity Date, the Company is required to pay the Lender the aggregate outstanding principal amount underlying the Perceptive Term Loan Facility and any accrued and unpaid interest thereon. Prior to the Maturity Date, there will be no scheduled principal payments under the Perceptive Term Loan Facility. The Perceptive Term Loan Facility may be prepaid at any time, subject to a prepayment premium equal to 2 % to 10 % of the aggregate outstanding principal amount being prepaid, depending on the date of prepayment. +Security Instruments and Warrants +Pursuant to a Security Agreement, dated as of the Funding Date (the Security Agreement), between the Company and the Lender, substantially all of the Company’s obligations under the Credit Agreement are secured by a first lien perfected security interest on all of the Company’s assets, subject to customary exceptions. +As consideration for the Credit Agreement, the Company has issued, on the Funding Date, the Perceptive Warrant of up to 5,000,000 shares of the Company's common stock, including the Initial Warrants which are equity classified at a per share exercise price equal to $ 1.0648 which is equal to the 10-day volume weighted average price (VWAP) of the Company’s common stock, on the business day immediately prior to the Closing Date of the Tranche A Loan. In connection with the Tranche B borrowing, additional warrants became exercisable into 1,000,000 shares of common stock with a per share exercise price equal to $ 1.0648 , which is equal to the Initial Warrant exercise price and expire on December 15, 2033 (the Tranche B Warrants). +In addition to the Initial and Tranche B Warrants, additional warrants would become exercisable into 1,000,000 shares of common stock concurrently with the borrowing date of the Tranche C Loan (the Tranche C Warrants). The Company accounted for the Tranche C Warrants as liabilities as the Tranche C Warrants did not meet the criteria for equity treatment (see Note 4 – Fair Value ). The Tranche C loan was not drawn by the loan commitment date and the associated Tranche C Warrants expired and are no longer exercisable. +Representations, Warranties, Covenants, and Events of Default +The Credit Agreement contains certain representations and warranties, affirmative covenants, negative covenants, financial covenants, and conditions that are customarily required for similar financings. The affirmative covenants, among other things, require the Company to undertake various reporting and notice requirements, maintain insurance and maintain in full force and effect all Regulatory Approvals, Material Agreements, Material Intellectual Property (each as defined in the Credit Agreement) and other rights, interests or assets (whether tangible or intangible) reasonably necessary for the operations of the Company’s business. The negative covenants restrict or limit the ability of the Company to, among other things and subject to certain exceptions contained in the Credit Agreement, incur new indebtedness; create liens on assets; engage in certain fundamental corporate changes, such as mergers or acquisitions, or changes to the Company’s business activities; make certain Investments or Restricted Payments (each as defined in the Credit Agreement); change its fiscal year; pay dividends; repay other certain indebtedness; engage in certain affiliate transactions; or enter into, amend or terminate any other agreements that has the impact of restricting the Company’s ability to make loan repayments under the Credit Agreement. In addition, the Company must (i) at all times prior to the Maturity Date maintain a minimum cash balance of $ 2.5 million; and (ii) as of the last day of each fiscal quarter commencing on the fiscal quarter ending March 31, 2023, meet certain minimum net revenue threshold amounts agreed to between the Company and Perceptive. +On May 10, 2023, the Company entered into the First Amendment with the Lender, whereby subject to the terms and conditions of the First Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold of each fiscal quarter commencing on the fiscal quarter ending June 30, 2023 through and including the fiscal quarter ending March 31, 2024. As consideration for the First Amendment, the Company agreed to issue to Perceptive a warrant to purchase up to 500,000 shares of the Company’s common stock (the First Amendment Warrants) which are equity classified at a per share exercise price equal to $ 1.6254 (see Note 10 - Equity ). +On August 4, 2023 (the Second Amendment Effective Date), the Company entered into the Second Amendment to the Credit Agreement and Guaranty (the Second Amendment) with Perceptive as lender and administrative agent and the Company, as borrower, whereby subject to the terms and conditions of the Second Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing on the fiscal quarter ending June 30, 2024 through and including the fiscal quarter ending December 31, 2025. +Under the terms of the Second Amendment, the conditions precedent for drawing on the Tranche B Loan were amended to (i) reduce the trailing twelve-month revenue milestone and (ii) add the receipt of aggregate cash proceeds of at least $ 27.5 million from an equity offering of the Company's common stock. During the three months ended December 31, 2023, the amended conditions precedent were met and on December 15, 2023, the Company exercised its ability to draw the Tranche B loan for $ 10.0 million. +On February 29, 2024 (the Third Amendment Effective Date), the Company entered into the Third Amendment to the Credit Agreement and Guaranty (the Third Amendment) with Perceptive as lender and administrative agent and the Company, as borrower, whereby subject to the terms and conditions of the Third Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) +F- 19 +was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing on the fiscal quarter ending March 31, 2024 through and including the fiscal quarter ending December 31, 2025. +On October 30, 2024 (the Fourth Amendment Effective Date), the Company entered into the Fourth Amendment to the Credit Agreement and Guaranty (the Fourth Amendment) with Perceptive, as lender and administrative agent, and the Company, as borrower, whereby subject to the terms and conditions of the Fourth Amendment, the Minimum Net Revenue Covenant (as defined in the Credit Agreement) was amended to reduce the relevant threshold as of the last day of each fiscal quarter commencing on the fiscal quarter ending June 30, 2025 through and including the fiscal quarter ending December 31, 2027. +The Credit Agreement also contains certain customary Events of Default which include, among others, non-payment of principal, interest, or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross-defaults to material contracts, certain regulatory-related events and events constituting a change of control. As of December 31, 2024, the Company was in compliance with all restrictive and financial covenants associated with its borrowings. The occurrence of an Event of Default could result in, among other things, the declaration that all outstanding principal and interest under the Perceptive Term Loan Facility are immediately due and payable in whole or in part. +On the Closing Date, the Initial Warrants and Additional Warrants were valued at $ 2.9 million and $ 0.1 million, respectively, using the Black-Scholes option-pricing model, estimated settlement probabilities and estimated exercise prices. As a result of the fees paid to Perceptive and the value of the Perceptive Warrant, the Company recognized a discount on the Perceptive Term Loan in the amount of $ 5.2 million. The First Amendment Warrants were valued at $ 0.7 million using the Black-Scholes option-pricing model which the recognized as a discount on the Perceptive Term Loan Facility. The Company recorded the debt discount as a reduction to the principal amount of the debt and is amortized as interest expense over the life of the debt. +Scheduled principal repayments (maturities) of long-term obligations were as follows (in thousands): +As of +December 31, 2024 +2025 +$ +21 +2026 +5 +2027 and thereafter +40,000 +Total +$ +40,026 +Note 9 – Leases +Operating Leases +The Company acts as a lessee under all its lease agreements. In January 2024 the Company relocated its corporate headquarters and laboratory facilities to Louisville, Colorado. The Company also leases laboratory and office space in De Soto, Kansas, under a non-cancelable lease agreement for approximately 9,066 square feet that is set to expire in October 2026 . The Company's De Soto lease agreement was amended on April 12, 2024 to include an additional 1,772 square feet of office space. The Company also holds various copier and equipment leases under non-cancelable lease agreements that expire within the next five years . +Centennial Valley Properties I, LLC Lease Agreement +On March 11, 2022, the Company entered into a Lease Agreement (the Lease) with Centennial Valley Properties I, LLC and subsequently assigned to CVP I Owner LLC, a Colorado limited liability company (the Landlord) for office and laboratory space in Louisville, Colorado (the Leased Premises). The initial term of the Lease is twelve years (the Initial Term) from the commencement date, which was April 1, 2023 (the Commencement Date). The Company has two renewal options to extend the term of the Lease for an additional seven - or ten-year terms for each renewal. +Under the Lease, the Company is leasing approximately 79,980 square feet at the Leased Premises. The Company will pay base rent over the life of the Lease beginning at approximately $ 227,000 per month and escalating, based on fixed escalation provisions, to approximately $ 326,000 per month, plus certain operating expenses and taxes. The Company's obligation to pay base rent shall be abated, commencing as of the Commencement Date and ending on March 31, 2024 (the Abated Rent Period). Further, the Company's obligation to pay base rent with respect to a portion of the area of the Lease Premises equal to 19,980 square feet shall be abated (the Partial Abated Rent), commencing as of April 1, 2024 and ending on March 31, 2025 (the Partial Abated Rent Period). Pursuant to a work letter entered by the parties in connection with the Lease, the Landlord contributed an aggregate of $ 18.8 million toward the cost of construction and improvements for the Leased Premises and the Company exercised its option for an additional tenant improvement allowance of $ 2.0 million (the Extra Allowance Amount). The Company will repay the Extra Allowance Amount actually funded by the Landlord in equal monthly payments with an interest rate of 6 % per year over the Initial Term excluding any part of the Abated Rent Period or Partial Abated Rent Period, which shall start to accrue on the date that the Landlord first disburses the Extra Allowance Amount. The Company made an accounting policy election to reduce the right-of-use asset and lease liability at lease commencement because the Lease specifies a maximum level of reimbursement for tenant improvements which are probable of being incurred and +F- 20 +within the Company's control. Due to the tenant improvement allowances at the accounting lease commencement date and rent abatement periods described above, the Company expects the lease liability to accrete to approximately $ 25.1 million by March 2025. The Company utilized the total $ 20.8 million in tenant improvement allowances for capital expenditures for leasehold improvements throughout the year ended December 31, 2023. +The Lease includes various covenants, indemnities, defaults, termination rights, and other provisions customary for lease transactions of this nature. During the three months ended September 30, 2022, a $ 5.0 million cash collateralized letter of credit under the operating lease agreement was released and the funds were subsequently transferred to the Landlord as a refundable deposit (subject to contingent reduction over the term of the lease) to secure the performance of the Company’s obligations. The $ 5.0 million refundable deposit is included within ' Other long-term assets ' in the balance sheet as of December 31, 2024 and 2023. +Operating lease expense for all operating leases was $ 2.3 million and $ 4.3 million for the year ended December 31, 2024 and 2023, respectively. As of December 31, 2024 , the weighted-average remaining lease term and discount rate associated with our operating leases were 10 years and 11.40 %, respe ctively. +Future minimum lease payments associated with our operating leases were as follows (in thousands): +As of +December 31, 2024 +2025 +$ +3,580 +2026 +4,172 +2027 +4,063 +2028 +4,151 +2029 +4,243 +2030 and thereafter +23,870 +Total future minimum lease payments +44,079 +Less amount representing interest +( 18,532 +) +Total lease liabilities +$ +25,547 +Note 10 – Equity +Common Stock +The Company’s Restated Certificate of Incorporation authorizes the Company to issue up to 200,000,000 shares of common stock with a par value of $ 0.001 per share. The holder of each share of common stock is entitled to one vote per share. The common shareholders are entitled to dividends whenever funds and assets are legally available and when and if declared by the Board of Directors. The Company is currently subject to restrictions on the payment of dividends (see Note 8 – Debt ) and no dividends have been declared as of December 31, 2024. +Preferred Stock +The Company’s Restated Certificate of Incorporation authorizes the Company to issue up to 5,000,000 shares of preferred stock with a par value of $ 0.001 per share. As of December 31, 2024 and 2023 , no shares of preferred stock were issued or outstanding. +Equity Financing Programs +The Company maintains two facilities that enable equity financing on an ongoing basis at the Company’s discretion, our at-the-market (ATM) offering and our common stock purchase agreement with Lincoln Park Capital Fund, LLC (Lincoln Park). +In November 2021, the Company entered into a sales agreement with a financial institution, pursuant to which the Company may issue and sell, from time to time, shares of its common stock having an aggregate offering price of up to $ 50.0 million (the ATM Shares), subject to terms and conditions. The ATM Shares will be offered and sold by the Company pursuant to its previously filed and currently effective registration statement on Form S-3, and sales of common stock, if any, will be made at market prices by methods deemed to be an “at-the-market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on the NASDAQ Global Market, or any other existing trading market for our common stock. +On March 7, 2022 (the LPC Effective Date), the Company entered into a purchase agreement with Lincoln Park Capital Fund, LLC (the Purchase Agreement), pursuant to which Lincoln Park has committed to purchase up to $ 50.0 million of the Company's common stock (the LPC Facility). Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $ 50.0 million of the Company’s common stock. Such sales of common stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company’s sole discretion, over the 36-month period commencing on the LPC Effective Date. The Purchase Agreement may be terminated by the Company at any time, at its sole discretion, without any cost or penalty, by giving one business day notice to Lincoln Park to terminate +F- 21 +the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the common stock. +On the LPC Effective Date, the Company issued 184,275 shares of common stock to Lincoln Park as a commitment fee (the Initial Commitment Shares) for which the Company did not receive consideration and, upon the available amount being reduced to an amount equal to or less than $ 20.0 million, the Company will be required to issue 61,425 shares (the Additional Commitment Shares and together with the Initial Commitment Shares, collectively, the Commitment Shares). The Initial Commitment Shares issued were valued at $ 0.6 million and, together with due diligence expenses and legal fees of $ 0.1 million, reflect deferred offering costs of $ 0.7 million, were included on the balance sheet in 'Other long-term assets'. The deferred offering costs were charged against 'Additional paid-in capital' based upon proceeds from the sale of common stock under the Purchase Agreement. During the years ended December 31, 2024 and 2023, there were no deferred offering costs charged against 'Additional paid-in capital'. During the year ended December 31, 2024, the Company expensed $ 0.7 million of deferred offering costs to 'Other (expense) income, net' in the statements of operations as a result of changes in the probability of our ability to fully utilize the LPC Facility prior to the termination date. As of December 31, 2024, zero deferred offering costs remain. As of December 31, 2024, the Company had remaining available capacity for share issuances of up to $ 46.9 million under the LPC facility, subject to the restrictions and limitations of the underlying facilities. Effective February 5, 2025 , the Company terminated the LPC Facility. +During the year ended December 31, 2024, the Company raised approximatel y $ 0.6 million ($ 0.6 million after deducting underwriting discounts and commissions and offering expenses payable), in gross proceeds from the sale of 313,928 common shares at a weighted average price per share of $ 1.99 under the ATM facility. O n April 5, 2024, the Company filed Supplement No. 1 to the ATM Prospectus Supplement dated December 22, 2021. To comply with volume limitations under applicable SEC rules and regulations, Supplement No. 1 reduced the aggregate offering price to up to $ 100,000 of shares in order to maximize the amount the Company could offer under the April 2024 Offering (defined below ) . Following the successful completion of the Company’s April 2024 Offering, the Company is no longer subject to volume limitations under applicable SEC rules and regulations that limit their availability as sources of funding. On August 7, 2024, the Company filed Supplement No. 2 to the ATM Prospectus Supplement dated December 22, 2021 to increase the aggregate offering price u nder the ATM facility up to $ 50.0 million of shares. On November 1, 2024, the Company filed a shelf registration statement on Form S-3 and entered into a new sales agreement with a financial institution, pursuant to which the Company may issue and sell, from time to time, shares of its common stock having an aggregate offering price of up to $ 50.0 million, subject to terms and conditions (the 2024 ATM Program). The shares of common stock offered pursuant to the 2024 ATM Program will be offered and sold by the Company pursuant to its registration statement on Form S-3 which became effective with the SEC on November 12, 2024. Sales of common stock under the 2024 ATM Program, if any, will be made at market prices by methods deemed to be an “at-the-market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on the NASDAQ Global Market, or any other existing trading market for our common stock. In connection with establishing the 2024 ATM Program, the Company terminated its prior $ 50.0 million ATM program established in November 2021, and no additional stock can be issued thereunder. A s of December 31, 2024, the Company had remaining available capacity for share issuances of up to $ 50.0 million under the ATM facility. +April 2024 Offering Summary +On April 9, 2024, the Company closed an underwritten offering of common stock and a concurrent private placement which are described in further detail below. Collectively, the Company raised net proceeds of approximately $ 51.3 million. +Underwritten Offering +On April 9, 2024, the Company closed an underwritten offering (the Offering) of 17,391,832 shares of its common stock (the Common Stock). The Common Stock was issued and sold pursuant to an underwriting agreement (the Underwriting Agreement), dated April 5, 2024, by and between the Company and TD Securities (USA) LLC, William Blair & Company, L.L.C., and Canaccord Genuity LLC as representatives of the underwriters (the Underwriters), at a price to the public of $ 1.15 per share. The Company received net proceeds of approximately $ 18.2 million from the Offering after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. +The Underwriting Agreement contains customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the Underwriters, including for liabilities under the Securities Act, other obligations of the parties and termination provisions. The Underwriting Agreement also includes lock up restrictions that will be in effect during the period ending 90 days subsequent to April 5, 2024. The representations, warranties, and agreements contained in the Underwriting Agreement were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to such agreement, and may be subject to limitations agreed upon by the contracting parties. +The Offering was made pursuant to the Company’s effective Registration Statement on Form S-3 (File No. 333-261095) previously filed with the SEC on November 29, 2021 and a prospectus supplement, dated April 5, 2024 relating to the Offering . +F- 22 +Concurrent Private Placement +On April 5, 2024, the Company entered into securities purchase agreements (the Securities Purchase Agreements) with various investors, including certain members of management, certain of its directors and funds affiliated with those directors (the Investors) for the issuance and sale by the Company of an aggregate of 760,857 shares of Series A Non-Voting Convertible Preferred Stock, par value $ 0.001 per share (the Series A Preferred Stock) in an offering (the Concurrent Private Placement). The Preferred Stock was issued to the Investors pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the Securities Act) afforded by Section 4(a)(2) of the Securities Act. Pursuant to the terms of the Securities Purchase Agreements, the Company agreed to submit to its stockholders the approval of the (i) conversion of the Preferred Stock into shares of Common Stock in accordance with Nasdaq Stock Market Rules (the Conversion Proposal) and (ii) the issuance of Series A Preferred Stock to certain members of management, certain of its directors and funds affiliated with those directors (the Issuance Proposal) at its 2024 annual meeting of stockholders. The Securities Purchase Agreements include customary representations, warranties and covenants by the parties to the agreement. +Pursuant to the Securities Purchase Agreements, the Investors purchased the Preferred Stock at a purchase price of $ 46.00 per share for an aggregate purchase price of approximately $ 35.0 million, net of fees of approximately $ 1.9 million. +Registration Rights Agreement +In connection with the Concurrent Private Placement, the Company also entered into a Registration Rights Agreement, dated April 5, 2024 (the Registration Rights Agreement), with the Investors, which provides that the Company will register the resale of the shares of Common Stock issuable upon conversion of the Preferred Stock. Pursuant to the Registration Rights Agreement, the Company was required to prepare and file an initial registration statement with the SEC as soon as reasonably practicable, but in no event later than April 23, 2024 (the Filing Deadline), and to use reasonable best efforts to have the registration statement declared effective within 50 days after the closing of the Concurrent Private Placement, subject to the approval of the conversion of the Private Placement Shares being received at the Company’s 2024 annual meeting of stockholders. +On April 8, 2024, the Company filed a Certificate of Designations of Preferences, Rights and Limitations of the Series A Non-Voting Convertible Preferred Stock with the Secretary of State of the State of Delaware (the Certificate of Designations) in connection with the Concurrent Private Placement. The Certificate of Designations provided for the issuance of up to 760,857 shares of the Series A Preferred Stock. +Following stockholder approval of the Conversion Proposal, each share of Series A Preferred Stock automatically converted into 40 shares of Common Stock, subject to certain limitations, including that a holder of Series A Preferred Stock was prohibited from converting shares of Series A Preferred Stock into shares of Common Stock if, as a result of such conversion, such holder, together with its affiliates, would beneficially own more than a specified percentage (established by the holder between 0 % and 19.9 %) of the total number of shares of Common Stock issued and outstanding immediately after giving effect to such conversion. +On May 21, 2024, the Company held its 2024 annual meeting of stockholders in which the Conversion Proposal and Issuance Proposal were approved by the Company's stockholders. Upon approval, each share of Series A Preferred Stock automatically converted into 40 shares of Common Stock and, on May 23, 2024, the Company issued 30,434,280 shares of Common Stock in exchange for all Series A Preferred Stock. +Warrants +During 2018, the Company issued warrants to purchase shares of convertible preferred stock in conjunction with the sale of certain convertible preferred shares and issuance of debt. The Company issued to the lender a warrant to purchase 613,333 shares of Series G convertible preferred stock, at an exercise price of $ 0.75 per share, subject to adjustment upon specified dilutive issuances. The warrant was immediately exercisable upon issuance and expires on February 23, 2028 . Through the effective date of the Company’s initial public offering (IPO) in October 2020, the Series G warrants were remeasured to an estimate of fair value using a Black-Scholes pricing model. As a result of the Company’s IPO, the preferred stock warrants were automatically converted to warrants to purchase 103,326 shares of common stock with a weighted average exercise price of $ 4.46 and were also transferred to additional paid-in capital. All common stock warrants remain outstanding as of December 31, 2024. +On November 21, 2022, as consideration for the Perceptive Term Loan Facility (see Note 8 – Debt ), the Company issued the Perceptive Warrant to purchase up to 5,000,000 shares of the Company's common stock, including the Initial Warrants. The per share exercise price for the Initial Warrants is equal to $ 1.0648 , which is equal to the lower of (A) the 10-day VWAP of the Company’s common stock on the business day immediately prior to the Closing Date of the Tranche A Loan or (B) the public offering price per share of common stock of $ 1.15 . The Initial Warrants are equity classified and were immediately exercisable upon issuance and expire on November 21, 2032 . The Initial Warrants were valued at $ 2.9 million using the Black-Scholes option-pricing model assuming an expected term of 10 years, a volatility of 81.3 %, a dividend yield of 0 % and a risk-free interest rate of 3.67 %. All Initial Warrants remain outstanding as of December 31, 2024. +On May 10, 2023, as consideration for the First Amendment (see Note 8 – Debt ), the Company agreed to issue to Perceptive a warrant to purchase up to 500,000 shares of the Company’s common stock (the First Amendment Warrants) at a per share exercise price equal +F- 23 +to $ 1.6254 , which is equal to the 10-day VWAP of the Company’s common stock ending on the business day immediately prior to the First Amendment Effective Date. The First Amendment Warrants are equity classified and immediately exercisable upon issuance and expire on May 10, 2033 . The First Amendment Warrants were valued at $ 0.7 million using the Black-Scholes option-pricing model assuming an expected term of 10 years, a volatility of 78.7 %, a dividend yield of 0 % and a risk-free interest rate of 3.49 %. All First Amendment Warrants remain outstanding as of December 31, 2024. +On December 15, 2023 (the Tranche B Borrowing Date), the Company exercised its ability to draw the Tranche B loan (see Note 8 – Debt ). In connection with the Tranche B draw, the Company remeasured the Tranche B Warrants through the Tranche B Borrowing Date and recorded the change in fair value through the statements of operations and, subsequently, reclassified the fair value to additional paid-in capital. The Tranche B Warrants are now equity classified and immediately exercisable upon issuance and expire on December 15, 2033 . The Tranche B Warrants were valued at $ 1.3 million using the Black-Scholes option-pricing model assuming an expected term of 10 years, a volatility of 76.2 %, a dividend yield of 0 % and a risk-free interest rate of 3.91 %. All Tranche B Warrants remain outstanding as of December 31, 2024 . +Note 11 – Revenue and Accounts Receivable Credit Concentration +We derive our revenue from two sources: (i) Lung Diagnostic Testing, providing lung diagnostic testing services for healthcare providers associated with our five blood-based tests and (ii) Development Services, providing diagnostic testing services to biopharmaceutical, life sciences, and diagnostic companies. +Lung Diagnostic Testing revenues consist of blood-based lung tests which are recognized in the amount expected to be received in exchange for diagnostic tests when the diagnostic tests are delivered. The Company conducts diagnostic tests and delivers the completed test results to the prescribing physician or patient, as applicable. The fees for diagnostic tests are billed either to a third party such as Medicare, medical facilities, commercial insurance payers, or to the patient. The Company determines the transaction price related to its diagnostic test contracts by considering the nature of the payer, test type, and historical price concessions granted to groups of customers. For diagnostic test revenue, the Company estimates the transaction price, which is the amount of consideration it expects to be entitled to receive in exchange for providing services based on its historical collection experience, using a portfolio approach. The Company recognizes revenues for diagnostic tests upon delivery of the tests to the physicians requesting the tests or patient, as applicable. +Development Services revenue consists of on-market tests, pipeline tests, custom diagnostic testing, and other scientific services for a purpose as defined by any individual customer, which is often with biopharmaceutical companies. The performance obligations and related revenue for these sales is defined by a written agreement between the Company and the customer. These services are generally completed upon the delivery of testing results, achievement of contractual milestone(s) as defined in the customer agreements, or over the term of the contract which is generally expected to be completed in one year or less. Revenue for these services is recognized upon delivery of the completed test results, upon completion of the contractual milestone(s), or over the term of contract. In addition, Development Services also include amounts derived from licensing our digital sequencing technologies to our international laboratory partners. We are compensated through royalty-based payments for the licensed technology, and depending on the nature of the technology licensing arrangements and considering factors including but not limited to enforceable right to payment and payment terms, and if an asset with alternative use is created, these revenues are recognized in the period when royalty-bearing sales occur. +Revenues consisted of the following (in thousands): +Year Ended December 31, +2024 +2023 +Lung Diagnostic Testing +$ +64,708 +$ +45,192 +Development Services +6,615 +3,895 +Total revenue +$ +71,323 +$ +49,087 +Deferred Revenue +Deferred revenue consists of cash payments from customers received in advance of delivery. As test results are delivered, the Company recognizes the deferred revenue in 'Revenues' in the statements of operations. The Company had $ 0.3 million in ‘Deferred revenue’ recorded in the balance sheet as of December 31, 2023 and $ 1.3 million was added throughout 2024 to ‘Deferred revenue’ for up-front cash payments received while $ 0.9 million was recognized in 'Revenues' during the year ended December 31, 2024. The ‘Deferred revenue’ of $ 0.7 million recorded in the balance sheet as of December 31, 2024 is expected to be recognized in revenues over the next twelve months as test results are delivered and services are performed. As of December 31, 2024 and 2023, the Company had $ 0.2 million and $ 0.3 million in non-cu rrent deferred revenue, respectively, recorded within ‘Other long-term liabilities’ in the balance sheets which represent amounts to be recognized in excess of twelve months from the respective balance sheet date. +F- 24 +The Company’s customers in excess of 10% of total revenue and their related revenue as a percentage of total revenue were as follows: +Year Ended December 31, +2024 +2023 +United Healthcare +7 +% +10 +% +In addit ion to the above table, we collect reimbursement on behalf of customers covered by Medicare, which accounted for 39 % and 43 % of the Company’s total revenue for the years ended December 31, 2024 and 2023, respectively. +The Company is subject to credit risk from its accounts receivable related to services provided to its customers. The Company’s third-party payors and other customers in excess of 10% of accounts receivable, and their related accounts receivable as a percentage of total accounts receivable were as follows: +As of +December 31, 2024 +December 31, 2023 +Medicare +21 +% +21 +% +Daiichi Sankyo +14 +% +8 +% +Note 12 – Share Based Compensation +Predecessor 2016 and 2006 Equity Incentive Plans +Under the 2006 Equity Incentive Plan (2006 Plan), the Company was authorized to grant incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards and RSUs. No additional awards may be granted under the 2006 Plan. +In February 2016, the Company adopted the 2016 Equity Incentive Plan (2016 Plan) as a successor to and continuation of the prior 2006 Plan. The 2016 Plan provided for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSUs, and other stock awards to directors, employees, and consultants. Awards granted under the 2016 Plan or the 2006 Plan that were unallocated, expired or otherwise terminated, or were forfeited, cancelled, or repurchased by the Company, became available for future issuance under the 2016 Plan. In addition, shares subject to an award were withheld to satisfy a participant’s tax withholding obligations, or were reacquired by the Company as consideration for the exercise or purchase price of a stock award also became available for future issuance under the 2016 Incentive Plan. No additional awards may be granted under the 2016 Plan. +2020 Equity Incentive Plan +Effective upon the closing of our IPO, the Company’s Board of Directors approved the 2020 Equity Incentive Plan (2020 Plan), which replaced the 2016 Plan. The 2020 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSUs, performance awards and other stock awards. Officers, directors, employees, consultants, agents, and independent contractors who provide services to the Company may receive awards. The terms of all awards are governed by an agreement between the Company and the recipients, as administered and approved by the Compensation Committee of the Board of Directors). Any awards that expire or are forfeited under the 2016 Plan or 2006 Plan become available for issuance under the 2020 Plan. +The number of shares originally reserved for issuance under the 2020 Plan was 1,893,395 . The 2020 Plan includes an annual increase on the first day of each calendar year, beginning with the calendar year ending December 31, 2022, and continuing until, and including, the calendar year ending December 31, 2030. The annual increase will be equal to the lesser of (i) 4 % of the number of shares of our common stock issued and outstanding as of December 31st of the immediately preceding calendar year and (ii) such lesser amount determined by the Board of Directors. +To the extent an equity award granted under the 2020 Plan (other than any substitute award) or granted under any other equity plan maintained by us under which awards are outstanding as of the effective date of the 2020 Plan (the Prior Plans) expires or otherwise terminates without having been exercised or paid in full, or is settled in cash, the shares subject to such award will become available for future grant under the 2020 Plan. In addition, to the extent shares subject to an award are withheld to satisfy a participant’s tax withholding obligation upon the exercise or settlement of such award (other than any substitute award) or to pay the exercise price of a stock option granted under the 2020 Plan or a prior plan, such shares will become available for future grant under the 2020 Plan. The total number of shares available for grant under all plans as of December 31, 2024 was 662,106 . +Employee Stock Purchase Plan +Effective with our IPO in October 2020, the Company’s Board of Directors and its stockholders approved the Company’s Employee Stock Purchase Plan (the ESPP). The number of shares originally reserved for issuance under the ESPP was 338,106 . The maximum number of shares of our common stock available under the ESPP will automatically increase on the first trading day of each calendar +F- 25 +year by an amount equal to the lesser of (i) 1 % of the shares of our common stock issued and outstanding on December 31st of the immediately preceding calendar year, (ii) 338,106 shares of our common stock or (iii) an amount determined by our Board of Directors. +Subject to any plan limitations, the ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. The price at which common stock is purchased under the ESPP is equal to 85 % of the fair market value of the Company’s common stock on the first or last day of the offering period, whichever is lower. No employee may participate in an offering period if the employee owns 5% or more of the total combined voting power or value of the Company’s stock. The ESPP provides for successive six-month offering periods beginning on September 1st and March 1st of each year. During the year ended December 31, 2024, 471,843 shares were issued under the ESPP leaving 175,275 shares remaining for future issuance. +Description of Awards Granted +The Company has granted incentive stock options, non-statutory stock options, performance-based stock options, and RSUs. +Incentive stock options, which may only be issued to employees, are granted at an exercise price per share equal to the closing market price of the Company’s common stock on the grant date, and vest over time as determined by the Compensation Committee, provided that the term of the options may not exceed ten years from the date of grant. Accelerated vesting may occur in the event of an optionee's death, disability, or other events. +Non-statutory stock options, which may be issued to employees, non-employees and directors, are granted at an exercise price per share equal to the closing market price of the Company’s common stock on the grant date, and vest over time as determined by the Compensation Committee, provided that the term of the options may not exceed ten years from the date of grant. Accelerated vesting may occur in the event of an optionee's death, disability, or other events. +Performance-based stock options are typically granted on an annual basis and consist of a performance-based and service-based component. The performance targets and vesting conditions for performance-condition options are based on achievement of recognized revenue targets. Performance-based options vest in three equal annual installments beginning one year after the grant date , pending certification of performance achievement by the Compensation Committee and continued service. The fair value of performance-condition awards is based on the closing market price of the Company’s common stock on the grant date. T here are no performance-based stock options outstanding as of December 31, 2024. +RSUs and the related terms and conditions are awarded at the discretion of the Compensation Committee. RSU holders have a contractual right to receive a share of common stock when vested. RSUs vest over time as determined by the Compensation Committee. RSU agreements may provide for accelerated vesting in the event of a stock unit holder's death, disability, or retirement or other events. +Our Compensation Committee may grant other stock awards that are based on or related to shares of our common stock, such as awards of shares of common stock granted as bonus and not subject to any vesting conditions, deferred stock units, stock purchase rights, and shares of our common stock issued in lieu of our obligations to pay cash under any compensatory plan or arrangement. +Bonus-To-Options Program +The Company also has a Bonus-to-Options Program (the Bonus Option Program) which is separate from previously described plans and was initially adopted by the Board of Directors in 2008, and subsequently amended and restated in 2010, 2011, 2015, and 2022. For fiscal year 2024, the Bonus Option Program is subject to the shares reserved under the 2020 Plan. The Bonus Option Program, which is limited to participation of the Chief Executive Officer, direct reports to the Chief Executive Officer and Vice Presidents of the Company, allows participants who so elect to convert a portion of their annual cash bonus into fully vested, non-qualified stock options to purchase shares of common stock (Bonus Options). The exercise price for the options under the Bonus Option Program equals the closing market price of the Company's common stock on the grant date, as disclosed below under “ Fair Value of Common Stock ”. Bonus Options issued must be exercised within a ten-year term. +The Company recorded the following activity related to the Bonus Option Program during the year ended December 31, 2024 (in thousands, excepted weighted average exercise price and weighted average contractual life): +Number of +Options +Weighted Average +Exercise Price +Weighted Average +Contractual +Life (Years) +Aggregate +Intrinsic +Value +Outstanding ‑ January 1, 2024 +1,050 +$ +2.81 +8.4 +$ +22 +Granted +341 +1.46 +— +— +Forfeited/canceled +( 27 +) +24.34 +— +— +Exercised +— +— +— +— +Outstanding ‑ December 31, 2024 +1,364 +$ +2.04 +8.0 +$ +35 +Exercisable ‑ December 31, 2024 +1,364 +$ +2.04 +8.0 +$ +35 +F- 26 +The Company record ed $ 0.8 million and $ 0.4 million du ring the years ended December 31, 2024 and 2023, respectively, associated with the estimate of options to be delivered to eligible participants under the Bonus Option Program and which were granted in the first quarter of 2025 and 2024, respectively, by the Compensation Committee of the Board of Directors. In determining the amount of share-based compensation to recognize under the Bonus Option Program, the Company estimates the bonus attainment for the year and determines the expected number of options to be delivered to eligible participants. A Black-Scholes option pricing model is used to determine the estimated fair value of the expected number of options to be delivered to eligible participants. The key elements in determining the estimated fair value include assumptions for volatility, the risk-free interest rate, expected dividends and strike price, utilizing the measurement date closing stock price until the grants are authorized. Beginning with fiscal year 2025, the Company terminated the Bonus Option Program. +Share-Based Compensation Expense +Share-based compensation expense reported in the Company’s statements of operations was (in thousands): +Year Ended December 31, +2024 +2023 +Direct costs and expenses +$ +82 +$ +53 +Research and development +333 +331 +Sales, marketing, general and administrative +6,223 +4,989 +Total +$ +6,638 +$ +5,373 +The unrecognized remaining share-based compensation expense for optio ns and RSUs was approximately $ 5.7 million as of December 31, 2024 and is expected to be amortized to expense over the next 2.1 years. +Stock Options +Stock option activity during the year ended December 31, 2024, excluding the Bonus Option Program described above, was (in thousands, except weighted average exercise price and weighted average contractual life): +Number of +Options +Weighted Average +Exercise Price +Weighted Average +Contractual +Life (Years) +Aggregate +Intrinsic +Value +Outstanding - January 1, 2024 +2,041 +$ +3.36 +6.9 +$ +964 +Granted +2,412 +1.67 +— +— +Forfeited/canceled +( 259 +) +1.94 +— +— +Exercised +( 31 +) +0.67 +— +— +Outstanding ‑ December 31, 2024 +4,163 +$ +2.49 +7.7 +$ +719 +Exercisable ‑ December 31, 2024 +1,864 +$ +3.35 +6.1 +$ +616 +The weighted average fair value of the Bonus Options and stock options to purchase common stock granted during the years ended December 31, 2024 and 2023 was $ 1.14 and $ 1.24 , respectively. +Fair Value of Stock Options +The estimated grant date fair value of stock options was calculated using the Black-Scholes option-pricing model, based on the following assumptions: +• +Expected Term : The expected term represents the period that the options granted are expected to be outstanding using the simplified method (based on the mid-point between the vesting date and the end of the contractual term). +• +Expected Volatility : The Company uses an average historical stock price of selected comparable companies over the expected term of the awards as the Company does not have sufficient trading history for its common stock. +• +Risk-Free Interest Rate : The Company uses the risk-free interest rate over the expected term of the options based on the constant maturity rate of U.S. Treasury securities with similar maturities as of the date of the grant. +• +Expected Dividend Yield : The Company is currently subject to restrictions on the payment of dividends (see Note 8 - Debt ) and no dividends have been declared as of December 31, 2024 and 2023. The Company has not paid and does not anticipate paying any dividends in the near future. Therefore, the expected dividend yield was zero. +F- 27 +The fair value of each option grant was estimated on the grant date with the following weighted average assumptions for the years indicated: +Year Ended December 31, +2024 +2023 +Expected term (in years) +5.85 +5.39 +Expected volatility +78.1 +% +80.1 +% +Risk‑free rate +3.86 +% +3.98 +% +Expected dividend yield +— +% +— +% +Restricted Stock Units +Restricted stock unit activity during the year ended December 31, 2024 was (in thousands, except weighted average grant date fair value per share): +Number of Shares +Weighted Average +Grant Date Fair Value Per Share +Outstanding ‑ January 1, 2024 +2,729 +$ +1.91 +Granted +1,670 +1.81 +Forfeited/canceled +( 15 +) +1.92 +Released +( 613 +) +2.07 +Outstanding ‑ December 31, 2024 +3,771 +$ +1.84 +Note 13 – Net Loss per Common Share +Basic net loss per share excludes dilution and is computed by dividing net loss attributable to the common stockholders by the weighted-average shares outstanding during the period. Diluted net loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, resulting in the issuance of shares of common stock that would then share in the earnings or losses of the Company. +Basic and diluted loss per share as of the dates indicated were (in thousands, except per share amounts): +Year Ended December 31, +2024 +2023 +Numerator +Net loss attributable to common stockholders +$ +( 42,931 +) +$ +( 52,146 +) +Denominator +Weighted-average shares outstanding used +in computing net loss per share, basic and diluted +129,670 +82,113 +Net loss per share, basic and diluted +$ +( 0.33 +) +$ +( 0.64 +) +The potentially dilutive securities as of December 31, 2024 and 2023 primarily represent the shares subject to future issuance under stock options awards, warrants, RSUs, and shares subject to purchase under our ESPP, the terms of which are described in further detail in Note 12 – Share Based Compensation . The potentially dilutive securities would be subject to the treasury stock method when dilutive. +The following outstanding common stock equivalents were excluded from diluted net loss attributable to common stockholders for the periods presented because inclusion would be anti-dilutive (in thousands): +Year Ended December 31, +2024 +2023 +Options to purchase common stock +5,527 +3,091 +Shares committed under ESPP +104 +59 +Warrants +4,603 +5,603 +Restricted stock units +3,771 +2,729 +Total +14,005 +11,482 +F- 28 +Note 14 - Income Taxes +Since inception, the Company has incurred net taxable losses, and accordingly, no current provision for income taxes has been recorded. The effective income tax rate of the provision for income taxes differs from the federal statutory rate as follows: +Year Ended December 31, +2024 +2023 +Federal statutory income tax rate +21 +% +21 +% +State income taxes, net of federal benefit +5 +1 +Research and developments credits +— +1 +Change in ownership limitation +( 9 +) +— +Permanent items +( 3 +) +( 3 +) +Change in valuation allowance +( 14 +) +( 20 +) +Effective income tax rate +— +% +— +% +The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities are as follows (in thousands): +As of December 31, +2024 +2023 +Deferred Tax Assets: +Net operating loss carryforwards +$ +78,372 +$ +72,722 +Research and development tax credits +192 +4,149 +Interest expense limitation +7,107 +5,120 +Capitalized research costs +5,055 +4,281 +Share-based compensation +2,294 +1,685 +Lease liability +6,601 +6,398 +Accruals and reserves +1,305 +667 +Total +100,926 +95,022 +Valuation allowance +( 98,993 +) +( 93,023 +) +Total deferred tax assets after valuation allowance +1,933 +1,999 +Deferred Tax Liabilities: +Property and equipment +( 66 +) +( 4 +) +Right-of-use asset +( 977 +) +( 692 +) +Intangible assets +( 890 +) +( 1,303 +) +Total deferred tax liabilities +( 1,933 +) +( 1,999 +) +Net deferred tax assets and liabilities +$ +— +$ +— +At December 31, 2024, the Company ha d $ 329.7 million and $ 0.2 million of federal net operating loss and research and experimentation tax carryforwards, respectively, which are set to expire beginning in 2026 . The Internal Revenue Code contains provisions that may limit the net operating loss carryovers available to be used in any year if certain events occur, including significant changes in ownership interest. +In assessing the realizability of its deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As the Company does not have any historical taxable income, projections of future taxable income over the periods in which the deferred tax assets are deductible, and after consideration of the history of operating losses, the Company does not believe it is more likely than not that it will realize the benefits of net deferred tax assets and, accordingly, has established a valuation allowance equal to 100 % of net deferred ta x assets. The valuation allowance increased by $ 6.0 million during 2024 and $ 10.5 million during 2023. +During 2024, the Company determined that it has uncertain tax positions related to its U.S. research and development credits. As of December 31, 2024 and 2023 , there was no accrued interest related to uncertain tax positions. The Company does not believe it is +F- 29 +reasonably possible that its unrecognized tax benefits will significantly change in the next twelve months. A reconciliation of beginning and ending balances for unrecognized tax benefits is as follows (in thousands): +Year Ended December 31, +2024 +2023 +Balance at January 1 +$ +1,037 +$ +952 +Additions for tax positions related to the current year +48 +57 +Additions for tax positions related to prior years +( 1,037 +) +28 +Reductions for tax positions related to prior years +— +— +Reductions related to settlements +— +— +Reductions related to a lapse of statute +— +— +Balance at December 31 +$ +48 +$ +1,037 +The Company monitors proposed and issued tax law, regulations, and cases to determine the potential impact of uncertain income tax positions. As of December 31, 2024, the Company had not identified any potential subsequent events that would have a material impact on unrecognized income tax benefits within the next twelve months. +The Company’s federal and state returns for all years will remain open to examination by federal and state tax authorities for three and four years, respectively, from the date of utilization of any net operating loss carryforwards. +Note 15 – Segment Reporting +Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker (CODM) in deciding how to allocate resources and assess performance. The Company's chief executive officer and chief financial officer, as a group, represents the entity's chief operating decision makers. The Company’s CODM views the Company’s operations and manages its business as a single operating segment focused on diagnostic testing in the clinical setting and providing services to biopharmaceutical companies (see Note 11 – Revenue and Accounts Receivable Credit Concentration ). The CODM views the Company's operations as a single operating segment as each revenue stream utilizes the same equipment and resources. In addition, discrete financial information is not available for each revenue stream other than gross margin. The accounting policies of the segment are the same as those described in Note 2 – Summary of Significant Accounting Policies . +Substantially all of the Company’s revenue and all long-lived assets were derived or are located in the United States for the years ended December 31, 2024 and 2023. The measure of segment assets is reported on the balance sheet as total assets. +As a single operating segment, the CODM assesses how to allocate resources and measures the Company's performance based on net income or loss that is reported on the statement of operations as net loss. The CODM uses net income or loss to evaluate the return generated from segment assets in deciding whether to reinvest into the segment or into other parts of the entity, such as acquisitions. Net income or loss is used to monitor budget versus actual results, which are used in assessing performance of the segment and in establishing management's compensation. +The CODM regularly reviews the following significant expenses and other segment items. A summary of the significant expenses and other segment items reported in the Company’s statements of operations as of the dates indicated is as follows (in thousands): +Year Ended December 31, +2024 +2023 +Revenues +$ +71,323 +$ +49,087 +Less: +Direct costs and expenses (less employee related expenses and depreciation and amortization) +11,476 +9,200 +Employee related expenses (less share-based compensation expenses) +55,606 +45,936 +Contracted services expenses +6,616 +5,261 +Sales and marketing education and event expenses +7,574 +7,195 +Occupancy and equipment service expenses +4,055 +5,372 +Clinical trials and associated costs +1,180 +1,663 +Depreciation and amortization expense +5,773 +3,328 +Share-based compensation expenses +6,638 +5,373 +Interest expense +8,258 +9,536 +Other segment items (1) +7,078 +8,369 +Net loss +$ +( 42,931 +) +$ +( 52,146 +) +F- 30 +(1) +Other segment items in segment net loss primarily include software and IT related expenses, administrative and professional development expenses, risk management and insurance expenses, other non-cash expenses, and allocated overhead expenses. +Note 16 – Commitments and Contingencies +Co‑Development Agreement +In April 2014 and amended in October 2016, the Company entered into a worldwide agreement with AVEO to develop and commercialize AVEO's hepatocyte growth factor inhibitory antibody ficlatuzumab with the Company's proprietary companion diagnostic test, BDX004, a version of the Company’s serum protein test that is commercially available to help physicians guide treatment decisions for patients with advanced non-small cell lung cancer (NSCLC). Under the terms of the agreement, AVEO conducted a proof of concept (POC) clinical study of ficlatuzumab for NSCLC in which BDX004 was used to select clinical trial subjects (the NSCLC POC Trial). Under the agreement, the Company and AVEO shared equally in the costs of the NSCLC POC Trial, and each were responsible for 50 % of development and regulatory costs associated with all future clinical trials agreed upon by the Company and AVEO. +In September 2020, the Company exercised its opt-out right with AVEO for the payment of 50 % of development and regulatory costs for ficlatuzumab effective December 2, 2020 (the AVEO Effective Date). Following the AVEO Effective Date, the Company is entitled to a 10 % royalty of net sales of ficlatuzumab and 25 % of license income generated from the licensing of ficlatuzumab from AVEO. In September 2021, AVEO announced that the FDA has granted Fast Track Designation (FTD) to ficlatuzumab for the treatment of patients with relapsed or recurrent head and neck squamous cell carcinoma. In November 2021 AVEO also announced plans to initiate a registrational Phase 3 clinical trial for ficlatuzumab which began in January 2024. There were no royalties received or expenses related to this agreement for the years ended December 31, 2024 and 2023 and the Company has no obligations related to the AVEO agreement as of December 31, 2024. +License Agreements +In August 2019, we entered into a non-exclusive license agreement with Bio-Rad Laboratories, Inc. (Bio-Rad) (the Bio-Rad License). Under the terms of the Bio-Rad License, the Company received a non-exclusive license, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of Droplet Digital PCR™ (ddPCR) in cancer detection testing for third parties in the United States. There are no license fees related to this agreement. The Company also agreed to purchase all of the necessary supplies and reagents for such testing exclusively from Bio-Rad, pursuant to a separately executed supply agreement (the Supply Agreement) with Bio-Rad. The Bio-Rad License was set to expire in August 2024 . In May 2024, the Company amended the agreement to extend the Supply Agreement to August 2026. Either party may terminate for the other’s uncured material breach or bankruptcy events. Bio-Rad may terminate the Bio-Rad License if the Company does not purchase licensed products under the Supply Agreement for a consecutive twelve-month period or for any material breach by us of the Supply Agreement. +On May 13, 2021 (the CellCarta Effective Date), we reached agreement with CellCarta Biosciences Inc. (formerly “Caprion Biosciences, Inc.”) (the CellCarta License) on a new royalty bearing license agreement for the Nodify XL2 test. The parties agreed to terminate all prior agreements and replace with this new arrangement, which has a 1 % fee on net sales made from the first commercial sale of the Nodify XL2 test to the CellCarta Effective Date as an upfront make-good payment covering past royalties due and a royalty rate of 0.675 % on future Nodify XL2 test net sales worldwide for 15 years from the first commercial sale, ending in 2034 . Royalty expense under the CellCarta License for each of the years ended December 31, 2024 and 2023 was $ 0.3 million and $ 0.2 million, respective ly. +On October 31, 2019, we completed an acquisition of Freenome's United States operations (formerly "Oncimmune USA" or "Oncimmune") including its COLA/CLIA lab in De Soto, Kansas and its pulmonary nodule malignancy test, then marketed in the United States as the EarlyCDT Lung® test. We renamed and relaunched the test on February 28, 2020 as the Nodify CDT test. As part of the acquisition of the assets of Oncimmune, the Company entered into several agreements to govern the relationship between the parties. The Company agreed to a license agreement and royalty payment related to the Nodify CDT test of 8 % of recognized revenue for non-screening tests up to an annual minimum volume and 5 % thereafter. Royalty expenses were $ 1.5 million and $ 1.0 million f or the years ended December 31, 2024 and 2023, respectively. +Litigation, Claims and Assessments +From time to time, we may become involved in legal proceedings or investigations which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition, or cash flows. +Note 17 – Subsequent Events +On February 28, 2025 (the Fifth Amendment Effective Date), the Company entered into the Fifth Amendment to the Credit Agreement and Guaranty (the Fifth Amendment) with Perceptive, as lender and administrative agent, and the Company, as borrower, whereby +F- 31 +subject to the terms and conditions of the Fifth Amendment, the Tranche C Loan revenue milestone was eliminated and the Commitment Termination Date (as defined in the Cred it Agreement) was extended, providing continued availability to the Tranche C Loan in an aggregate amount equal to $ 10.0 million through December 31, 2025. In addition, on the Tranche C Loan Borrowing Date (as defined in the Credit Agreement), the Tranche C Warrants, as amended, will become vested and exercisable at an exercise price equal to $0.793 , the Company's closing stock price on February 28, 2025. +F- 32 \ No newline at end of file diff --git a/raw/filings/0001439725/2024/0000950170-25-030835/filing_metadata.csv b/raw/filings/0001439725/2024/0000950170-25-030835/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..636357d218d259aa614e01f6946416b082774b15 --- /dev/null +++ b/raw/filings/0001439725/2024/0000950170-25-030835/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001439725,BDSX,BIODESIX INC,10-K,2025-03-03,2024-12-31,2025-03-03T21:05:32.000Z,0000950170-25-030835,bdsx-20241231.htm,10-K,15208694,1,1,https://www.sec.gov/Archives/edgar/data/1439725/000095017025030835/bdsx-20241231.htm,https://www.sec.gov/Archives/edgar/data/1439725/000095017025030835/,2024,2024,1 diff --git a/raw/filings/0001439725/2024/0000950170-25-030835/item1.txt b/raw/filings/0001439725/2024/0000950170-25-030835/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..d8ed893e842efa5582561e756fe66c2f5ff6aeb5 --- /dev/null +++ b/raw/filings/0001439725/2024/0000950170-25-030835/item1.txt @@ -0,0 +1,319 @@ +Item 1. B usiness. +Business Overview +Biodesix, Inc. (“Biodesix”, “we,” “us,” “our” or the “Company”) is a leading diagnostic solutions company. Our mission at Biodesix is to transform patient care and improve outcomes through personalized diagnostics that are timely, accessible, and address immediate clinical needs. We envision a world where patient disease is conquered through the guidance of personalized diagnostics. +We derive our revenue from two sources: (i) Biodesix Lung Diagnostic Testing (Lung Diagnostic Testing), providing lung diagnostic testing services for healthcare providers associated with our five blood-based tests and (ii) Biodesix Development Services (Development Services) providing diagnostic testing services to biopharmaceutical, life sciences, and diagnostic companies. +During 2024, we achieved multiple milestones: +• +We delivered on our commercial and diagnostic services strengths resulting in an estimated $71.3 million in total revenue for the year, an increase of 45% over 2023; +o +Lung Diagnostic Testing - $64.7 million of revenue, an increase of 43%, from 54,300 tests delivered, an increase of 40%; +o +Development Services - $6.6 million in biopharmaceutical services revenue, an increase of 70%; +• +We continued to present and publish new clinical data supporting the adoption of our tests, increased reimbursement coverage for our Lung Diagnostic tests from private payors, and launched new research partnerships, including with the Memorial Sloan Kettering Cancer Center; +• +We launched the new CLARIFY study, which will collect patient outcomes and other clinical information on 4,000 patients who have received Nodify Lung® Nodule Risk Assessment testing in the clinical setting and have at least 1-2 years of follow-up. +• +We improved our operational efficiencies increasing gross margin percentage to 78% as compared to 73% in 2023; +• +We maintained our cost-disciplined approach limiting growth in full year Operating Expense, excluding Direct costs and expenses to 17% over 2023, including non-cash share-based compensation expenses, while growing revenue by 45%; and +• +We were awarded the prestigious 2024 Inc. Magazine Best Workplaces – a reflection of our strong team culture and employee engagement. +Our Strategy +At Biodesix, we have built a team with deep experience in diagnostics including commercialization, reimbursement, regulatory, medical affairs, research and development, technology, and operations to provide needed products and services to address critical clinical questions and help improve patient care. We believe that establishing a new standard of care utilizing personalized diagnostics requires a deep understanding of clinical needs, scientific expertise to develop tests using the optimal technology for each clinical question, development of clinical evidence to demonstrate benefits of the testing, a scalable operational infrastructure, and an established commercial channel to drive market adoption and payer coverage. +We employ multiple technologies, including genomics, proteomics, and radiomics, combined with artificial intelligence (AI), to discover, develop, and commercialize innovative diagnostic tests for physicians, biopharmaceutical, life science, and diagnostics companies to help improve patient care. +1. +Lung Diagnostic Tests - Drive increased awareness, adoption, and reimbursement coverage of our diagnostic tests by: +• +continuously educating health care providers key opinion leaders, hospital systems, advocacy groups, patients, payers, academic research organizations, and technology assessment and guideline organizations on the clinical data and benefits of our tests; +• +continuing to invest in the expansion and professional development of our lung-focused clinical sales force and commercial support teams; +• +extending our commercial reach in clinics specializing in the management of lung nodules and the diagnosis of lung disease and their referral networks; +• +investing in clinical studies and publish additional clinical data to continue to increase market adoption and reimbursement coverage for our tests; +3 +• +publishing health economics and outcomes research demonstrating the impact of our tests on the US healthcare system and overall costs; and +• +engaging key opinion leaders and partners to identify existing or emerging clinical needs in lung disease and to develop tests to address those questions to be provided to the market through our existing commercial channel. +2. +Diagnostic Development Services — Expand revenue-generating contracts with research institutions, biopharmaceutical clients, and life sciences customers by: +• +leveraging our team’s expertise and multi-omic offering to sell a comprehensive line of research, discovery, development, clinical trial testing, regulatory, reimbursement, commercialization, and logistics support services across cancer types and diseases; +• +adding new biopharmaceutical, life science, tools, and diagnostic customers and leveraging existing projects and relationships to expand sales with our current customers; +• +engaging with our customers, key opinion leaders, leading academic centers, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape and to identify unmet clinical needs; and +• +entering strategic partnerships with biopharmaceutical companies, academic research organizations, technology providers, and other diagnostic companies. +Our Tests and Services +Biodesix Lung Diagnostic Tests +Our tests support clinical decisions to expedite personalized care and improve outcomes for patients with lung disease. We believe our diagnostic tests help healthcare providers meaningfully improve lung disease diagnosis, treatment, and monitoring as well as lower the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. We currently offer two tests that assess the risk of cancer in lung nodules and three tests that provide treatment guidance after a lung cancer diagnosis. +This is our clinical testing focus because lung cancer is the deadliest cancer in the United States with the majority of patients diagnosed with advanced disease. With the introduction of numerous treatment options, physicians need an ever-increasing amount of information in order to select the best treatment plan for each individual patient. We believe that the lung cancer continuum of care has a variety of clinical unmet needs ranging from initial diagnosis of lung cancer after discovery of a lung nodule to treatment guidance for early and advanced stage disease, and monitoring for disease progression. We estimate that in the United States, the lung cancer continuum of care represents over 10 million annual testing opportunities and represents greater than $27 billion market opportunity annually in the US. +• +Diagnosis : We estimate approximately 1.6 million new incidental lung nodules and potentially 4 million lung nodules from the adoption of screening could be identified annually in the United States. Following initial discovery of a nodule, patients are typically evaluated by a pulmonologist for risk of lung cancer before an invasive procedure is carried out to obtain a tissue sample to confirm diagnosis. This risk assessment is based on clinical factors such as the patient’s smoking history and age, and radiological features such as the size and location of the nodule, obtained from a computed tomography (CT) scan. On initial assessment, we estimate that approximately 80% of patients are identified as low to moderate risk (5-65%) where guideline recommendations for their care plan are unclear, often resulting in either overtreatment of patients with benign nodules or undertreatment in patients with cancer. An estimated 17% of patients initially scheduled for watchful waiting, or follow-up CT scans in intervals up to a year, are later diagnosed with malignant nodules, potentially delaying their diagnosis. Conversely, we estimate that 62% of biopsies and 35% of surgeries performed on lung nodules find benign disease, representing a significant overtreatment that incurs both risk and cost to the patient and their providers. We therefore believe that there is a clear clinical need for blood-based diagnostic testing to help improve the initial risk assessment of pulmonary nodules, helping direct patients to the relevant treatment pathway, and ultimately improving patient outcomes and saving costs to the system. +• +Treatment Guidance – Early Stage : We estimate that there are over 700 thousand testing opportunities annually in the United States in early-stage lung cancer to assess a patient’s risk of recurrence following curative-intent surgery, and to detect potential target mutations for therapeutics. Depending on a patient’s risk of recurrence, they may also receive chemotherapy, radiotherapy or chemoradiation post-surgery. The assessment of risk of recurrence is primarily based on the stage of cancer at diagnosis, with stage I patients typically receiving no additional treatment beyond surgery. However, 20 to 40% of patients with stage I disease do still recur within five years following surgery, representing a sub-group of patients who may have benefited from more intensive treatment protocol. We believe there is a clear clinical need for blood-based diagnostic testing prior to surgery to identify stage I patients who may benefit from a more intensive treatment protocol and we also believe there is the need for identifying stage II and IIIA patients who may benefit from a less intensive treatment protocol. There have also been recent advances in the use of targeted therapies in early-stage lung disease. These therapies typically target +4 +specific genomic mutations or alterations found in some tumors. We believe there is therefore an emerging need for testing designed specifically for mutation detection in early-stage disease. +• +Treatment Guidance – Advanced Stage: We estimate that there are over 3 million diagnostic testing opportunities annually in the United States to guide advanced stage lung cancer treatment decisions. With nearly 60 FDA-approved systemic treatment regimens listed in national treatment guidelines for non-small cell lung cancer (NSCLC), there is an elevated need for personalized biomarkers to help physicians identify the right patient for the right treatment. Multiple tissue-based diagnostic tests have been approved to identify patients eligible for targeted therapies and immunotherapy; however, about 50% of patients do not have sufficient tissue collected following diagnosis to facilitate testing. To compound the issue, different molecular tests take varying amounts of time (days versus weeks) to report results back to the ordering physician. Physicians are often left with a dilemma to either make treatment decisions prior to receiving critical diagnostic test results, or delay treatment initiation while waiting for the test results. Therefore, we believe there is an imminent need for a blood-based testing solution that measures tumor mutations and the patient’s immune profile, to provide physicians with more comprehensive and timely information to initiate personalized treatment as quickly as possible. +• +Monitoring : We estimate that there are over 800 thousand testing opportunities in the United States for blood-based tumor genomic and immune profiling to monitor for disease recurrence and progression in NSCLC patients. Unfortunately, advanced stage lung cancer is often terminal, so repeat tissue biopsy to assess the evolution of resistance mutations or to detect disease progression is not feasible from either a cost or risk perspective to the patient, which we believe demonstrates an important need for blood-based testing to help routinely monitor these patients. As a patient progresses through therapies, changes in their immune system occur and blood-based immune profiling could help physicians identify these changes prior to subsequent therapy selection. +Diagnosis – Nodule Management +Our blood-based tests for patients with a pulmonary nodule, Nodify Lung Nodule Risk Assessment, assists physicians in reclassifying a patient’s risk of lung cancer by incorporating their protein biomarker results with radiographic imaging and clinical characteristics. Nodify Lung testing consists of the Nodify CDT® and Nodify XL2® proteomic tests, which can be ordered separately or together from a single blood draw to help reclassify risk of cancer to aid physicians in stratifying patients into distinct nodule management pathways with the goal of earlier diagnosis of cancer and avoidance of unnecessary invasive procedures. +Nodify CDT Test +The Nodify CDT test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely malignant or at a higher risk of being cancerous. Results allow physicians to identify patients who may be better candidates for timely invasive diagnostic procedures such as bronchoscopy, transthoracic needle biopsy, or surgical resection, with the goal of diagnosing cancer earlier. The Nodify CDT test enhances lung nodule risk assessment to facilitate compliance with clinical treatment guidelines. The Nodify CDT test is validated for use in patients who are 40 years or older, have no history of cancer except non-melanomatous skin cancer, have nodules between 8 and 30mm, and pre-test risk of lung cancer of less than 65%. +The test measures the levels of seven circulating autoantibodies (P53, NY-ESO-1, CAGE, GBU4-5, SOX2, HuD, and MAGE A4) associated with lung cancer, combined with an algorithm to report out three potential results: High Level, Moderate Level, or No Significant Levels of Antibodies Detected (NSLAD). The seven autoantibodies have been shown to be elevated for all types of lung cancer, and from the earliest stage of the disease. +Unlike the tumor antigens themselves, the autoantibody levels can be measured accurately through a blood sample, based upon the signal amplification generated by the immune response to cancer. This mechanism of action likely reflects very early events in a tumor’s evolution; as the immune system initiates a response to the cancer, it can also trigger an expansion of self-reactive antibodies that can be measured in circulation. +The Nodify CDT test has an established average turnaround time of one business day from receipt of the blood sample, providing physicians with timely results to guide diagnostic planning. The clinical data for the test has been published in a number of peer-reviewed publications and presentations, including a clinical validation study published in late 2024 that confirmed the previously published performance of the test. +Nodify XL2 Test +The Nodify XL2 test is a blood-based proteomic test that helps identify patients who have a suspicious lung nodule that is likely benign or at a reduced risk of being cancerous. Results allow physicians to identify patients who may be better candidates for routine CT surveillance to monitor for growth or shrinkage of the nodule over time instead of an invasive diagnostic procedure. The Nodify XL2 test is used for patients who are 40 years or older, have no history of lung cancer or other recent cancer diagnoses, have nodules between 8 and 30mm, and have a pre-test risk of lung cancer of less than or equal to 50%. A body of clinical data has been published in peer-reviewed journals and presentations and recent data from the ORACLE clinical utility study was published demonstrating a 74% reduction in unnecessary invasive procedures with the use of the test. +5 +The Nodify XL2 test integrates peptides with clinical and radiological characteristics that are combined by an algorithm to report out three potential results: Likely Benign, Reduced Risk, or Indeterminate. Specifically, the Nodify XL2 test measures the relative abundance of two peptides (LG3BP and C163A) in circulation in the patient’s blood. The native proteins from which the peptides are derived have been associated with an inflammatory response to lung cancer. The clinical factors are patient age and smoking status, and radiological factors are nodule size, location, and edge characteristics. +If both tests are ordered for the patient and Nodify CDT returns a result of High or Moderate Level indicating an increased risk of malignancy, then the Nodify XL2 test is cancelled. If Nodify CDT returns a result of NSLAD, then the Nodify XL2 test is performed and both test results are typically available within four to five business days. +Lung Cancer Treatment & Monitoring +Profiling the tumor through blood-based genomic testing can help identify mutations in genes that may be driving growth of the tumor and may be targets for therapeutics. However, tumors also have intrinsic mechanisms that prevent the patient’s immune system from identifying and eliminating the cancer cells. Profiling the immune system can show if the patient’s immune system may have been subverted and therefore, is less likely to be responsive to immunotherapies. Our blood-based IQLung™ testing strategy consists of the VeriStrat® immune profiling test, and the GeneStrat® ddPCR and GeneStrat NGS® tumor profiling tests, which can be ordered together or separately for patients with NSCLC. Together, the tests have an established average turnaround time of three business days, providing physicians with timely results to facilitate treatment decisions. +VeriStrat Test +The VeriStrat test is a blood-based proteomic test that provides a personalized view of each patient’s immune response to their cancer. Results help inform physicians whether their patient has a more aggressive cancer and can help with treatment planning. The VeriStrat test profiles the patient’s immune system by measuring eight protein features measured by MALDI-ToF mass spectrometry and interpreted by a proprietary machine learning-based algorithm to produce either a VeriStrat Good or VeriStrat Poor test result. +The presence of a VeriStrat Poor result indicates the presence of chronic inflammation and a chronic acute phase immune response. A chronic acute phase immune response can trigger the immune system to provide growth factors to the tumor to increase blood flow and tumor growth. The test has been studied in over 85 peer-reviewed and published clinical studies across many different types of therapies such as chemotherapy, targeted therapies, immune therapies, and combinations. The results consistently show the test to be predictive of outcomes, independent of other prognostic factors including PD-L1 expression and performance status. Patients who test as VeriStrat Poor, on average, have an overall survival that is less than half of those who test as VeriStrat Good, independent of treatment type, demonstrating that the test is strongly prognostic. Conversely, patients with a VeriStrat Good test result typically respond better to standard of care treatments than those patients that test as VeriStrat Poor. By using the VeriStrat test for immune profiling, physicians can help identify the patient's immune response to lung cancer to help guide treatment decisions. +GeneStrat ddPCR Test +The GeneStrat test is a blood-based tumor profiling test that detects the guideline recommended, actionable mutations in lung cancer: EGFR, KRAS, BRAF, EML4-ALK, ROS-1, and RET. Physicians can order one or any combination of the gene tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat test performance and potential clinical utility have been published in multiple peer reviewed studies. +GeneStrat NGS Test +The GeneStrat NGS test is a blood-based 52-gene tumor profiling test panel that detects the guideline recommended, actionable mutations in lung cancer including five gene classes (SNV, INDELS, CNA, fusions, and exon-skipping). Specific variants of relevance to NSCLC include EGFR, KRAS, BRAF, EML4-ALK, ROS-1, RET, MET, NTRK. The GeneStrat NGS test is used for late-stage, metastatic NSCLC and physicians can order one or any combination of the IQLung tests, whichever they deem medically necessary for the individual patient. The presence of a mutation in one of the genes could indicate the patient is a candidate for the associated guideline-recommended targeted therapy. The GeneStrat NGS test performance and potential clinical utility have been published in multiple published studies. +We believe that rapid, blood-based tumor profiling with the GeneStrat ddPCR and GeneStrat NGS tests can be complementary to both targeted tissue-based testing and tissue-based broad genomic sequencing. Testing with GeneStrat ddPCR and GeneStrat NGS tests at diagnosis can help quickly identify patients who are eligible for targeted therapies. Additionally, blood-based testing upfront can help save valuable tissue for diagnostic evaluation, and broad genomic profiling for rare mutations to enroll in clinical trials. +Commercialization and Competitive Advantages +For our Biodesix Lung Diagnostic Tests, commercial efforts are focused on the promotion of our tests to healthcare professionals actively involved in the diagnosis and treatment of lung disease. Primarily focusing on pulmonology, the commercial team, consisting of specialty sales representatives, medical affairs, marketing and customer care representatives, works to educate and inform the entire +6 +patient care group consisting of physicians, nurses, office staff, laboratory personnel, and administration as to the appropriate use and value provided by our testing. The goal is to drive test adoption through articulating the scientific and clinical evidence behind our tests, how they impact the clinical care of a patient, and how the tests can ultimately help to improve patient outcomes. +Patients with pulmonary nodules are concentrated in the pulmonology specialty and referral networks, where additional resources such as lung cancer screening and nodule management clinics may exist to provide an increased level of care. We are also engaging large hospital systems in a “top-down” approach, with a goal of incorporating our tests into system-wide pathways and protocols. +We believe our continued growth drivers stem from our competitive advantages, including: +• +Our demonstrated success commercializing diagnostic tests in lung disease with unprecedented turnaround times. With five diagnostic tests launched and multiple improvements and several tests currently in development, our commercial portfolio of blood-based solutions currently addresses clinical unmet needs within diagnosis, treatment and monitoring of lung cancer. Our diagnostic tests provide rapid and actionable diagnostic information to help inform physicians on the next steps in a patient’s care plan to help diagnose lung cancer faster and expediting time to treatment. +• +Our broad test offering and continued development and publication of clinical data supports market adoption. We leverage a multi-omic approach to offer various technologies and testing that meet the variety of clinical testing needs for providers treating patients with lung disease. We continue to publish clinical data and health economics and outcomes research to support the ongoing adoption of our tests by physicians, healthcare systems, and payers. +• +Our commercial infrastructure and lung-focused sales channel, which includes our extensive knowledge and experience in sales, marketing, reimbursement and operations, provides us with the ability to efficiently launch and scale tests and drive revenue. We have built one of the only commercial teams in diagnostics focused on lung. By offering a broad menu of tests for current clinical use, and continuing to develop additional tests for lung, we can efficiently leverage the existing team and infrastructure to address more clinical needs for the same call point. +Biodesix Development Services +We enable the world’s leading biopharmaceutical, life sciences, and academic research institutions with scientific, technological, and operational capabilities that fuel the development of diagnostic tests, tools, and therapeutics. We provide development services to enable therapeutic clinical trials, the validation of life sciences tools and diagnostics, and the discovery, development, and commercialization of diagnostics. Biodesix Diagnostic Services has been utilized by over 65 industry clients and academic research partners. +We continuously revisit our technology strategy and roadmap to integrate new technologies into our evolving offering, which ultimately support the addition of new service and product revenue offerings. We believe that no single technology can interrogate the complexity of the human disease state to help solve all clinical questions. For that reason, we employ a multi-omic and collaborative approach to solving diagnostic challenges. +We offer end-to-end diagnostic solutions, including translational research, initial biomarker discovery, assay design, development, and validation, testing of clinical trial samples, regulatory, reimbursement, commercialization, and logistical support services (e.g., specimen collection and collection kits). We offer our existing on-market tests, a suite of other research tests and the capability to custom design novel tests for use by our customers. +While our biopharmaceutical discovery, diagnostic development and testing revenue continues to grow, it is important to note that we benefit greatly from these partnerships in many ways that expand beyond revenue. We are continuously expanding our knowledge and biological understanding of multiple diseases and the rapidly evolving treatment landscape, for example, by actively partnering in consortia including with the Friends of Cancer Research. +Pipeline +In order to continue to leverage our existing sales channel, we are developing additional tests to help address clinical unmet needs for patients with lung disease. +Risk of Recurrence (ROR) +Currently, surgical resection of the tumor without systemic or radiation therapy is the standard of care for stage I NSCLC patients. However, 20 to 40% of surgically treated patients will suffer a recurrence within five years after surgery. From market research with pulmonologists, thoracic surgeons, and medical oncologists, we identified a significant clinical unmet need for a blood-based test to help identify stage I NSCLC patients who are at a higher risk of recurrence and may benefit from a more aggressive surgical procedure, or from neoadjuvant or adjuvant systemic treatment. Based on this unmet diagnostic need, we discovered the Risk of Recurrence (ROR) test, which is a pre-surgery blood-based proteomic test, designed with the advanced Biodesix AI platform to predict whether a stage I NSCLC patient has a higher risk of recurrence post-surgical resection. Knowing this information early and before surgery may change the surgical plan and/or support treatment decisions such as neoadjuvant or adjuvant therapy, which have the potential to reduce tumor volume and address micro-metastatic disease as early as possible. Our ROR test was validated in an independent sample set, and we are currently working with major academic institutions across the United States to further validate the test. +7 +Immunotherapy Treatment Guidance (PIR) +In 2015, the first immunotherapy-based treatment regimen was approved by the FDA for use in lung cancer. Currently, there are 9 immune checkpoint inhibitor (ICI) regimens (single agent or combinations) recommended by the NCCN guidelines for treatment of advanced NSCLC patients. For a portion of patients treated, these drugs can result in significant improvement in overall survival compared with platinum-based chemotherapy options. +The combination ICI regimens see some improvement in performance over single agent ICI, but side effect profiles are worse, and costs are higher than for single agent ICI. In addition, recent data have shown that a subset of patients experience more rapid disease progression on ICI compared with chemotherapy. We utilized the advanced Biodesix AI platform to discover our Primary Immune Response (PIR) test. PIR is a blood-based proteomic test designed to profile a patient's potential to mount an immune response to their cancer and predict those patients likely to respond to ICI monotherapy treatment, ICI + chemotherapy combination treatment, or who would be highly resistant to ICI therapy. Our PIR test has been validated in multiple independent sample sets for advanced stage NSCLC patients treated with single agent ICI, and we are currently working with major academic institutions across the United States to further validate the test. +Monitoring – Progression & Resistance +Blood-based monitoring with our ddPCR technology and proteomics platform may offer a feasible method to non-invasively evaluate therapeutic mechanism of action, disease progression, and the emergence of resistance mutations in patients. Our internal validation studies have shown the utility of the GeneStrat EGFR ddPCR test as an example in all three of these indications. The test can identify disease progression up to three months (median) in advance of standard imaging. Using ddPCR for longitudinal blood-based monitoring of EGFR cell-free DNA mutations is a cost-effective testing method while patients are being treated with targeted therapies. Additional utility for ddPCR and our proteomics approach exists for minimal residual disease (MRD) testing given the sensitivity and specificity of these technologies. In March 2024, we announced a Master Collaborative Research Agreement with Memorial Sloan Kettering Cancer Center, under which the teams are collaborating on a development plan for diagnostic tests aimed at improving the treatment of cancer, including MRD. +Clinical Trials +We are dedicated to continuously publishing and presenting new data on the clinical validation and utility of our diagnostic tests. The following are our ongoing clinical studies for our diagnostic testing solutions. +ALTITUDE Clinical Utility Study (NCT04171492) +The ALTITUDE clinical utility study is designed to evaluate the performance of Nodify Lung testing (Nodify XL2 and Nodify CDT tests) in a randomized controlled study (RCT). The study is titled “A Multicenter, Randomized Controlled Trial, Prospectively Evaluating the Clinical Utility of the Nodify XL2 Proteomic Test in Incidentally Discovered Low to Moderate Risk Lung Nodules”. The study objectives are to evaluate how the addition of the Nodify Lung test result impacts the clinical decision making for patients with new, incidentally identified solid lung nodules assessed as low to moderate risk of lung cancer. The trial has an adaptive study design with a blinded standard of care arm and 2:1 randomization for open-label results for the Nodify XL2 test. +CLARIFY Clinical Utility Study (NCT06728319) +CLARIFY is a large, retrospective study assessing the performance of the Nodify CDT and Nodify XL2 tests in a real-world patient population. The study is titled “A Multicenter, Retrospective, Chart Review Study Evaluating The Impact and Utility of the Blood-Based Proteomic Integrated Classifier and Auto-Antibody Tests in the Real World.” The study's primary objective is to assess the performance of the Nodify CDT and Nodify XL2 tests both individually and serially. The study will evaluate up to 4,000 patients who have at least 1-2 years of follow-up from high-volume community and academic practices that have integrated the testing into their management of lung nodules. Further evaluation of the performance of the tests in a large, real-world population will provide deeper insights into day-to-day clinical practice and diverse and understudied patient sub-populations. It received central IRB approval in August 2024 and began enrollment in September 2024. +INSIGHT Observational Study (NCT03289780) +The INSIGHT observational study is designed to evaluate the real-world clinical utility and performance of VeriStrat, GeneStrat ddPCR, and GeneStrat NGS. The title is “Observational Study Assessing the Clinical Effectiveness of VeriStrat and Validating Immunotherapy Tests in Subjects with Non-Small Cell Lung Cancer (INSIGHT)”. On June 27, 2023, we completed enrollment of 5,000 patients with non-small cell lung cancer. Final analysis with 3-year follow-up is estimated to be completed by 2026. +Reimbursement +The primary source of reimbursement for our tests in the United States is from third-party payers, including government payers, such as Medicare, and commercial payers, such as insurance companies. Reimbursement for laboratory tests in the United States is determined by various payers, including private third-party payers, managed care organizations, and state and federal health care programs, such as Medicare and Medicaid. In Medicare, coverage of an item or service depends on whether it is “reasonable and necessary” under Section +8 +1862(a)(1)(A) of the Social Security Act (SSA). For single-source laboratory tests, this determination is typically made by the Medicare Administrative Contractor (MAC) with jurisdiction over the laboratory where the test is performed. Our Louisville, Colorado laboratory is currently under the jurisdiction of Novitas Solutions, Inc. Our De Soto, Kansas laboratory is under the jurisdiction of Wisconsin Physicians Service Insurance Corporation (WPS), which participates in the MolDX program (administered by another MAC, Palmetto GBA) to set coverage policy for molecular diagnostic tests. +Medicare pays for clinical diagnostic laboratory tests (CDLTs), on the Clinical Laboratory Fee Schedule (CLFS). Section 216(a) of the Protecting Access to Medicare Act of 2014 (PAMA) added Section 1834A to the SSA, which established the current CLFS rate setting processes and coding provisions for CDLTs, and created a new subcategory of CDLTs called Advanced Diagnostic Laboratory Tests (ADLTs), with separate reporting and payment requirements. +Under Section 1834A and its implementing regulations, clinical laboratories that receive the majority of their Medicare revenues from payments made under the CLFS and the Physician Fee Schedule report on a triennial basis (or annually for ADLTs), private payer rates and volumes for their tests with specific billing codes based on final payments made during a set data collection period. The payment rate for a test for the ensuing three-year period (or one year for ADLTs) is set at the weighted median of the rates reported under the specific billing code for that test. Newly established codes for CDLTs are priced until the next private payer rate reporting cycle either based on the payment rate of a comparable code on the CLFS, as determined by CMS ("crosswalking") or at the median of rates submitted by the individual MACs based on statutory and regulatory factors ("gapfilling"). New ADLTs are initially priced at “actual list charge” for a nine-month period, after which they are priced based on private payer rates, with a recoupment provision if actual list charge is more than 130% of the weighted median of private payer rates reported. +The various payers in the United States also determine their own billing rules. In December 2020, Medicare revised its billing rules for clinical laboratory tests to require cancer-related protein-based Multianalyte Assays with Algorithmic Analyses to be billed directly to Medicare by the performing laboratory in most cases when performed on a specimen collected from a hospital outpatient. Molecular pathology tests and most ADLTs are also generally required to be billed directly to Medicare by the laboratory under these circumstances. +The Centers for Medicare & Medicaid Services (CMS) has designated three of the Biodesix tests as Advanced Diagnostic Laboratory Tests (ADLT). The designation was effective for the Nodify CDT test as of June 30, 2023, for the Nodify XL2 test as of May 17, 2019, and for the VeriStrat test as of December 21, 2018. Obtaining ADLT status is a recognition that the tests meet the stringent criteria established under the Protecting Access to Medicare Act of 2014. ADLT status is reserved for innovative tests with Medicare coverage that are offered and furnished by a single laboratory and provide new clinical diagnostic information that cannot be obtained from any other test or combination of tests. We believe that our lung cancer tests can both improve patient outcomes and help guide cost-effective treatment choices for patients with and at-risk of lung cancer. Achieving broad coverage and adequate reimbursement for each of our tests is a key component of our financial success and will continue to be important over time. +Compliance with applicable laws and regulations, as well as internal compliance policies and procedures adds complexity to the billing process. The Centers for Medicare & Medicaid Services (CMS) is responsible for overseeing the establishment of new Healthcare Common Procedure Coding System (HCPCS) codes for billing the Medicare program and other payers. CMS continuously evaluates and implements changes to the Medicare billing, coding, and reimbursement processes. To receive reimbursement from third-party payers, we bill our tests using a variety of HCPCS codes or Current Procedural Terminology (CPT) codes, as defined by the American Medical Association. For some of the tests we conduct, there may not be a specific CPT or HCPCS code, in which case the test may be billed under a miscellaneous code for an unlisted molecular pathology procedure or unlisted multiple anolyte test with algorithmic analysis (MAAA) procedure. Because these miscellaneous codes do not describe a specific service, the third-party payer claim may be examined to determine the service provided, whether the service was appropriate and medically necessary and whether payment should be rendered. This process can result in a delay in processing the claim, a lower reimbursement amount, and/or denial of the claim. +Competition +We primarily face competition from diagnostic companies, all of whom provide cancer-focused diagnostic tests to hospitals, researchers, clinicians, and biopharmaceutical companies. +Diagnosis—Nodule Management +We are not aware of any other company that offers two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. We are aware of efforts by Veracyte, Inc. to develop and validate a test that may be competitive to the Nodify XL2 and/or Nodify CDT tests in the future. +Treatment Guidance and Monitoring—Non-Small Cell Lung Cancer +We are unaware of any other diagnostic test available, commercially or in development, that will compete with our VeriStrat immune profiling test. There is substantial interest and activity in tumor profiling through liquid biopsy. Our genomic test offerings, the GeneStrat ddPCR and GeneStrat NGS tests, face competition from academic hospital laboratories, and companies such as Guardant Health and +9 +Foundation Medicine. We believe that there are several companies and academic research institutions in the process of developing tests for monitoring patients or following treatment for recurrence or progression of lung cancer. +Biodesix Development Services +We are aware of a number of companies who compete with our Development Services for biopharmaceutical, life science and research partners, including in diagnostic research, clinical trial testing, and the discovery, development, and commercialization of tests. From the perspective of tumor profiling, we believe Guardant Health, Foundation Medicine, Tempus AI, and NeoGenomics are our most significant competitors. Conversely, in the immune profiling market, we believe Adaptive Biotechnologies and Personalis are our most significant competitors. +Clinical Laboratory Operations +Throughout 2024, all aspects of the testing process, from receipt of the test requisition form through delivery of test results, were performed for the VeriStrat, GeneStrat ddPCR, and GeneStrat NGS tests in our Louisville, Colorado facility. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery averaging 90% of our tests within three days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. Our Louisville facility is a high-complexity CLIA certified clinical laboratory. The laboratory is College of American Pathology (CAP) accredited, New York State Department of Health (NYSDOH)—permitted holding necessary Laboratory Director certifications and test approvals, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified, along with all other states that require licensing: California, Maryland, Pennsylvania, and Rhode Island. +Receipt of requisitions and testing for the Nodify CDT and Nodify XL2 tests are performed in our De Soto, Kansas clinical laboratory. Delivery of the test results is centralized to our Louisville, Colorado corporate headquarters. The proprietary testing methods use semi-automated workflows that facilitate the successful delivery averaging 90% of our tests within five days, and we believe our existing workflows will continue to successfully deliver our tests within this timeframe. Our De Soto, Kansas facility is a high-complexity CLIA certified clinical laboratory. This clinical laboratory is also CAP-accredited, NYSDOH—permitted holding necessary Laboratory Director certifications and test approvals, ISO 13485:2016 Quality Management Systems—Requirements for Regulatory Purposes for Medical Devices certified and licensed by California, Maryland, Pennsylvania, and Rhode Island. +Personnel in both laboratory facilities are responsible for quality assurance oversight, licensing, and regulation compliance and maintenance to ensure data integrity and consistent, validated processes. +Supply Chain +We rely on third-party suppliers to provide certain components of our diagnostic tests, including a select few (located in the United States, Europe and China), as critical single source providers of components. Bio-Rad, as described below, is the sole source supplier for our GeneStrat test. Freenome's United States operations (formerly "Oncimmune USA" or "Oncimmune") is also the sole source supplier for our Nodify CDT tests but there are known secondary suppliers for these materials. +We entered into a nonexclusive license and supply agreement with Bio-Rad in August 2019. We rely on Bio-Rad to supply equipment and reagents used to perform ddPCR testing, a service offered by us under a variety of fee for service agreements and the core technology powering the GeneStrat test, but these supplies are able to be supplied by known suppliers. A disruption to this supply would negatively impact our ability to perform the GeneStrat tests until alternatives could be validated. +All materials for our VeriStrat test and Nodify XL2 test have alternative suppliers readily available, and a disruption in any single supplier would not materially impact our ability to deliver the test. +We have initiated the second source qualification process for the majority of these critical components, however, we may not be successful in securing second sourcing for all of them at all or on a timely basis. A disruption to this supply would negatively impact our ability to perform these tests until an alternative supplier could be validated. +Intellectual Property +Our success depends, in part, on our ability to obtain and maintain intellectual property and proprietary protection for our products and other know-how, to operate our business without infringing, misappropriating or otherwise violating the intellectual property and proprietary rights of others, and to defend and enforce our intellectual property and proprietary rights. We take efforts to protect our proprietary position using a variety of methods, which include pursuit of United States and foreign patent applications related to our proprietary technology, inventions and improvements that we determine are important to our business. We also may rely on trade secrets, trademarks, know-how, continuing technological innovation and potential in-licensing and acquisition opportunities to develop and maintain our proprietary position. For more information regarding risks relating to intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property.” +We have invested heavily in the protection of our key assets, namely the VeriStrat and GeneStrat tests, and we acquired a patent portfolio relating to the Nodify XL2 and Nodify CDT tests in our acquisitions of Indi in June 2018, and of Oncimmune USA in October 2019 from Oncimmune Limited (Oncimmune). We own patents and patent applications as well as trade secrets relating to our products +10 +currently in development, a collection device for whole blood, our business strategy, client lists and business methods. Further, we have expanded our access to key intellectual property through license and co-development agreements, including our Non-Exclusive License Agreement with Bio-Rad (the Bio-Rad License), which allows us to use the Droplet Digital PCR technology developed by Bio-Rad and which we employ in our GeneStrat test. +Our patent strategy has focused on creating and acquiring protection for our VeriStrat and Nodify XL2 proteomic tests, while utilizing trade secret and some methods patent protection for our genomic test (the GeneStrat ddPCR and GeneStrat NGS tests) and ELISA test (the Nodify CDT test). We have entered into a non-exclusive license agreement with Bio-Rad, without the right to grant sublicenses, to utilize certain of Bio-Rad’s intellectual property, machinery, materials, reagents, supplies and know-how necessary for the performance of ddPCR in cancer detection testing for third parties in the United States. Bio-Rad owns patents relating to ddPCR and to which we have a non-exclusive license to utilize for the performance of ddPCR in cancer detection testing for third parties as set forth in the Bio-Rad License Agreement. We have patent protection in the United States and other countries around the world for the primary use of the VeriStrat test for profiling of patients with NSCLC, and various other uses of the VeriStrat test, such as breast cancer, prostate cancer, head and neck cancer have received patent protection. We have also received patent protection relating to our core classifier development program, our AI platform and our approaches to using MALDI-ToF technology (DeepMALDI® techniques). Additionally, our first device patent was issued in 2019 for our internally designed blood collection device. +As of December 31, 2024, our patent portfolio includes 59 issued United States patents, 79 issued foreign patents, and 22 pending applications (including 12 foreign patent applications). With regard to our product development efforts, new applications have been filed around developments relating to micro-organisms diagnostics, new analytic methodologies using Shapley values and semi-quantitative spectra analysis in MALDI, and national stage applications are now in active prosecution to protect our pipeline ROR and PIR tests. +The patent portfolio can be broken down into five major categories: +1) +Issued patents and patent applications relating to the VeriStrat and Nodify® tests and uses of these tests; +2) +Issued patents and patent applications relating to methods for developing classifiers, including using our AI platform and DeepMALDI technologies; +3) +Issued patents and patent applications relating to tests currently in development; +4) +Issued patents and patent applications relating to our novel blood collection device; and +5) +Issued patents and patent applications relating to tests developed for our third-party partners. +The patents relating to the VeriStrat test are scheduled to expire between 2026 and 2032 and are actively under review for additional protection. The patents relating to the Nodify XL2 test are scheduled to expire beginning in 2031 (excluding any patent term extension granted by the United States Patent and Trademark Office (USPTO)), and the patents relating to the Nodify CDT test are scheduled to expire in 2027. The patent related to the blood collection device is scheduled to expire in 2039. Should our current patent applications in prosecution in the United States issue, the resulting patents would be scheduled to have expiration dates between 2036 and 2040 (excluding any patent term extension(s) granted by the USPTO). +Patent Cooperation Treaty (PCT) applications are not eligible to become issued patents until, among other things, we file such PCT applications as national stage patent application(s) within 30 months in the countries in which we seek patent protection. If we do not timely file any national stage patent applications, we may lose our priority date with respect to any such PCT patent applications and any patent protection on the inventions disclosed in such PCT patent applications. Provisional patent applications are not eligible to become issued patents but can become the basis of PCT foreign stage and United States non-provisional patent applications, if such applications are filed within 12 months of filing the related provisional patent application. If we do not timely file any non-provisional patent applications, we will lose our priority date and any patent protection on the inventions disclosed in any such provisional patent application. As of December 31, 2024, we have no pending PCT applications. +In addition, the term of individual issued patents depends upon the legal term for patents in the countries in which they are obtained. In most countries in which we have filed, including the United States, the patent term is generally 20 years from the earliest filing date of a non-provisional patent application, assuming the patent has not been terminally disclaimed over a commonly-owned patent or a patent naming a common inventor, or over a patent not commonly owned but that was disqualified as prior art as the result of activities undertaken within the scope of a joint research agreement. The life of a patent, and the protection it affords, is therefore limited and once the patent lives of our issued patents have expired, we may face competition, including from other competing technologies. In the United States, the term of a patent may also be eligible for patent term adjustment for delays within the USPTO. The term of a patent that covers a biological product may also be eligible for patent term extension when FDA approval is granted for a portion of the term effectively lost as a result of the FDA regulatory review period, subject to certain limitations and provided statutory and regulatory requirements are met. Any such patent term extension can be for no more than five years, only one patent per approved product can be extended, the extension cannot extend the total patent term beyond 14 years from approval, and only those claims covering the approved biological product, a method for using it or a method for manufacturing it may be extended. We may not receive an extension if we fail +11 +to exercise due diligence during the testing phase or regulatory review process, fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. There can be no assurance that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. +Our ability to maintain and solidify our proprietary and intellectual property position will depend on our success in obtaining effective patent claims and maintaining and enforcing claims that are granted. However, our owned and licensed patents could be invalidated or narrowed or otherwise fail to adequately protect our proprietary and intellectual property position and our pending owned and licensed patent applications, and any patent applications that we may in the future file or license from third parties, may not result in the issuance of patents. +Branding is a part of any intellectual property strategy as patent or trade secret protection and we have a number of registered and pending trademarks relating to our company and products. We have received or filed for trademark protection in the United States for our trade name (Biodesix), the Biodesix logo, the names of five of our commercial tests (namely the VeriStrat, GeneStrat ddPCR, GeneStrat NGS, Nodify XL2 and Nodify CDT tests), and a suite of research tests (ImmunoStrat® test), as well as having trademark protection for our core development and methodological platforms, such as our AI platform and DeepMALDI technologies. In all, as of December 31, 2024, we have 16 uniquely registered United States trademarks, 8 of which (including Biodesix, VeriStrat, and GeneStrat) have received foreign issuances as well, with four trademarks pending approval from the USPTO. We will continue to pursue protection in the United States and abroad for our branded assets and will continue to use branding to protect products currently in development, key Biodesix developments and non-trade secret methodologies. +We also rely on trade secrets, including know-how, confidential information, unpatented technologies and other proprietary information, to strengthen or enhance our competitive position, protect and maintain aspects of our business that are not amenable to, or that we do not presently consider appropriate for, patent protection, and prevent competitors from reverse engineering or copying our technologies. We have decided that some technologies, such as our laboratory methodologies (including sample preparation and assay development), and some information (such as client and billing information) are best kept as trade secrets. However, trade secrets and confidential know-how are difficult to protect. To avoid inadvertent and improper disclosure of trade secrets, and to avoid the risks of former employees using these trade secrets to future employment, it is our policy to require employees, consultants and independent contractors to assign all rights to intellectual property they develop in connection with their employment with or services for the Company to the Company. We also protect our existing and developing intellectual property expressly through confidentiality provisions in agreements with third parties. There can be no assurance, however, that these agreements will be self-executing or otherwise provide meaningful protection for our trade secrets or other intellectual property or proprietary information, or adequate remedies in the event of unauthorized use or disclosure of such trade secrets or other intellectual property or proprietary information. +We also seek to preserve the integrity and confidentiality of our trade secrets and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in the measures we take to protect and preserve our trade secrets, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. +We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives, which may include objectives within and outside the United States. Despite our efforts to protect our intellectual property rights, and despite the breadth of protection that has issued around our key assets, these rights may not be respected in the future or may be circumvented or challenged (and potentially invalidated) in a legal proceeding in any jurisdiction where we have intellectual property rights. In addition, the laws of various foreign countries where we have received intellectual property protection and where we may eventually distribute our products may not afford the same protections or assurances to the same extent as the laws in the United States. See “Risk Factors—Risks Related to Our Intellectual Property” for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on us. +Government Regulations +Clinical laboratory tests like our diagnostic tests are regulated under CLIA and state law. The FDA regulates medical devices pursuant to the FDCA, including many diagnostic test kits, such as in vitro diagnostic tests (IVDs). However, most Laboratory Developed Tests (LDTs) are not currently subject to enforcement under the FDA’s regulation (although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to such enforcement) because the FDA has historically exercised enforcement discretion over LDTs. LDTs are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. +We currently market our GeneStrat, VeriStrat, Nodify XL2 and Nodify CDT tests as LDTs in the United States. As a result, we believe our diagnostic services are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDCA provisions. If the FDA disagrees with the LDT status of any of our tests, the FDA may consider the test to be an unapproved medical device and may subject us to FDA enforcement action, including, without limitation, requiring us to seek clearance, authorization or approval for the laboratory test. If the FDA were to begin enforcement with respect to our LDTs, we could incur substantial costs and +12 +delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market requirements. +FDA’s authority to regulate LDTs has been contested for many years, and there have been several legislative and administrative proposals regarding LDT regulation seeking to end or limit enforcement discretion and to bring LDTs under new or existing FDA regulatory frameworks. On September 29, 2023, FDA announced a proposed final rule (Final Rule on Laboratory Developed Tests). This rule clarifies that IVDs are devices under the Federal Food, Drug, and Cosmetic Act (FD&C Act) and amends FDA regulations to explicitly regulate laboratory developed tests (LDTs) as in vitro diagnostic tests in accordance with the agency’s regulatory authority over medical devices. The FDA finalized its rule on May 6, 2024 and announced that the agency will phase-out its LDT enforcement discretion policy in gradual stages over a total period of four years. LDTs that fall within targeted enforcement discretion policies may be exempt from some of these requirements. +Under the final rule, our tests that are currently offered as LDTs could become subject to certain statutory and regulatory provisions that are applicable to medical devices, including but not limited to, medical device reporting and correction and removal reporting requirements, quality systems regulations, registration and listing requirements, and premarket review requirements. Laboratories offering “high-risk” tests that will be subject to premarket authorization application requirements or licensure under Section 351 of the Public Health Service Act, will need to ensure that the appropriate submission is received by the FDA before November 6, 2027. Laboratories offering “moderate-risk” or “low-risk” tests that will be subject to De Novo authorization or premarket notification submissions will need to ensure that the appropriate submission is received by the FDA before May 6, 2028. Other regulatory requirements will be gradually phased in beginning on May 6, 2025. +Failure to comply with applicable requirements under the relevant timeframes could cause us to lose the ability to perform our tests, experience disruptions to our business, or become subject to administrative or judicial enforcement actions. Legal challenges have been filed in federal district court over the agency’s authority to regulate LDTs as medical devices, and the outcome of such litigation and its impact on FDA’s plan to implement the requirements are uncertain. Congress has also considered legislation to establish a new comprehensive regulatory framework that would provide oversight over LDTs. The incoming Trump Administration may also reverse the final rule. +Federal and State Laboratory Licensing Requirements +The Biodesix Louisville, Colorado clinical laboratory was a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. In addition to holding a CLIA Certificate and CAP laboratory accreditation, Biodesix’s Quality Management System (QMS) holds an ISO 13485:2016 certificate. The Biodesix Louisville, Colorado clinical laboratory received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers, and Molecular and Cellular Tumor Markers and Virology as well as held state permits and licenses in California, Maryland, New York, Pennsylvania, and Rhode Island. +CLIA regulations establish standards for proficiency testing; facility administration; general laboratory systems; pre-analytic, analytic systems, post- analytic systems; personnel qualifications and responsibilities; quality control, quality assessment; and specific provisions for laboratories performing moderate to high complexity tests. Our Louisville, Colorado clinical laboratory is inspected biennially as part of its ongoing certification under CLIA certificate of accreditation by CAP. +Under CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of or assessment of health. CLIA requires that a laboratory hold a certificate applicable to the type of laboratory examinations it performs and that it complies with, among other things, standards covering operations, personnel, facilities administration, quality systems and proficiency testing, which are intended to ensure, among other things, that clinical laboratory testing services are accurate, reliable and timely. +The Biodesix De Soto, Kansas clinical laboratory is a CAP-accredited clinical laboratory regulated by CMS pursuant to CLIA. CMS has granted CAP deeming authority under CLIA, which allows CAP to inspect laboratories in lieu of CMS. The De Soto, Kansas clinical laboratory has received approval from the NYSDOH, NYS CLEP in Soluble Tumor Markers and Diagnostic Immunology as well as holding state permits and licenses in California, Maryland, Pennsylvania, and Rhode Island. +The International Organization for Standardization (ISO) is an independent, non-governmental international organization that defines world-class specifications for products, services and systems, to ensure quality, safety and efficiency. ISO 13485:2016 is a harmonized, international regulatory benchmark for quality management systems that addresses most or all of the QMS requirements in markets including the United States, European Union, Australia, Japan and Canada. The ISO 13485:2016 certificate confirms that an organization operates a QMS that conforms to the standards established by ISO. On January 31, 2024, the FDA issued a final rule to harmonize and modernize its Quality System Regulation (QSR), which would supplant the existing requirements with ISO 13485:2016. The rule amends the current good manufacturing practice requirements of the QSR in 21 CFR 820. The QMSR rule emphasizes risk management activities and risk-based decision making and aims to reduce regulatory burdens on device manufacturers and importers by harmonizing domestic and international requirements. Device manufacturers and importers have one year to modify their quality systems to meet the requirements of the QMSR rule by February 2, 2026. +13 +To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Laboratories such as ours, which are performing high complexity testing, are required to meet more stringent CLIA requirements than laboratories performing less complex tests, and therefore our laboratories are also subject to random, unannounced survey and inspection at any time. In addition, a laboratory that is certified as “high complexity” under CLIA may develop, manufacture, validate and use proprietary LDTs. CLIA requires analytical validation including accuracy, precision, specificity, sensitivity and establishment of a reference range for any LDT used in clinical testing. The regulatory and compliance standards applicable to the testing we perform may change over time and any such changes could have a material effect on our business. +CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that out-of-state laboratories maintain an in-state laboratory license to perform tests on samples from patients who reside in that state. As a condition of licensure, certain states may require that laboratory personnel meet qualifications, quality control procedures, facility requirements, record maintenance requirements or other state-specific requirements. +Because our Louisville, Colorado clinical laboratory is located in the State of Colorado, we do not need a specific State of Colorado laboratory license, however, we maintain licenses to conduct testing in other states where nonresident laboratories are required to obtain state laboratory licenses. We maintain licenses for our Louisville, Colorado and De Soto, Kansas laboratories with the NYSDOH. We also hold licenses in other states in which we operate, including California, Maryland, Pennsylvania and Rhode Island, that require licensing of out-of-state laboratories under certain circumstances. Other states may currently have or adopt similar licensure requirements in the future, which may require us to modify, delay or stop its operations in those states until such requirements are met. +Failure to comply with CLIA certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate or license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions, and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity. +CLIA and state laws and regulations, operating together, sometimes limit the ability of laboratories to offer consumer-initiated testing, also known as direct access testing. We do not offer direct access testing and instead require that our tests be ordered by licensed healthcare providers. +Our Louisville, Colorado and De Soto, Kansas laboratories are certified and adhere to the NYS CLEP, based on New York State Public Health Law, Article 5 Title 5. NYS CLEP is exempt from CLIA and establishes their own method of laboratory certification and test validation approval. To process New York State patient specimens a laboratory must submit a robust analytical and clinical validation package to demonstrate clinical utility of the test and receive approval prior to offering the test in the state of New York. All of our tests have obtained NYS CLEP approval including GeneStrat ddPCR, GeneStrat NGS, VeriStrat, Nodify XL2 and Nodify CDT tests. NYS CLEP requires semi-annual inspections to ensure the laboratory meets all general and specialty standards. Due to the pandemic, NYSDOH CLEP routine re-inspections were delayed by multiple years. +Regulatory Framework for Medical Devices in the United States and Internationally +Pursuant to its authority under the FDCA, the FDA has jurisdiction over medical devices, which are defined to include, among other things, IVDs. The FDA regulates the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. It is possible that one or more of our current, or future, tests will be subject to FDA authority and oversight as either an IVD or a CDx pursuant to the FDA’s authority to regulate medical devices under the FDCA. +Medical devices are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. Government regulations specific to medical devices are wide ranging and govern, among other things: +• +product design, development, manufacturing assembly and release; +• +laboratory and clinical testing, labeling, packaging, storage and distribution; +• +product safety and efficacy; +• +premarketing clearance or approval; +• +service operations, including assay development and validation, clinical sample testing, clinical trial solutions, and quality and regulatory solutions; +• +record keeping; +• +product marketing, promotion and advertising, sales and distribution; +• +post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; +14 +• +post-market approval studies; and +• +product import and export +Many countries in which we may offer any of our diagnostic tests in the future have anti-kickback regulations prohibiting providers from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable under any national health care program. In situations involving physicians employed by state-funded institutions or national health care agencies, violation of the local anti-kickback law may also constitute a violation of the Foreign Corrupt Practices Act of 1997 (FCPA). +The FCPA prohibits any United States individual, business entity or employee of a United States business entity to offer or provide, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether or not such conduct violates local laws. In addition, it is illegal for a company that reports to the Securities and Exchange Commission (SEC) to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls. We will also be required to maintain accurate information and control over sales and distributors’ activities that may fall within the purview of the FCPA, its books and records provisions and its anti-bribery provisions. +The standard of intent and knowledge in anti-bribery cases is minimal. Intent and knowledge are usually inferred from that fact that bribery took place. The accounting provisions do not require intent. Violations of the FCPA’s anti-bribery provisions for corporations and other business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Other countries, including the United Kingdom and other OECD Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United Kingdom Anti-Bribery Act. +When marketing our diagnostic tests outside of the United States, we may be subject to foreign regulatory requirements governing human clinical testing, prohibitions on the import of tissue necessary for us to perform our diagnostic tests or restrictions on the export of tissue imposed by countries outside of the United States or the import of tissue into the United States, and marketing approval. These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required. +Market access, sales and marketing of medical devices in non-U.S. countries are subject to foreign regulatory requirements that vary widely from country to country. For example, in the European Economic Area (EEA), a medical device must meet the Medical Devices Directive’s (MDD)/In Vitro Medical Devices Directive’s (IVDD) Essential Requirements or, applicable on May 26, 2021, the Medical Devices Regulation’s (MDR) / applicable on May 26, 2022, In Vitro Medical Devices Regulation’s (IVDR) General Safety and Performance Requirements which apply to it, taking into account its intended purpose as defined by the data supplied by the manufacturer on the label, in the instructions for use or in promotional or sales materials or statements and as specified by the manufacturer in the clinical evaluation. Before placing a medical device on the EEA market, the manufacturer must draw up a declaration of conformity, certifying that the device complies with the MDD/IVDD/MDR/IVDR, and must then affix the CE mark. For medium and high-risk devices as well as low risk devices that are placed on the market in sterile condition, have a measuring function, or are reusable surgical instruments, the manufacturer must obtain a CE Certificate from a notified body. The notified body typically audits and examines the device’s technical documentation, including the clinical evaluation, and the quality system for the manufacture, design and final inspection of the relevant device before issuing a CE Certificate. Following the issuance of this CE Certificate, manufacturers may draw up the declaration of conformity and affix the CE mark to the devices covered by this CE Certificate. +Manufacturers of medical devices must document in a clinical evaluation report (CER) the evaluation of the clinical data related to the device. The CER is part of the device’s technical file. The evaluation shall document that the applicable Essential Requirements/General Safety and Performance Requirements are met and document the evaluation of the undesirable side-effects and the acceptability of the benefit-risk ratio. The CER must be updated based on information from the post-market surveillance and vigilance activities related to the device. The CER shall consist, inter alia , of analyzed clinical data collected from a clinical investigation of the device, or the results of other studies on substantially equivalent devices. Reliance on “substantially equivalent” devices is very restrictive and requires, inter alia , that the manufacturer has full access to the technical documentation of the equivalent device on an ongoing basis and, if the “equivalent device” is not its own, that the manufacture has in place a contract with the manufacturer of the “equivalent device.” +Similar requirements apply in the UK. For access to the UK market, manufacturers must obtain a UKCA Certificate and affix a UKCA mark to their medical devices. Initially, the government stated the CE mark will be accepted in the UK until July 1, 2023. However, on July 1, 2023, the government updated their guidance for regulating medical devices stating their intention to extend recognition and acceptance of the CE marking for placing most goods on the market in Great Britain, indefinitely, if the device was placed on the EU market before January 1, 2021. +Device Classification +Under the FDCA, medical devices are classified into one of three classes: Class I, Class II or Class III, depending on the degree of risk to patients that is associated with each medical device and the amount of oversight needed to provide reasonable assurances with respect to safety and effectiveness of the medical device. +15 +On January 31, 2024, the FDA’s Center for Devices and Radiological Health (CDRH) announced that the Center intends to initiate the reclassification process for most IVD tests that are currently Class III (high risk) into Class II (moderate risk). The majority of these tests are infectious disease and companion diagnostic IVDs. Reclassification would allow manufacturers of certain types of tests to seek marketing clearance through the less burdensome premarket notification (510(k)) pathway rather than the premarket approval pathway, the most stringent type of FDA medical device review. +Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to a set of FDA regulations, referred to as the General Controls for Medical Devices, which require compliance with the applicable portions of the FDA’s QSR, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements. +Class II devices are subject to the General Controls as well as any special controls deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, patient registries, FDA guidance documents and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process, although some Class II devices are exempt from the 510(k) requirements. +Class III devices include devices deemed by the FDA to pose the greatest risk: such as life-supporting or life-sustaining devices, implantable devices, or those deemed novel and not substantially equivalent to a predicate device following the 510(k) process. CDx tests are regularly considered Class III devices. +Premarket Submission Process +Unless a statutory or regulatory exemption or enforcement discretion policy applies, before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, the manufacturer must obtain the FDA’s: (1) permission for commercial distribution under section 510(k) of the FDCA (510(k) clearance); or (2) approval of a Premarket Approval (PMA); or (3) de novo classification and authorization. These processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees. +Under the 510(k)-clearance process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and therefore a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Premarket notifications typically include bench, analytical, and preclinical data. Clinical data is sometimes required to support substantial equivalence. If a manufacturer obtains a 510(k) clearance for its device and then makes a modification that could significantly affect the device’s safety or effectiveness or constitutes a major change or modification in the intended use of the device, a new clearance, authorization or approval may be required. +By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous, costly, and time-consuming PMA approval process or seek reclassification of the device through the De Novo process. +If a predicate device is not available, the FDA allows the submission of a direct De Novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. A De Novo request includes a description of the device, a discussion of the general controls and any specific controls recommended to provide reasonable assurance of the safety and effectiveness of the device, a description of the probable benefits of the device when compared to the probable risks when the device is used as intended, non-clinical data including bench performance and animal testing, technical information about the device, and clinical data (if applicable). FDA’s goal is to review a De Novo request within 150 review days after receiving the petition. As with a 510(k) submission or PMA, the length of the review can be prolonged if the FDA requests additional information from the applicant. +To obtain a PMA, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling, +16 +and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use. +Once filed as a PMA, the FDA has 180 days to review the filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. +Prior to approval of a PMA, the FDA may conduct inspections of any clinical trial data and clinical trial sites, as well as inspections of any manufacturing facility and processes. The FDA can delay, limit or deny approval of a PMA application for many reasons, including (1) the device may not be shown safe or effective to the FDA’s satisfaction; (2) the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval; (3) the manufacturing process or facilities may not meet applicable requirements; and (4) changes in FDA approval policies or adoption of new regulations may require additional data. +If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when data is available. The PMA process can be expensive, uncertain and lengthy. A number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing. New PMA applications or PMA supplements are required for any modifications to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, materials or design of a device that has been approved through the PMA process. +As a condition of PMA application approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer-term safety and effectiveness data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. +The 510(k), De Novo or PMA processes can be expensive, lengthy and unpredictable. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k)-clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device. +Companion Diagnostics and the Premarket Process +We believe that several of our future product candidates may include a companion diagnostic (CDx). CDx’s can identify patients who are most likely to benefit from a particular therapeutic product, identify patients likely to be at increased risk for serious side effects as a result of treatment with a particular therapeutic product, or monitor response to treatment with a particular therapeutic product for the purpose of adjusting treatment to achieve improved safety or effectiveness. The use of the CDx will be stipulated in the labeling of both the CDx and the therapeutic product. The FDA may require an application for the CDx to be separate from the drug approval process, and this could potentially delay the approval of any new drug application or the CDx, or complicate the review process. CDx’s are generally regulated as Class III medical devices by the FDA and are therefore most often subject to the PMA approval process. +The FDA issued guidance in July 2016 for the co-development of CDx tests with a therapeutic product and issued another draft guidance in December 2018 specific to oncology CDx tests. The FDA finalized this draft guidance in April 2020 in “Developing and Labeling In vitro Companion Diagnostic Devices for a Specific Group of Oncology Therapeutic Products.” The guidance is meant to guide the development of CDx products, which are defined as IVDs that provide information that is essential for the safe and effective use of the therapeutic product. A CDx is often developed and approved or cleared contemporaneously with the therapeutic, and the use of the CDx is stipulated in the labeling of both the CDx and the corresponding therapeutic product. While it supports contemporaneous marketing authorizations, if there are any deficiencies in the submissions, the FDA may place a PMA review of a CDx on hold or request additional testing, which could potentially delay the approval of the corresponding new drug application or the marketing authorization of the CDx, or otherwise complicate the review process. Some oncology CDx tests can be developed in a way that results in labeling for a specific group of oncology therapeutic products, rather than a single therapeutic product. +17 +Post-Market FDA Regulation +Even if regulatory clearance, authorization or approval of a device is granted, the FDA may impose limitations on the uses and indications for which the device may be labeled and promoted, and the device remains subject to significant regulatory requirements. Medical devices may be marketed only for the uses and indications for which they are cleared, authorized or approved. After a device, including a device exempt from FDA premarket review, is placed on the market, numerous post-market regulatory requirements apply, and the FDA has broad authority to enforce these requirements. Medical device manufacturers are subject to unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of any suppliers. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include sanctions such as: warning letters, fines, injunctions, consent decrees and civil penalties; unanticipated expenditures, including requirements to repair, replace, and/or refund the cost of the devices, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; the FDA’s refusal of our requests for 510(k) clearance, De Novo classification, or PMA of new products, new intended uses or modifications to existing products; the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries; and withdrawing 510(k) clearance or PMAs that have already been granted and criminal prosecution. In the event that a supplier fails to maintain compliance with the FDA’s or our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. +Federal and State Fraud and Abuse Laws +We are subject to federal fraud and abuse laws such as the federal Anti-Kickback Statute (AKS), the federal prohibition against physician self-referral (Stark Law), the Eliminating Kickbacks in Recovery Act (EKRA), and the federal False Claims Act (FCA). We are also subject to similar state and foreign fraud and abuse laws. +The AKS (Social Security Act § 1128B(b)) prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing or ordering, any item or service that may be reimbursable, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. There are a number of statutory exceptions and regulatory safe harbors to the AKS that provide protection from AKS liability to arrangements that fully satisfy the applicable requirements. +EKRA (18 USC § 220) prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in return for the referral of a patient to, or in exchange for an individual using the services of certain entities, including laboratories, if the services are covered by a health care benefit program. The term “health care benefit program” is broadly defined such that EKRA extends to referrals reimbursed by both governmental and commercial third-party payers. EKRA includes a number of statutory exceptions that provide protection from EKRA liability if the applicable requirements are met. +The Stark Law (Social Security Act § 1877) generally prohibits, among other things, clinical laboratories and other so-called “designated health services” entities from billing Medicare for any designated health services when the physician ordering the service, or any member of such physician’s immediate family, has a financial relationship, such as a direct or indirect investment interest in or compensation arrangement with the billing entity, unless the arrangement meets an exception to the prohibition. The Stark Law also prohibits physicians from making such referrals to a designated health services entity. There are also similar state laws that apply where Medicaid and/or commercial payers are billed. +The FCA (31 USC § 3729) imposes penalties against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment to the government that are false or fraudulent, or knowingly making, using or causing to be made or used a false record or statement material to such a false or fraudulent claim, or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. This statute also permits a private individual acting as a “qui tam” whistleblower to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery. FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties per false claim or statement for penalties assessed. +Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payer knows or should know is likely to influence the beneficiary to order or receive a reimbursable item or service from a particular provider, practitioner, or supplier, and contracting with an individual or entity that the person knows or should know is excluded from participation in a federal health care program. In addition, federal criminal statutes created by the Health Insurance Portability and Accountability Act (HIPAA) prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services. +In addition to these federal laws, there are often similar state anti-kickback and false claims laws that typically apply to arrangements involving reimbursement by a state-funded Medicaid or other health care program. Often, these laws closely follow the language of +18 +their federal law counterparts, although they do not always have the same exceptions or safe harbors. In some states, these anti-kickback laws apply with respect to all payers, including commercial payers. +A number of states have enacted laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and other healthcare providers, and, in some states, marketing expenditures. In addition, some state statutes impose outright bans on certain manufacturer gifts to physicians or other health care professionals. Some of these laws, referred to as “aggregate spend” or “gift” laws, carry substantial fines if they are violated. +Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs and extensive annual trainings for all of our employees and contractors. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from participation in government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. +Anti-Corruption +The FCPA and similar international bribery laws make it unlawful for persons or entities to make payments to foreign government officials to assist in obtaining and maintaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any offer, payment, promise to pay, or authorizing the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to do or omit to do an act in violation of his or her duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business, to any person. In addition to the anti-bribery provisions of the FCPA, the statute also contains accounting requirements designed to operate in tandem with the anti-bribery provisions. Covered companies are required to make and keep books and records that accurately and fairly reflect the transactions of the company and devise and maintain an adequate system of internal accounting controls. With our international operations through our third-party partnerships, we could incur significant fines and penalties, as well as criminal liability, if we fail to comply with either the anti-bribery or accounting requirements of the FCPA, or similar international bribery laws. Even an unsuccessful challenge of our compliance with these laws could cause us to incur adverse publicity and significant legal and related costs. We successfully passed our latest FCPA compliance review in 2023 with no findings. +Privacy and Data Protection Laws +Numerous federal and state laws and regulations, including HIPAA, as amended by the Health Information Technology for Economic and Clinical Health (HITECH) Act, govern the collection, dissemination, security, use and confidentiality of protected health information (PHI) and personal information. In the course of performing our business we obtain personal information, including PHI. Laws and regulations relating to privacy, data protection, and consumer protection are evolving and, in some cases, particularly with regard to newer laws, may be subject to potentially differing interpretations. Under HIPAA and HITECH, the Department of HHS issues regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of PHI, used or disclosed by CEs and their authorized business associates (BAs). Because we are a health care provider that electronically transmits health care information, and we also provide certain services to CEs and receive PHI from them, we are at times either a CE or a BA, as defined by HIPAA. Our subcontractors that create, receive, maintain, transmit or otherwise process PHI on our behalf are HIPAA BAs and must also comply with HIPAA, as applicable. +HIPAA and HITECH include the privacy and security rules, breach notification requirements and electronic transaction standards. The privacy rule governs the use and disclosure of PHI, generally prohibits the use or disclosure of PHI except as permitted under the rule, and mandates certain safeguards to protect the privacy of PHI. The privacy rule also sets forth individual rights, such as the right to access or amend certain records containing such individual’s PHI, or to request restrictions on the use or disclosure of such individual’s PHI. The security rule requires CEs and BAs to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI (also referred to as ePHI) by implementing administrative, physical and technical safeguards. Under HIPAA’s breach notification rule, a CE must notify individuals, the Secretary of HHS, and in some circumstances, the media of certain breaches of unsecured PHI or ePHI, and similar breach notification provisions apply to certain BAs under the HITECH Act. +Penalties for failure to comply with a requirement of HIPAA and HITECH vary depending on the number and nature of the violations and any history of prior violations, but can be significant and include civil monetary or criminal penalties. HIPAA is enforced by the Department of Health and Human Services, Office for Civil Rights, and HIPAA also authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in improper use, access to or disclosure of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of +19 +HIPAA CEs, such as us, and their BAs for compliance with the HIPAA privacy and security standards and breach notification rules. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator. +In addition, we may be subject to state privacy, cybersecurity, and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information Act, which, in addition to HIPAA and HITECH, sets forth standards with which all California health care providers must abide. Colorado has enacted the Colorado Privacy Act, and Virginia has enacted the Consumer Data Protection Act, both of which also have standards that must be complied with that supplement Federal data protection requirements. State laws may be more stringent, broader in scope or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other in regards to personal information treatment, which may complicate compliance efforts. For instance, the California Consumer Privacy Act (CCPA) became effective on January 1, 2020 and was amended by the passage of the California Privacy Rights Act (CPRA) in November of 2020, which amendments came into force on January 1, 2023. The CCPA, among other things, gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA has been amended from time to time, and it remains unclear what, if any, further modifications will be made to this legislation or how it will be interpreted. Although there are certain exemptions for PHI and clinical trial data, the CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future and the CCPA may increase our compliance costs and potential liability. Additionally, the CPRA imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It also creates a new California data protection agency – the California Privacy Protection Agency – specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. Similar laws have been proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that could continue to make compliance challenging and costly. +Additionally, the Federal Trade Commission (FTC) and state attorneys general enforce consumer protection laws that prohibit unfair and deceptive acts and practices, including Section 5 of the FTC Act, which creates standards for the collection, use, dissemination and security of health-related and other personal information. Claims of unfair or deceptive trade practices regarding privacy and security can lead to significant liabilities and consequences, including regulatory investigations, penalties, fines and orders as well as civil claims, which could impact our data practices and operations or cause reputational damage. +We may also be subject to laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may add additional compliance burden and complexity. For example, in the EEA, the collection and use of personal data is governed by the European Union's General Data Protection Regulation (GDPR). In the United Kingdom, the GDPR has been adopted in substantially the same form, however the UK may potentially make revisions in the coming years. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze, store, transfer and otherwise process personal data. European and United Kingdom data protection authorities may interpret the GDPR and national laws differently and impose additional requirements, which adds to the complexity of processing personal data in or from the EEA or United Kingdom. Guidance on implementation and compliance practices is often updated or otherwise revised. GDPR applies extra-territorially under certain circumstances and imposes stringent requirements on controllers and processors of personal data, including, for example, requirements to ensure a legal bases to process personal information, provide robust disclosures to individuals, facilitate data subject rights, provide data security breach notifications within 72 hours after discovering a breach in certain circumstances, limit retention of personal information and apply enhanced protections to health data and other categories of sensitive personal information. The GDPR also has requirements around international transfers of personal data. Requirements around transfers to the United States and other jurisdictions have increased since a July 2020 decision by the Court of Justice of the European Union invalidated the Privacy Shield as a basis to transfer personal data from Europe to the United States, and added requirements for reliance on Standard Contractual Clauses. Regulatory guidance on requirements for international transfers, and other GDPR compliance matters, continues to evolve; for example, in July 2023, the European Commission completed adoption of a new adequacy decision for data flows to the United States. However, it is widely expected that the new adequacy decision will itself face scrutiny from the Court of Justice, underscoring that GDPR compliance is an ongoing endeavor. Failure to comply with the requirements of the GDPR may result in fines of up to €20 million or up to 4% of the total worldwide annual turnover of our preceding fiscal year, whichever is higher, and other administrative penalties. To comply with the GDPR and other applicable international data protection laws and regulations, we may be required to put in place additional mechanisms ensuring compliance, which may result in other substantial expenditures. +Cybersecurity +Our business relies on secure and continuous processing of information and the availability of our IT networks and IT resources, as well as critical IT vendors that support our technology, research and other data processing operations. While we take steps to protect our +20 +systems and data, security incidents, data breaches, computer malware and computer hacking attacks have become more prevalent across industries, including the life sciences sector, and may occur on our systems or those of our third-party service providers. Unauthorized persons may in the future be able to exploit weaknesses in the security systems of our (or our third-party service providers) IT networks and gain access to PHI and other personal information, sensitive trade secrets, or other proprietary information. Any wrongful use or disclosure of PHI, other personal information, trade secrets or other proprietary information by us or our third-party service providers could subject us to regulatory fines or penalties, third-party claims or otherwise could adversely affect our business and results of operations. Although HIPAA and the regulations promulgated thereunder do not provide for a private right of action, failures to adequately protect PHI or our IT systems could be viewed as violations of the HIPAA security rule or violations of other applicable information security laws, regulations, contractual obligations or industry standards, and could further result in costly data breach notification obligations that negatively impact our reputation. +Moreover, data security incidents or data breaches, as well as attacks on our IT systems, could result in operational disruptions or data loss or corruption that could adversely impact our business and operations, resulting in substantial investment of resources to investigate, recover and remediate and subject us to heightened regulatory scrutiny. See Item 1C. "Cybersecurity" for additional information on our cybersecurity practices. +Healthcare Reform +In March 2010, the Patient Protection and Affordable Care Act (ACA) was enacted in the United States. The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private insurers. For example, the ACA requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices. The medical device tax was permanently repealed at the end of 2019. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters, and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict. +Beginning in 2017, the Trump administration sought to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. The Trump administration issued three executive orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. For example, on December 20, 2019, President Trump signed appropriations legislation for fiscal year 2020 that repealed certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high-cost employer-sponsored insurance plans, for tax years beginning after December 31, 2019; the annual fee imposed on certain health insurance providers based on market share, for calendar years beginning December 31, 2020; and the medical device excise tax on non-exempt medical devices, for sales after December 31, 2019. While Congress did not pass comprehensive legislation that would repeal all or part of the ACA, two bills affecting the implementation of certain taxes under the ACA have been signed into law. Specifically, the Tax Cuts and Jobs Act of 2017 (TCJA), among other things, included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment, or penalty, imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Beginning in 2021, the Biden administration has signaled its intent to pursue policies strengthening the ACA. +Other legislative changes have been proposed and adopted in the United States since the ACA was enacted to reduce healthcare expenditures. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions of Medicare payments to providers of up to 2% per fiscal year that started in 2013 and, due to subsequent statutory amendments, will remain in effect through 2030 unless additional Congressional action is taken. In 2020, the CARES Act temporarily suspended the 2% cut in Medicare payments from May 1, 2020 through December 31, 2020, and it extended the sequestration reductions through fiscal year 2030 to offset the cost of such temporary suspension. The Consolidated Appropriations Act of 2021 further extended the temporary suspension through March 31, 2021. On April 14, 2021, Congress enacted legislation that further extended the suspension through December 31, 2021. On December 10, 2021, further legislation was enacted to extend the suspension through March 31, 2022, after which a 1.0% sequestration applied for Medicare payments made between April 1, 2022 and June 30, 2022. +The American Taxpayer Relief Act of 2012 made other changes, including reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. If federal spending is reduced, anticipated budgetary shortfalls may also impact the ability of relevant agencies, such as the FDA or the National Institutes of Health to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve R&D, manufacturing, and marketing activities, which may delay our ability to develop, market and sell any products we may develop. The Biden administration shifted direction from Trump administration policies by issuing orders and other documents rolling back regulations and Executive Orders from the Trump administration, and as noted, indicating that it will pursue policies strengthening the ACA. +In December 2020, in its enactment of the Consolidated Appropriations Act, Congress enacted the No Surprises Act. This law, which took effect January 1, 2022, bars out-of-network providers from billing patients in excess of the in-network cost sharing for services furnished with respect to a visit at certain in-network health care facilities. The law establishes an independent dispute resolution process between the provider and the payer to determine the appropriate payment rate to the provider. As written, the No Surprises Act may apply to laboratory tests furnished by an independent laboratory with respect to a hospital visit. The law establishes a notice and consent +21 +exception that generally does not apply to laboratory tests, although it allows HHS to apply this exception to certain advanced tests. Regulations and subregulatory guidance were issued by HHS, the Department of Labor, and the Department of the Treasury in 2021 and 2022, with the first set of regulations was issued as an interim final rule on July 1, 2021, a second set issued as an interim final rule on September 30, 2021, and a third set issued as a final rule on August 19, 2022. These regulations and subregulatory guidance have provided additional information on the applicability of the No Surprises Act, the rules governing the independent dispute resolution process, and specific provider requirements (including the obligation to furnish a “good faith estimates” of “expected charges” to uninsured or self-pay patients), as well as areas of temporary enforcement discretion. +Environmental, Health and Safety Regulations +We are subject to various federal, state, local, and foreign environmental, health and safety laws and regulations and permitting and licensing requirements. Such laws include those governing laboratory practices, the generation, storage, use, manufacture, handling, transportation, treatment, remediation, release and disposal of, and exposure to potential bloodborne pathogens, hazardous materials and associated wastes. Our operations involve the generation, use, storage and disposal of hazardous materials as well as regulated medical waste, and the risk of injury, contamination or non-compliance with environmental, health and safety laws and regulations or permitting or licensing requirements cannot be eliminated. Compliance with environmental laws and regulations has not had a material effect on our capital expenditures, earning or competitive position. To date, there has not been a for cause OSHA or EPA inspection. +Corporate Information +We were incorporated in Delaware in 2005 as Elston Technologies, Inc. Our principal executive offices are located at 919 West Dillon Rd, Louisville, CO 80027, and our telephone number is (303) 417-0500. On June 20, 2006, we changed our name to Biodesix, Inc. +Implications of Being an Emerging Growth Company and Smaller Reporting Company +We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act (JOBS Act). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, certain requirements related to the disclosure of executive compensation in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. +We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. Additionally, because we have taken advantage of certain reduced reporting requirements, the information contained herein may be different from the information you receive from other public companies in which you hold stock. +We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.24 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) until December 31, 2025 (the last day of the fiscal year ending after the fifth anniversary of the completion of our initial public offering (IPO)). +Additionally, we are a “smaller reporting company ” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible. +For certain risks related to our status as an emerging growth company, see “Risk Factors—General Risk Factors—We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.” +Human Capital Resources +Our culture is underpinned by our cultural beliefs including an unwavering commitment to inclusion and diversity. We are committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent offering opportunities for our team members to +22 +grow and develop in their careers, supported by a competitive suite of benefits and health and wellness programs. We regularly engage our team members in monthly all-hands meetings to align and focus on the current state of affairs of our business, our partnerships, new products, clinical trials, and other pertinent information about our business. We engage our team members in programs such as peer recognition and recruitment that focuses on recognizing outstanding individual contributions to company performance, cultural fit of new team members and acknowledging the diversity of our team to ensure our team members feel valued and can do their best work. We have a national annual community service initiative, “ Biodesix Gives Back ” that allows each team member to invest ten hours of paid community service to organizations of their choosing. +As of December 31, 2024, we had approximately 273 full-time and part-time employees, all of whom are located in the United States. The majority of our team member base is located in proximity to our corporate office and testing facilities located in Louisville, Colorado and our laboratory in De Soto, Kansas. +Diversity, Equity and Inclusion +We believe that a diverse employee population, including cultural background, gender, ethnicity, sexual orientation and lived experiences, is critical to our success since we need to represent our patients, providers, and partners. Our employees are encouraged to leverage their personal strengths and experiences to continually innovate and contribute to the development of new ideas and process improvements that drive better experiences for our partners. +Employee Engagement +Our company culture emphasizes the satisfaction and well-being of our team members and a diverse, engaged workforce. We solicit the opinion and views of our team members through surveys and peer focus groups. We have an established and valued peer recognition culture. Teammates recognize other teammates publicly for their support and contributions fostering collaboration, engagement and retention. We regularly review feedback we receive on our operating principles to determine if any modifications are needed. During 2021, we updated our cultural beliefs to align with our core values that reflect our current focus on Teamwork, Innovation, Making an Impact and Excel. In 2025, we transitioned our cultural beliefs into Operating Principles to reflect a renewed focus and commitment on Team, Impact, and Excellence . Additionally, the Company annually celebrates our top sales performers through our President’s Club and other top company performers as nominated by fellow team members through our four (4) Performance Excellence Awards that recognize creativity and innovation, an entrepreneurial spirit, a strategic impact on the success of the Company and lastly, embodying the Biodesix cultural beliefs and goes “above and beyond” daily. +Training and Development +We invest in our team members' career growth and provide team members with a wide range of development opportunities, including face-to-face, virtual, and self-directed learning, mentoring, coaching, and external development. +Health, Safety and Wellness +The physical health, financial stability, life balance and mental health of each of our team members is vital to our success. We sponsor several cancer awareness activities in our local communities to bring engagement and awareness of health, safety and wellness to positively impact lives. We provide an Employee Assistance Program to enhance physical, financial, and mental well-being for all our team members. +Pay Equity +The main objective of our compensation program is to provide a compensation package that will attract, retain, motivate, and reward superior team members who operate in a highly competitive and technologically challenging environment. We emphasize overall Company performance and provide equity incentives for all team members to align their financial interests with the interests of shareholders. In addition, we offer an employee stock purchase plan to all employees in which participants are eligible to purchase shares at a discount to market. We think like customers and act like owners. +Biodesix seeks fairness in total compensation. We benchmark with external comparisons, internal comparisons and look at the relationship between team member roles within the organization. We also review our compensation practices, both in terms of our overall workforce and individual team members, to ensure our pay is fair and equitable. We currently have no pay disparities based on gender, race, or ethnicity. +Available Information +We file with, or furnish to, the SEC reports including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available free of charge on our corporate website ( www.biodesix.com ) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov . The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this Annual Report on Form 10-K. +23 \ No newline at end of file diff --git a/raw/filings/0001439725/2024/0000950170-25-030835/item13.txt b/raw/filings/0001439725/2024/0000950170-25-030835/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..f3db53c69f5ed01e49467a3eb2a6ea157240cc5a --- /dev/null +++ b/raw/filings/0001439725/2024/0000950170-25-030835/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence. +The information required by this item is incorporated by reference from the information under the caption "Board and Corporate Governance Matters—Policies and Procedures for Related-Party Transactions" and "—Director Independence" contained in the Proxy Statement and is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0001439725/2024/0000950170-25-030835/item9a.txt b/raw/filings/0001439725/2024/0000950170-25-030835/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..c75d47638cda63d8f43e3a4d5aa7c4a74aa9d347 --- /dev/null +++ b/raw/filings/0001439725/2024/0000950170-25-030835/item9a.txt @@ -0,0 +1,9 @@ +Item 9A. Controls and Procedures. +Evaluation of Disclosure Controls and Procedures +We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. +Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2024 based on the criteria established in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), using the 2013 framework. Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2024, the Company's internal control over financial reporting was effective based on the criteria set forth by COSO. +This annual report does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2024, there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001439725/2024/0000950170-25-030835/rp_note.txt b/raw/filings/0001439725/2024/0000950170-25-030835/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001439725/2024/0000950170-25-030835/rpt_disclosure.txt b/raw/filings/0001439725/2024/0000950170-25-030835/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..63902532006188db2163bfe3ead6627bd09cfa13 --- /dev/null +++ b/raw/filings/0001439725/2024/0000950170-25-030835/rpt_disclosure.txt @@ -0,0 +1,56 @@ +reviewing related-party transactions; +• +approving, or as permitted, pre-approving, audit and permissible non-audit services to be performed by our independent registered public accounting firm; and +• +reviewing and assessing, at least annually, the performance of the audit committee and adequacy of its charter. +Compensation Committee +Our compensation committee consists of Messrs. Massarany and Patience and Dr. Kayyem, and the chair of our compensation committee is Mr. Massarany. Our board of directors has determined that each of Messrs. Massarany and Patience and Dr. Kayyem is independent under the applicable Nasdaq listing rules and is a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act. The functions of this committee include: +• +reviewing, modifying and overseeing overall compensation strategy and policies; +• +reviewing and approving the compensation arrangements and other terms of employment (including, when and if appropriate, employment agreements, severance agreements, consulting agreements and change in control or termination agreements) of our chief executive officer, other executive officers and senior management, as appropriate; +• +reviewing and recommending to the full board of directors the compensation of our directors; +• +appointing and overseeing the work of compensation consultants, legal counsel or any other advisors and consultants engaged for the purpose of advising the compensation committee; +• +reviewing, recommending to the full board of directors, as appropriate, and administering equity award plans, compensation plans and similar programs, as well as modification or termination of plans and programs; +• +establishing policies with respect to equity compensation arrangements; +• +reviewing and evaluating with the chief executive officer and the full board of directors the succession plans for our executive officers; and +• +reviewing and assessing, at least annually, the performance of the compensation committee and the adequacy of its charter. +Compensation Committee Interlocks and Insider Participation +None of the members of the compensation committee is currently, or has been at any time during 2025, one of our officers or employees. None of our executive officers currently serve, or has served during 2025, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. +Nominating and Corporate Governance Committee +Our nominating and corporate governance committee consists of Ms. Franchi, Dr. Strobeck and Mr. Kennedy, and the chair of our nominating and corporate governance committee is Dr. Strobeck. Our board of +2026 Proxy Statement +15 +Table of Contents +directors has determined that Ms. Franchi, Dr. Strobeck and Mr. Kennedy are independent under the applicable Nasdaq listing rules. The functions of this committee include: +• +reviewing periodically and evaluating director performance of our board of directors and its applicable committees, and recommending to our board of directors and management areas for improvement; +• +identifying, evaluating, nominating and recommending individuals for membership on our board of directors; +• +reviewing with our chief executive officer the plans for succession to the offices of our executive officers and make recommendations to our board of directors with respect to the selection of appropriate individuals to succeed to these positions; +• +reviewing and recommending to our board of directors any amendments to our corporate governance policies; +• +monitoring our cybersecurity risk profile, receiving periodic updates from management on all matters related to cybersecurity, and reporting to our full board of directors on an annual or as necessary basis; and +• +reviewing and assessing, at least annually, the performance of the nominating and corporate governance committee and the adequacy of its charter. +Director Nomination Process +Selection and Nomination Process +Our board of directors is responsible for nominating members for election to our board of directors by our stockholders at our annual meetings of stockholders. Whenever a vacancy occurs on our board of directors, whether due to a newly created director position or the death, resignation, removal or retirement of an existing director, our board of directors is authorized to select a person to fill the vacancy to serve as a director until the annual meeting of stockholders at which the director’s term expires and until the election and qualification of his or her successor or, if sooner, his or her death, resignation or removal. Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. +Criteria for Board Membership +The board of directors and the nominating and corporate governance committee will determine the appropriate characteristics, skills and experience for the board of directors as a whole and for its individual members. The board of directors and the nominating and corporate governance committee will consider the minimum general criteria set forth below, and may add any specific additional criteria with respect to specific searches, in selecting candidates and existing directors for service on the board of directors. An acceptable candidate may not fully satisfy all of the criteria, but is expected to satisfy nearly all of them. While the nominating and corporate governance committee does not have a formal policy in this regard, the diversity of the board of the directors is a consideration in evaluating candidates for director positions, among others. +The board of directors and the nominating and corporate governance committee believe that candidates for director should have certain minimum qualifications, including being able to read and understand basic financial statements, being over 21 years of age and having the highest personal integrity and ethics. In considering candidates, the board of directors and the nominating and corporate governance committee intend to +2026 Proxy Statement +16 +Table of Contents +consider such factors as possessing relevant expertise upon which to be able to offer advice and guidance to management, having sufficient time to devote to the affairs of the Company, demonstrated excellence in his or her field, having the ability to exercise sound business judgment and having the commitment to rigorously represent the long-term interests of our stockholders. +The board of directors and the nominating and corporate governance committee review candidates for director nomination in the context of the current composition of the board of directors, the operating requirements of the Company and the long-term interests of our stockholders. In conducting this assessment, the board of directors and the nominating and corporate governance committee consider age, skills, diversity and such other factors as it deems appropriate given the current needs of the board of directors and the Company to maintain a balance of knowledge, experience and capability. In the case of incumbent directors whose terms of office are set to expire, the board of directors and the nominating and corporate governance committee review such directors’ overall service to the Company during their term, including the number of meetings attended, level of participation, quality of performance, and any other relationships and transactions that might impair such directors’ independence. In the case of new director candidates, the board of directors and the nominating and corporate governance committee also determine whether the nominee must be independent for purposes of any stock exchange on which any of the Company’s capital stock is listed. +Stockholder Recommendations and Nominations +Stockholders who wish to recommend candidates may contact the nominating and corporate governance committee in the manner described below under “Board and Corporate Governance Matters—Stockholder Communications with our Board of Directors.” Stockholder nominations must be made according to the procedures required under our bylaws and described in this proxy statement under the heading “Additional Information—Stockholder Proposals and Nominations for Next Year’s Annual Meeting of Stockholders.” Stockholder-recommended candidates and stockholder nominees whose nominations comply with these procedures will be evaluated by our nominating and corporate governance committee in the same manner as other nominees. \ No newline at end of file diff --git a/raw/filings/0001680247/2017/0001680247-18-000021/filing.txt b/raw/filings/0001680247/2017/0001680247-18-000021/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..914a62e64e348a3a3f3d0a175a34c13f24f3a6aa --- /dev/null +++ b/raw/filings/0001680247/2017/0001680247-18-000021/filing.txt @@ -0,0 +1,3804 @@ +10-K +1 +a10-k2017.htm +10-K +Document +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +______________________________ +FORM 10-K +______________________________ +ý +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2017 +or +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number: 001-38035 +______________________________ +ProPetro Holding Corp. +(Exact name of registrant as specified in its charter) +______________________________ +Delaware +26-3685382 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer +Identification No.) +1706 South Midkiff, Bldg. B +Midland, Texas 79701 +(Address of principal executive offices) +Registrant’s telephone number, including area code: (432) 688-0012 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange on which registered +Common Stock ($0.001 par value) +New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: +None +______________________________________________________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. +Large accelerated filer +o +Accelerated filer +o +Non-accelerated filer +ý (Do not check if a smaller reporting company) +Smaller reporting company +o +Emerging growth company +ý +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý +The aggregate market value of the Company’s Common Stock held by nonaffiliates on June 30, 2017 , determined using the per share closing price on the New York Stock Exchange Composite tape of $13.96 on that date, was approximately $ 674.2 million . +The number of the registrant’s common shares, par value $0.001 per share, outstanding at March 16, 2018 , was 83,039,854 . +TABLE OF CONTENTS +PART I +BUSINESS +2 +RISK FACTORS +13 +UNRESOLVED STAFF COMMENTS +27 +PROPERTIES +27 +LEGAL PROCEEDINGS +27 +MINE SAFETY DISCLOSURES +27 +PART II +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +27 +SELECTED FINANCIAL DATA +30 +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +34 +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +50 +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +51 +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +82 +CONTROLS AND PROCEDURES +82 +OTHER INFORMATION +82 +PART III +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +82 +EXECUTIVE COMPENSATION +83 +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +84 +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +85 +PRINCIPAL ACCOUNTING FEES AND SERVICES +85 +PART IV +EXHIBITS AND FINANCIAL SCHEDULES +85 +FORM 10-K SUMMARY +85 +SIGNATURES +85 +EXHIBIT INDEX +87 +FORWARD‑LOOKING STATEMENTS +This annual report on Form 10-K contains forward‑looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “may,” “could,” “plan,” “project,” “budget,” “predict,” “pursue,” “target,” “seek,” “objective,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” and other expressions that are predictions of, or indicate, future events and trends and that do not relate to historical matters identify forward‑looking statements. Our forward‑looking statements include statements about our business strategy, our industry, our future profitability, our expected capital expenditures and the impact of such expenditures on our performance and our capital programs. +A forward‑looking statement may include a statement of the assumptions or bases underlying the forward‑looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward‑looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward‑looking statements include: +• the level of production of crude oil, natural gas and other hydrocarbons and the resultant market prices of crude oil, natural gas, natural gas liquids and other hydrocarbons; +• changes in general economic and geopolitical conditions; +• competitive conditions in our industry; +• changes in the long‑term supply of and demand for oil and natural gas; +• actions taken by our customers, suppliers, competitors and third‑party operators; +• changes in the availability and cost of capital; +• our ability to successfully implement our business plan; +• large or multiple customer defaults, including defaults resulting from actual or potential insolvencies; +• the price and availability of debt and equity financing (including changes in interest rates); +• our ability to complete growth projects on time and on budget; +• changes in our tax status; +• technological changes; +• operating hazards, natural disasters, weather‑related delays, casualty losses and other matters beyond our control; +• the effects of existing and future laws and governmental regulations (or the interpretation thereof); and +• the effects of future litigation. +You should not place undue reliance on our forward‑looking statements. Although forward‑looking statements reflect our good faith beliefs at the time they are made, forward‑looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under “Risk Factors,” which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward‑looking statements. We undertake no obligation to publicly update or revise any forward‑looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law. +Unless the context indicates otherwise, all references to “we,” “our” or “us” refer to ProPetro Holding Corp. and its consolidated subsidiary, ProPetro Services, Inc. +1 +PART I +Item 1. Business. +Our Company +We are a growth‑oriented, Midland, Texas‑based oilfield services company providing hydraulic fracturing and other complementary services to leading upstream oil and gas companies engaged in the exploration and production, or E&P, of North American unconventional oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as the most prolific oil‑producing area in the United States, and we believe we are one of the largest providers of hydraulic fracturing services in the region by hydraulic horsepower, or HHP, with an aggregate deployed capacity of 690,000 HHP, or 16 deployed units, at December 31, 2017. In addition, we deployed two new hydraulic fracturing units into service through March of 2018, bringing our current fleet to 18 deployed units, or 780,000 HHP. +Our modern hydraulic fracturing fleet has been designed to handle Permian Basin specific operating conditions and the region’s increasingly high‑intensity well completions, which are characterized by longer horizontal wellbores, more frac stages per lateral and increasing amounts of proppant per well. Over 92% of our fleet has been delivered over the past five years, and substantially all our fleet has been built by a single manufacturer since 2013. +In addition to our core hydraulic fracturing operations, we also offer a suite of complementary well completion and production services, including cementing, acidizing, coiled tubing, flowback services, surface air drilling and drilling. We believe these complementary services create operational efficiencies for our customers and allow us to capture a greater portion of their capital spending across the lifecycle of an unconventional well. +Our primary business objective is to serve as a strategic partner to our customers. We achieve this objective by providing reliable, high‑quality services that are tailored to our customers’ needs and synchronized with their well development programs. This alignment assists our customers in optimizing the long‑term development of their unconventional resources. Over the past three years, we have leveraged our strong Permian Basin relationships to significantly grow our installed HHP capacity and organically build our Permian Basin cementing and coiled tubing lines of business. Consistent with past performance, we believe our substantial market presence will continue to yield a variety of actionable growth opportunities allowing us to expand both our hydraulic fracturing and complementary services going forward. To this end, we intend to continue our past practice of opportunistically deploying new equipment on a long‑term, dedicated basis in response to specific customer demand. +Initial Public Offering +On March 22, 2017, we closed our initial public offering, or IPO, at which time we issued and sold 13,250,000 shares of common stock, and certain selling shareholders sold 11,750,000 shares of common stock, at a price to the public of $14.00 per share. We received cash proceeds of approximately $170.1 million from this transaction, net of underwriting discounts and commissions and offering expenses, which we used (i) to repay $71.8 million in outstanding borrowings and accrued interest under our term loan, (ii) $86.8 million to fund the purchase of additional hydraulic fracturing units and other equipment, and (iii) the remaining for general corporate purposes. +In connection with the IPO, the Company executed a stock split, such that each holder of common stock of the Company received 1.45 shares of common stock for every one share of previous common stock. Accordingly, any information related to, or dependent upon, the share or option counts in our comparative 2016 and 2015 consolidated financial statements have been updated to reflect the effect of the stock split. +Our Services +We conduct our business through six operating segments: hydraulic fracturing (inclusive of acidizing), cementing, coil tubing, flowback, surface drilling and drilling. For reporting purposes, the hydraulic fracturing (inclusive of acidizing) and cementing operating segments are aggregated into our one reportable segment: pressure +2 +pumping. For additional financial information, please see Part II - Item 8. Financial Statements and Supplementary Data. +Pressure Pumping +Hydraulic Fracturing +We primarily provide hydraulic fracturing services to E&P companies in the Permian Basin. These services are intended to optimize hydrocarbon flow paths during the completion phase of horizontal shale wellbores. We have significant expertise in multi‑stage fracturing of horizontal oil‑producing wells in unconventional geological formations. As of December 31, 2017, we had grown our hydraulic fracturing business to a total of 16 hydraulic fracturing units with an aggregate of 690,000 HHP. In the fourth quarter of 2017, we took delivery of an additional 86 Tier 2 diesel engines, which will support our long-term plans for optimizing the total capacity and operational performance of our fleet. As of March of 2018, we deployed two new hydraulic fracturing units into service, utilizing 36 of the 86 Tier 2 engines, and bringing our current fleet total to 18 deployed units, or 780,000 HHP. +The fracturing process consists of pumping a fracturing fluid into a well at sufficient pressure to fracture the formation. Materials known as proppants, which in our business are comprised primarily of sand, are suspended in the fracturing fluid and are pumped into the fracture to prop it open. The fracturing fluid is designed to “break,” or loosen viscosity, and be forced out of the formation by its pressure, leaving the proppants suspended in the fractures created, thereby increasing the mobility of the hydrocarbons. As a result of the fracturing process, production rates are usually enhanced substantially, thus increasing the rate of return of hydrocarbons for the operator. +We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We refer to all of our fracturing units, other equipment and vehicles necessary to perform fracturing jobs as our “fleet” and the personnel assigned to each unit as a “crew.” Our hydraulic fracturing units consist primarily of a high pressure hydraulic pump, diesel engine, transmission and various hoses, valves, tanks and other supporting equipment that are typically mounted to a flat‑bed trailer. +We provide dedicated equipment, personnel and services that are tailored to meet each of our customer’s needs. Each unit in our fleet has a designated team of personnel, which allows us to provide responsive and customized services, such as project design, proppant and other consumables procurement, real‑time data provision and post‑completion analysis for each of our jobs. Many of our hydraulic fracturing units and associated personnel have continuously worked with the same customer for the past several years promoting deep relationships and a high degree of coordination and visibility into future customer activity levels. Furthermore, in light of our substantial market presence and historically high fleet utilization levels, we have established a variety of entrenched relationships with key equipment, sand and other downhole consumable suppliers, including over 30 sand suppliers utilized in 2017. These strategic relationships ensure ready access to equipment, parts and materials on a timely and economic basis and allow our dedicated procurement logistics team to ensure consistently safe and reliable operations. +Acidizing +As of December 31, 2017, we operated 10 acidizing pumps and four combination units in the Permian Basin, together totaling approximately 22,000 HHP, which perform procedures like toe preps, pump downs and foamed acid. Acidizing, which is consolidated into our hydraulic fracturing operating segment, is a stimulation technique where acid is injected under pressure into formations (typically carbonate reservoirs) which can form or expand fissures. We believe that our acidizing operations provide an organic growth opportunity for us to expand our service offerings within our existing customer base. +3 +Cementing +We provide cementing services for completion of new wells and remedial work on existing wells. Cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Cementing provides isolation between fluid zones behind the casing to minimize potential damage to hydrocarbon bearing formations or the integrity of freshwater aquifers, and provides structural integrity for the casing by securing it to the earth. Cementing is also done when recompleting wells, where one zone is plugged and another is opened. +As of December 31, 2017, we operated a total of 16 cementing units, with ten units operating in the Permian Basin and six units operating in the Uinta‑Piceance Basin. We believe that our cementing segment provides an organic growth opportunity for us to expand our service offerings within our existing customer base. +Other Services +Coiled Tubing +Coiled tubing services involve injecting coiled tubing into wells to perform various completion well intervention operations. Coiled tubing is a flexible steel pipe with a diameter of typically less than three inches and manufactured in continuous lengths of thousands of feet. It is wound or coiled on a truck‑mounted reel for onshore applications. Due to its small diameter, coiled tubing can be inserted into existing production tubing and used to perform a variety of services to enhance the flow of oil or natural gas. +The principal advantages of using coiled tubing include the ability to (i) continue production from the well without interruption, thus reducing the risk of formation damage, (ii) move continuous coiled tubing in and out of a well significantly faster than conventional pipe used with a workover rig, which must be jointed and unjointed, (iii) direct fluids into a wellbore with more precision, allowing for improved stimulation fluid placement, (iv) provide a source of energy to power a downhole motor or manipulate down‑hole tools and (v) enhance access to remote fields due to the smaller size and mobility. +As of December 31, 2017, we had one 2”, one 2 3 / 8 ” and one 1 1 / 4 ” coiled tubing unit, all of which were operating in the Permian Basin. We believe these units are well suited for the performance requirements of the unconventional resource markets we serve. The average age of these units is less than four years old. +Flowback Services +Our flowback services consist of production testing, solids control, hydrostatic testing and torque services. Flowback involves the process of allowing fluids to flow from the well following a treatment, either in preparation for an impending phase of treatment or to return the well to production. Our flowback equipment consists of manifolds, accumulators, valves, flare stacks and other associated equipment that combine to form up to a total of five well‑testing spreads. We provide flowback services in the Permian Basin and mid‑continent markets. +Surface Air Drilling +We currently operate a surface air drilling operation in the Uinta‑Piceance Basin, which is capable of offering cost‑effective, pre‑set surface air drilling services to target depths of approximately 4,000 feet in areas of fragile geology. Air drilling is a technique in which oil, natural gas, or geothermal wells are drilled by creating a pressure within the well that is lower than the reservoir pressure, which results in increased rates of penetration, reduced formation damage and reduced drilling costs. This division is uniquely suited to the fragile geology of the Uinta‑Piceance Basin and is highly complementary to our cementing offering. +4 +Competitive Strengths +Our primary business objective is to serve as a strategic partner for our customers. We achieve this objective by providing reliable, high‑quality services that are tailored to our customers’ needs and synchronized with their well development programs. This alignment assists our customers in optimizing the long‑term development of their unconventional resources. We believe that the following competitive strengths differentiate us from our peers and uniquely position us to achieve our primary business objective. +• +Strong market position in the Permian Basin. We believe we are one of the largest hydraulic fracturing providers by HHP in the Permian Basin, which is the most prolific oil producing area in the United States. Our longstanding customer relationships and substantial Permian Basin market presence uniquely position us to continue growing in tandem with the basin’s ongoing development. The Permian Basin is a mature, liquids‑rich basin with well known geology and a large, exploitable resource base that delivers attractive E&P producer economics at or below current commodity prices. As a result of its significant size, coupled with the presence of multiple prospective geologic benches and other favorable characteristics, the Permian Basin has become widely recognized as the most attractive and economic oil resource in North America. +Our operational focus has historically been in the Permian Basin’s Midland sub‑basin in support of our customers’ core operations. More recently, however, many of our customers have made sizeable acquisitions in the Delaware Basin, and we have expanded our services into the Delaware Basin to help develop their acreage. Further, we believe that we are uniquely positioned to capture a large addressable growth opportunity as the basin develops. For the foreseeable future, we expect both the Midland Basin and the Delaware Basin to continue to command a disproportionate share of future North American E&P spending. +• +Hydraulic fracturing is highly levered to increasing drilling activity and completion intensity levels. The combination of an expanding Permian Basin horizontal rig count and more complex well completions has a compounding effect on HHP demand growth. Horizontal drilling has become the default method for E&P operators to most economically extract unconventional resources, and the number of horizontal rigs has increased from 22% of the total Permian Basin rig count in December 2011 to approximately 91% of the Permian Basin rig count at the end of December 2017. As the horizontal rig count has grown, well completion intensity levels have also increased as a result of longer wellbore lateral lengths, more fracturing stages per foot of lateral and increasing amounts of proppant per stage. Furthermore, the ongoing improvement in drilling and completion efficiencies, driven by innovations such as multi‑well pads and zipper fracs, have further increased the demand for HHP. Taken together, these demand drivers have helped contribute to the full utilization of our fleet and leave us well positioned to capture future organic growth opportunities and enhanced pricing for the services we offer. +• +Deep relationships and operational alignment with high‑quality, Permian Basin‑focused customers. Our deep local roots, operational expertise and commitment to safe and reliable service have allowed us to cultivate longstanding customer relationships with the most active and well‑capitalized Permian Basin operators. Our diverse customer base is comprised of market leading exploration and production companies, with no single customer representing more than 20% of our revenue for the year ended December 31, 2017. Many of our current customers have worked with us since our inception and have integrated our fleet scheduling with their well development programs. This high degree of operational alignment and their continued support have allowed us to maintain relatively high utilization rates over time. As our customers increase activity levels, we expect to continue to leverage these strong relationships to keep our fleet fully utilized and selectively expand our platform in response to specific customer demand. +• +Standardized fleet of modern, well‑maintained equipment. We have a large, homogenous fleet of modern equipment that is configured to handle the Permian Basin’s most complex, highest‑intensity, hydraulic fracturing jobs. We believe that our fleet design is a key advantage compared to many of our competitors who have fracturing units that are not optimized for Permian Basin conditions. Our fleet is largely standardized across units to facilitate efficient maintenance and repair, reducing equipment downtime and +5 +improving labor efficiency. Furthermore, our strong relationships with a variety of key suppliers and vendors provide us with the reliable access to the equipment necessary to support our continued organic growth strategy. +• +Proven cross‑cycle financial performance. Over the past several years, we have maintained relatively high cross‑cycle fleet utilization rates. Since September 2016, our fleet has been 100% utilized, and for each of the years ended December 31, 2015, 2016 and 2017, we operated in excess of 65% utilization. Our consistent track record of steady organic growth, coupled with our ability to quickly deploy new HHP on a dedicated and fully utilized basis, has resulted in revenue growth across industry cycles. We believe that we will be able to grow faster than our competitors while preserving attractive EBITDA margins as a result of our differentiated service offerings and a robust backlog of demand for our services. Furthermore, we believe that our philosophy of maintaining modest financial leverage and a healthy balance sheet has left us more conservatively capitalized than our peers. We expect that improving market fundamentals, our superior execution and our customer‑focused approach should result in strong financial performance. +• +Seasoned management and operating team. We have a seasoned executive management team, with our three most senior members contributing more than 100 years of collective industry and financial experience. Members of our management team founded our business and seeded our company with a portion of our original investment capital. We believe their track record of successfully building premier oilfield service companies in the Permian Basin, as well as their deep roots and relationships throughout the West Texas community, provide a meaningful competitive advantage for our business. In addition, our management team has assembled a loyal group of highly‑motivated and talented managers and field personnel, and we have had virtually no manager‑level turnover in our core service divisions over the past three years. We employ a balanced decision‑making structure that empowers managerial and field personnel to work directly with customers to develop solutions while leveraging senior management’s oversight. This collaborative approach fosters strong customer links at all levels of the organization and effectively institutionalizes customer relationships beyond the executive suite. +Strategy +Our strategy is to: +• +Capture an increasing share of rising demand for hydraulic fracturing services in the Permian Basin. We intend to continue to position ourselves as a Permian Basin‑focused hydraulic fracturing business, as we believe the Permian Basin hydraulic fracturing market offers supportive long‑term growth fundamentals. These fundamentals are characterized by increased demand for our HHP, driven by increasing drilling activity and well completion intensity levels. We are currently operating at 100% utilization, and we believe we are strategically positioned to deploy additional hydraulic fracturing equipment as our customers continue to develop their assets in the Midland Basin and Delaware Basin. W e have deployed two new hydraulic fracturing units into service through March of 2018, bringing our current fleet total to 18 deployed units or 780,000 HHP. +• +Capitalize on improving pricing and efficiency gains. The increase in demand for HHP coupled with expected competitor equipment attrition is expected to drive more favorable hydraulic fracturing supply and demand fundamentals. We believe this market tightening may lead to a general increase in prices for hydraulic fracturing services. Furthermore, our consistently high fleet utilization levels and 24 hours per day, seven days per week operating schedule (with approximately 78% of our fleet operating on such a schedule at December 31, 2017) should result in greater revenue opportunity and enhanced margins as fixed costs are spread over a broader revenue base. We believe that any incremental future fleet additions will benefit from these trends and associated economies of scale. +• +Cross‑sell our complementary services. In addition to our hydraulic fracturing services, we offer a broad range of complementary services in support of our customers’ development activities, including cementing, acidizing, coiled tubing, flowback services, surface air drilling and drilling. These complementary services create operational efficiencies for our customers, and allow us to capture a greater percentage of their +6 +capital spending across the lifecycle of an unconventional well. We believe that, as our customers increase spending levels, we are well positioned to continue cross‑selling and growing our complementary service offerings. +• +Maintain financial stability and flexibility to pursue growth opportunities. Consistent with our historical practices, we plan to continue to maintain a conservative balance sheet, which will allow us to better react to potential changes in industry and market conditions and opportunistically grow our business. In the near term, we intend to continue our past practice of aligning our growth capital expenditures with visible customer demand, by strategically deploying new equipment on a long‑term, dedicated basis in response to inbound customer requests. We will also selectively evaluate potential strategic acquisitions that increase our scale and capabilities or diversify our operations. +Our Customers +Our customers consist primarily of oil and natural gas producers in North America. Our top five customers accounted for approximately 66%, 58% and 53% of our revenue, for the years ended December 31, 2017, 2016 and 2015, respectively. For the year ended December 31, 2017, Surge Operating, LLC, XTO Energy, CrownQuest Operating, LLC, Diamondback E&P, LLC and Parsley Energy Operations, LLC accounted for 15.0%, 13.8%, 12.7%, 12.6% and 11.8%, respectively, of total revenue. No other customer accounted for more than 10% of total revenue for the year ended December 31, 2017. +Competition +The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services that meet the specific needs of oil and natural gas exploration and production companies at competitive prices. Competitive factors impacting sales of our services are price, reputation and technical expertise, service and equipment quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies’ criteria in choosing a service provider. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our deep local roots, operational expertise, equipment’s ability to handle the most complex Permian Basin well completions, and commitment to safety and reliability. +We provide our services primarily in the Permian Basin, and we compete against different companies in each service and product line we offer. Our competition includes many large and small oilfield service companies, including the largest integrated oilfield services companies. Our major competitors for hydraulic fracturing services, which make up the majority of our revenues, include C&J Energy Services, Halliburton, Patterson‑UTI Energy Inc., RPC, Inc., Schlumberger, Keane Group, Inc., Liberty Oilfield Services, Superior Energy Services and a number of locally oriented businesses. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the fourth quarter, relating to the conclusion of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather during which we may experience declines in our operating results. +Operating Risks and Insurance +Our operations are subject to hazards inherent in the oilfield services industry, such as accidents, blowouts, explosions, fires and spills and releases that can cause personal injury or loss of life, damage or destruction of property, equipment, natural resources and the environment and suspension of operations. +In addition, claims for loss of oil and natural gas production and damage to formations can occur in the oilfield services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in us being named as a defendant in lawsuits asserting large claims. +7 +Because our business involves the transportation of heavy equipment and materials, we may also experience traffic accidents which may result in spills, property damage and personal injury. +Despite our efforts to maintain safety standards, we from time to time have suffered accidents in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations. +We maintain commercial general liability, workers’ compensation, business auto, commercial property, umbrella liability, in certain instances, excess liability, and directors and officers insurance policies providing coverages of risks and amounts that we believe to be customary in our industry. Further, we have pollution legal liability coverage for our business entities, which would cover, among other things, third party liability and costs of clean up relating to environmental contamination on our premises while our equipment are in transit and while on our customers’ job site. With respect to our hydraulic fracturing operations, coverage would be available under our pollution legal liability policy for any surface or subsurface environmental clean‑up and liability to third parties arising from any surface or subsurface contamination. We also have certain specific coverages for some of our businesses, including for our hydraulic fracturing services. +Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of the high premium costs relative to perceived risk. Further, insurance rates have in the past been subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us. See “Risk Factors” for a description of certain risks associated with our insurance policies. +Environmental and Occupational Health and Safety Regulations +Our operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection, and occupational health and safety. Numerous federal, state and local governmental agencies issue regulations that often require difficult and costly compliance measures that could carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non compliance. These laws and regulations may, for example, restrict the types, quantities and concentrations of various substances that can be released into the environment, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas and other protected areas, or require action to prevent or remediate pollution from current or former operations. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental, health and safety laws and regulations occur frequently, and any changes that result in more stringent and costly requirements could materially adversely affect our operations and financial position. We have not experienced any material adverse effect from compliance with these requirements. This trend, however, may not continue in the future. +Below is an overview of some of the more significant environmental, health and safety requirements with which we must comply. Our customers’ operations are subject to similar laws and regulations. Any material adverse effect of these laws and regulations on our customers’ operations and financial position may also have an indirect material adverse effect on our operations and financial position. +Waste Handling. We handle, transport, store and dispose of wastes that are subject to the Resource Conservation and Recovery Act (“RCRA”) and comparable state laws and regulations, which affect our activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non hazardous wastes. With federal approval, the individual states administer some or all of the +8 +provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although certain petroleum production wastes are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non hazardous waste provisions. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non hazardous wastes or recategorize some non hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to recategorize certain oil and natural gas exploration, development and production wastes as hazardous wastes. Several environmental organizations have also petitioned the EPA to modify existing regulations to recategorize certain oil and natural gas exploration, development and production wastes as hazardous. Any such changes in these laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) and analogous state laws generally impose liability without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Liability for the costs of removing or remediating previously disposed wastes or contamination, damages to natural resources, the costs of conducting certain health studies, amongst other things, is strict and joint and several. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state laws. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such hazardous substances have been released. +One of our facilities in Midland, Texas is located within the boundaries of the West County Road 112 federal Superfund site, which site and the associated investigation and cleanup is being managed by EPA Region 6. The site’s soil and groundwater is contaminated with chromium and hexavalent chromium as a result of historic site operations unaffiliated with the Company and unassociated with the Company’s operations. Toxic tort claims also have been asserted as a result of this groundwater contamination against various unaffiliated parties. In 2013, in order to reduce the Company’s risk of incurring any future liabilities in connection with this site, the Company negotiated and obtained a bona fide prospective purchaser (“BFPP”) letter from EPA Region 6 in connection with a reorganization of the facility site ownership and lease. The BFPP letter generally acknowledges and provides that the Company is unaffiliated with any potentially responsible parties or known contamination that is the subject of the Superfund action, the Company agrees to comply with any future land use restrictions that may be imposed in connection with a site remedy (none have been imposed to date), and the Company agrees to cooperate with and provide access and assistance to EPA Region 6 in connection with the remediation. In exchange for these undertakings, the Company will not be subject to any CERCLA action by the EPA. In addition, the Company separately obtained a 10‑year environmental pollution legal liability insurance policy, effective March 4, 2013, with an aggregate limit of $20 million to insure against potential third‑party claims and any known or unknown pre‑existing conditions at the site, including Superfund or toxic tort liabilities. Both prior to and since obtaining the BFPP letter and the insurance policy, no claims have been made or threatened against the Company or any of its affiliated persons or entities with regard to this Superfund site or any related liabilities, and the Company has not incurred any significant expenses in connection with this matter. +NORM. In the course of our operations, some of our equipment may be exposed to naturally occurring radioactive materials (“NORM”) associated with oil and gas deposits and, accordingly may result in the generation of wastes and other materials containing NORM. NORM exhibiting levels of naturally occurring radiation in excess +9 +of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. +Water Discharges. The Clean Water Act, Safe Drinking Water Act, Oil Pollution Act and analogous state laws and regulations impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into regulated waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Also, spill prevention, control and countermeasure plan requirements require appropriate containment berms and similar structures to help prevent the contamination of regulated waters. +Air Emissions. The Clean Air Act (“CAA”) and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other emissions control requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants from specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. These and other laws and regulations may increase the costs of compliance for some facilities where we operate. Obtaining or renewing permits also has the potential to delay the development of oil and natural gas projects. +Climate Change. The EPA has determined that GHGs present an endangerment to public health and the environment because such gases contribute to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA has adopted and implemented, and continues to adopt and implement, regulations that restrict emissions of GHGs under existing provisions of the CAA. The EPA also requires the annual reporting of GHG emissions from certain large sources of GHG emissions in the United States, including certain oil and gas production facilities. The U.S. Congress has from time to time considered adopting legislation to reduce emissions of GHGs and almost one‑half of the states have already taken legal measures to reduce emissions of GHGs primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. And in December 2015, the United States joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of greenhouse gases. The Paris Agreement entered into force in November 2016. On June 1, 2017, President Trump announced that the United States planned to withdraw from the Paris Agreement and to seek negotiations either to reenter the Paris Agreement on different terms or establish a new framework agreement. The Paris Agreement provides for a four‑year exit process beginning when it took effect in November 2016, which would result in an effective exit date of November 2020. The United States’ adherence to the exit process is uncertain and/or the terms on which the United States may reenter the Paris Agreement or a separately negotiated agreement are unclear at this time. +Moreover, climate change may cause more extreme weather conditions and increased volatility in seasonal temperatures. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Endangered and Threatened Species. Environmental laws such as the Endangered Species Act (“ESA”) and analogous state laws may impact exploration, development and production activities in areas where we operate. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and various state analogs. The U.S. Fish and Wildlife Service may identify previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us or our customers to incur additional costs or become subject to operating restrictions or operating bans in the affected areas. +Regulation of Hydraulic Fracturing and Related Activities. Our hydraulic fracturing operations are a significant component of our business. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding +10 +rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. For example, in May 2014, the EPA issued an Advanced Notice of Proposed Rulemaking seeking comment on the development of regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. Beginning in August 2012, the EPA issued a series of rules under the CAA that establish new emission control requirements for certain oil and natural gas production and natural gas processing operations and associated equipment. And in March 2015, the Bureau of Land Management (“BLM”) finalized a rule governing hydraulic fracturing on federal lands. In June 2016, a federal district court judge in Wyoming struck down the final rule, finding that the BLM lacked congressional authority to promulgate the rule. The BLM appealed that ruling. However, in July 2017, the BLM initiated a rulemaking to rescind the final rule and reinstate the regulations that existed immediately before the published effective date of the rule. In light of the BLM’s proposed rulemaking, in September 2017, the U.S. Court of Appeals for the Tenth Circuit dismissed the appeal and remanded with directions to vacate the lower court’s opinion, leaving the final rule in place. BLM’s current rulemaking is subject to public notice and comment, as well as judicial challenges. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in recent sessions of Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +More recently, federal and state governments have begun investigating whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In March 2016, the United States Geological Survey identified six states with the most significant hazards from induced seismicity, including Oklahoma, Kansas, Texas, Colorado, New Mexico and Arkansas. The United States Geological Survey also noted the potential for induced seismicity in Ohio and Alabama. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma issued new rules for wastewater disposal wells in 2014 that imposed certain permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has developed and implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission released well completion seismicity guidelines in December 2016 for operators in the SCOOP and STACK that call for hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, in February 2017, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission adopted similar rules in 2014. In addition, in December 2016, the EPA released its final report regarding the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources under certain circumstances such as water withdrawals for fracturing in times or areas of low water availability, surface spills during the management of fracturing fluids, chemicals or produced water, injection of fracturing fluids into wells with inadequate mechanical integrity, injection of fracturing fluids directly into groundwater resources, discharge of inadequately treated fracturing wastewater to surface waters, and disposal or storage of fracturing wastewater in unlined pits. The results of these studies could lead federal and state governments and agencies to develop and implement additional regulations. +Increased regulation of hydraulic fracturing and related activities (whether as a result of the EPA study results or resulting from other factors) could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and record keeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. +11 +OSHA Matters. The Occupational Safety and Health Act (“OSHA”) and comparable state statutes regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. +Employees +As of December 31, 2017, we employed 986 people. None of our employees are represented by labor unions or subject to collective bargaining agreements. +We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s web site at www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on their public reference room. Our SEC filings are also available to the public on our website at www.propetroservices.com. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Annual Report on Form 10-K or the documents incorporated by reference in this Annual Report on Form 10-K. This Annual Report on Form 10-K also contains summaries of the terms of certain agreements that we have entered into that are filed as exhibits to this Annual Report on Form 10-K or other reports that we have filed with the SEC. The descriptions contained in this Annual Report on Form 10-K of those agreements do not purport to be complete and are subject to, and qualified in their entirety by reference to, the definitive agreements. You may request a copy of the agreements described herein at no cost by writing or telephoning us at the following address: ProPetro Holding Corp., Attention: Investor Relations, P.O. Box 873, Midland, Texas 79702, phone number (432) 688-0012. +12 +Item 1A. Risk Factors. +The following is a description of significant factors that could cause actual results to differ materially from those contained in forward-looking statement made in this Annual Report on Form 10-K and presented elsewhere by management from time to time. Such factors may have a material adverse effect on our business, financial condition and results of operations. It is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete statement of all our potential risks or uncertainties. Due to these, and other factors, past performance should not be considered an indication of future performance. +Our business and financial performance depends on the oil and natural gas industry and particularly on the level of capital spending and exploration and production activity within the United States and in the Permian Basin, and a decline in prices for oil and natural gas may have an adverse effect on our revenue, cash flows, profitability and growth. +Demand for most of our services depends substantially on the level of capital expenditures in the Permian Basin by companies in the oil and natural gas industry. As a result, our operations are dependent on the levels of capital spending and activity in oil and gas exploration, development and production. A prolonged reduction in oil and gas prices would generally depress the level of oil and natural gas exploration, development, production, and well completion activity and would result in a corresponding decline in the demand for the hydraulic fracturing services that we provide. The significant decline in oil and natural gas prices beginning in late 2014 caused a reduction in our customers’ spending and associated drilling and completion activities, which had an adverse effect on our revenue. If prices were to decline, similar declines in our customers’ spending would have an adverse effect on our revenue. In addition, a worsening of these conditions may result in a material adverse impact on certain of our customers’ liquidity and financial position resulting in further spending reductions, delays in the collection of amounts owing to us and similar impacts. +Many factors over which we have no control affect the supply of and demand for, and our customers’ willingness to explore, develop and produce oil and natural gas, and therefore, influence prices for our services, including: +• +the domestic and foreign supply of, and demand for, oil and natural gas; +• +the level of prices, and expectations about future prices, of oil and natural gas; +• +the level of global oil and natural gas exploration and production; +• +the cost of exploring for, developing, producing and delivering oil and natural gas; +• +the supply of and demand for drilling and hydraulic fracturing equipment; +• +the expected decline rates of current production; +• +the price and quantity of foreign imports; +• +political and economic conditions in oil and natural gas producing countries and regions, including the United States, the Middle East, Africa, South America and Russia; +• +actions by the members of Organization of Petroleum Exporting Countries with respect to oil production levels and announcements of potential changes in such levels; +• +speculative trading in crude oil and natural gas derivative contracts; +• +the level of consumer product demand; +• +the discovery rates of new oil and natural gas reserves; +• +contractions in the credit market; +13 +• +the strength or weakness of the U.S. dollar; +• +available pipeline and other transportation capacity; +• +the levels of oil and natural gas storage; +• +weather conditions and other natural disasters; +• +domestic and foreign tax policy; +• +domestic and foreign governmental approvals and regulatory requirements and conditions; +• +the continued threat of terrorism and the impact of military and other action, including military action in the Middle East; +• +technical advances affecting energy consumption; +• +the proximity and capacity of oil and natural gas pipelines and other transportation facilities; +• +the price and availability of alternative fuels; +• +the ability of oil and natural gas producers to raise equity capital and debt financing; +• +merger and divestiture activity among oil and natural gas producers; and +• +overall domestic and global economic conditions. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. Such a decline would have a material adverse effect on our business, results of operation and financial condition. +The cyclical nature of the oil and natural gas industry may cause our operating results to fluctuate. +We derive our revenues from companies in the oil and natural gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices. We have experienced, and may in the future experience, significant fluctuations in operating results as a result of the reactions of our customers to changes in oil and natural gas prices. For example, prolonged low commodity prices experienced by the oil and natural gas industry during 2015 and 2016, combined with adverse changes in the capital and credit markets, caused many exploration and production companies to reduce their capital budgets and drilling activity. This resulted in a significant decline in demand for oilfield services and adversely impacted the prices oilfield services companies could charge for their services. In addition, a majority of the service revenue we earn is based upon a charge for a relatively short period of time (for example, a day, a week or a month) for the actual period of time the service is provided to our customers. By contracting services on a short‑term basis, we are exposed to the risks of a rapid reduction in market prices and utilization and resulting volatility in our revenues. +The majority of our operations are located in the Permian Basin, making us vulnerable to risks associated with operating in one major geographic area. +Our operations are geographically concentrated in the Permian Basin. For each of the years ended December 31, 2017, 2016 and 2015, approximately 97% of our revenues were attributable to our operations in the Permian Basin. As a result of this concentration, we may be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in the Permian Basin caused by significant governmental regulation, processing or transportation capacity constraints, market limitations, curtailment of production or interruption of the processing or transportation of oil and natural gas produced from the wells in these areas. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil and natural gas producing areas such as the Permian Basin, which may cause these conditions to occur with +14 +greater frequency or magnify the effects of these conditions. Due to the concentrated nature of our operations, we could experience any of the same conditions at the same time, resulting in a relatively greater impact on our revenue than they might have on other companies that have more geographically diverse operations. +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our business, results of operations and financial condition. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we fail to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re‑market or otherwise use the production could have a material adverse effect on our business, results of operations and financial condition. The decline and volatility in oil and natural gas prices over the last two years has negatively impacted the financial condition of our customers and further declines, sustained lower prices, or continued volatility could impact their ability to meet their financial obligations to us. +We face significant competition that may cause us to lose market share. +The oilfield services industry is highly competitive and has relatively few barriers to entry. The principal competitive factors impacting sales of our services are price, reputation and technical expertise, equipment and service quality and health and safety standards. The market is also fragmented and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial and other resources than we do. Our larger competitors’ greater resources could allow those competitors to compete more effectively than we can. For instance, our larger competitors may offer services at below‑market prices or bundle ancillary services at no additional cost our customers. We compete with large national and multi‑national companies that have longer operating histories, greater financial, technical and other resources and greater name recognition than we do. Several of our competitors provide a broader array of services and have a stronger presence in more geographic markets. In addition, we compete with several smaller companies capable of competing effectively on a regional or local basis. +Some jobs are awarded on a bid basis, which further increases competition based on price. Pricing is often the primary factor in determining which qualified contractor is awarded a job. The competitive environment may be further intensified by mergers and acquisitions among oil and natural gas companies or other events that have the effect of reducing the number of available customers. As a result of competition, we may lose market share or be unable to maintain or increase prices for our present services or to acquire additional business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. +Our competitors may be able to respond more quickly to new or emerging technologies and services and changes in customer requirements. The amount of equipment available may exceed demand, which could result in active price competition. In addition, depressed commodity prices lower demand for hydraulic fracturing equipment, which results in excess equipment and lower utilization rates. In addition, some exploration and production companies have commenced completing their wells using their own hydraulic fracturing equipment and personnel. Any increase in the development and utilization of in‑house fracturing capabilities by our customers could decrease the demand for our services and have a material adverse impact on our business. +In addition, competition among oilfield service and equipment providers is affected by each provider’s reputation for safety and quality. We cannot assure that we will be able to maintain our competitive position. +Our business depends upon our ability to obtain specialized equipment, parts and key raw materials, including frac sand and chemicals, from third‑party suppliers, and we may be vulnerable to delayed deliveries and future price increases. +We purchase specialized equipment, parts and raw materials (including, for example, frac sand, chemicals and fluid ends) from third party suppliers and affiliates. At times during the business cycle, there is a high demand for hydraulic fracturing and other oil field services and extended lead times to obtain equipment and raw materials +15 +needed to provide these services. Should our current suppliers be unable or unwilling to provide the necessary equipment, parts or raw materials or otherwise fail to deliver the products timely and in the quantities required, any resulting delays in the provision of our services could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, future price increases for this type of equipment, parts and raw materials could negatively impact our ability to purchase new equipment, to update or expand our existing fleet, to timely repair equipment in our existing fleet or meet the current demands of our customers. +Reliance upon a few large customers may adversely affect our revenue and operating results. +The majority of our revenue is generated from our hydraulic fracturing services. Due to the large percentage of our revenue historically derived from our hydraulic fracturing services with recurring customers and the limited availability of our fracturing units, we have had some degree of customer concentration. Our top ten customers represented approximately 87%, 83% and 70% of our consolidated revenue for the years ended December 31, 2017, 2016 and 2015, respectively. It is likely that we will depend on a relatively small number of customers for a significant portion of our revenue in the future. If a major customer fails to pay us, revenue would be impacted and our operating results and financial condition could be harmed. Additionally, if we were to lose any material customer, we may not be able to redeploy our equipment at similar utilization or pricing levels and such loss could have an adverse effect on our business until the equipment is redeployed at similar utilization or pricing levels. +Certain of our completion services, particularly our hydraulic fracturing services, are substantially dependent on the availability of water. Restrictions on our or our customers’ ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows. +Water is an essential component of unconventional shale oil and natural gas production during both the drilling and hydraulic fracturing processes. Over the past several years, certain of the areas in which we and our customers operate have experienced extreme drought conditions and competition for water in such areas is growing. In addition, some state and local governmental authorities have begun to monitor or restrict the use of water subject to their jurisdiction for hydraulic fracturing to ensure adequate local water supply. For instance, some states require E&P companies to report certain information regarding the water they use for hydraulic fracturing and to monitor the quality of groundwater surrounding some wells stimulated by hydraulic fracturing. Generally, our water requirements are met by our customers from sources on or near their sites, but there is no assurance that our customers will be able to obtain a sufficient supply of water from sources in these areas. Our or our customers’ inability to obtain water from local sources or to effectively utilize flowback water could have an adverse effect on our financial condition, results of operations and cash flows. +We rely on a few key employees whose absence or loss could adversely affect our business. +Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services could adversely affect our business. In particular, the loss of the services of one or more members of our executive team, including our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, could disrupt our operations. We do not maintain “key person” life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees. +If we are unable to employ a sufficient number of skilled and qualified workers, our capacity and profitability could be diminished and our growth potential could be impaired. +The delivery of our services requires skilled and qualified workers with specialized skills and experience who can perform physically demanding work. As a result of the volatility of the oilfield services industry and the demanding nature of the work, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled labor force. The demand for skilled workers is high, and the supply is limited. As a result, competition for experienced oilfield service personnel is intense, and we face significant challenges in competing for crews and management with large and well‑established competitors. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in +16 +the wage rates that we must pay, or both. If either of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired. +Our operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could limit our ability to grow. +The oilfield services industry is capital intensive. In conducting our business and operations, we have made, and expect to continue to make, substantial capital expenditures. Our total capital expenditures incurred were approximately $305.3 million , $46.0 million and $71.7 million during the years ended December 31, 2017 , 2016 and 2015 . We have historically financed capital expenditures primarily with funding from cash on hand, cash flow from operations, equipment and vendor financing and borrowings under our credit facilities. We may be unable to generate sufficient cash from operations and other capital resources to maintain planned or future levels of capital expenditures which, among other things, may prevent us from acquiring new equipment or properly maintaining our existing equipment. Further, any disruptions or continuing volatility in the global financial markets may lead to an increase in interest rates or a contraction in credit availability impacting our ability to finance our operations. This could put us at a competitive disadvantage or interfere with our growth plans. Further, our actual capital expenditures could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount we have available, we could be required to seek additional sources of capital, which may include debt financing, joint venture partnerships, sales of assets, offerings of debt or equity securities or other means. We may not be able to obtain any such alternative source of capital. We may be required to curtail or eliminate contemplated activities. If we can obtain alternative sources of capital, the terms of such alternative may not be favorable to us. In particular, the terms of any debt financing may include covenants that significantly restrict our operations. Our inability to grow as planned may reduce our chances of maintaining and improving profitability. +Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, geopolitical issues, interest rates, inflation, the availability and cost of credit and the United States and foreign financial markets have contributed to increased economic uncertainty and diminished expectations for the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have precipitated an economic slowdown. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish further, which could impact the price at which oil, natural gas and natural gas liquids can be sold, which could affect the ability of our customers to continue operations and adversely impact our results of operations, liquidity and financial condition. +Our indebtedness and liquidity needs could restrict our operations and make us more vulnerable to adverse economic conditions. +Our existing and future indebtedness, whether incurred in connection with acquisitions, operations or otherwise, may adversely affect our operations and limit our growth, and we may have difficulty making debt service payments on such indebtedness as payments become due. Our level of indebtedness may affect our operations in several ways, including the following: +• +increasing our vulnerability to general adverse economic and industry conditions; +• +the covenants that are contained in the agreements governing our indebtedness could limit our ability to borrow funds, dispose of assets, pay dividends and make certain investments; +• +our debt covenants could also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry; +17 +• +any failure to comply with the financial or other debt covenants, including covenants that impose requirements to maintain certain financial ratios, could result in an event of default, which could result in some or all of our indebtedness becoming immediately due and payable; +• +our level of debt could impair our ability to obtain additional financing, or obtain additional financing on favorable terms, in the future for working capital, capital expenditures, acquisitions or other general corporate purposes; and +• +our business may not generate sufficient cash flow from operations to enable us to meet our obligations under our indebtedness. +Restrictions in our ABL Credit Facility (as defined herein) and any future financing agreements may limit our ability to finance future operations or capital needs or capitalize on potential acquisitions and other business opportunities. +The operating and financial restrictions and covenants in our credit facility and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities. For example, our ABL Credit Facility restricts or limits our ability to: +• +grant liens; +• +incur additional indebtedness; +• +engage in a merger, consolidation or dissolution; +• +enter into transactions with affiliates; +• +sell or otherwise dispose of assets, businesses and operations; +• +materially alter the character of our business as currently conducted; and +• +make acquisitions, investments and capital expenditures. +Furthermore, our ABL Credit Facility contains certain other operating and financial covenants. Our ability to comply with the covenants and restrictions contained in the ABL Credit Facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in our ABL Credit Facility, a significant portion of our indebtedness may become immediately due and payable, our lenders’ commitment to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Any subsequent replacement of our ABL Credit Facility or any new indebtedness could have similar or greater restrictions. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facility and Other Financing Arrangements .” +Our operations are subject to unforeseen interruptions and hazards inherent in the oil and natural gas industry, for which we may not be adequately insured and which could cause us to lose customers and substantial revenue. +Our operations are exposed to the risks inherent to our industry, such as equipment defects, vehicle accidents, fires, explosions, blowouts, surface cratering, uncontrollable flows of gas or well fluids, pipe or pipeline failures, abnormally pressured formations and various environmental hazards, such as oil spills and releases of, and exposure to, hazardous substances. For example, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives. In addition, our operations are exposed to potential natural disasters, including blizzards, tornadoes, storms, floods, other adverse weather conditions and earthquakes. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean‑up responsibilities, regulatory +18 +investigations and penalties or other damage resulting in curtailment or suspension of our operations. The cost of managing such risks may be significant. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our environmental or safety record as unacceptable, which could cause us to lose customers and substantial revenues. +Our insurance may not be adequate to cover all losses or liabilities we may suffer. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased and could escalate further. In addition, sub‑limits have been imposed for certain risks. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our business, results of operations and financial condition. In addition, we may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. +Since hydraulic fracturing activities are part of our operations, they are covered by our insurance against claims made for bodily injury, property damage and clean‑up costs stemming from a sudden and accidental pollution event. However, we may not have coverage if we are unaware of the pollution event and unable to report the “occurrence” to our insurance company within the time frame required under our insurance policy. In addition, these policies do not provide coverage for all liabilities, and the insurance coverage may not be adequate to cover claims that may arise, or we may not be able to maintain adequate insurance at rates we consider reasonable. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +A terrorist attack or armed conflict could harm our business. +Terrorist activities, anti‑terrorist efforts and other armed conflicts involving the United States could adversely affect the U.S. and global economies and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants, refineries or transportation facilities are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas, which, in turn, could also reduce the demand for our services. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies. +Increasing trucking regulations may increase our costs and negatively impact our results of operations. +In connection with our business operations, including the transportation and relocation of our hydraulic fracking equipment and shipment of frac sand, we operate trucks and other heavy equipment. As such, we operate as a motor carrier in providing certain of our services and therefore are subject to regulation by the United States Department of Transportation and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations, driver licensing, insurance requirements, financial reporting and review of certain mergers, consolidations and acquisitions, and transportation of hazardous materials (HAZMAT). Our trucking operations are subject to possible regulatory and legislative changes that may increase our costs. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive or work in any specific period, onboard black box recorder device requirements or limits on vehicle weight and size. +Interstate motor carrier operations are subject to safety requirements prescribed by the United States Department of Transportation. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Matters such as the weight and dimensions of equipment are also subject to federal and state regulations. From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +19 +Certain motor vehicle operators require registration with the Department of Transportation. This registration requires an acceptable operating record. The Department of Transportation periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria that could result in a suspension of operations. +We are subject to environmental laws and regulations, and future compliance, claims, and liabilities relating to such matters may have a material adverse effect on our results of operations, financial position or cash flows. +The nature of our operations, including the handling, transporting and disposing of a variety of fluids and substances, including hydraulic fracturing fluids and other regulated substances, air emissions, and wastewater discharges exposes us to some risks of environmental liability, including the release of pollutants from oil and natural gas wells and associated equipment to the environment. The cost of compliance with these laws can be significant. Failure to properly handle, transport or dispose of these materials or otherwise conduct our operations in accordance with these and other environmental laws could expose us to substantial liability for administrative, civil and criminal penalties, cleanup and site restoration costs and liability associated with releases of such materials, damages to natural resources and other damages, as well as potentially impair our ability to conduct our operations. Such liability is commonly on a strict, joint and several liability basis, without regard to fault. Liability may be imposed as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Neighboring landowners and other third parties may file claims against us for personal injury or property damage allegedly caused by the release of pollutants into the environment. Environmental laws and regulations have changed in the past, and they may change in the future and become more stringent. Current and future claims and liabilities may have a material adverse effect on us because of potential adverse outcomes, defense costs, diversion of management resources, unavailability of insurance coverage and other factors. The ultimate costs of these liabilities are difficult to determine and may exceed any reserves we may have established. If existing environmental requirements or enforcement policies change, we may be required to make significant unanticipated capital and operating expenditures. +The adoption of climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating costs and reduced demand for oil and natural gas. +The EPA has determined that greenhouse gases (“GHGs”) present an endangerment to public health and the environment because such gases contribute to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA has adopted and implemented, and continues to adopt and implement, regulations that restrict emissions of GHGs under existing provisions of the Clean Air Act (“CAA”). The EPA also requires the annual reporting of GHG emissions from certain large sources of GHG emissions in the United States, including certain oil and gas production facilities. The EPA has also taken steps to limit methane emissions from oil and gas production facilities. In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of GHGs and almost one‑half of the states have already taken legal measures to reduce emissions of GHGs primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. And in December 2015, the United States joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of greenhouse gases. The Paris Agreement entered into force in November 2016. On June 1, 2017, President Trump announced that the United States planned to withdraw from the Paris Agreement and to seek negotiations either to reenter the Paris Agreement on different terms or establish a new framework agreement. The Paris Agreement provides for a four‑year exit process beginning when it took effect in November 2016, which would resulting in an effective exit date of November 2020. The United States’ adherence to the exit process is uncertain and/or the terms on which the United States may reenter the Paris Agreement or a separately negotiated agreement are unclear at this time. +Moreover, climate change may cause more extreme weather conditions and increased volatility in seasonal temperatures. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +20 +Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +Our hydraulic fracturing operations are a significant component of our business, and it is an important and common practice that is used to stimulate production of hydrocarbons, particularly oil and natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. For example, in May 2014, the EPA issued an Advanced Notice of Proposed Rulemaking seeking comment on the development of regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. Beginning in August 2012, the EPA issued a series of rules under the CAA that establish new emission control requirements for emissions of volatile organic compounds and methane from certain oil and natural gas production and natural gas processing operations and equipment. And in March 2015, the Bureau of Land Management (“BLM”) finalized a rule governing hydraulic fracturing on federal lands. In June 2016, a federal district court judge in Wyoming struck down the final rule, finding that the BLM lacked congressional authority to promulgate the rule. The BLM appealed that ruling. However, in July 2017, the BLM initiated a rulemaking to rescind the final rule and reinstate the regulations that existed immediately before the published effective date of the rule. In light of the BLM’s proposed rulemaking, in September 2017, the U.S. Court of Appeals for the Tenth Circuit dismissed the appeal and remanded with directions to vacate the lower court’s opinion, leaving the final rule in place. BLM’s current rulemaking is subject to public notice and comment, as well as judicial challenges. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in recent sessions of Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +More recently, federal and state governments have begun investigating whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In March 2016, the United States Geological Survey identified six states with the most significant hazards from induced seismicity, including Oklahoma, Kansas, Texas, Colorado, New Mexico and Arkansas. The United States Geological Survey also noted the potential for induced seismicity in Ohio and Alabama. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma issued new rules for wastewater disposal wells in 2014 that imposed certain permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has developed and implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission released well completion seismicity guidelines in December 2016 for operators in the SCOOP and STACK that call for hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, in February 2017, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission adopted similar rules in 2014. In addition, in December 2016, the EPA released its final report regarding the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources under certain circumstances such as water withdrawals for fracturing in times or areas of low water availability, surface spills during the management of fracturing fluids, chemicals or produced water, injection of fracturing fluids into wells with inadequate mechanical integrity, injection of fracturing fluids directly into groundwater resources, discharge of inadequately treated fracturing wastewater to surface waters, and disposal or storage of fracturing wastewater in unlined pits. The results of these studies could lead federal and state governments and agencies to develop and implement additional regulations. +21 +Increased regulation of hydraulic fracturing and related activities (whether as a result of the EPA study results or resulting from other factors) could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. +Conservation measures, commercial development and technological advances could reduce demand for oil and natural gas and our services. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas, resulting in reduced demand for oilfield services. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +The commercial development of economically‑viable alternative energy sources and related products (such as electric vehicles, wind, solar, geothermal, tidal, fuel cells and biofuels) could have a similar effect. In addition, certain U.S. federal income tax deductions currently available with respect to oil and natural gas exploration and development, including the allowance of percentage depletion for oil and natural gas properties, may be eliminated as a result of proposed legislation. Any future decreases in the rate at which oil and natural gas reserves are discovered or developed, whether due to the passage of legislation, increased governmental regulation leading to limitations, or prohibitions on exploration and drilling activity, including hydraulic fracturing, or other factors, could have a material adverse effect on our business and financial condition, even in a stronger oil and natural gas price environment. +We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition and results of operations. +We operate with most of our customers under master service agreements, or MSAs. We endeavor to allocate potential liabilities and risks between the parties in the MSAs. Generally, under our MSAs, including those relating to our hydraulic fracturing services, we assume responsibility for, including control and removal of, pollution or contamination which originates above surface and originates from our equipment or services. Our customer assumes responsibility for, including control and removal of, all other pollution or contamination which may occur during operations, including that which may result from seepage or any other uncontrolled flow of drilling fluids. We may have liability in such cases if we are negligent or commit willful acts. Generally, our customers also agree to indemnify us against claims arising from their employees’ personal injury or death to the extent that, in the case of our hydraulic fracturing operations, their employees are injured or their properties are damaged by such operations, unless resulting from our gross negligence or willful misconduct. Similarly, we generally agree to indemnify our customers for liabilities arising from personal injury to or death of any of our employees, unless resulting from gross negligence or willful misconduct of the customer. In addition, our customers generally agree to indemnify us for loss or destruction of customer‑owned property or equipment and in turn, we agree to indemnify our customers for loss or destruction of property or equipment we own. Losses due to catastrophic events, such as blowouts, are generally the responsibility of the customer. However, despite this general allocation of risk, we might not succeed in enforcing such contractual allocation, might incur an unforeseen liability falling outside the scope of such allocation or may be required to enter into an MSA with terms that vary from the above allocations of risk. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in our being named as a defendant in lawsuits asserting large claims. As a result, we may incur substantial losses which could materially and adversely affect our financial condition and results of operation. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. For example, we depend on digital technologies to perform many of our services and process and record operational and accounting data. At the same time, cyber incidents, including deliberate attacks or +22 +unintentional events, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary information, personal information and other data, or other disruption of our business operations. In addition, certain cyber incidents, such as unauthorized surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks, including cyberattacks, may not be sufficient and may not protect against or cover all of the losses we may experience as a result of the realization of such risks. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate the effects of cyber incidents. +The concentration of our capital stock ownership among our largest shareholders and their affiliates will limit your ability to influence corporate matters. +Energy Capital Partners owns approximately 25.0% of our outstanding common stock. Consequently, Energy Capital Partners has significant influence over all matters that require approval by our shareholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership will limit your ability to influence corporate matters, and as a result, actions may be taken that you may not view as beneficial. Moreover, this concentration of stock ownership may also adversely affect the trading price of our common stock to the extent investors perceive a disadvantage in owning stock of a company with a significant shareholder. +Conflicts of interest could arise in the future between us, on the one hand, and Energy Capital Partners and its affiliates and affiliated funds, including its and their current and future portfolio companies, on the other hand, concerning among other things, potential competitive business activities or business opportunities. +Conflicts of interest could arise in the future between us, on the one hand, and Energy Capital Partners and its affiliates and affiliated funds, including its and their current and future portfolio companies, on the other hand, concerning among other things, potential competitive business activities or business opportunities. Energy Capital Partners and its affiliated funds are primarily North American investors in essential, long‑lived and capital intensive energy assets within a host of energy related industries. Energy Capital Partners and its affiliated funds currently have investments in companies that operate in the energy infrastructure and oilfield services industries. As a result, Energy Capital Partners and its affiliates’ and affiliated funds’ current and future portfolio companies which it controls may now, or in the future, directly or indirectly, compete with us for investment or business opportunities. +Our governing documents provide that Energy Capital Partners and its affiliates and affiliated funds (including portfolio investments of Energy Capital Partners and its affiliates and affiliated funds) are not restricted from owning assets or engaging in businesses that compete directly or indirectly with us and will not have any duty to refrain from engaging, directly or indirectly, in the same or similar business activities or lines of business as us, including those business activities or lines of business deemed to be competing with us, or doing business with any of our clients, customers or vendors. In particular, subject to the limitations of applicable law, our certificate of incorporation, among other things: +• +permits Energy Capital Partners and its affiliates and affiliated funds and our non‑employee directors to conduct business that competes with us and to make investments in any kind of property in which we may make investments; and +• +provides that if Energy Capital Partners or any of its affiliates who is also one of our non‑employee directors becomes aware of a potential business opportunity, transaction or other matter, they will have no duty to communicate or offer that opportunity to us. +Energy Capital Partners or its affiliates or affiliated funds may become aware, from time to time, of certain business opportunities (such as acquisition opportunities) and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Further, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be available to us or causing them to be more expensive for us to pursue. In addition, Energy +23 +Capital Partners and its affiliates and affiliated funds may dispose of their interests in energy infrastructure or other oilfield services companies or other assets in the future, without any obligation to offer us the opportunity to purchase any of those assets. As a result, our renouncing our interest and expectancy in any business opportunity that may be from time to time presented to Energy Capital Partners and its affiliates and affiliated funds could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours. +In any of these matters, the interests of Energy Capital Partners and its affiliates and affiliated funds may differ or conflict with the interests of our other shareholders. Any actual or perceived conflicts of interest with respect to the foregoing could have an adverse impact on the trading price of our common stock. +Our certificate of incorporation and bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock. +Our certificate of incorporation authorizes our board of directors to issue preferred stock, in addition to the Series A Preferred Shares, without shareholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our shareholders, including: +• +limitations on the removal of directors; +• +limitations on the ability of our shareholders to call special meetings; +• +advance notice provisions for shareholder proposals and nominations for elections to the board of directors to be acted upon at meetings of shareholders; +• +providing that the board of directors is expressly authorized to adopt, or to alter or repeal our bylaws; and +• +establishing advance notice and certain information requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by shareholders at shareholder meetings. +A significant reduction by Energy Capital Partners of its ownership interests in us could adversely affect us. +We believe that Energy Capital Partners’ substantial ownership interest in us provides them with an economic incentive to assist us to be successful. However, Energy Capital Partners will not be subject to any obligation to maintain its ownership interest in us and may elect at any time to sell all or a substantial portion of, or otherwise reduce, its ownership interest in us. Energy Capital Partners currently owns approximately 25.0% of our outstanding common stock. If Energy Capital Partners sells all or a substantial portion of its ownership interest in us, it may have less incentive to assist in our success and its affiliate(s) that are expected to serve as members of our board of directors may resign. Such actions could adversely affect our ability to successfully implement our business strategies which could adversely affect our cash flows or results of operations. +We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors. +We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes‑Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company. If some investors find our common stock less attractive because we rely on these exemptions, there may be a less active trading market for our common stock and our stock price may be more volatile. +24 +We will remain an emerging growth company for up to five years, although we will lose that status sooner if we have more than $1.07 billion of revenues in a fiscal year, become a “large accelerated filer” or issue more than $1.0 billion of non‑convertible debt over a rolling three‑year period. +Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. +To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our common stock to be less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. +Our ability to use our net operating loss carryforwards may be limited. +As of December 31, 2017 , we had approximately $261.0 million of federal net operating loss carryforwards that will begin to expire in 2032 and state net operating losses of approximately $47.0 million that will begin to expire in 2024 . Utilization of these net operating loss carryforwards (“NOLs”) depends on many factors, including our future income, which cannot be assured. In addition, Section 382 (“Section 382”) of the Internal Revenue Code of 1986, as amended (the “Code”), generally imposes an annual limitation on the amount of taxable income that may be offset by NOLs when a corporation has undergone an “ownership change” (as determined under Section 382). Generally, a change of more than 50% in the ownership of a corporation’s stock, by value, over a three‑year period constitutes an ownership change for U.S. federal income tax purposes. Any unused annual limitation may, subject to certain limitations, be carried over to later years. We have experienced ownership changes, which may result in annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long‑term tax‑exempt rate as defined in Section 382, increased under certain circumstances as a result of recognizing built‑in gains in our assets existing at the time of the ownership change. The limitations arising from ownership changes may prevent utilization of our NOLs prior to their expiration. Future ownership changes or regulatory changes could further limit our ability to utilize our NOLs. To the extent we are not able to offset our future income with our NOLs, this could adversely affect our operating results and cash flows if we attain profitability. +The recently passed comprehensive tax reform bill could adversely affect our business and financial condition. +On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (“Tax Act”), which significantly reforms the Code. The Tax Act, among other things, contains significant changes to corporate taxation, including a permanent reduction of the corporate income tax rate, a partial limitation on the deductibility of business interest expense, limitation of the deduction for certain net operating losses to 80% of current year taxable income, an indefinite carryforward of certain net operating losses, immediate deductions for certain new investments instead of deductions for depreciation expense over time and the modification or repeal of many business deductions and credits. We continue to examine the impact of this tax reform legislation, and as its overall impact is uncertain, we note that the Tax Act could adversely affect our business and financial condition. The impact of this tax reform legislation on holders of our common stock is also uncertain and could be adverse. +Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents. +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our shareholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General +25 +Corporation Law (the “DGCL”), our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations. +26 +Item 1B. Unresolved Staff Comments. +None. +Item 2. Properties +Our corporate headquarters are located at 1706 S. Midkiff, Bldg. B, Midland, Texas 79701. In addition to our headquarters, we also lease other properties that are used for field offices, yards or storage. We believe that our facilities are adequate for our current operations. +Item 3. Legal Proceedings. +From time to time we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings that we believe would have a material adverse effect on our financial position, results of operations or cash flows and are not aware of any material legal proceedings contemplated by governmental authorities. +Item 4. Mine and Safety Disclosures +None. +Part II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of +Equity Securities. +Market Information +On March 22, 2017, we consummated our initial public offering of our common stock at a price of $14.00 per share. Our common stock is traded on the New York Stock Exchange under the symbol “PUMP.” Prior to that time, there was no public market for our stock. As a result, we have only set forth in the table below the quarterly information with respect to the high and low prices for each quarter in 2017 and have excluded 2016 because there was no public market in 2016 for our stock. +Price Per Share +of Common Stock +Dividends +Per Share +High +Low +2017 +Fourth quarter +20.49 +13.81 +N/A +Third quarter +14.48 +10.92 +N/A +Second quarter +14.70 +11.93 +N/A +First quarter +14.50 +12.47 +N/A +Holders +As of December 31, 2017 , there were 83,039,854 shares of common stock outstanding, held of record by 18 holders. The number of record holders of our common stock does not include DTC participants or beneficial owners holding shares through nominee names. +27 +Dividend +We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the growth of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon then‑existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory restrictions on our ability to pay dividends and other factors our board of directors may deem relevant. In addition, our ABL Credit Facility places restrictions on our ability to pay cash dividends. +Use of Proceeds +On March 22, 2017, we consummated our IPO in which 25,000,000 shares of our common stock, par value $0.001 per share, were sold at a public offering price of $14.00 per share, with 13,250,000 shares issued and sold by the Company and 11,750,000 shares sold by existing stockholders. We received net proceeds of approximately $170.1 million after deducting $10.9 million of underwriting discounts and commissions, and $4.5 million of other offering expenses. At closing, we used the proceeds (i) to repay $71.8 million in outstanding borrowings under the term loan, (ii) $86.8 million to fund the purchase of additional hydraulic fracturing units and other equipment, and (iii) the remaining for general corporate purposes. +Equity Compensation Plan Information +The following table sets forth our issuance of awards under our 2013 Stock Option Plan and 2017 Incentive Award Plan as of December 31, 2017: +Plan Category +Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) +Weighted average exercise price of outstanding options, warrants and rights +Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) +(a) +(b) +(c) +Equity compensation plans approved by security holders +5,664,367 +5.20 +3,983,396 +Equity compensation plans not approved by security holders +N/A +N/A +N/A +Total +5,664,367 +5.20 +3,983,396 +___________________ +(1) Includes 3,847,763 option awards under the 2013 Stock Option Plan, and 788,590 option awards, 688,744 restricted share unit awards and 339,270 performance stock unit awards (assuming achievement of maximum payout) that have been granted under the 2017 Incentive Award Plan. The weighted average exercise price in column (b) does not take the restricted share unit awards or performance stock unit awards into account. +Performance Graph +The quarterly changes for the periods shown in the following graph are based on the assumption that $100 had been invested in our common stock, the Russell 2000 Index (“Russell 2000”) and a self-constructed peer group Index of comparable companies (“Peer Group”) on March 17, 2017 (the first trading date of our common stock), and that all dividends were reinvested at the closing prices of the dividend payment dates. The relevant companies included in our Peer Group consists of Keane Group, Inc., RPC, Inc., C&J Energy Services, Inc., Basic Energy +28 +Services, Inc., Calfrac Well Services Ltd., Patterson-UTI Energy, Inc. and Superior Energy Services, Inc. Subsequent measurement points are the last trading days of each quarter in 2017. We did not provide a five-year graph because we became a publicly traded company in March of 2017. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on the last trading date of 2017. The calculations exclude trading commissions and taxes. The stock price performance on the following graph and table is not necessarily indicative of future stock price performance. +Date +Peer Group +Russell 2000 +ProPetro Holding Corp. +3/17/2017 +$ +100.0 +$ +100.0 +$ +100.0 +3/31/2017 +$ +95.5 +$ +99.6 +$ +88.9 +6/30/2017 +$ +96.6 +$ +101.7 +$ +96.3 +9/29/2017 +$ +105.1 +$ +107.1 +$ +99.0 +12/29/2017 +$ +114.7 +$ +110.4 +$ +139.0 +29 +Item 6. Selected Historical Financial Data. +The following table presents selected historical financial and operating data of ProPetro Holding Corp. for the years indicated. The selected historical financial data as of December 31, 2017 and 2016 and for the years ended December 31, 2017 , 2016 and 2015 are derived from the audited consolidated financial statements appearing elsewhere in this annual report. The 2015 balance sheet selected historical financial data was derived from the audited financial statements for the year ended December 31, 2015 , not included in this Form 10-K. Historical results are not necessarily indicative of future results. +We conduct our business through six operating segments: hydraulic fracturing, cementing, coil tubing, flowback, surface drilling and drilling. For reporting purposes, the hydraulic fracturing and cementing operating segments are aggregated into our one reportable segment: pressure pumping. The selected historical consolidated financial and operating data presented below should be read in conjunction with “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes and other financial data included elsewhere in this annual report. +30 +Year Ended December 31, +(In thousands, except for per share data and percentages) +2017 +2016 +2015 +Statement of Operations Data: +Revenue +$ +981,865 +$ +436,920 +$ +569,618 +Pressure pumping +945,040 +409,014 +510,198 +All other +36,825 +27,906 +59,420 +Costs and Expenses: +Cost of services (1) +813,823 +404,140 +483,338 +General and administrative (2) +49,215 +26,613 +27,370 +Depreciation and amortization +55,628 +43,542 +50,134 +Property and equipment impairment expense +— +6,305 +36,609 +Goodwill impairment expense +— +1,177 +— +Loss on disposal of assets +39,086 +22,529 +21,268 +Total costs and expenses +957,752 +504,306 +618,719 +Operating Income (Loss) +24,113 +(67,386 +) +(49,101 +) +Other Income (Expense): +Interest expense +(7,347 +) +(20,387 +) +(21,641 +) +Gain on extinguishment of debt +— +6,975 +— +Other expense +(1,025 +) +(321 +) +(499 +) +Total other expense +(8,372 +) +(13,733 +) +(22,140 +) +Income (loss) before income taxes +15,741 +(81,119 +) +(71,241 +) +Income tax (expense) benefit +(3,128 +) +27,972 +25,388 +Net income (loss) +$ +12,613 +$ +(53,147 +) +$ +(45,853 +) +Per Share Information +Net income (loss) per common share: +Basic +$ +0.17 +$ +(1.19 +) +$ +(1.31 +) +Diluted +$ +0.16 +$ +(1.19 +) +$ +(1.31 +) +Weighted average common shares outstanding: +Basic +76,371 +44,787 +34,993 +Diluted +79,583 +44,787 +34,993 +Balance Sheet Data as of: +Cash and cash equivalents +$ +23,949 +$ +133,596 +$ +34,310 +Property and equipment — net of accumulated depreciation +$ +470,910 +$ +263,862 +$ +291,838 +Total assets +$ +719,032 +$ +541,422 +$ +446,454 +Long-term debt — net of deferred loan costs +$ +57,178 +$ +159,407 +$ +236,876 +Total shareholders’ equity +$ +413,252 +$ +221,009 +$ +69,571 +Cash Flow Statement Data: +Net cash provided by operating activities +$ +109,257 +$ +10,659 +$ +81,230 +Net cash used in investing activities +$ +(281,469 +) +$ +(41,688 +) +$ +(62,776 +) +Net cash provided by (used in) financing activities +$ +62,565 +$ +130,315 +$ +(15,216 +) +Other Data: +Adjusted EBITDA (3) +$ +137,443 +$ +7,816 +$ +60,149 +Adjusted EBITDA margin (3) +14.0 +% +1.8 +% +10.6 +% +Capital expenditures +$ +305,299 +$ +46,008 +$ +71,676 +____________________ +(1) +Exclusive of depreciation and amortization. +(2) +Inclusive of stock‑based compensation. +(3) +We view Adjusted EBITDA and Adjusted EBITDA margin as important indicators of performance. We define EBITDA as our net income (loss), before (i) interest expense, (ii) income taxes and (iii) depreciation and amortization. We define Adjusted EBITDA as EBITDA, plus (i) loss (gain) on disposal of assets, (ii) (gain) on extinguishment of debt, (iii) stock based compensation, and (iv) other unusual or non‑recurring (income)/expenses, such as impairment and costs related to our initial public offering. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues. +31 +Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures utilized by our management and other users of our financial statements such as investors, commercial banks, research analysts and others, to assess our financial performance because it allows us to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team (such as income tax rates). Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP. +We believe that our presentation of Adjusted EBITDA and Adjusted EBITDA margin will provide useful information to investors in assessing our financial condition and results of operations. Net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA and Adjusted EBITDA margin. Adjusted EBITDA and Adjusted EBITDA margin should not be considered alternatives to net income (loss) presented in accordance with GAAP. Because Adjusted EBITDA and Adjusted EBITDA margin may be defined differently by other companies in our industry, our definition of Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similarly titled measures of other companies, thereby diminishing its utility. The following table presents a reconciliation of net income (loss) to Adjusted EBITDA and Adjusted EBITDA margin for each of the years indicated. +32 +Reconciliation of net income (loss) to Adjusted EBITDA +($ in thousands) +Pressure +Pumping +All Other +Total +Year ended December 31, 2017 +Net income (loss) +$ +50,417 +$ +(37,804 +) +$ +12,613 +Depreciation and amortization +51,155 +4,473 +55,628 +Interest expense +— +7,347 +7,347 +Income tax expense +— +3,128 +3,128 +Loss on disposal of assets +38,059 +1,027 +39,086 +Stock‑based compensation +— +9,489 +9,489 +Other expense +— +1,025 +1,025 +Other general and administrative expense (1) +— +722 +722 +Deferred IPO Bonus +5,491 +2,914 +8,405 +Adjusted EBITDA +$ +145,122 +$ +(7,679 +) +$ +137,443 +Year ended December 31, 2016 +Pressure +Pumping +All Other +Total +Net loss +$ +(45,316 +) +$ +(7,831 +) +$ +(53,147 +) +Depreciation and amortization +37,282 +6,260 +43,542 +Interest expense +— +20,387 +20,387 +Income tax benefit +— +(27,972 +) +(27,972 +) +Loss on disposal of assets +23,690 +(1,161 +) +22,529 +Property and equipment impairment expense +— +6,305 +6,305 +Goodwill impairment expense +— +1,177 +1,177 +Gain on extinguishment of debt +— +(6,975 +) +(6,975 +) +Stock‑based compensation +— +1,649 +1,649 +Other expense +— +321 +321 +Adjusted EBITDA +$ +15,656 +$ +(7,840 +) +$ +7,816 +Pressure +Pumping +All Other +Total +Year ended December 31, 2015 +Net loss +$ +(5,022 +) +$ +(40,831 +) +$ +(45,853 +) +Depreciation and amortization +38,369 +11,765 +50,134 +Interest expense +— +21,641 +21,641 +Income tax benefit +— +(25,388 +) +(25,388 +) +Loss on disposal of assets +21,213 +55 +21,268 +Property and equipment impairment expense +7,980 +28,629 +36,609 +Stock‑based compensation +— +1,239 +1,239 +Other expense +— +499 +499 +Adjusted EBITDA +$ +62,540 +$ +(2,391 +) +$ +60,149 +_________________ +(1) +Other general and administrative expense relates to legal settlement expense. +33 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and the related notes appearing at the end of this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward‑looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis. +Basis of Presentation +Unless otherwise indicated, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “ProPetro Holding Corp.,” “the Company,” “we,” “our,” “us” or like terms refer to ProPetro Holding Corp. and its subsidiary. +Overview +We are a growth‑oriented, Midland, Texas‑based oilfield services company providing hydraulic fracturing and other complementary services to leading upstream oil and gas companies engaged in the exploration and production, or E&P, of North American unconventional oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as the most prolific oil‑producing area in the United States, and we believe we are currently one of the largest providers of hydraulic fracturing services in the region by hydraulic horsepower, or HHP, with an aggregate deployed capacity of 690,000 HHP at December 31, 2017. Our fleet has been designed to handle the highest intensity, most complex hydraulic fracturing jobs, and has been 100% utilized since September 2016. In the quarter ended December 31, 2017 , we put one new hydraulic fracturing unit into service bringing our total fleet to 16 units as of December 31, 2017 . During the year ended December 31, 2017 , we put a total of six new hydraulic fracturing units into service. In addition, we have deployed two new hydraulic fracturing units into service through March of 2018, bringing our current fleet total to 18 deployed units, or 780,000 HHP. +Our Assets and Operations +Through our pressure pumping segment, which includes cementing operations, we primarily provide hydraulic fracturing services (inclusive of acidizing services) to E&P companies in the Permian Basin. Our modern hydraulic fracturing fleet has been designed to handle Permian Basin specific operating conditions and the region’s increasingly high‑intensity well completions, which are characterized by longer horizontal wellbores, more frac stages per lateral and increasing amounts of proppant per well. Over 92% of our fleet has been delivered over the past five years, and substantially all our fleet has been built by a single manufacturer since 2013. Further, we have fully maintained our equipment throughout the recent industry downturn to ensure optimal performance and reliability. Additionally, all of the hydraulic horsepower delivered over the last five years has been sourced from a single manufacturer, leading to a homogeneous fleet with streamlined maintenance programs and training for our personnel. +In addition to our core pressure pumping segment operations, we also offer a suite of complementary well completion and production services, including coiled tubing, flowback services and surface air drilling. We believe these complementary services create operational efficiencies for our customers and allow us to capture a greater portion of their capital spending across the lifecycle of a well. Additionally, we believe that these complementary services should benefit from a continued industry recovery and that we are well positioned to continue expanding these offerings in response to our customers increasing service needs and spending levels. +34 +How We Generate Revenue +We generate revenue primarily through our pressure pumping segment, and more specifically, by providing hydraulic fracturing services to our customers. We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We also provide personnel and services that are tailored to meet each of our customers’ needs. We generally do not have long‑term written contractual arrangements with our customers other than standard master service agreements, which include general contractual terms between our customers and us. We charge our customers on a per‑job basis, in which we set pricing terms after receiving full specifications for the requested job, including the lateral length of the customer’s wellbore, the number of frac stages per well, the amount of proppant to be employed and other parameters of the job. +In addition to hydraulic fracturing services, we generate revenue through the complementary services that we provide to our customers, including cementing, acidizing, coiled tubing, flowback services and surface air drilling. These complementary services are provided through various contractual arrangements, including on a turnkey contract basis, in which we set a price to perform a particular job, a daywork contract basis, in which we are paid a set price per day for our services, or a footage contract basis, in which we are paid a set price per foot we drill. We are also sometimes paid by the hour for these complementary services. +Our revenue, profitability and cash flows are highly dependent upon prevailing crude oil prices and expectations about future prices. For many years, oil prices and markets have been extremely volatile. Prices are affected by many factors beyond our control. West Texas Intermediate (“WTI”) oil prices which declined significantly close to the end of the second half of 2014 have recently recovered. The average WTI oil prices per barrel was $50.8, $43.3 and $48.7 for the years ended December 31, 2017 , 2016 and 2015 , respectively, and is expected to continue to increase in 2018. As a result of the recent recovery in oil prices, our industry has experienced a significant increase in both drilling and pressure pumping activity levels. Looking forward, assuming oil prices remain at or above recent levels, we believe U.S. rig counts will continue to increase, which may result in an increase in demand for drilling and pressure pumping services. Higher oil and natural gas prices do not necessarily result in increased activity because demand for our services is generally driven by our customers’ expectations of future oil and natural gas prices, as well as rig count. +The historical average Permian Basin rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows: +Year Ended December 31 +Drilling Type (Permian Basin) +2017 +2016 +2015 +Directional +6 +2 +5 +Horizontal +311 +154 +203 +Vertical +39 +26 +64 +Total +356 +182 +272 +Costs of Conducting our Business +The principal direct costs involved in operating our business are expendables, other direct costs, and direct labor costs. Generally, we price each job to reflect a predetermined margin over our expendables and direct labor costs. Our fixed costs are relatively low and a large portion of the costs described below are only incurred as we perform jobs for our customers. +Expendables. Expendables are the largest expenses incurred, and include the product and freight costs associated with proppant, chemicals and other consumables used in our pressure pumping and other operations. These costs comprise a substantial variable component of our service costs, particularly with respect to the quantity and quality of sand and chemicals demanded when providing hydraulic fracturing services. Expendable product costs comprised approximately 61.3% , 61.0% and 58.9% of total costs of service for the years ended December 31, 2017 , 2016 and 2015 , respectively. +35 +Other Direct Costs. We incur other direct expenses related to our service offerings, including the costs of fuel, repairs and maintenance, general supplies, equipment rental and other miscellaneous operating expenses. Fuel is consumed both in the operation and movement of our hydraulic fracturing fleet and other equipment. Repairs and maintenance costs are expenses directly related to upkeep of equipment, which have been amplified by the demand for higher horsepower jobs. Capital expenditures to upgrade or extend the useful life of equipment are not included in other direct costs. Other direct costs were 26.5%, 24.4% and 24.3% of total costs of service for the years ended December 31, 2017 , 2016 and 2015 , respectively. +Direct Labor Costs. Payroll and benefit expenses related to our crews and other employees that are directly attributable to the effective delivery of services are included in our operating costs. Direct labor costs amounted to 12.2%, 14.5% and 16.9% of total costs of service for the years ended December 31, 2017 , 2016 and 2015 , respectively. +How We Evaluate Our Operations +Our management uses a variety of financial and operating metrics to evaluate and analyze the performance of our business, including Adjusted EBITDA and Adjusted EBITDA margin. +EBITDA, Adjusted EBITDA and Adjusted EBITDA margin +We view Adjusted EBITDA and Adjusted EBITDA margin as important indicators of performance. We define EBITDA as our net income (loss), before (i) interest expense, (ii) income taxes and (iii) depreciation and amortization. We define Adjusted EBITDA as EBITDA, plus (i) loss/(gain) on disposal of assets, (ii) (gain) on extinguishment of debt, (iii) stock based compensation, and (iv) other unusual or non‑recurring (income)/expenses, such as impairment and costs related to our initial public offering. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues. +Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures utilized by our management and other users of our financial statements such as investors, commercial banks, research analysts and others, to assess our financial performance because it allows us to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), nonrecurring expenses (such as IPO bonus) and items outside the control of our management team (such as income tax rates). Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income (loss), operating income (loss), cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP. +Note Regarding Non‑GAAP Financial Measures +Adjusted EBITDA and Adjusted EBITDA margin are not financial measures presented in accordance with GAAP. We believe that the presentation of these non‑GAAP financial measures will provide useful information to investors in assessing our financial condition and results of operations. Net income is the GAAP measure most directly comparable to Adjusted EBITDA. Our non‑GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measures. Each of these non‑GAAP financial measures has important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measures. You should not consider Adjusted EBITDA or Adjusted EBITDA margin in isolation or as a substitute for an analysis of our results as reported under GAAP. Because Adjusted EBITDA and Adjusted EBITDA margin may be defined differently by other companies in our industry, our definitions of these non‑GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. +Factors Affecting the Comparability of Our Financial Results +Our future results of operations may not be comparable to our historical results of operations for the reasons described below: +36 +Our strategic focus on our pressure pumping segment and other complementary services will reduce the relative financial contribution of the drilling operating segment in our results of operations. We expect revenues and costs of services related to our drilling operating segment to comprise a lower percentage of total revenues and total costs of service in future results of operations when compared to historic results due to our increased focus on pressure pumping and other complementary service offerings. We idled all seven of our Permian vertical drilling rigs during 2016. As a result, during the year ended December 31, 2017 , no revenue was generated by our drilling segment as compared to $9.9 million of revenue (or 2.3% of revenues) for the year ended December 31, 2016 , and $35.7 million (or 6.3% of revenues) for the year ended December 31, 2015 . Likewise cost of services related to drilling was $0.4 million for the year ended December 31, 2017 , as compared to $8.5 million (2.1% of all costs of services) for the year ended December 31, 2016, and $30.8 million (or 6.4% of cost of service) for the year ended December 31, 2015 . We anticipate the financial significance of this service line relative to the financial results from pressure pumping and other service offerings to continue to decline. +Results of Operations +We conduct our business through six operating segments: hydraulic fracturing, cementing, coil tubing, flowback, surface drilling, and drilling. During the year, we consolidated our acidizing operations into our hydraulic fracturing segment bringing the number of our operating segment to six, from seven previously reported in prior years. The change in the number of our operating segments did not have any monetary impact on our reportable segment information in the current or prior years included in this Form 10-K. For reporting purposes, the hydraulic fracturing (which now includes our acidizing operations) and cementing operating segments are aggregated into our one reportable segment: pressure pumping. We expect revenues and costs of services related to our drilling operating segment to comprise a lower percentage of total revenues and total costs of service in future results of operations when compared to historic results due to our increased focus on pressure pumping and other complementary service offerings. We anticipate the financial significance of this service line relative to the financial results from pressure pumping and other service offerings to continue to decline. +37 +Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 +($ in thousands, except percentages) +YEAR ENDED +CHANGE +2017 +2016 +Variance +% +Revenue +$ +981,865 +$ +436,920 +$ +544,945 +124.7 +% +Cost of services (1) +813,823 +404,140 +409,683 +101.4 +% +General and administrative expense (2) +49,215 +26,613 +22,602 +84.9 +% +Depreciation and amortization +55,628 +43,542 +12,086 +27.8 +% +Property and equipment impairment +— +6,305 +(6,305 +) +(100.0 +)% +Goodwill impairment +— +1,177 +(1,177 +) +(100.0 +)% +Loss on disposal of assets +39,086 +22,529 +16,557 +73.5 +% +Interest expense +7,347 +20,387 +(13,040 +) +(64.0 +)% +Gain on extinguishment of debt +— +(6,975 +) +(6,975 +) +(100.0 +)% +Other expense +1,025 +321 +704 +219.3 +% +Income tax expense/(benefit) +3,128 +(27,972 +) +(31,100 +) +(111.2 +)% +Net income (loss) +$ +12,613 +$ +(53,147 +) +$ +65,760 +123.7 +% +Adjusted EBITDA (3) +$ +137,443 +$ +7,816 +$ +129,627 +1,658.5 +% +Adjusted EBITDA Margin (3) +14.0 +% +1.8 +% +12.2 +% +677.8 +% +Pressure pumping segment results of operations: +Revenue +$ +945,040 +$ +409,014 +$ +536,025 +131.1 +% +Cost of services +$ +784,349 +$ +379,815 +$ +404,534 +106.5 +% +Adjusted EBITDA +$ +145,122 +$ +15,656 +$ +129,466 +826.9 +% +Adjusted EBITDA Margin (4) +15.4 +% +3.8 +% +11.6 +% +305.3 +% +____________________ +(1) +Exclusive of depreciation and amortization. +(2) +Inclusive of stock‑based compensation. +(3) +For definitions of the non‑GAAP financial measures of Adjusted EBITDA and Adjusted EBITDA margin and reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to our most directly comparable financial measures calculated in accordance with GAAP, please read “Selected Historical Financial Data”. +(4) +The non‑GAAP financial measure of Adjusted EBITDA margin for the pressure pumping segment is calculated by taking Adjusted EBITDA for the pressure pumping segment as a percentage of our revenues for the pressure pumping segment. +Revenues. Revenues increased 124.7% , or $544.9 million , to $981.9 million for the year ended December 31, 2017 , as compared to $436.9 million for the year ended December 31, 2016 . The increase was primarily attributable to the increase in customer activity, fleet size and demand for our services, which has led to an increase in pricing for our hydraulic fracturing and other services. Our pressure pumping segment revenues increased 131.1% , or $ 536.0 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016 . Revenues from services other than pressure pumping increased 32.0% , or $8.9 million , for the year ended December 31, 2017 , as compared to the year ended December 31, 2016 . The increase in revenues from services other than pressure pumping during the year ended December 31, 2017 was primarily attributable to the increase in revenues and customer demand for our flowback, coil tubing and surface drilling services, offset by the decrease in revenue from idling of our drilling rigs. +38 +Cost of Services. Cost of services increased 101.4% , or $409.7 million , to $813.8 million for the year ended December 31, 2017 , from $404.1 million during the year ended December 31, 2016 . Cost of services in our pressure pumping segment increased $ 404.5 million during the year ended December 31, 2017 , as compared to the year ended December 31, 2016 . The increases were primarily attributable to higher activity levels, coupled with an increase in personnel headcount following the increased activity levels. As a percentage of pressure pumping segment revenues, pressure pumping cost of services decreased to 83.0% for the year ended December 31, 2017 , as compared to 92.9% for the year ended December 31, 2016 . The decrease in cost of services as a percentage of revenue for the pressure pumping segment resulted from greater pricing power as demand for our services increased, without a corresponding increase in certain costs, which resulted in significantly higher realized Adjusted EBITDA margins during the year ended December 31, 2017 . +General and Administrative Expenses. General and administrative expenses increased 84.9% , or $22.6 million , to $49.2 million for the year ended December 31, 2017 , as compared to $26.6 million for the year ended December 31, 2016 . The net increase was primarily attributable to increases in payroll, insurance, advertising, communication, office expense, travel and legal costs, totaling $8.3 million, and an IPO bonus of $8.4 million to key employees, along with $7.8 million increase in stock compensation recorded during the year ended December 31, 2017 , and offset by a decrease in property taxes of $1.6 million, and other remaining general and administrative expenses of $0.3 million. General and administrative expenses as a percentage of total revenues decreased to 5.0% for the year ended December 31, 2017 , as compared to 6.1% for the year ended December 31, 2016 , excluding non-recurring deferred IPO bonus of $8.4 million and stock compensation expense of $6.8 million, general and administrative expenses as a percentage of total revenues decreased to 3.5% for the year ended December 31, 2017 , as compared to 6.1% for the year ended December 31, 2016 . The decrease in general and administrative expenses as a percentage of total revenue is as a result of the higher revenue during the year ended December 31, 2017 . +Depreciation and Amortization. Depreciation and amortization increased 27.8% , or $12.1 million , to $55.6 million for the year ended December 31, 2017 , as compared to $43.5 million for the year ended December 31, 2016 . The increase was primarily attributable to additional property and equipment purchased and put into service in the year ended December 31, 2017 . We calculate depreciation of property and equipment using the straight-line method. +Property and Equipment Impairment Expense. There was no property and equipment impairment expense during the year ended December 31, 2017 , compared to $6.3 million during the year ended December 31, 2016 . The non‑cash impairment expense in 2016 was associated with our drilling rigs, and was recognized as a result of depressed commodity prices and a negative future near‑term outlook for these assets. +Goodwill Impairment Expense. There was no goodwill impairment expense during the year ended December 31, 2017 , compared to $1.2 million during the year ended December 31, 2016 . The non‑cash goodwill impairment expense in 2016 was as a result of the write‑down of goodwill related to our surface drilling reporting unit. +Loss on Disposal of Assets. Loss on the disposal of assets increased 73.5% , or $16.6 million , to $39.1 million for the year ended December 31, 2017 , as compared to $22.5 million for the year ended December 31, 2016 . The increase was primarily attributable to greater service intensity of jobs completed, coupled with higher fleet size, activity levels and utilization of our equipment. +Interest Expense. Interest expense decreased 64.0% , or $13.0 million , to $7.3 million for the year ended December 31, 2017 , as compared to $20.4 million for the year ended December 31, 2016 . The decrease in interest expense was primarily attributable to a reduction in our average debt balance during 2017 due to the early retirement of our term loan and revolving credit facility in the first quarter of 2017. +Gain on Extinguishment of Debt. There was no debt extinguishment gain or loss during the year ended December 31, 2017 , compared to the gain on extinguishment of debt, net of cost, of $7.0 million during the year ended December 31, 2016 . The gain on extinguishment of debt during 2016 was as a result of the auction process with our lenders to repurchase $37.5 million of our term loan at a 20% discount to par value. +39 +Other Expense. Other expense was $1.0 million for the year ended December 31, 2017 , as compared to $0.3 million for the year ended December 31, 2016 . The increase was primarily attributable to an increase in lenders related expenses, non-recurring listing related expenses, and partially offset by an increase in the unrealized gain resulting from the change in the fair value of our interest rate swap liability at December 31, 2017 compared to December 31, 2016 . +Income Tax Expense/(Benefit). Income tax expense was $3.1 million for the year ended December 31, 2017 , compared to income tax benefit of $28.0 million , for the year ended December 31, 2016 . The change from an income tax benefit to income tax expense is primarily due to the Company’s reporting income before taxes during the year ended December 31, 2017 , compared to a loss before taxes recorded during the year ended December 31, 2016 . The income before taxes generated is attributable to the increase in our revenue during the year ended December 31, 2017 , compared to December 31, 2016 . Additionally, the income tax expense during the year ended December 31, 2017 , included a one-time deferred tax benefit offset of $3.4 million, resulting from the U.S. government enacted tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). +40 +Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 +YEAR ENDED +CHANGE +($ in thousands, except percentages) +2016 +2015 +Variance +% +Revenue +$ +436,920 +$ +569,618 +$ +(132,698 +) +(23.3 +)% +Cost of services (1) +404,140 +483,338 +(79,198 +) +(16.4 +)% +General and administrative expense (2) +26,613 +27,370 +(757 +) +(2.8 +)% +Depreciation and amortization +43,542 +50,134 +(6,592 +) +(13.1 +)% +Property and equipment impairment +6,305 +36,609 +(30,304 +) +(82.8 +)% +Goodwill impairment +1,177 +— +1,177 +100.0 +% +Loss on disposal of assets +22,529 +21,268 +1,261 +5.9 +% +Interest expense +20,387 +21,641 +(1,254 +) +(5.8 +)% +Gain on extinguishment of debt +(6,975 +) +— +6,975 +100.0 +% +Other expense +321 +499 +(178 +) +(35.7 +)% +Income tax benefit +(27,972 +) +(25,388 +) +2,584 +10.2 +% +Net income (loss) +$ +(53,147 +) +$ +(45,853 +) +$ +7,294 +15.9 +% +Adjusted EBITDA (3) +$ +7,816 +$ +60,149 +$ +(52,333 +) +(87.0 +)% +Adjusted EBITDA Margin (3) +1.8 +% +10.6 +% +(8.8 +)% +(83.0 +)% +Pressure pumping segment results of operations: +Revenue +$ +409,014 +$ +510,198 +$ +(101,184 +) +(19.8 +)% +Cost of services +$ +379,815 +$ +432,372 +$ +(52,557 +) +(12.2 +)% +Adjusted EBITDA +$ +15,656 +$ +62,540 +$ +(46,884 +) +(75.0 +)% +Adjusted EBITDA Margin (4) +3.8 +% +12.3 +% +(8.5 +)% +(69.1 +)% +____________________ +(1) +Exclusive of depreciation and amortization. +(2) +Inclusive of stock‑based compensation. +(3) +For definitions of the non‑GAAP financial measures of Adjusted EBITDA and Adjusted EBITDA margin and reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to our most directly comparable financial measures calculated in accordance with GAAP, please read “Selected Historical Financial Data”. +(4) +The non‑GAAP financial measure of Adjusted EBITDA margin for the pressure pumping segment is calculated by taking Adjusted EBITDA for the pressure pumping segment as a percentage of our revenues for the pressure pumping segment. +Revenues. Revenues decreased 23.3%, or $132.7 million, to $436.9 million for the year ended December 31, 2016 as compared to $569.6 million for the year ended December 31, 2015. The decrease was primarily attributable to a reduction in customer activity, a decline in pricing for our hydraulic fracturing services as a result of an over‑supply of HHP in our areas of operations, and the idling of our seven drilling rigs. Our pressure pumping segment revenues decreased 19.8%, or $101.2 million, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. Revenues other than pressure pumping decreased 53.0%, or $31.5 million, for the year December 31, 2016 as compared to the year ended December 31, 2015. The decrease was primarily attributable to a decline in demand and pricing for these ancillary services. The overall decrease in revenues was attributable to a competitive market environment caused by the decrease in U.S. onshore drilling and completion activity as a result of decreased oil and natural gas commodity prices. Average oil and natural gas prices have decreased 11.0% and 3.8%, respectively, from the year ended December 31, 2015 as compared to the year ended December 31, 2016. The +41 +Baker Hughes U.S. onshore rig count also decreased 48.3% during the year ended December 31, 2016 as compared to the year ended December 31, 2015. +Cost of Services. Cost of services decreased 16.4%, or $79.2 million, to $404.1 million for the year ended December 31, 2016 from $483.3 million as compared to the year ended December 31, 2015. Cost of services in our pressure pumping segment decreased $52.6 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The decreases were primarily attributable to lower activity levels, coupled with reduced personnel headcount. As a percentage of pressure pumping segment revenues, pressure pumping cost of services increased to 92.9% for the year ended December 31, 2016 as compared to 84.7% for the year ended December 31, 2015. The increase in cost of services as a percentage of sales for the pressure pumping segment resulted from lower revenue generating activity levels without a corresponding reduction in costs as well as depressed pricing for our services, which resulted in significantly lower realized EBITDA margins. +General and Administrative Expenses. General and administrative expenses decreased 2.8%, or $0.8 million, to $26.6 million for the year ended December 31, 2016 as compared to $27.4 million for the year ended December 31, 2015. The decrease was primarily attributable to a $2.2 million reduction in insurance expense due to a reduction in personnel headcount and a $1.0 million reduction in property taxes, partially offset by an increase in bonus expense of $2.5 million as compared to 2015. General and administrative expenses as a percentage of total revenues was 6.1% for the year ended December 31, 2016 as compared to 4.8% for the year ended December 31, 2015. This increase was due partially to pricing pressures in a competitive operating environment, as well as our decision to maintain equipment and retain key personnel during times of lower equipment utilization levels. +Depreciation and Amortization. Depreciation and amortization decreased 13.1%, or $6.6 million, to $43.5 million for the year ended December 31, 2016 as compared to $50.1 million for the year ended December 31, 2015. The decrease was primarily attributable to a decrease in average depreciable assets partially offset by approximately $46.0 million in capital expenditures during the year ended December 31, 2016. We calculate depreciation of property and equipment using the straight‑line method. +Property and Equipment Impairment Expense. Property and equipment impairment expense was $36.6 million for the year ended December 31, 2015, as compared to $6.3 million for the year ended December 31, 2016. The non‑cash impairment expense in 2015 was associated with our drilling rigs and acidizing assets and was recognized as a result of depressed commodity prices and a negative future near‑term outlook for these assets. The non‑cash impairment expense in 2016 was a result of the continuous depressed demand for our drilling rigs. +Goodwill Impairment Expense. Goodwill impairment expense was $1.2 million for the year ended December 31, 2016, as compared to no goodwill impairment expense for the year ended December 31, 2015. The impairment expense in 2016 was attributable to the write‑down of goodwill related to our surface drilling reporting unit. +Loss on Disposal of Assets. Loss on the disposal of assets increased 5.9%, or $1.3 million, to $22.5 million for the year ended December 31, 2016 as compared to $21.3 million for the year ended December 31, 2015. The increase was primarily attributable to greater service intensity of jobs completed despite lower pressure pumping activity levels. +Interest Expense. Interest expense decreased 5.8%, or $1.3 million, to $20.4 million for the year ended December 31, 2016 as compared to $21.6 million for the year ended December 31, 2015. The decrease in interest expense was primarily attributable to a reduction in our average debt balance during 2016. +Gain on Extinguishment of Debt. Gain on extinguishment of debt was $7.0 million, net of cost, for the year ended December 31, 2016, as compared to no debt extinguishment gain or loss for the year ended December 31, 2015. In June 2016, we conducted an auction process with our lenders to repurchase $37.5 million of our term loan at a 20% discount to par value. +42 +Other Expense. Other expense decreased to $0.3 million for the year ended December 31, 2016 as compared to $0.5 million for the year ended December 31, 2015. The decrease was primarily attributable to an unrealized gain resulting from the change in the fair value of our interest rate swap liability at December 31, 2016 compared to 2015, partially offset by restructuring expenses related to the first amendment to our existing credit agreement incurred in 2016 and the reduction of other income in 2016 as compared to 2015. +Income Tax Benefit. The increase of $2.6 million in income tax benefit for the year ended December 31, 2016 as compared to the year ended December 31, 2015 is primarily attributable to a higher loss before income taxes, partially offset by the valuation allowance of $0.9 million recorded in the year. +Liquidity and Capital Resources +Historically, our primary sources of liquidity and capital resources have been borrowings under our term loan and revolving credit facility, cash flows from our operations and capital contributions from our shareholders. Our primary uses of capital have been investing in and maintaining our property and equipment and repaying indebtedness. As of December 31, 2017 , our cash and cash equivalents were $23.9 million , and as of December 31, 2016 , were $133.6 million . +On March 22, 2017, we consummated our IPO in which 25,000,000 shares of our common stock, par value $0.001 per share, were sold at a public offering price of $14.00 per share, with 13,250,000 shares issued and sold by the Company and $11,750,000 shares sold by existing stockholders. We received net proceeds of approximately $170.1 million after deducting $10.9 million of underwriting discounts and commissions, and $4.5 million of other offering expenses. At closing, we used the proceeds (i) to repay $71.8 million in outstanding borrowings under our term loan, (ii) $86.8 million to fund the purchase of additional hydraulic fracturing units and other equipment, and (iii) the remaining for general corporate purposes. +Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows and (iii) borrowings under our ABL Credit Facility. Our primary uses of cash will be to continue to fund our operations, support organic growth opportunities and satisfy debt payments. As of December 31, 2017 , our total liquidity consists of cash and cash equivalent of $23.9 million , and $79.0 million of availability under our ABL Credit Facility. +There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Future cash flows are subject to a number of variables, and are highly dependent on the drilling, completion, and production activity by our customers, which in turn is highly dependent on oil and gas prices. Depending upon market conditions and other factors, we may issue equity and debt securities or take other actions necessary to fund our business or meet our future long-term liquidity requirements. +Cash and Cash Flows +The following table sets forth our net cash provided by (used in) operating, investing and financing activities during the year at December 31, 2017 , 2016 and 2015 , respectively. +Year Ended December 31, +($ in thousands) +2017 +2016 +2015 +Net cash provided by operating activities +$ +109,257 +$ +10,659 +$ +81,230 +Net cash used in investing activities +$ +(281,469 +) +$ +(41,688 +) +$ +(62,776 +) +Net cash provided by (used in) financing activities +$ +62,565 +$ +130,315 +$ +(15,216 +) +Operating Activities +Net cash provided by operating activities was $109.3 million for the year ended December 31, 2017 , compared to $10.7 million for the year ended December 31, 2016 . The net increase of $98.6 million was primarily due to an increase in revenue and net income in the year, resulting from an increase in customer activity, fleet size and demand +43 +for our services, and partially offset by the increase in our working capital needs resulting from higher fleet size and expanding activity levels. +Net cash provided by operating activities was $10.7 million for the year ended December 31, 2016 and $81.2 million for the year ended December 31, 2015 . The decrease was primarily due to a decrease in operating margins when adjusted for non‑cash items. Operating income (loss), excluding depreciation, amortization and impairment expenses, decreased from income of $37.6 million in 2015 to a loss of $16.4 million in 2016. Additionally, the change in operating assets and liabilities decreased from a $38.3 million cash inflow in 2015 to a $19.8 million cash inflow in 2016 due to an increase in accounts receivable attributable to higher business activity levels in the fourth quarter of 2016 as compared to 2015, partially offset by the timing of payments of our accounts payable. +Investing Activities +Net cash used in investing activities increased to $281.5 million for the year ended December 31, 2017 , from $41.7 million for the year ended December 31, 2016 . The increase was primarily attributable to the additional hydraulic fracturing units and other ancillary equipment purchased and a marginal increase in maintenance capital expenditures, during the year ended December 31, 2017 , compared to the year ended December 31, 2016 . +Net cash used in investing activities was $41.7 million and $62.8 million for the years ended December 31, 2016 and 2015 , respectively. The decrease was primarily due to the addition of one hydraulic fracturing unit in January 2015 and a decline in capital expenditures in response to lower activity levels in 2016. +Financing Activities +Net cash provided by financing activities was $62.6 million for the year ended December 31, 2017 , compared to $130.3 million for the year ended December 31, 2016 . The net decrease in cash provided from financing activities was primarily attributable to the repayment of borrowings $166.5 million , repayment of insurance financing of $3.8 million , debt issuance cost of $1.7 million , payment of IPO costs of $15.1 million and offset by the receipt of $185.5 million of IPO proceeds, insurance financing proceeds of $4.1 million and proceeds from borrowings of $60.0 million during the year ended December 31, 2017 , compared to net cash used of $71.3 million for repayment of borrowings, repayment of insurance financing of $4.5 million , payment of preferred equity financing costs of $7.5 million debt extinguishment, debt issuance and IPO costs of $1.0 million, offset by insurance financing proceeds of $4.1 million , equity capitalization proceeds of $40.4 million and proceeds from preferred equity capitalization of $170.0 million during the year ended December 31, 2016 . +Net cash provided by financing activities was $130.3 million for the year ended December 31, 2016 , and net cash used in financing activities was $15.2 million for the year ended December 31, 2015 . The change was primarily due to a $210.4 million increase in equity capitalization, $40.4 million common equity and $170.0 million preferred equity, partially offset by a $28.2 million increase in net repayments of borrowings, $7.5 million of transaction costs incurred related to the private placement and $30.0 million extinguishment of debt during 2016. In 2015, we entered into a new equipment financing arrangement relating to three hydraulic fracturing units, where we extended the amortization period from 13 to 36 months and reduced the amount of required monthly installment payments. +Credit Facility and Other Financing Arrangements +ABL Credit Facility +On March 22, 2017, we entered into a new revolving credit facility with a $150 million borrowing capacity, or the ABL Credit Facility. Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either LIBOR or base rate, plus the applicable margin, which ranges from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans, with no LIBOR floor. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. The ABL Credit Facility has a tenor of 5 years and a borrowing base of 85% of eligible accounts receivable less customary reserves. Under this facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, +44 +mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. In addition, the ABL Credit Facility includes a Springing Fixed Charge Coverage Ratio of 1.0x when excess availability is less than the greater of (i) 10% of the lesser of the facility size and the Borrowing Base and (ii) $12 million. The ABL has a commitment fee of 0.375%, which reduces to 0.25% if utilization is greater than 50% of the borrowing base. +On February 22, 2018, we entered into an amendment with our lenders to increase the capacity of the ABL Credit Facility. The amendment increased total capacity under the facility from $150 million to $200 million. +Equipment Financing Arrangements +On November 24, 2015, we entered into a 36‑month equipment financing arrangement for three hydraulic fracturing units, and received proceeds of $25.0 million. A portion of the proceeds were used to pay off manufacturer notes, and the remainder was used for additional liquidity. +On June 30, 2017, we entered into a financing arrangement for the purchase of light vehicles. As of December 31, 2017 , we purchased certain light vehicles under this financing arrangement in the amount of $4.7 million . +Off Balance Sheet Arrangements +We had no off balance sheet arrangements as of December 31, 2017 . +Capital Requirements +Capital expenditures incurred were $305.3 million during the year ended December 31, 2017 as compared to $46.0 million during the year ended December 31, 2016 . The increase was primarily attributable to additional property and equipment purchased. +Capital expenditures were $46.0 million and $71.7 million during the years ended December 31, 2016 and 2015 , respectively. +Our capital expenditures, maintenance costs and other expenses, including labor, proppant and fuel costs have increased commensurately with our organic fleet growth and increase in overall hydraulic fracturing fleet utilization to 100% utilization since September 2016. +Contractual Obligations +The following table presents our contractual obligations and other commitments as of December 31, 2017 . +($ in thousands) +Payment Due by Period +Total +1 year or less +2 - 3 years +4 - 5 years +More than +5 years +ABL Credit Facility (1) +$ +55,000 +$ +— +$ +— +$ +55,000 +$ +— +Equipment financing (2) +19,287 +16,980 +2,307 +— +— +Operating leases (3) +2,079 +594 +710 +688 +87 +Total contractual obligations +$ +76,366 +$ +17,574 +$ +3,017 +$ +55,688 +$ +87 +____________________ +(1) The ABL Credit Facility balance outstanding is exclusive of future commitment fees, interest or other fees since our potential future obligations thereunder are based on future events and cannot be reasonably estimated. +(2) +Equipment financing includes ford credit and hydraulic fracturing fleet financing arrangements. We have included a total estimated interest costs of $1.3 million , based on signed contracts. +(3) +Operating leases include agreements for various office locations. +45 +Recent Accounting Pronouncements +In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2014‑09, Revenue from Contracts with Customers (Topic 606) . ASU No. 2014‑09 requires entities to recognize revenue to depict transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014‑09 requires entities to disclose both qualitative and quantitative information that enables users of the consolidated financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including disclosure of significant judgments affecting the recognition of revenue. ASU No. 2014‑09 was originally effective for annual periods beginning after December 15, 2016, using either the retrospective or cumulative effect transition method. On August 12, 2015, the FASB issued ASU No. 2015‑14, which defers the effective date of the revenue standard, ASU No. 2014‑09, by one year for all entities and permits early adoption on a limited basis. We have completed our evaluation of ASU No. 2014-09, and the adoption of this guidance will not materially affect our revenue recognition. However, there will be additional disclosures on our consolidated financial statements relating to the adoption of this standard. +In July 2015, the FASB issued ASU No. 2015‑11, Simplifying the Measurement of Inventory, which requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. ASU No. 2015‑11 does not apply to inventories that are measured by using either the last‑in, first‑out method or the retail inventory method. The amendments in ASU No. 2015‑11 are effective for fiscal years beginning after December 15, 2016. The ASU became effective for us in 2017 and the adoption of this guidance did not materially affect our consolidated financial statements. +In February 2016, the FASB issued ASU No. 2016‑02, Leases , a new standard on accounting for leases. The ASU introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in the current accounting guidance as well as the FASB’s new revenue recognition standard. However, the ASU eliminates the use of bright‑line tests in determining lease classification as required in the current guidance. The ASU also requires additional qualitative disclosures along with specific quantitative disclosures to better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including periods within that reporting period, using a modified retrospective approach. Early adoption is permitted. We have not completed an evaluation of the impact the pronouncement will have on our consolidated financial statements and related disclosures. +In March 2016, the FASB issued ASU No. 2016‑09, Compensation‑ Stock Compensation (Topic 718): Improvements to Employee Share‑Based Payment Accounting, which modifies several aspects of the accounting for share‑based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. The ASU became effective for us in 2017 and the adoption of this guidance did not materially affect our consolidated financial statements. +In January 2017, the FASB issued ASU No. 2017‑04, Simplifying the Test for Goodwill Impairment , which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. As a result, under this ASU, an entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This pronouncement is effective for impairment tests in fiscal years beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We believe that the adoption of this guidance will not materially affect our consolidated financial statements. +46 +Critical Accounting Policies and Estimates +The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally acceptable in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported revenues and expenses during the years. We evaluate these estimates and assumptions on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates. +Listed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved, and that we believe are critical to the understanding of our operations. +Property and Equipment +Our property and equipment are recorded at cost, less accumulated depreciation. +Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in earnings. +We retired certain components of equipment rather than entire pieces of equipment, which resulted in a net loss on disposal of assets of $39.1 million and $22.5 million and $21.3 million for the years ended December 31, 2017 , 2016 and 2015 , respectively. +Depreciation of property and equipment is provided on the straight‑line method over estimated useful lives as shown in the table below. The estimated useful lives and salvage values of property and equipment is subject to key assumptions such as maintenance, utilization and job variation. Unanticipated future changes in these assumptions could negatively or positively impact our net income (loss). A 10% change in the useful lives of our property and equipment would have resulted in approximately $5.6 million impact on net income (loss) during the year ended December 31, 2017 . +Vehicles +1-5 years +Equipment +1-20 years +Buildings and improvements +5-20 years +Impairment of Long-Lived Assets +In accordance with the Financial Accounting Standards Board Accounting Standards Codification (ASC) 360 regarding Accounting for the Impairment or Disposal of Long‑Lived Assets , we review the long‑lived assets to be held and used whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future undiscounted cash flows attributable to the assets is less than the carrying amount of such assets. In this circumstance, we recognize an impairment loss for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Our cash flow forecasts require us to make certain judgements regarding long‑term forecasts of future revenue and costs and cash flows related to the assets subject to review. The significant assumption in our cash flow forecasts is our future growth expectations. The significant assumption is uncertain in that it is driven by future demand for our services and utilization which could be impacted by crude oil market prices, future market conditions and technological +47 +advancements. Our fair value estimates for certain long‑lived assets require us to use significant other observable inputs among others including significant assumptions related to market approach based on recent auction sales or selling prices of comparable equipment. The estimates of fair value are also subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future. No events or changes in circumstances occurred that would indicate an impairment of our property and equipment during the year ended December 31, 2017 . We recorded an impairment loss of $6.3 million during the year ended December 31, 2016 related to our drilling asset group, as our cash flow forecasts were negatively impacted with the idling of these rigs during the fourth quarter. The fair value estimate also declined as observable market inputs, such as recent auction sales also decreased. During the year ended December 31, 2015 , the impairment expense for drilling and acidizing was $28.6 million and $8.0 million , respectively. +If the crude oil market declines or the demand for vertical drilling does not recover, and if the equipment remains idle or under‑utilized, the estimated fair value of such equipment may decline, which could result in additional impairment charges. Though the impacts of variations in any of these factors can have compounding or off‑setting impacts, a 10% decline in the estimated fair value of our drilling assets at December 31, 2017 would result in additional impairment of $0.7 million , and a 10% decline in the estimated future cash flows for our other asset groups would not indicate an impairment. +Goodwill +Goodwill is the excess of the consideration transferred over the fair value of the tangible and identifiable intangible assets and liabilities recognized. Goodwill is not amortized. We perform an annual impairment test of goodwill as of December 31, or more frequently if circumstances indicate that impairment may exist. +There were no additions to, or disposal of, goodwill during the year ended December 31, 2017 . We performed our annual goodwill impairment test in accordance with ASC 350, Intangibles—Goodwill and Other , on December 31, 2017 , at which time, we determined that the fair value of our hydraulic fracturing reporting unit was substantially in excess of its carrying value. The hydraulic fracturing operating segment is the only segment which has goodwill at December 31, 2017 . During the year ended December 31, 2016, we recorded goodwill impairment charge of $1.2 million relating to our surface drilling reporting unit. No goodwill impairment was recorded in 2015. The quantitative impairment test we perform for goodwill utilizes certain assumptions, including forecasted revenue and cost assumptions. If the crude oil market declines and remains at low levels for a sustained period of time, we could record an impairment of the carrying value of our goodwill in the future. If crude oil prices decline further or remain at low levels, to the extent appropriate we expect to perform our goodwill impairment assessment on a more frequent basis to determine whether an impairment is required. Our discounted cash flow analysis for each reporting unit includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margin, forecasted capital expenditures, the timing of an anticipated market recovery, and the timing of expected cash flow. As such, these analyses incorporate inherent uncertainties that are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecast. +Income Taxes +Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. +We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and the results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded +48 +amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. In determining the valuation allowance of $1.2 million as of December 31, 2017 , we have considered and made judgments and estimates regarding estimated future taxable income. These estimates and judgments include some degree of uncertainty and changes in these estimates and assumptions could require us to adjust the valuation allowances for our deferred tax assets and the ultimate realization of tax assets depends on the generation of sufficient taxable income. +On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to (1) reducing the U.S. federal corporate tax rate from 35% to 21%, (2) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized, (3) creating a new limitation on deductible interest expense, (4) changes to bonus depreciation, and (5) changing rules related to use and limitations of net operating loss carryforwards for tax years beginning after December 31, 2017. The only material items that impacted the Company’s consolidated financial statements in 2017 were bonus depreciation and the corporate rate reduction. While the corporate rate reduction is effective January 1, 2018, we accounted for this anticipated rate change during the year ended December 31, 2017, the year of enactment. Consequently, we recorded a $3.4 million decrease to the net deferred tax liability, with a corresponding net adjustment to deferred tax benefit. +Our methodology for recording income taxes requires a significant amount of judgment in the use of assumptions and estimates. Additionally, we forecast certain tax elements, such as future taxable income, as well as evaluate the feasibility of implementing tax planning strategies. Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results. Unforeseen events may significantly impact these variables, and changes to these variables could have a material impact on our income tax accounts. The final determination of our income tax liabilities involves the interpretation of local tax laws and related authorities in each jurisdiction. Changes in the operating environments, including changes in tax law, could impact the determination of our income tax liabilities for a tax year. +49 +Item 7A. Quantitative and Qualitative Disclosure of Market Risks +Market risk is the risk of loss arising from adverse changes in market rates and prices. Historically, our risks have been predominantly related to potential changes in the fair value of our long‑term debt due to fluctuations in applicable market interest rates. Going forward our market risk exposure generally will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non‑operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes. +Commodity Price Risk +Our material and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our pressure pumping services such as proppants, chemicals, guar, trucking and fluid supplies. Our fuel costs consist primarily of diesel fuel used by our various trucks and other motorized equipment. The prices for fuel and the raw materials in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Historically, we have generally been able to pass along price increases to our customers; however, we may be unable to do so in the future. We do not engage in commodity price hedging activities. +Interest Rate Risk +We may be subject to interest rate risk on variable rate debt under our credit facility. The impact of a 1% increase in interest rates on our variable rate debt as of December 31, 2017 , 2016 and 2015 would have resulted in an increase in interest expense and corresponding decrease in pre‑tax income of approximately $0.2 million , $2.1 million and $2.3 million , for the years ended December 31, 2017 , 2016 and 2015 , respectively. +Credit Risk +Financial instruments that potentially subject us to concentrations of credit risk are trade receivables. We extend credit to customers and other parties in the normal course of business. We have established various procedures to manage our credit exposure, including credit evaluations and maintaining an allowance for doubtful accounts. +50 +Item 8. Financial Statements and Supplementary Data. +Report of Independent Registered Public Accounting Firm +52 +Consolidated Balance Sheets as of December 31, 2017 and 2016 +53 +Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015 +54 +Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015 +55 +Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015 +56 +Notes to Consolidated Financial Statements +57 +51 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the shareholders and Board of Directors of +ProPetro Holding Corp. and Subsidiary +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of ProPetro Holding Corp. and Subsidiary (the “Company”), as of December 31, 2017 and 2016, the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017 and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. +Basis for Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. +Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ DELOITTE & TOUCHE LLP +Houston, Texas +March 27, 2018 +We have served as the Company's auditor since 2013. +52 +PROPETRO HOLDING CORP. AND SUBSIDIARY +CONSOLIDATED BALANCE SHEETS +AS OF DECEMBER 31, 2017 AND 2016 (In thousands, except share data) +2017 +2016 +ASSETS +CURRENT ASSETS: +Cash and cash equivalents +$ +23,949 +$ +133,596 +Accounts receivable - net of allowance for doubtful accounts of $443 and $552, respectively +199,656 +115,179 +Inventories +6,184 +4,713 +Prepaid expenses +5,123 +4,608 +Other current assets +748 +6,684 +Total current assets +235,660 +264,780 +PROPERTY AND EQUIPMENT - Net of accumulated depreciation +470,910 +263,862 +OTHER NONCURRENT ASSETS: +Goodwill +9,425 +9,425 +Intangible assets - net of amortization +301 +589 +Deferred revenue rebate - net of amortization +615 +2,462 +Other noncurrent assets +2,121 +304 +Total other noncurrent assets +12,462 +12,780 +TOTAL ASSETS +$ +719,032 +$ +541,422 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES: +Accounts payable +$ +211,149 +$ +129,093 +Accrued liabilities +16,607 +13,619 +Current portion of long-term debt +15,764 +16,920 +Accrued interest payable +76 +109 +Total current liabilities +243,596 +159,741 +DEFERRED INCOME TAXES +4,881 +1,148 +LONG-TERM DEBT +57,178 +159,407 +OTHER LONG-TERM LIABILITIES +125 +117 +Total liabilities +305,780 +320,413 +COMMITMENTS AND CONTINGENCIES (Note 17) +SHAREHOLDERS’ EQUITY: +Preferred stock, $0.001 par value, 30,000,000 shares authorized, 0 and 16,999,990 shares issued, respectively +— +17 +Preferred stock, additional paid-in capital +— +162,494 +Common stock, $0.001 par value, 200,000,000 shares authorized, 83,039,854 and 52,627,652 shares issued, respectively +83 +53 +Additional paid-in capital +607,466 +265,355 +Accumulated deficit +(194,297 +) +(206,910 +) +Total shareholders’ equity +413,252 +221,009 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +719,032 +$ +541,422 +See notes to consolidated financial statements. 53 +PROPETRO HOLDING CORP. AND SUBSIDIARY +CONSOLIDATED STATEMENTS OF OPERATIONS +FOR THE YEARS ENDED DECEMBER 31, 2017 , 2016 AND 2015 +(In thousands, except per share data) +2017 +2016 +2015 +REVENUE - Service revenue +$ +981,865 +$ +436,920 +$ +569,618 +COSTS AND EXPENSES: +Cost of services (exclusive of depreciation and amortization) +813,823 +404,140 +483,338 +General and administrative (inclusive of stock‑based compensation) +49,215 +26,613 +27,370 +Depreciation and amortization +55,628 +43,542 +50,134 +Property and equipment impairment expense +— +6,305 +36,609 +Goodwill impairment expense +— +1,177 +— +Loss on disposal of assets +39,086 +22,529 +21,268 +Total costs and expenses +957,752 +504,306 +618,719 +OPERATING INCOME (LOSS) +24,113 +(67,386 +) +(49,101 +) +OTHER INCOME (EXPENSE): +Interest expense +(7,347 +) +(20,387 +) +(21,641 +) +Gain on extinguishment of debt +— +6,975 +— +Other expense +(1,025 +) +(321 +) +(499 +) +Total other income (expense) +(8,372 +) +(13,733 +) +(22,140 +) +INCOME (LOSS) BEFORE INCOME TAXES +15,741 +(81,119 +) +(71,241 +) +INCOME TAX (EXPENSE)/BENEFIT +(3,128 +) +27,972 +25,388 +NET INCOME (LOSS) +$ +12,613 +$ +(53,147 +) +$ +(45,853 +) +NET INCOME (LOSS) PER COMMON SHARE: +Basic +$ +0.17 +$ +(1.19 +) +$ +(1.31 +) +Diluted +$ +0.16 +$ +(1.19 +) +$ +(1.31 +) +WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: +Basic +76,371 +44,787 +34,993 +Diluted +79,583 +44,787 +34,993 +See notes to consolidated financial statements. 54 +PROPETRO HOLDING CORP. AND SUBSIDIARY +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +FOR THE YEARS ENDED DECEMBER 31, 2017 , 2016 AND 2015 (In thousands) +Preferred Stock +Common Stock +Shares +Amount +Preferred +Additional +Paid‑In +Capital +Shares +Amount +Additional +Paid‑In +Capital +Accumulated +Deficit +Total +BALANCE - January 1, 2015 +— +$ +— +$ +— +34,621 +$ +35 +$ +222,060 +$ +(107,910 +) +$ +114,185 +Stock‑based compensation cost +— +— +— +— +— +1,239 +— +1,239 +Net loss +— +— +— +— +— +— +(45,853 +) +(45,853 +) +BALANCE - December 31, 2015 +— +— +— +34,621 +35 +223,299 +(153,763 +) +69,571 +Stock‑based compensation cost +— +— +— +— +— +1,649 +— +1,649 +Additional equity capitalization, net of costs +— +— +— +18,007 +18 +40,407 +— +40,425 +Preferred equity capitalization, net of costs +17,000 +17 +162,494 +— +— +— +— +162,511 +Net loss +— +— +— +— +— +— +(53,147 +) +(53,147 +) +BALANCE - December 31, 2016 +17,000 +17 +162,494 +52,628 +53 +265,355 +(206,910 +) +221,009 +Stock‑based compensation cost +— +— +— +— +— +9,489 +— +9,489 +Initial Public Offering, net of costs +— +— +— +13,250 +13 +170,128 +— +170,141 +Conversion of preferred stock to common stock at Initial Public Offering +(17,000 +) +(17 +) +(162,494 +) +17,000 +17 +162,494 +— +— +Exercise of stock options—net +— +— +— +162 +— +— +— +— +Net income +— +— +— +— +— +— +12,613 +12,613 +BALANCE - December 31, 2017 +— +$ +— +$ +— +83,040 +$ +83 +$ +607,466 +$ +(194,297 +) +$ +413,252 +See notes to consolidated financial statements. 55 +PROPETRO HOLDING CORP. AND SUBSIDIARY +CONSOLIDATED STATEMENTS OF CASH FLOWS +FOR THE YEARS ENDED DECEMBER 31, 2017 , 2016 AND 2015 (In thousands) +2017 +2016 +2015 +CASH FLOWS FROM OPERATING ACTIVITIES: +Net income (loss) +$ +12,613 +$ +(53,147 +) +$ +(45,853 +) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depreciation and amortization +55,628 +43,542 +50,134 +Gain on extinguishment of debt +— +(6,975 +) +— +Property and equipment impairment expense +— +6,305 +36,609 +Goodwill impairment expense +— +1,177 +— +Deferred income tax expense (benefit) +3,430 +(27,972 +) +(23,945 +) +Amortization of deferred revenue rebate +1,846 +1,846 +1,846 +Amortization of deferred debt issuance costs +3,403 +2,091 +1,351 +Stock‑based compensation +9,489 +1,649 +1,239 +Loss on disposal of assets +39,086 +22,529 +21,268 +(Gain) loss on interest rate swap +(251 +) +(205 +) +260 +Changes in operating assets and liabilities: +Accounts receivable +(84,477 +) +(24,888 +) +67,348 +Other current assets +3,304 +(563 +) +9 +Inventories +(1,472 +) +3,859 +(622 +) +Prepaid expenses +(468 +) +(62 +) +2,082 +Accounts payable +64,228 +37,049 +(23,889 +) +Accrued liabilities +2,930 +4,392 +(6,295 +) +Accrued interest +(32 +) +32 +(312 +) +Net cash provided by operating activities +109,257 +10,659 +81,230 +CASH FLOWS FROM INVESTING ACTIVITIES: +Capital expenditures +(285,891 +) +(42,832 +) +(62,855 +) +Proceeds from sale of assets +4,422 +1,144 +79 +Net cash used in investing activities +(281,469 +) +(41,688 +) +(62,776 +) +CASH FLOWS FROM FINANCING ACTIVITIES: +Proceeds from borrowings +60,045 +— +60,718 +Repayments of borrowings +(166,546 +) +(41,295 +) +(73,782 +) +Proceeds from insurance financing +4,125 +4,126 +4,105 +Repayments of insurance financing +(3,807 +) +(4,527 +) +(6,257 +) +Extinguishment of debt +— +(30,000 +) +— +Payment of debt extinguishment costs +— +(525 +) +— +Payment of debt issuance costs +(1,653 +) +(140 +) +— +Proceeds from additional common equity capitalization +— +40,425 +— +Proceeds from preferred equity capitalization +— +170,000 +— +Payment of preferred equity capitalization costs +— +(7,489 +) +— +Proceeds from IPO +185,500 +— +— +Payment of deferred IPO costs +(15,099 +) +(260 +) +— +Net cash provided by (used in) financing activities +62,565 +130,315 +(15,216 +) +NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS +(109,647 +) +99,286 +3,238 +CASH AND CASH EQUIVALENTS — Beginning of year +133,596 +34,310 +31,072 +CASH AND CASH EQUIVALENTS — End of year +$ +23,949 +$ +133,596 +$ +34,310 +See notes to consolidated financial statements. 56 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +1. ORGANIZATION AND HISTORY +ProPetro Holding Corp. (“Holding”), a Texas corporation was formed on April 14, 2007, to serve as a holding company for its wholly owned subsidiary ProPetro Services, Inc. (“Services”), a Texas corporation. Services provide hydraulic fracturing (inclusive of acidizing), cementing, coil tubing, drilling, surface drilling and flowback services to oil and gas producers, located primarily in Texas, Oklahoma, New Mexico, Utah, Colorado, and Wyoming. Holding was converted and incorporated to a Delaware Corporation on March 8, 2017. +On March 4, 2013, a majority interest in the Company was purchased by Energy Capital Partners (“ECP”), an energy‑focused private equity firm (see Note 18). +On December 22, 2016, the Company restated and amended the Company’s Shareholders Agreement and certificate of formation in the state of Texas, approving a reverse stock split, such that each holder of common stock of the Company shall receive one share of common stock for every 170.4667 shares of previous common stock held. In conjunction, the Company amended the amount of authorized shares to 230,000,000 , of which 200,000,000 are common and 30,000,000 are preferred. +On March 22, 2017, we consummated our initial public offering (“IPO”) in which 25,000,000 shares of our common stock, par value $0.001 per share, were sold at a public offering price of $14.00 per share, with 13,250,000 shares issued and sold by the Company and 11,750,000 shares sold by existing stockholders. We received net proceeds of approximately $170.1 million after deducting $10.9 million of underwriting discounts and commissions, and $4.5 million of other offering expenses. At closing, we used the proceeds (i) to repay $71.8 million in outstanding borrowings under the term loan, (ii) $86.8 million to fund the purchase of additional hydraulic fracturing units and other equipment, and (iii) the remaining for general corporate purposes. In connection with the IPO, the Company executed a stock split, such that each holder of common stock of the Company received 1.45 shares of common stock for every one share of previous common stock, and all 16,999,990 shares of our outstanding Series A preferred stock converted to common stock on a 1 :1 basis. +Accordingly, any information related to or dependent upon the share or option counts in the 2017 , 2016 and 2015 consolidated financial statements and Note 13 Net Income (loss) Per Share , Note 14 Stock‑Based Compensation , Note 18 Equity Capitalization and Note 19 Quarterly Financial Data (Unaudited) have been updated to reflect the effect of the reverse stock split in December 2016 and the stock split in March 2017. +Holding and Services are collectively referred to as the “Company” in the accompanying consolidated financial statements. +2. SIGNIFICANT ACCOUNTING POLICIES +A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements are as follows: +Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Holding and its wholly owned subsidiary, Services. All intercompany accounts and transactions have been eliminated in consolidation. +Basis of Presentation — The accompanying consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (SEC) and in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). +Use of Estimates — Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Such estimates include, but are not +57 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +limited to, allowance for doubtful accounts, depreciation of property and equipment, estimates of fair value of property and equipment, estimates related to fair value of reporting units for purposes of assessing goodwill, estimates related to deferred tax assets and liabilities, including any related valuation allowances, and estimates of fair value of stock‑based compensation. Actual results could differ from those estimates. +Revenue Recognition — The Company’s services are sold based upon contracts or other agreements with the customer that include fixed or determinable prices and do not include other post‑delivery obligations. Revenue for services is recognized as the services are rendered and when collectability is reasonably assured. Rates for services are typically determined per the contract or agreement with customers. +Pressure Pumping — Pressure pumping consists of downhole pumping services including hydraulic fracturing (inclusive of acidizing services) and cementing. The Company recognizes revenues when services are performed, collection of the receivables is probable, and a price is fixed or determinable. The Company prices services for its pressure pumping by the job, project or day depending on the type of service performed and request from the customer. +Drilling Services — Drilling services consists of surface air drilling and drilling, whereby we drill a well for a customer to a certain depth using a drilling rig and related equipment. The Company recognizes revenues either on a “turnkey” contract basis, in which a fixed and set price for the job is determinable, on a “daywork” contract basis, in which a stated rate per day is fixed and determinable, or on a “footage” contract basis, in which a rate per feet drilled is fixed and determinable. +Other Completion & Production Services — Other completion & production services consists of coil tubing and flowback services whereby the Company recognizes revenues when services are performed either on a per job or per day or hourly rate, collections of receivables are probable, and a price is fixed or determinable. +Cash and Cash Equivalents — The Company considers highly liquid investments with initial maturities of three months or less to be cash equivalents. +Accounts Receivable — Accounts receivables are stated at the amount billed and billable to customers. The Company’s allowance for doubtful accounts is based on management’s evaluations of the collectability of each accounts receivable based on the customer’s payment history and general economic conditions. At December 31, 2017 , 2016 and 2015 , the allowance for doubtful accounts was $0.4 million , $0.6 million and $0.8 million , respectively. +Inventories — Inventories, which consists only of raw materials, are stated at lower of average cost or net realizable value. +Property and Equipment — The Company’s property and equipment are recorded at cost, less accumulated depreciation. +Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in the statement of operations. +The Company recorded a loss on disposal of assets of $39.1 million , $22.5 million and $21.3 million for the years ended December 31, 2017 , 2016 and 2015 , respectively. The recorded loss on disposal is primarily attributed to the increased service intensity of pressure pumping activity which has resulted in a shorter useful life and faster replacement of certain components of the pressure pumping equipment. +58 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +Depreciation — Depreciation of property and equipment is provided on the straight‑line method over the following estimated useful lives: +Vehicles +1 ‑ 5 years +Equipment +1 ‑ 20 years +Leasehold improvements +5 ‑ 20 years +Impairment of Long‑Lived Assets — In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360, Accounting for the Impairment or Disposal of Long‑Lived Assets , the Company reviews its long‑lived assets to be held and used whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. +An impairment loss is indicated if the sum of the expected future undiscounted cash flows attributable to the asset group is less than the carrying amount of such asset group. In this circumstance, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. No impairment was recorded in 2017 . The impairment recorded in 2016 was $6.3 million for property and equipment relating to the drilling asset group. The impairment recorded in 2015 was $36.6 million for property and equipment relating to the drilling and acidizing asset groups. +The Company accounts for long‑lived assets to be disposed of at the lower of their carrying amount or fair value, less cost to sell once management has committed to a plan to dispose of the assets. +Goodwill — Goodwill is the excess of the consideration transferred over the fair value of the tangible and identifiable intangible assets and liabilities recognized. Goodwill is not amortized. We perform an annual impairment test of goodwill as of December 31, or more frequently if circumstances indicate that impairment may exist. The determination of impairment is made by comparing the carrying amount of a reporting unit with its fair value, which is generally calculated using a combination of market and income approaches. If the fair value of the reporting unit exceeds the carrying value, no further testing is performed. If the fair value of the reporting unit is less than the carrying value, we consider goodwill to be impaired, and the amount of impairment loss is estimated and recorded in the statement of operations. +In 2014, we acquired Blackrock Drilling, Inc. (“Blackrock”) for $1.8 million . The assets acquired from Blackrock were recorded as $0.6 million of equipment with the excess of the purchase price over the fair value of the assets recorded as goodwill of $1.2 million . The acquisition complemented our existing drilling operations. The transaction has been accounted for using the acquisition method of accounting and, accordingly, assets and liabilities assumed were recorded at their fair values as of the acquisition date. Based on our goodwill impairment test as of December 31, 2016, the Company concluded that there was an impairment of goodwill of $1.2 million related to the Blackrock acquisition. Accordingly, a $1.2 million impairment expense was recorded during the year ended December 31, 2016 , to fully write-down the goodwill related to Blackrock. Prior to the impairment write‑down, the goodwill related to the Blackrock acquisition of $1.2 million was recorded in the all other reportable segment. No impairment of Blackrock goodwill was recorded during the year ended December 31, 2015. +In 2011, we acquired Technology Stimulation Services, LLC (“TSS”) for $24.4 million . The assets acquired from TSS were recorded as $15 million of equipment with the excess of the purchase price over fair value of the assets recorded as goodwill of $9.4 million . The acquisition complemented our existing pressure pumping business. The transaction has been accounted for using the acquisition method of accounting and, accordingly, assets and liabilities assumed were recorded at their fair values as of the acquisition date. Based on our goodwill impairment tests as of December 31, 2017 , 2016 and 2015 , we concluded that the goodwill related to TSS acquisition was determined not to be impaired. The goodwill related to the TSS acquisition of $9.4 million is recorded in the pressure pumping reportable segment. +59 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +Intangible Assets — Intangible assets with finite useful lives are amortized on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized, which is generally on a straight‑line basis over the asset’s estimated useful life. +Income Taxes — Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. +We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidences, including future reversals of existing taxable temporary differences, projected future taxable income, and the results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. +Advertising Expense — All advertising costs are expensed as incurred. For the years ended December 31, 2017 , 2016 and 2015 , advertising expense was $0.8 million , $0.4 million and $0.9 million , respectively. +Deferred Loan Costs — The Company capitalized certain costs in connection with obtaining its borrowings, including lender, legal, and accounting fees. These costs are being amortized over the term of the related loan using the straight‑line method (which approximates the interest method). Deferred loan costs amortization is included in interest expense. Unamortized deferred loan costs associated with loans paid off or refinanced with different lenders are charged off in the period in which such an event occurs. Deferred loan costs are classified as a reduction of long‑term debt or in certain instance as an asset in the consolidated balance sheet. Amortization of deferred loan costs is recorded as interest expense in the statement of operations, and during the years ended December 31, 2017 , 2016 and 2015 , the amount of expense recorded was $3.4 million , $2.1 million and $1.4 million , respectively. +Stock-Based Compensation — The Company recognizes the cost of stock‑based awards on a straight‑line basis over the requisite service period of the award, which is usually the vesting period under the fair value method. Total compensation cost is measured on the grant date using fair value estimates. +Insurance Financing — The Company annually renews their commercial insurance policies and records a prepaid insurance asset and amortizes it monthly over the coverage period. The Company may choose to finance a portion of the premiums and will make repayments monthly over ten months in equal installments. +Concentration of Credit Risk — The Company’s assets that are potentially subject to concentrations of credit risk are cash and cash equivalents and trade accounts receivable. Cash balances are maintained in financial institutions, which at times exceed federally insured limits. The Company monitors the financial condition of the financial institutions in which accounts are maintained and has not experienced any losses in such accounts. The receivables of the Company are spread over a number of customers, a majority of which are credible operators and suppliers to the oil and natural gas industries. The Company performs ongoing credit evaluations as to the financial condition of its customers with respect to trade receivables. +In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) . ASU No. 2014-09 requires entities to recognize revenue to depict transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 requires entities to disclose both qualitative and quantitative information that enables users of the consolidated +60 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including disclosure of significant judgments affecting the recognition of revenue. ASU No. 2014-09 was originally effective for annual periods beginning after December 15, 2016, using either the retrospective or cumulative effect transition method. On August 12, 2015, the FASB issued ASU No. 2015-14, which defers the effective date of the revenue standard, ASU No. 2014-09, by one year for all entities and permits early adoption on a limited basis. We have completed our evaluation of ASU No. 2014-09, and the adoption of this guidance will not materially affect our revenue recognition. However, there will be additional disclosures on our consolidated financial statements relating to the adoption of this standard. +I n July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires entities to measure most inventory "at the lower of cost and net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. ASU No. 2015-11 does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. The amendments in ASU No. 2015-11 are effective for fiscal years beginning after December 15, 2016. The ASU became effective for us in 2017 and the adoption of this guidance did not materially affect our consolidated financial statements. +In February 2016, the FASB issued ASU No. 2016-02, Leases , a new standard on accounting for leases. The ASU introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in the current accounting guidance as well as the FASB’s new revenue recognition standard. However, the ASU eliminates the use of bright-line tests in determining lease classification as required in the current guidance. The ASU also requires additional qualitative disclosures along with specific quantitative disclosures to better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including periods within that reporting period, using a modified retrospective approach. Early adoption is permitted. We have not completed an evaluation of the impact the pronouncement will have on our consolidated financial statements and related disclosures. +In March 2016, the FASB issued ASU No. 2016-09, Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which modifies several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. The ASU became effective for us in 2017 and the adoption of this guidance did not materially affect our consolidated financial statements. +In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment , which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. As a result, under this ASU, an entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This pronouncement is effective for impairment tests in fiscal years beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We believe that the adoption of this guidance will not materially affect our consolidated financial statements. +61 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +3. SUPPLEMENTAL CASH FLOWS INFORMATION +December 31, +($ in thousands) +2017 +2016 +2015 +Supplemental cash flows disclosures +Interest paid +$ +3,966 +$ +18,249 +$ +20,531 +Income taxes paid +$ +— +$ +3 +$ +1,295 +Supplemental disclosure of non‑cash activities +Capital expenditures included in accounts payable +$ +33,850 +$ +3,176 +$ +8,821 +Conversion of preferred stock to common stock at Initial Public Offering +$ +162,511 +$ +— +$ +— +4. FAIR VALUE MEASUREMENTS +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. +In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used, when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions other market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows: +Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment. +Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. +Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. +A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. +Assets and Liabilities Measured at Fair Value on a Recurring Basis +Our financial instruments include cash and cash equivalents, accounts receivables, accounts payable, and a derivative financial instrument. The estimated fair value of our financial instruments — cash and cash equivalent, accounts receivable and accounts payable at December 31, 2017 , 2016 and 2015 approximates their carrying value as reflected in our consolidated balance sheets because of their short‑term nature. We use a derivative financial instrument, an interest rate swap, to manage interest rate risk. Our policies do not permit the use of derivative financial instruments for speculative purposes. We did not designate the interest rate swap as a hedge for accounting +62 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +4. FAIR VALUE MEASUREMENTS (Continued) +purposes. We record all derivatives as of the end of our reporting period in our consolidated balance sheet at fair value, which is based on quoted market prices, which represents a level 1 in the fair value measurement hierarchy. We may be exposed to credit losses in the event of nonperformance by counterparties to the interest rate swap. The counterparty of the interest rate swap is a lender under our term loan and a credible, large institution, and the Company does not believe there is significant or material credit risk upon settling the contract. The fair value of the interest rate swap liability at December 31, 2017 , 2016 and 2015 was $0 , $0.3 million and $0.5 million , respectively. Based on quoted market prices as of December 31, 2017 , 2016 and 2015 , for contracts with similar terms and maturity date, as provided by the counterparty, we recorded a gain of $0.3 million , $0.2 million and a loss of $0.3 million , respectively. +Assets Measured at Fair Value on a Nonrecurring Basis +Assets measured at fair value on a nonrecurring basis at December 31, 2017 and 2016 , respectively, are set forth below: +Estimated fair value measurements +Balance +Quoted prices in +active market +(Level 1) +Significant other +observable inputs +(Level 2) +Significant other +unobservable inputs +(Level 3) +Total gains +(losses) +($ in thousands): +2017: +Property and equipment, net +$ +— +$ +— +$ +— +$ +— +$ +— +Goodwill +$ +— +$ +— +$ +— +$ +— +$ +— +2016: +Property and equipment, net +$ +8,700 +$ +— +$ +8,700 +$ +— +$ +(6,305 +) +Goodwill +$ +9,425 +$ +— +$ +— +$ +9,425 +$ +(1,177 +) +No impairment was recorded for our property and equipment during the year ended December 31, 2017 . In 2016, the depressed cash flows and continued decline in utilization of our drilling assets were indicative of potential impairment, resulting in the Company comparing the carrying value of the drilling assets with its estimated fair value. We determined that the carrying value of the drilling assets was greater than its estimated fair value and accordingly, an impairment expense was recorded. In 2016, the non‑cash asset impairment charges for drilling was $6.3 million , which had a net carrying value of $15.0 million prior to the impairment write‑down. In 2015, the non‑cash asset impairment charges for drilling and acidizing was $28.6 million and $8 million , respectively, aggregating to a total of $36.6 million . In 2015, the drilling and acidizing assets groups had a net carrying value of $48.1 million and $15.6 million prior to the impairment write‑down. See Note 7, “Impairment of Long‑Lived Assets.” +We generally apply fair value techniques to our reporting units on a nonrecurring basis associated with valuing potential impairment loss related to goodwill. Our estimate of the reporting unit fair value is based on a combination of income and market approaches, Level 1 and 3, respectively, in the fair value hierarchy. The income approach involves the use of a discounted cash flow method, with the cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies market multiples in estimating the fair value. Significant assumptions include projected revenue growth, capital expenditures, utilization, gross margins, discount rates, terminal growth rates, and weight allocation between income and market approaches. If the reporting unit's carrying amount exceeds its fair value, we consider goodwill impaired, and the impairment loss is recorded in the period. There were no additions to, or disposal of, goodwill during the year ended December 31, 2017 , 2016 and 2015 . Based on our annual goodwill impairment test, no impairment of goodwill was recorded for the year ended December 31, 2017 . At December 31, 2016, we estimated the fair value of our surface drilling +63 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +4. FAIR VALUE MEASUREMENTS (Continued) +reporting unit to be $3.8 million and its carrying value was $4.2 million . As a result of the potential impairment with the carrying value exceeding the estimated fair value, we then further determined the implied fair value of the $1.2 million goodwill for the surface drilling reporting unit to be $0 . Accordingly, we recorded an impairment expense of $1.2 million . The impairment expense was attributable to the challenging oil and gas market and slow recovery of crude oil prices, all of which adversely impacted on our expected future cash flows for the surface drilling reporting unit. There was no impairment of goodwill in 2015. +5. INTANGIBLE ASSETS +Intangible assets are composed of internally developed software. Intangible assets are amortized on a straight‑line basis with a useful life of five years. Amortization expense included in net income (loss) for the years ended December 31, 2017 , 2016 and 2015 was $0.3 million , $0.3 million and $0.3 million , respectively. At December 31, 2017 and 2016 , respectively, the company’s intangible assets subject to amortization are as follows: +($ in thousands) +2017 +2016 +Internally developed software +$ +1,440 +$ +1,440 +Less accumulated amortization +1,139 +851 +Intangible assets — net +$ +301 +$ +589 +Estimated remaining amortization expense for each of the subsequent fiscal years is expected to be as follows: +($ in thousands) +Year +Estimated +Future +Amortization +Expense +2018 +$ +288 +2019 +13 +Total +$ +301 +The average amortization period remaining is approximately 1.05 years . +6. PROPERTY AND EQUIPMENT +Property and equipment consisted of the following at December 31, 2017 and 2016 , respectively: +($ in thousands) +2017 +2016 +Equipment and vehicles +$ +646,800 +$ +402,641 +Leasehold improvements +4,987 +4,500 +Subtotal +651,787 +407,141 +Less accumulated depreciation +180,877 +143,279 +Property and equipment — net +$ +470,910 +$ +263,862 +7. IMPAIRMENT OF LONG‑LIVED ASSETS +Whenever events or circumstances indicate that the carrying value of long‑lived assets may not be recoverable, the Company reviews the carrying value of long‑lived assets, such as property and equipment and other assets to +64 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +7. IMPAIRMENT OF LONG-LIVED ASSETS (Continued) +determine if they are recoverable. If any long‑lived assets are determined to be unrecoverable, an impairment expense is recorded in the period. Asset recoverability is estimated using undiscounted future net cash flows at the lowest identifiable level, excluding interest expense and one‑time other income and expense adjustments. The Company determined the lowest level of identifiable cash flows to be at the asset group level, which consists of hydraulic fracturing (inclusive of acidizing), cementing, coil tubing, flowback, drilling, and surface drilling. +During the year ended December 31, 2017 , no impairment expense was recorded for any of our assets group. During the year ended December 31, 2016 , the gradual shift from vertical to horizontal drilling rigs in the Permian Basin led to the deterioration in utilization of our drilling rigs, and we expected undiscounted future cash flows to be lower than the carrying value of the drilling assets. Given that the carrying value of the drilling assets may not be recoverable, the Company estimated the fair value of the asset group and compared it to its carrying value. Potential impairment exists if the estimated undiscounted future net cash flows for a given asset group is less than the carrying amount of the asset group. The impairment expense is determined by comparing the estimated fair value with the carrying value of the related asset, and any excess amount by which the carrying value exceeds the fair value is recorded as an impairment expense in the period. At December 31, 2016, the estimated fair value of the drilling asset group of $8.7 million was determined using the market approach, which represents a level 2 in the fair value measurement hierarchy. Our fair value estimates required us to use significant other observable inputs including assumptions related to replacement cost, among others. According an impairment expense of $6.3 million was recorded in 2016 as the carrying value of the drilling asset group of $15.0 million was greater than its then estimated fair value. All other assets groups were determined to be recoverable in 2016. During the year ended December 31, 2015 , the asset groups identified to have impairment were drilling and acidizing, with estimated fair values of approximately $18.8 million and $6.3 million , respectively. The estimated fair values of the drilling and acidizing asset groups were determined using the cost approach, which represents a level 2 in the fair value measurement hierarchy. During the year ended December 31, 2015 , the impairment expense for drilling and acidizing was $28.6 million and $8.0 million , respectively. +8. DEFERRED REVENUE REBATE +In November 2011, the Company acquired certain oilfield fracturing equipment from a customer and agreed to provide future fracturing services to the customer for a period of 78 months in exchange for a 12% $25 million note payable to the customer. The Company recorded the fracturing equipment at its estimated fair value of approximately $13 million and assigned the remaining value of approximately $12 million to a deferred revenue rebate account to be amortized over the customer’s 78 ‑month service period. In March 2013, the Company repaid the note payable to the customer. For each of the years ended December 31, 2017 , 2016 and 2015 the Company recorded $1.8 million of amortization as a reduction of revenue. +9. LONG‑TERM DEBT +2013 Term Loan and Revolving Credit Facility +On September 30, 2013, we entered into a term loan in the amount of $220 million ("Term Loan") with a $40 million revolving credit line ("Revolving Credit Facility" ) . Borrowings under the Term Loan and Revolving Credit Facility accrued interest at LIBOR plus 6.25% , subject to a 1% LIBOR floor, and were secured by a first priority lien and security interest in all assets of the Company. Proceeds from the Term Loan were used to pay off 100% of our debt outstanding, including accrued interest, at September 30, 2013, with excess proceeds from the Term Loan and the Revolving Credit Facility used to fund growth and working capital needs. The Term Loan and Revolving Credit Facility were scheduled to mature on September 30, 2019 and September 30, 2018, respectively, with quarterly and monthly payments of principal and interest, respectively. +Under the Term Loan and Revolving Credit Facility we were required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to reporting, insurance, collateral maintenance, change of control, transactions with affiliates, distributions, and limitations on additional indebtedness. In addition, the Term Loan and Revolving Credit +65 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +9. LONG‑TERM DEBT (Continued) +Facility included a maximum leverage ratio of 3.5 x EBITDA (earnings before interest, taxes, depreciation, and amortization) to total debt, which became effective March 31, 2014. +In 2015, given the then near-term economic uncertainty and volatility of commodity prices, we determined that we were likely to be out of compliance with the leverage ratio covenant under the Term Loan and Revolving Credit Facility at the March 31, 2016 test date. Accordingly, the Company and its equity sponsor, Energy Capital Partners ("ECP"), commenced negotiations with the lenders to amend the covenants and leverage ratio in the Term Loan and Revolving Credit Facility. The resulting amendment and waiver agreement was executed on June 8, 2016. Under the terms of the amendment, ECP infused $40.0 million of additional equity into the Company, $10.0 million of which was reserved for working capital, with up to $30.0 million available to repurchase debt. A minority shareholder also infused $0.4 million alongside ECP to prevent dilution. The amendment and waiver also suspended the leverage ratio test until June 30, 2017, and provided us with 30 days to deliver any past-due financial statements. +Gain on Extinguishment of Debt — in connection with the amendment to the Term Loan and Revolving Credit Facility, we initiated an auction process with the lenders to repurchase a portion of debt for a price of $0.80 , a 20% discount to par value. The auction settled on June 16, 2016 as the Company repurchased a total amount of $37.5 million of debt for $30.0 million plus $0.5 million in debt extinguishment auction costs, leading to a gain on extinguishment of debt of $7.0 million . +On January 13, 2017, we repaid $75 million of the outstanding balance under the Term Loan and repaid the remaining balance of $13.5 million under the Revolving Credit Facility using a portion of the proceeds from the private placement offering. On March 22, 2017, we retired the $71.8 million remaining balance of the Term Loan, along with accrued interest, using a portion of the proceeds from our IPO. Each of the Term Loan and Revolving Credit Facility were terminated in accordance with their terms upon the repayment of outstanding borrowings. +Equipment Financing +On November 24, 2015, we entered into a 36 months financing arrangement for three hydraulic fracturing units in the amount of $25 million , and a portion of the proceeds were used to pay off the previous manufacturer notes, with the remainder being used for additional liquidity. +On June 30, 2017, we entered into a financing arrangement for the purchase of light vehicles. As of December 31, 2017 , the outstanding balance for certain light vehicles purchased under this financing arrangement is $4.7 million . +ABL Credit Facility +On March 22, 2017, we entered into a new revolving credit facility with a $150 million borrowing capacity ("ABL Credit Facility"). Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either LIBOR or base rate, plus the applicable margin, which ranges from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans, with no LIBOR floor. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. The ABL Credit Facility has a tenor of 5 years and a borrowing base of 85% of eligible accounts receivable less customary reserves. Under this facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. In addition, the ABL Credit Facility includes a Springing Fixed Charge Coverage Ratio of 1.0 x when excess availability is less than the greater of (i) 10% of the lesser of the facility size and the Borrowing Base and (ii) $12.0 million . The ABL has a commitment fee of 0.38% , which reduces to 0.25% if utilization is greater than 50% of the borrowing base. +66 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +9. LONG‑TERM DEBT (Continued) +On February 22, 2018, we entered into an amendment with our lenders to increase the capacity of the ABL Credit Facility. The amendment increased total capacity under the facility from $150 million to $200 million . +The fair values of the ABL Credit Facility, Revolving Credit Facility and equipment financing approximate their carrying values. Our Term Loan was completely retired at December 31, 2017 . The estimated fair value of the Term Loan at December 31, 2016 was approximately 89% of its carrying value or $130.6 million compared to $146.8 million carrying value. +Total debt consisted of the following notes at December 31, 2017 and 2016 , respectively: +($ in thousands) +2017 +2016 +ABL Credit Facility +$ +55,000 +$ +— +6.25% "Term loan" +— +146,750 +Revolving Credit Facility +— +13,500 +Equipment financing +17,942 +19,193 +Total debt +72,942 +179,443 +Less deferred loan costs, net of amortization +— +3,116 +Subtotal +72,942 +176,327 +Less current portion of long-term debt +15,764 +16,920 +Total long-term debt, net of deferred loan costs +$ +57,178 +$ +159,407 +The loan origination costs relating to the ABL Credit Facility are classified as an asset in the balance sheet. +Annual Maturities — Scheduled annual maturities of total debt are as follows at December 31, 2017 : +($ in thousands) +2018 +$ +15,764 +2019 +2,142 +2020 +36 +2021 +— +2022 and thereafter +55,000 +Total +$ +72,942 +10. ACCRUED LIABILITIES +Accrued liabilities consisted of the following at December 31, 2017 and 2016 , respectively: +($ in thousands) +2017 +2016 +Accrued insurance +$ +2,762 +$ +2,900 +Accrued payroll and related expenses +10,110 +4,729 +Other +3,735 +5,990 +Total +$ +16,607 +$ +13,619 +67 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +11. EMPLOYEE BENEFIT PLAN +The Company has a 401(k) plan whereby all employees with six months of service may contribute up to $15,000 to the plan annually. The employees vest in the Company contributions to the 401(k) plan 25% per year, beginning in the employee’s second year of service, with full vesting occurring after five years of service. The employees are fully vested in their contributions when made. The Company matches employee contributions 20 cents on the dollar up to 10% of gross salary. During the years ended December 31, 2017 , 2016 and 2015 , the recorded expense under the plan was $0.2 million , $0.2 million and $0.2 million , respectively. +12. REPORTABLE SEGMENT INFORMATION +The Company has six operating segments for which discreet financial information is readily available: hydraulic fracturing, cementing, coil tubing, flowback, surface drilling, and drilling. During the fourth quarter of 2017, our acidizing operation was consolidated into our hydraulic fracturing operating segment, and we no longer maintain discreet financial information for acidizing, resulting in a reduction in the number of our operating segments from seven previously reported in 2016 to six operating segments. The change in the number of our operating segments did not impact our reportable segment information reported during the years ended December 31, 2017 , 2016 and 2015 . Our operating segments represent how the chief operating decision maker (CODM) evaluates performance and allocate resources. +In accordance with Accounting Standards Codification (ASC) 280 — Segment Reporting , the Company has one reportable segment (pressure pumping) comprised of the hydraulic fracturing and cementing operating segments. All other operating segments and corporate administrative expenses are included in the “all other” category in the table below. Inter‑segment revenues are not material and were not shown separately in the table below. +The Company manages and assesses the performance of the reportable segment by its adjusted EBITDA (earnings before other income (expense), interest, taxes, depreciation & amortization, stock-based compensation expense, impairment expense, (gain)/loss on disposal of assets, gain on extinguishment of debt and other unusual or nonrecurring expenses or income) . A reconciliation from segment level financial information to the consolidated statement of operations is provided in the table below. +68 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +12. REPORTABLE SEGMENT INFORMATION (Continued) +($ in thousands) +Pressure +Pumping +All Other +Total +Year ended December 31, 2017 +Service revenue +$ +945,040 +$ +36,825 +$ +981,865 +Adjusted EBITDA +$ +145,122 +$ +(7,679 +) +$ +137,443 +Depreciation and amortization +$ +51,155 +$ +4,473 +$ +55,628 +Capital expenditures +$ +300,406 +$ +4,893 +$ +305,299 +Goodwill +$ +9,425 +$ +— +$ +9,425 +Total assets +$ +688,279 +$ +30,753 +$ +719,032 +Pressure +Pumping +All Other +Total +Year ended December 31, 2016 +Service revenue +$ +409,014 +$ +27,906 +$ +436,920 +Adjusted EBITDA +$ +15,656 +$ +(7,840 +) +$ +7,816 +Depreciation and amortization +$ +37,282 +$ +6,260 +$ +43,542 +Property and equipment impairment expense +$ +— +$ +6,305 +$ +6,305 +Goodwill impairment expense +$ +— +$ +1,177 +$ +1,177 +Capital expenditures +$ +45,473 +$ +535 +$ +46,008 +Goodwill +$ +9,425 +$ +— +$ +9,425 +Total assets +$ +501,906 +$ +39,516 +$ +541,422 +Pressure +Pumping +All Other +Total +Year ended December 31, 2015 +Service revenue +$ +510,198 +$ +59,420 +$ +569,618 +Adjusted EBITDA +$ +62,540 +$ +(2,391 +) +$ +60,149 +Depreciation and amortization +$ +38,369 +$ +11,765 +$ +50,134 +Property and equipment impairment expense +$ +7,980 +$ +28,629 +$ +36,609 +Capital expenditures +$ +69,029 +$ +2,647 +$ +71,676 +Goodwill +$ +9,425 +$ +1,177 +$ +10,602 +Total assets +$ +398,449 +$ +48,005 +$ +446,454 +69 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +12. REPORTABLE SEGMENT INFORMATION (Continued) +Reconciliation of net income (loss) to adjusted EBITDA: +($ in thousands) +Pressure +Pumping +All Other +Total +Year ended December 31, 2017 +Net income (loss) +$ +50,417 +$ +(37,804 +) +$ +12,613 +Depreciation and amortization +51,155 +4,473 +55,628 +Interest expense +— +7,347 +7,347 +Income tax expense +— +3,128 +3,128 +Loss on disposal of assets +38,059 +1,027 +39,086 +Stock‑based compensation +— +9,489 +9,489 +Other expense +— +1,025 +1,025 +Other general and administrative expense (1) +— +722 +722 +Deferred IPO Bonus +5,491 +2,914 +8,405 +Adjusted EBITDA +$ +145,122 +$ +(7,679 +) +$ +137,443 +Year ended December 31, 2016 +Pressure +Pumping +All Other +Total +Net loss +$ +(45,316 +) +$ +(7,831 +) +$ +(53,147 +) +Depreciation and amortization +37,282 +6,260 +43,542 +Interest expense +— +20,387 +20,387 +Income tax benefit +— +(27,972 +) +(27,972 +) +Loss on disposal of assets +23,690 +(1,161 +) +22,529 +Property and equipment impairment expense +— +6,305 +6,305 +Goodwill impairment expense +— +1,177 +1,177 +Gain on extinguishment of debt +— +(6,975 +) +(6,975 +) +Stock‑based compensation +— +1,649 +1,649 +Other expense +— +321 +321 +Adjusted EBITDA +$ +15,656 +$ +(7,840 +) +$ +7,816 +Pressure +Pumping +All Other +Total +Year ended December 31, 2015 +Net loss +$ +(5,022 +) +$ +(40,831 +) +$ +(45,853 +) +Depreciation and amortization +38,369 +11,765 +50,134 +Interest expense +— +21,641 +21,641 +Income tax benefit +— +(25,388 +) +(25,388 +) +Loss on disposal of assets +21,213 +55 +21,268 +Property and equipment impairment expense +7,980 +28,629 +36,609 +Stock‑based compensation +— +1,239 +1,239 +Other expense +— +499 +499 +Adjusted EBITDA +$ +62,540 +$ +(2,391 +) +$ +60,149 +(1) Other general and administrative expense relates to legal settlement expense. +70 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +12. REPORTABLE SEGMENT INFORMATION (Continued) +Major Customers +For the years ended December 31, 2017 , 2016 and 2015 , the Company had revenue from the following significant customers that accounted for the following percentages of the Company’s total revenue: +2017 +2016 +2015 +Customer A +15.0 +% +18.0 +% +12.5 +% +Customer B +13.8 +% +12.5 +% +8.8 +% +Customer C +12.7 +% +8.7 +% +14.2 +% +Customer D +12.6 +% +7.0 +% +11.1 +% +Customer E +11.8 +% +— +% +— +% +For the year ended December 31, 2017 , pressure pumping made up 99.9% of Customer A, 99.2% of Customer B, 99.9% of Customer C, 99.8% of Customer D and 95.5% of customer E. For the year ended December 31, 2016 , pressure pumping made up 96% of Customer A, 99% of Customer B, 100% of Customer C and 99% of Customer D. For the year ended December 31, 2015 , pressure pumping made up 99% of Customer A, 100% of Customer B, 88% of Customer C and 99% of Customer D. +13. NET INCOME (LOSS) PER SHARE +Basic net income (loss) per common share is computed by dividing the net income (loss) relevant to the common stockholders by the weighted-average number of shares outstanding during the year. Diluted net income (loss) per common share uses the same net income (loss) divided by the sum of the weighted-average number of shares of common stock outstanding during the period, plus dilutive effects of options, performance and restricted stocks units outstanding during the period calculated using the treasury method and the potential dilutive effects of preferred stocks (if any) calculated using the if-converted method. The table below shows the calculations for years ended December 31, 2017 , 2016 and 2015 . +(In thousands, except for per share data) +2017 +2016 +2015 +Numerator (both basic and diluted) +Net income (loss) relevant to common stockholders +$ +12,613 +$ +(53,147 +) +$ +(45,853 +) +Denominator +Denominator for basic income (loss) per share +76,371 +44,787 +34,993 +Dilutive effect of stock options +2,903 +— +— +Dilutive effect of performance stock units +59 +— +— +Dilutive effect of non-vested restricted stock units +250 +— +— +Denominator for diluted income (loss) per share +79,583 +44,787 +34,993 +Basic net income (loss) per common share +$ +0.17 +$ +(1.19 +) +$ +(1.31 +) +Diluted net income (loss) per common share +$ +0.16 +$ +(1.19 +) +$ +(1.31 +) +71 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +13. NET INCOME (LOSS) PER SHARE (Continued) +As shown in the table below, the following non-vested restricted stock units, preferred stock, performance stock units, and stock options have not been included in the calculation of diluted income (loss) per share for years ended December 31, 2017 , 2016 and 2015 as they would be anti-dilutive to the calculation above. +(Count in thousands) +2017 +2016 +2015 +Stock options +— +4,646 +3,486 +Preferred stock +— +17,000 +— +Performance stock units +— +— +— +Non-vested restricted stock units +— +372 +372 +— +22,018 +3,858 +14. STOCK‑BASED COMPENSATION +Effective March 4, 2013, we adopted the ProPetro Stock Option Plan pursuant to which our Board of Directors may grant stock options or other stock-based awards to key employees, consultants, and directors. The Plan, as amended, is authorized to grant up to 4,645,884 shares of common stock to be issued upon exercise of the options. The Company’s share price used to estimate the fair value of the option at the grant date was based on a combination of income and market approaches, which are highly complex and sensitive. The income approach involves the use of a discounted cash flow method, with cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies market multiples in estimating the fair value of the Company’s stock. The expected term used to calculate the fair value of all options considers the vesting date and the grant’s expiration date. The expected volatility was estimated by considering comparable public companies, and the risk free rate is based on the U.S treasury yield curve as of the grant date. The dividend assumption is based on historical experience. After becoming a public company, the market price was used to determine the market value of our common stock. Prior to 2015, the Company had granted a total of 3,499,228 options with an exercise price of $3.96 per option, and all options expire 10 years from the date of grant. +On June 14, 2013, we granted 2,799,408 stock option awards to certain key employees and directors that shall vest and become exercisable based upon the achievement of a service requirement. The options vest in 25% increments for each year of continuous service and an option becomes fully vested upon the optionee’s completion of the fourth year of service. The contractual term for the options awarded is 10 years. For the years ended December 31, 2017 , 2016 and 2015 , the Company recognized $0.7 million , $1.2 million and $1.2 million , respectively, in compensation expense related to these stock options. The fair value of each option award granted is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of the options was estimated at the date of grant using the following assumptions: +Expected volatility +45 +% +Expected dividends +$ +— +Expected term (in years) +6.25 +Risk free rate +1.35 +% +On December 1, 2013, we granted 699,820 stock option awards to certain key employees which were scheduled to vest in four substantially equal annual installments, subject to service and performance requirements and acceleration upon a change in control. As of December 31, 2016 and 2015 the performance requirements were not considered to be probable of achievement for any of the outstanding option awards and 114,456 options were forfeited during the year ended December 31, 2016. Accordingly, we did not recognize any compensation expense related to these stock options during the years ended December 31, 2016 and 2015. Effective March 16, 2017, we +72 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +14. STOCK‑BASED COMPENSATION (Continued) +terminated the options in connection with the IPO and approved a cash bonus totaling $5.1 million to the holders of the options. +The contractual term for the options awarded is 10 years. The fair value of each option award granted is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of the options was estimated at the date of grant using the following assumptions: +Expected volatility +45 +% +Expected dividends +$ +— +Expected term (in years) +6.25 +Risk free rate +1.83 +% +On July 19, 2016, we granted 1,274,549 stock option awards to certain key employees and directors which are scheduled to vest in five substantially equal semi-annual installments commencing in December 2016, subject to a continuing services requirement. The contractual term for the options awarded is 10 years. For the year ended December 31, 2017 , we recognized the remaining $1.8 million in stock compensation expense related to these stock options, as the Company fully accelerated vesting of the options in connection with the IPO, and for the years ended December 31, 2016 and 2015 , the Company recognized $0.4 million and $0 , respectively, in compensation expense related to these stock options. +The fair value of each option award granted is estimated on the date of grant using the Black- Scholes option-pricing model. The fair value of the options was estimated at the date of grant using the following assumptions: +Expected volatility +55 +% +Expected dividends +$ +— +Expected term (in years) +5.8 +Risk free rate +1.22 +% +In March 2017, our shareholders approved the ProPetro 2017 Incentive Award Plan ("IAP") pursuant to which our Board of Directors may grant stock options, restricted stock units ("RSUs"), performance stock units ("PSUs"), or other stock-based awards to key employees, consultants, directors and employees. The IAP authorizes up to 5,800,000 shares of common stock to be issued under awards granted pursuant to the plan. On March 16, 2017, we granted 793,738 stock option awards to certain key employees and directors pursuant to the IAP which are scheduled to vest in four substantially equal annual installments, subject to a continuing service requirement. The contractual term for the options awarded is 10 years. For the years ended December 31, 2017 , 2016 and 2015 , the Company recognized $0.5 million , $0 and $0 , respectively, in compensation expense related to these stock options. +The fair value of each stock option award granted is estimated on the date of grant using the Black- Scholes option-pricing model. The fair value of the options was estimated at the date of grant using the following assumptions: +Expected volatility +18 +% +Expected dividends +$ +— +Expected term (in years) +6.25 +Risk free rate +2.23 +% +73 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +14. STOCK‑BASED COMPENSATION (Continued) +A summary of the stock option activity for the year ended December 31, 2017 is presented below. +Number +of Shares +Weighted +Average +Exercise +Price +Outstanding at January 1, 2017 +4,645,884 +$ +3.49 +Granted +793,738 +$ +14.00 +Exercised +(226,194 +) +$ +3.96 +Forfeited +(5,148 +) +$ +14.00 +Expired +— +$ +— +Canceled +(571,927 +) +$ +3.96 +Outstanding at December 31, 2017 +4,636,353 +$ +5.20 +Exercisable at December 31, 2017 +3,847,763 +$ +3.39 +The weighted average grant-date fair value of stock options granted during the years ended December 31, 2017 , 2016 and 2015 was $3.35 , $1.77 and $0 , respectively. As of December 31, 2017 , the aggregate intrinsic value for our outstanding stock options was $69.4 million , and the aggregate intrinsic value for our exercisable stock options was $64.5 million . The aggregate intrinsic value for the exercised stock options during the year was $2.3 million . The remaining contractual term for the outstanding and exercisable stock options as of December 31, 2017 , were 6.9 years and 6.4 years, respectively. +Restricted Stock Units (Non-Vested Stock) and Performance Stock Units +On September 30, 2013, our Board of Directors authorized and granted 372,335 restricted stock units (RSUs) to a key executive. Each RSU represents the right to receive one share of common stock of the Company at par value $0.001 per share. Under the terms of the award, the shares of common stock subject to the RSUs were to be paid to the grantee upon change in control, regardless of whether the grantee was affiliated with the Company on the settlement date. The fair value of the RSUs is measured as the price of the Company’s shares on the grant date, which was estimated to be $3.89 . The share price used to estimate the fair value of the RSU at the grant date was based on a combination of income and market approaches, which are highly complex and sensitive. The income approach involves the use of a discounted cash flow method, with the cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies market multiples in estimating the fair value of the Company’s stock. Effective March 22, 2017, the Board of Directors canceled these RSUs and issued 372,335 new RSUs to the grantee. These issued RSUs are effectively identical to the RSUs granted in 2013, provided, however, that the RSUs will now be payable in full on March 22, 2018. The fair value of the RSUs issued on March 22, 2017, was based on the Company's closing stock market price at the grant date. In connection with the IPO, we fully recognized the stock compensation expense related to the re-issued RSUs. +On June 5, 2017, our Board of Directors granted 319,250 RSUs to employees, directors and executives pursuant to the IAP. Each RSU represents the right to receive one share of common stock. The fair value of the RSUs is based on the closing share price of our common stock on the date of grant. For the years ended December 31, 2017 , 2016 and 2015 the recorded stock compensation expense for all RSUs was $6.2 million , $0 and $0 , respectively. As of December 31, 2017 the total unrecognized compensation expense for all RSUs was approximately $3.3 million , and is expected to be recognized over a weighted-average period of approximately 2.5 years . +74 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +14. STOCK‑BASED COMPENSATION (Continued) +The following table summarizes RSUs activity for the year December 31, 2017 : +Number of +Shares +Weighted +Average +Grant Date +Fair Value +Outstanding at January 1, 2017 +372,335 +$ +3.89 +Granted +691,585 +$ +13.65 +Vested +— +$ +— +Exercised +— +$ +— +Forfeited +(2,841 +) +$ +13.25 +Expired +— +$ +— +Canceled +(372,335 +) +$ +3.89 +Outstanding at December 31, 2017 +688,744 +$ +13.66 +Effective June 5, 2017, our Board of Directors authorized and granted performance stock unit awards to certain key employees under the IAP. The actual number of shares that may be issued under the performance stock unit awards ranges from zero up to a maximum of twice the target number of performance stock unit awards granted to the participant, based on our total shareholder return relative to a designated peer group from the date of our IPO through December 31, 2019. Compensation expense is recorded ratably over the corresponding requisite service period. The fair value of performance stock unit awards is determined using a Monte Carlo probability model. Grant recipients do not have any shareholder rights until performance relative to the peer group has been determined following the completion of the performance period and shares have been issued. For the years ended December 31, 2017 , 2016 and 2015 the recorded stock compensation expense for the performance stock units was $0.4 million , $0 and $0 , respectively. +The following table summarizes information about the performance stock units that were outstanding at December 31, 2017 : +Period +Granted +Target Shares +Outstanding at +Beginning +of Year +Target +Shares +Granted +Target Shares Vested +Target +Shares +Forfeited +Target Shares +Outstanding +at End +of Year +Weighted +Average +Grant Date +Fair Value per +Share +2015 +— +— +— +— +— +— +2016 +— +— +— +— +— +— +2017 +— +169,635 +— +— +169,635 +$ +10.73 +Total +— +169,635 +— +— +169,635 +The total stock compensation expense for the years ended December 31, 2017 , 2016 and 2015 for all stock awards was $9.5 million , $1.6 million and $1.2 million , respectively. The total unrecognized compensation expense as of December 31, 2017 is approximately $6.8 million , and is expected to be recognized over a weighted-average period of approximately 2.6 years . +75 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +15. INCOME TAXES +The components of the provision for income taxes for the years ended December 31, 2017 , 2016 and 2015 are as follows: +($ in thousands) +2017 +2016 +2015 +Federal: +Current +$ +(376 +) +$ +— +$ +(1,092 +) +Deferred +3,634 +(29,082 +) +(22,177 +) +3,258 +(29,082 +) +(23,269 +) +State: +Current +74 +— +(350 +) +Deferred +(204 +) +1,110 +(1,769 +) +(130 +) +1,110 +(2,119 +) +Total expense (benefit) +$ +3,128 +$ +(27,972 +) +$ +(25,388 +) +Reconciliation between the amounts determined by applying the federal statutory rate of 35% to income tax benefit is as follows: +($ in thousands) +2017 +2016 +2015 +Tax at federal statutory rate +$ +5,510 +$ +(28,392 +) +$ +(24,935 +) +State taxes, net of federal benefit +176 +(216 +) +(885 +) +Permanent differences +1,582 +498 +579 +Stock-based compensation +(655 +) +— +— +Valuation allowance +273 +879 +— +Effect of change in enacted Tax Act +(3,448 +) +— +— +Other +(310 +) +(741 +) +(147 +) +Total provision +$ +3,128 +$ +(27,972 +) +$ +(25,388 +) +76 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +15. INCOME TAXES (Continued) +Deferred tax assets and liabilities are recognized for estimated future tax effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. The significant items giving rise to deferred tax assets (liabilities) at December 31, 2017 and 2016 , respectively, are as follows: +($ in thousands) +2017 +2016 +Deferred Income Tax Assets +Accrued liabilities +$ +1,264 +$ +334 +Allowance for doubtful accounts +94 +195 +Goodwill and other intangible assets +5,304 +10,953 +Stock‑based compensation +2,960 +1,692 +Net operating losses +56,788 +49,267 +Other +69 +389 +Noncurrent deferred tax assets +66,479 +62,830 +Total deferred tax assets +66,479 +62,830 +Valuation allowance +(1,151 +) +(879 +) +Total deferred tax assets — net +65,328 +61,951 +Deferred Income Tax Liabilities +Property and equipment +(68,811 +) +(60,958 +) +Prepaid expenses +(965 +) +(1,506 +) +Other +(131 +) +(635 +) +Noncurrent deferred tax liabilities +(69,907 +) +(63,099 +) +Net deferred tax liability +$ +(4,579 +) +$ +(1,148 +) +At December 31, 2017 , the Company had approximately $261.0 million of federal net operating loss carryforwards that will begin to expire in 2032 and state net operating losses of approximately $47.0 million that will begin to expire in 2024 . Utilization of net operating loss carryforwards may be limited due to past or future ownership changes. As of December 31, 2017 , we had a net valuation allowance of $1.2 million on the basis of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized. +The Company’s U.S. federal income tax returns for the years ended December 31, 2014 through December 31, 2016 remain open to examination by the Internal Revenue Service under the applicable U.S. federal statute of limitations provisions. The various states in which the Company is subject to income tax are generally open to examination for the tax years ended after December 31, 2013. +On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to (1) reducing the U.S. federal corporate tax rate from 35% to 21%, (2) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized, (3) creating a new limitation on deductible interest expense, (4) changes to bonus depreciation, and (5) changing rules related to use and limitations of net operating loss carryforwards for tax years beginning after December 31, 2017. The only material items that impacted the Company’s consolidated financial statements in 2017 were bonus depreciation and the corporate rate reduction. While the corporate rate reduction is effective January 1, 2018, we accounted for this anticipated rate change during the year ended December 31, 2017, the year of enactment. Consequently, we recorded a $3.4 million decrease to the net deferred tax liability, with a corresponding net adjustment to deferred tax benefit. +77 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +15. INCOME TAXES (Continued) +In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (subsequently codified as ASC 740‑10, Income Taxes, Under FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 ). ASC 740‑10 prescribes a comprehensive model for recognizing, measuring, presenting, and disclosing in the consolidated financial statements tax positions taken or expected to be taken on a tax return, including a decision to file or not to file in a particular jurisdiction. +The Company evaluated all tax positions and determined that the aggregate exposure under ASC 740‑10 did not have a material effect on the consolidated financial statements during the year ended December 31, 2017 , 2016 and 2015 . Therefore, no adjustments have been made to the consolidated financial statements related to the implementation of ASC 740‑10. The Company will continue to evaluate its tax positions in accordance with ASC 740‑10 and will recognize any future effect as a charge to income in the applicable period. +Income tax penalties and interest assessments recognized under ASC 740‑10 are accrued as a tax expense in the period that the Company’s taxes are in an uncertain tax position. Any accrued tax penalties or interest assessments will remain until the uncertain tax position is resolved with the taxing authorities or until the applicable statute of limitations has expired. +16. RELATED‑PARTY TRANSACTIONS +The Company leases its corporate offices from a related party pursuant to a five ‑year lease agreement with a five ‑year extension option requiring a base rent of $0.1 million per year. The Company also leases five properties adjacent to the corporate office from related parties with annual base rents of $0.03 million , $0.03 million , $0.1 million , $0.1 million , and $0.2 million . +For the years ended December 31, 2017 , 2016 and 2015 , the Company paid approximately $0.3 million , $0.2 million and $0.2 million , respectively, for the use of transportation services from a related party. +The Company also rents equipment in Elk City, Oklahoma from a related party. For the years ended December 31, 2017 , 2016 and 2015 , the Company paid $0.2 million , $0.2 million and $0.2 million , respectively. +At December 31, 2017 , 2016 and 2015 , the Company had $0.02 million , $0 and $0 in payables, respectively, and approximately $0 , $0.04 million and $0.02 million in receivables, respectively, for related parties for services provided. +All agreements pertaining to realty property and equipment were entered into during periods where the Company had limited liquidity and related parties secured them on behalf of the Company. All related party receivables and payables are immaterial and have not been separately shown on the face of the financial statements. +For related party disclosure related to equity transactions with Energy Capital Partners, see Note 18. +17. COMMITMENTS AND CONTINGENCIES +Operating Lease — The Company has various operating leases for office space and certain property and equipment. For the years ended December 31, 2017 , 2016 and 2015 , the Company recorded operating lease expense of $1.4 million , $1.4 million and $1.4 million , respectively. Required remaining lease payments for each fiscal year are as follows: +78 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +17. COMMITMENTS AND CONTINGENCIES (Continued) +($ in thousands) +2018 +$ +594 +2019 +366 +2020 +344 +2021 +344 +2022 and thereafter +431 +Total +$ +2,079 +Contingent Liabilities — The Company may be subject to various legal actions, claims, and liabilities arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a materially adverse effect on the Company’s financial position, results of operations, or liquidity. +79 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +18. EQUITY CAPITALIZATION +Credit Amendment Equity Infusion +In connection with the Term Loan and Revolving Credit Facility amendment dated June 8, 2016 (see Note 9), ECP and its related affiliates along with other shareholders infused $40.4 million of equity into the Company and we issued 18,007,328 additional shares of common stock. +On November 9, 2017, ECP sold 13,800,000 shares of its common stock holdings in a secondary offering at $15.07 per share. +Convertible Preferred Stock +On December 27, 2016, we completed a private placement offering of $170.0 million , issuing 16,999,990 shares of Series A nonparticipating convertible preferred stock, par value $0.001 per share. Costs associated with the offering were approximately $7.0 million , resulting in net proceeds to the Company of approximately $163.0 million . +As of December 31, 2016, 16,999,990 shares of Series A convertible preferred stock were issued and outstanding, convertible into common stock at the conversion price per the private placement agreement. Upon the consummation of the IPO, the Series A Preferred stock automatically converted into common stock. +Initial Public Offering +On March 22, 2017, we consummated our IPO in which 25,000,000 shares of our common stock, par value $0.001 per share, were sold at a public offering price of $14.00 per share, with 13,250,000 shares issued and sold by the Company and $11,750,000 shares sold by existing stockholders. We received net proceeds of approximately $170.1 million after deducting $10.9 million of underwriting discounts and commissions, and $4.5 million of other offering expenses. At closing, we used the proceeds (i) to repay $71.8 million in outstanding borrowings under the term loan, (ii) $86.8 million to fund the purchase of additional hydraulic fracturing units and other equipment, and (iii) the remaining for general corporate purposes. In connection with the IPO, all 16,999,990 shares of our outstanding Series A Preferred Stock converted to common stock on a 1 :1 basis. +Additionally, on March 28, 2017, one executive and one director net settled a total of 226,194 of their exercisable stock options and received 162,212 shares of common stock. +At December 31, 2017 and 2016 , the Company had 83,039,854 and 52,627,652 shares outstanding, respectively. +80 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2017, 2016 AND 2015 +19. QUARTERLY FINANCIAL DATA (UNAUDITED) +The following table sets forth our unaudited quarterly results for each of the last four quarters for the years ended December 31, 2017 and 2016 . This unaudited quarterly information has been prepared on the same basis as our annual audited financial statements and includes all adjustments, consisting only of normal recurring adjustments that are necessary to present fairly the financial information for the fiscal quarters presented. +2017 +(In thousands, except for per share data) +First Quarter +Second Quarter +Third Quarter +Fourth Quarter +Service revenue +$ +171,931 +$ +213,492 +$ +282,730 +$ +313,712 +Gross profit +$ +22,366 +$ +36,715 +$ +57,297 +$ +51,664 +Net income (loss) +$ +(24,351 +) +$ +4,921 +$ +21,965 +$ +10,078 +Net income (loss) per common share: +Basic +$ +(0.43 +) +$ +0.06 +$ +0.26 +$ +0.12 +Diluted +$ +(0.43 +) +$ +0.06 +$ +0.25 +$ +0.12 +Weighted average common shares outstanding: +Basic +55,996 +83,040 +83,040 +83,040 +Diluted +55,996 +86,279 +86,264 +86,818 +2016 +(In thousands, except for per share data) +First Quarter +Second Quarter +Third Quarter +Fourth Quarter +Service revenue +$ +87,930 +$ +68,165 +$ +116,904 +$ +163,921 +Gross profit +$ +7,641 +$ +3,316 +$ +6,681 +$ +15,142 +Net loss +$ +(12,940 +) +$ +(9,294 +) +$ +(13,598 +) +$ +(17,315 +) +Net income (loss) per common share: +Basic +$ +(0.37 +) +$ +(0.24 +) +$ +(0.26 +) +$ +(0.33 +) +Diluted +$ +(0.37 +) +$ +(0.24 +) +$ +(0.26 +) +$ +(0.33 +) +Weighted average common shares outstanding: +Basic +34,993 +39,496 +52,975 +52,628 +Diluted +34,993 +39,496 +52,975 +52,628 +81 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer, principal financial officer and principal accounting officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer, principal financial officer and principal accounting officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2017 . +Management’s Report on Internal Control over Financial Reporting +We are required to comply with the SEC’s rules implementing Section 302 of the Sarbanes‑Oxley Act of 2002, which requires our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. We will not be required to make our first assessment of our internal control over financial reporting until the year of our second annual report required to be filed with the SEC. +Our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal controls over financial reporting, and will not be required to do so for as long as we are an “emerging growth company” pursuant to the provisions of the JOBS Act. +Changes in Internal Control over Financial Reporting +No changes in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +None. +Part III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this Item concerning our Executive Officers, Directors and nominees for Director, Audit Committee members and financial expert(s) and concerning disclosure of delinquent filers under Section 16(a) of the Exchange Act and our Standards of Business Conduct is incorporated herein by reference from our definitive Proxy Statement for our 2018 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year. +82 +Item 11. Executive Compensation +The information required by this Item concerning Executive Compensation, material transactions involving Executive Officers and Directors and Compensation Committee interlocks, as well as the Compensation Committee Report, are incorporated herein by reference from our definitive Proxy Statement for our 2018 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year. +83 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this Item concerning the stock ownership of management and five percent beneficial owners and securities authorized for issuance under equity compensation plans is incorporated herein by reference from our definitive Proxy Statement for our 2018 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year. +84 +Item 13. Certain Relationships and Related Party Transactions, and Director Independence. +The information required by this Item concerning certain relationships and related person transactions and director independence is incorporated herein by reference from our definitive Proxy Statement for our 2018 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year. +Item 14. Principal Accounting Fees and Services. +The information required by this Item concerning principal accounting fees and services is incorporated herein by reference from our definitive Proxy Statement for our 2018 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year. +Part IV +Item 15. Exhibits and Financial Statement Schedules. +(a)(1) Financial Statements +The Financial Statements listed in the Index to Financial Statements in Item 8 are filed as part of this Annual Report on Form 10-K. +(a)(2) Exhibits +The exhibit index attached hereto is incorporated herein by reference. +Item 16. Form 10-K Summary. +None. +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on March 27, 2018. +ProPetro Holding Corp. +By: /s/ Dale Redman +Name: Dale Redman +Title: Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated on the date indicated. +85 +Signature +Title +Date +/s/ Dale Redman +Chief Executive Officer and Director (Principal Executive Officer) +March 27, 2018 +Dale Redman +/s/ Jeff Smith +Chief Financial Officer (Principal Financial Officer) +March 27, 2018 +Jeff Smith +/s/ Ian Denholm +Chief Accounting Officer (Principal Accounting Officer) +March 27, 2018 +Ian Denholm +/s/ Spencer D. Armour +Chairman +March 27, 2018 +Spencer D. Armour, III +/s/ Steve Beal +Director +March 27, 2018 +Steve Beal +/s/ Anthony Best +Director +March 27, 2018 +Anthony Best +/s/ Pryor Blackwell +Director +March 27, 2018 +Pryor Blackwell +/s/ Schuyler E. Coppedge +Director +March 27, 2018 +Schuyler E. Coppedge +/s/ Alan E. Douglas +Director +March 27, 2018 +Alan E. Douglas +/s/ Peter Labbat +Director +March 27, 2018 +Peter Labbat +/s/ Jack Moore +Director +March 27, 2018 +Jack Moore +86 +EXHIBIT INDEX +Exhibit +number +Description +3.1 +Certificate of Incorporation of ProPetro Holding Corp., as amended March 16, 2017 (incorporated by reference herein to Exhibit 3.1 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017). +3.2 +Bylaws of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 3.3 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated March 10, 2017 (Registration No. 333-215940)). +4.1 +Specimen Stock Certificate (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940). +4.2 +Registration Rights Agreement, dated March 4, 2013, by and among ProPetro Holding Corp. and the parties thereto (incorporated by reference herein to Exhibit 4.2 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +4.3 +Registration Rights Agreement, dated December 27, 2016, by and among ProPetro Holding Corp. and the investors listed on Schedule A thereto (incorporated by reference herein to Exhibit 4.2 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +4.4 +Stockholders Agreement, dated as of March 22, 2017, by and among ProPetro Holding Corp., Energy Capital Partners II, LP, Energy Capital Partners II-A, LP, Energy Capital Partners II-B, LP, Energy Capital Partners II-C (Direct IP), LP, Energy Capital Partners II-D, LP, Energy Capital Partners II (Midland Co-Invest), LP (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 28, 2017). +10.1 +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 8, 2017 (Registration No. 333-215940)). +10.2 +Credit Agreement, dated as of March 22, 2017 by and among ProPetro Holding Corp., ProPetro Services, Inc., Barclays Bank PLC, as the Agent, the Collateral Agent, a Letter of Credit Issuer and the Swingline Lender, and each of the Lenders from time to time party thereto (incorporated by reference herein to Exhibit 10.2 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 28, 2017). +10.3# +Employment Agreement, dated April 17, 2013, by and between ProPetro Holding Corp. and Dale Redman (incorporated by reference herein to Exhibit 10.3 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.4# +Employment Agreement, dated April 17, 2013, by and between ProPetro Holding Corp. and David Sledge (incorporated by reference herein to Exhibit 10.4 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.5# +Employment Agreement, dated April 17, 2013, by and between ProPetro Holding Corp. and Jeffrey Smith (incorporated by reference herein to Exhibit 10.5 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.6# +Stock Option Plan of ProPetro Holding Corp., dated March 4, 2013 (incorporated by reference herein to Exhibit 10.6 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.7# +First Amendment to the Stock Option Plan of ProPetro Holding Corp., dated June 14, 2013 (incorporated by reference herein to Exhibit 10.7 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.8# +Second Amendment to the Stock Option Plan of ProPetro Holding Corp., dated December 2, 2016 (incorporated by reference herein to Exhibit 10.8 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.9# +Non‑Qualified Stock Option Agreement, dated June 14, 2013, by and between ProPetro Holding Corp. and Dale Redman (incorporated by reference herein to Exhibit 10.9 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +87 +10.10# +Non‑Qualified Stock Option Agreement, dated June 14, 2013, by and between ProPetro Holding Corp. and David Sledge (incorporated by reference herein to Exhibit 10.10 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.11# +Non‑Qualified Stock Option Agreement, dated June 14, 2013, by and between ProPetro Holding Corp. and Jeffrey Smith (incorporated by reference herein to Exhibit 10.11 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.12# +Non‑Qualified Stock Option Agreement, dated June 14, 2013, by and between ProPetro Holding Corp. and Spencer D. Armour, III (incorporated by reference herein to Exhibit 10.12 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.13# +Non‑Qualified Stock Option Agreement, dated July 19, 2016, by and between ProPetro Holding Corp. and Dale Redman (incorporated by reference herein to Exhibit 10.13 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.14# +Non‑Qualified Stock Option Agreement, dated July 19, 2016, by and between ProPetro Holding Corp. and David Sledge (incorporated by reference herein to Exhibit 10.14 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.15# +Non‑Qualified Stock Option Agreement, dated July 19, 2016, by and between ProPetro Holding Corp. and Jeffrey Smith (incorporated by reference herein to Exhibit 10.15 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.16# +Non‑Qualified Stock Option Agreement, dated July 19, 2016, by and between ProPetro Holding Corp. and Spencer D. Armour, III (incorporated by reference herein to Exhibit 10.16 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.17# +Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement, dated September 30, 2013, by and between ProPetro Holding Corp. and Dale Redman (incorporated by reference herein to Exhibit 10.17 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940). +10.18# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1, dated March 7, 2017 (Registration No. 333-215940)). +10.19# +Form of ProPetro Holding Corp. Senior Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +10.20# +Form of ProPetro Holding Corp. Non‑Employee Director Compensation Policy (incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +10.21# +Form of ProPetro Holding Corp. Director Stock Ownership Policy (incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +10.22# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement (incorporated by reference to Exhibit 10.22 to the Company’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +10.23# +Form of ProPetro Holding Corp. Amendment to Non‑Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +10.24# +Amendment to Employment Agreement, by and between ProPetro Holding Corp. and Dale Redman (incorporated by reference herein to Exhibit 10.24 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +10.25# +Employment Agreement, dated February 17, 2017, by and between ProPetro Holding Corp. and Mark Howell (incorporated by reference herein to Exhibit 10.25 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +88 +10.26# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan Performance Restricted Stock Unit Award Grant Notice and Performance Stock Unit Award Agreement (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017). +10.27# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan Restricted Stock Unit Award Grant Notice and Performance Stock Unit Award Agreement (incorporated by reference herein to Exhibit 10.2 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017). +10.28# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan Director Restricted Stock Unit Award Grant Notice and Director Stock Unit Award Agreement (incorporated by reference herein to Exhibit 10.3 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017). +10.29 +Amendment No. 1 to Credit Agreement, dated as of February 22, 2018 by and among ProPetro Holding Corp., ProPetro Services, Inc., the Incremental Lenders therein, the Required Lenders and Barclays Bank PLC, as Administrative Agent for the Lenders (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated February 22, 2018). +21 +List of Subsidiaries of ProPetro Holding Corp. +23 +Consent of Independent Registered Public Accounting Firm. +31.1 +Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +31.2 +Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1 +Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2 +Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +# Compensatory plan, contract or arrangement. +89 \ No newline at end of file diff --git a/raw/filings/0001680247/2017/0001680247-18-000021/filing_metadata.csv b/raw/filings/0001680247/2017/0001680247-18-000021/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..8d2723f5ef914905b108de926c4a9dc1ca11d21c --- /dev/null +++ b/raw/filings/0001680247/2017/0001680247-18-000021/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001680247,PUMP,ProPetro Holding Corp.,10-K,2018-03-27,2017-12-31,2018-03-27T21:26:52.000Z,0001680247-18-000021,a10-k2017.htm,10-K,9655366,1,0,https://www.sec.gov/Archives/edgar/data/1680247/000168024718000021/a10-k2017.htm,https://www.sec.gov/Archives/edgar/data/1680247/000168024718000021/,2017,2017,1 diff --git a/raw/filings/0001680247/2017/0001680247-18-000021/item1.txt b/raw/filings/0001680247/2017/0001680247-18-000021/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..dd714b4f42bf1f4dbfe00239d7aaa0ed6b4d2cc6 --- /dev/null +++ b/raw/filings/0001680247/2017/0001680247-18-000021/item1.txt @@ -0,0 +1,107 @@ +Item 1. Business. +Our Company +We are a growth‑oriented, Midland, Texas‑based oilfield services company providing hydraulic fracturing and other complementary services to leading upstream oil and gas companies engaged in the exploration and production, or E&P, of North American unconventional oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as the most prolific oil‑producing area in the United States, and we believe we are one of the largest providers of hydraulic fracturing services in the region by hydraulic horsepower, or HHP, with an aggregate deployed capacity of 690,000 HHP, or 16 deployed units, at December 31, 2017. In addition, we deployed two new hydraulic fracturing units into service through March of 2018, bringing our current fleet to 18 deployed units, or 780,000 HHP. +Our modern hydraulic fracturing fleet has been designed to handle Permian Basin specific operating conditions and the region’s increasingly high‑intensity well completions, which are characterized by longer horizontal wellbores, more frac stages per lateral and increasing amounts of proppant per well. Over 92% of our fleet has been delivered over the past five years, and substantially all our fleet has been built by a single manufacturer since 2013. +In addition to our core hydraulic fracturing operations, we also offer a suite of complementary well completion and production services, including cementing, acidizing, coiled tubing, flowback services, surface air drilling and drilling. We believe these complementary services create operational efficiencies for our customers and allow us to capture a greater portion of their capital spending across the lifecycle of an unconventional well. +Our primary business objective is to serve as a strategic partner to our customers. We achieve this objective by providing reliable, high‑quality services that are tailored to our customers’ needs and synchronized with their well development programs. This alignment assists our customers in optimizing the long‑term development of their unconventional resources. Over the past three years, we have leveraged our strong Permian Basin relationships to significantly grow our installed HHP capacity and organically build our Permian Basin cementing and coiled tubing lines of business. Consistent with past performance, we believe our substantial market presence will continue to yield a variety of actionable growth opportunities allowing us to expand both our hydraulic fracturing and complementary services going forward. To this end, we intend to continue our past practice of opportunistically deploying new equipment on a long‑term, dedicated basis in response to specific customer demand. +Initial Public Offering +On March 22, 2017, we closed our initial public offering, or IPO, at which time we issued and sold 13,250,000 shares of common stock, and certain selling shareholders sold 11,750,000 shares of common stock, at a price to the public of $14.00 per share. We received cash proceeds of approximately $170.1 million from this transaction, net of underwriting discounts and commissions and offering expenses, which we used (i) to repay $71.8 million in outstanding borrowings and accrued interest under our term loan, (ii) $86.8 million to fund the purchase of additional hydraulic fracturing units and other equipment, and (iii) the remaining for general corporate purposes. +In connection with the IPO, the Company executed a stock split, such that each holder of common stock of the Company received 1.45 shares of common stock for every one share of previous common stock. Accordingly, any information related to, or dependent upon, the share or option counts in our comparative 2016 and 2015 consolidated financial statements have been updated to reflect the effect of the stock split. +Our Services +We conduct our business through six operating segments: hydraulic fracturing (inclusive of acidizing), cementing, coil tubing, flowback, surface drilling and drilling. For reporting purposes, the hydraulic fracturing (inclusive of acidizing) and cementing operating segments are aggregated into our one reportable segment: pressure +2 +pumping. For additional financial information, please see Part II - Item 8. Financial Statements and Supplementary Data. +Pressure Pumping +Hydraulic Fracturing +We primarily provide hydraulic fracturing services to E&P companies in the Permian Basin. These services are intended to optimize hydrocarbon flow paths during the completion phase of horizontal shale wellbores. We have significant expertise in multi‑stage fracturing of horizontal oil‑producing wells in unconventional geological formations. As of December 31, 2017, we had grown our hydraulic fracturing business to a total of 16 hydraulic fracturing units with an aggregate of 690,000 HHP. In the fourth quarter of 2017, we took delivery of an additional 86 Tier 2 diesel engines, which will support our long-term plans for optimizing the total capacity and operational performance of our fleet. As of March of 2018, we deployed two new hydraulic fracturing units into service, utilizing 36 of the 86 Tier 2 engines, and bringing our current fleet total to 18 deployed units, or 780,000 HHP. +The fracturing process consists of pumping a fracturing fluid into a well at sufficient pressure to fracture the formation. Materials known as proppants, which in our business are comprised primarily of sand, are suspended in the fracturing fluid and are pumped into the fracture to prop it open. The fracturing fluid is designed to “break,” or loosen viscosity, and be forced out of the formation by its pressure, leaving the proppants suspended in the fractures created, thereby increasing the mobility of the hydrocarbons. As a result of the fracturing process, production rates are usually enhanced substantially, thus increasing the rate of return of hydrocarbons for the operator. +We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We refer to all of our fracturing units, other equipment and vehicles necessary to perform fracturing jobs as our “fleet” and the personnel assigned to each unit as a “crew.” Our hydraulic fracturing units consist primarily of a high pressure hydraulic pump, diesel engine, transmission and various hoses, valves, tanks and other supporting equipment that are typically mounted to a flat‑bed trailer. +We provide dedicated equipment, personnel and services that are tailored to meet each of our customer’s needs. Each unit in our fleet has a designated team of personnel, which allows us to provide responsive and customized services, such as project design, proppant and other consumables procurement, real‑time data provision and post‑completion analysis for each of our jobs. Many of our hydraulic fracturing units and associated personnel have continuously worked with the same customer for the past several years promoting deep relationships and a high degree of coordination and visibility into future customer activity levels. Furthermore, in light of our substantial market presence and historically high fleet utilization levels, we have established a variety of entrenched relationships with key equipment, sand and other downhole consumable suppliers, including over 30 sand suppliers utilized in 2017. These strategic relationships ensure ready access to equipment, parts and materials on a timely and economic basis and allow our dedicated procurement logistics team to ensure consistently safe and reliable operations. +Acidizing +As of December 31, 2017, we operated 10 acidizing pumps and four combination units in the Permian Basin, together totaling approximately 22,000 HHP, which perform procedures like toe preps, pump downs and foamed acid. Acidizing, which is consolidated into our hydraulic fracturing operating segment, is a stimulation technique where acid is injected under pressure into formations (typically carbonate reservoirs) which can form or expand fissures. We believe that our acidizing operations provide an organic growth opportunity for us to expand our service offerings within our existing customer base. +3 +Cementing +We provide cementing services for completion of new wells and remedial work on existing wells. Cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Cementing provides isolation between fluid zones behind the casing to minimize potential damage to hydrocarbon bearing formations or the integrity of freshwater aquifers, and provides structural integrity for the casing by securing it to the earth. Cementing is also done when recompleting wells, where one zone is plugged and another is opened. +As of December 31, 2017, we operated a total of 16 cementing units, with ten units operating in the Permian Basin and six units operating in the Uinta‑Piceance Basin. We believe that our cementing segment provides an organic growth opportunity for us to expand our service offerings within our existing customer base. +Other Services +Coiled Tubing +Coiled tubing services involve injecting coiled tubing into wells to perform various completion well intervention operations. Coiled tubing is a flexible steel pipe with a diameter of typically less than three inches and manufactured in continuous lengths of thousands of feet. It is wound or coiled on a truck‑mounted reel for onshore applications. Due to its small diameter, coiled tubing can be inserted into existing production tubing and used to perform a variety of services to enhance the flow of oil or natural gas. +The principal advantages of using coiled tubing include the ability to (i) continue production from the well without interruption, thus reducing the risk of formation damage, (ii) move continuous coiled tubing in and out of a well significantly faster than conventional pipe used with a workover rig, which must be jointed and unjointed, (iii) direct fluids into a wellbore with more precision, allowing for improved stimulation fluid placement, (iv) provide a source of energy to power a downhole motor or manipulate down‑hole tools and (v) enhance access to remote fields due to the smaller size and mobility. +As of December 31, 2017, we had one 2”, one 2 3 / 8 ” and one 1 1 / 4 ” coiled tubing unit, all of which were operating in the Permian Basin. We believe these units are well suited for the performance requirements of the unconventional resource markets we serve. The average age of these units is less than four years old. +Flowback Services +Our flowback services consist of production testing, solids control, hydrostatic testing and torque services. Flowback involves the process of allowing fluids to flow from the well following a treatment, either in preparation for an impending phase of treatment or to return the well to production. Our flowback equipment consists of manifolds, accumulators, valves, flare stacks and other associated equipment that combine to form up to a total of five well‑testing spreads. We provide flowback services in the Permian Basin and mid‑continent markets. +Surface Air Drilling +We currently operate a surface air drilling operation in the Uinta‑Piceance Basin, which is capable of offering cost‑effective, pre‑set surface air drilling services to target depths of approximately 4,000 feet in areas of fragile geology. Air drilling is a technique in which oil, natural gas, or geothermal wells are drilled by creating a pressure within the well that is lower than the reservoir pressure, which results in increased rates of penetration, reduced formation damage and reduced drilling costs. This division is uniquely suited to the fragile geology of the Uinta‑Piceance Basin and is highly complementary to our cementing offering. +4 +Competitive Strengths +Our primary business objective is to serve as a strategic partner for our customers. We achieve this objective by providing reliable, high‑quality services that are tailored to our customers’ needs and synchronized with their well development programs. This alignment assists our customers in optimizing the long‑term development of their unconventional resources. We believe that the following competitive strengths differentiate us from our peers and uniquely position us to achieve our primary business objective. +• +Strong market position in the Permian Basin. We believe we are one of the largest hydraulic fracturing providers by HHP in the Permian Basin, which is the most prolific oil producing area in the United States. Our longstanding customer relationships and substantial Permian Basin market presence uniquely position us to continue growing in tandem with the basin’s ongoing development. The Permian Basin is a mature, liquids‑rich basin with well known geology and a large, exploitable resource base that delivers attractive E&P producer economics at or below current commodity prices. As a result of its significant size, coupled with the presence of multiple prospective geologic benches and other favorable characteristics, the Permian Basin has become widely recognized as the most attractive and economic oil resource in North America. +Our operational focus has historically been in the Permian Basin’s Midland sub‑basin in support of our customers’ core operations. More recently, however, many of our customers have made sizeable acquisitions in the Delaware Basin, and we have expanded our services into the Delaware Basin to help develop their acreage. Further, we believe that we are uniquely positioned to capture a large addressable growth opportunity as the basin develops. For the foreseeable future, we expect both the Midland Basin and the Delaware Basin to continue to command a disproportionate share of future North American E&P spending. +• +Hydraulic fracturing is highly levered to increasing drilling activity and completion intensity levels. The combination of an expanding Permian Basin horizontal rig count and more complex well completions has a compounding effect on HHP demand growth. Horizontal drilling has become the default method for E&P operators to most economically extract unconventional resources, and the number of horizontal rigs has increased from 22% of the total Permian Basin rig count in December 2011 to approximately 91% of the Permian Basin rig count at the end of December 2017. As the horizontal rig count has grown, well completion intensity levels have also increased as a result of longer wellbore lateral lengths, more fracturing stages per foot of lateral and increasing amounts of proppant per stage. Furthermore, the ongoing improvement in drilling and completion efficiencies, driven by innovations such as multi‑well pads and zipper fracs, have further increased the demand for HHP. Taken together, these demand drivers have helped contribute to the full utilization of our fleet and leave us well positioned to capture future organic growth opportunities and enhanced pricing for the services we offer. +• +Deep relationships and operational alignment with high‑quality, Permian Basin‑focused customers. Our deep local roots, operational expertise and commitment to safe and reliable service have allowed us to cultivate longstanding customer relationships with the most active and well‑capitalized Permian Basin operators. Our diverse customer base is comprised of market leading exploration and production companies, with no single customer representing more than 20% of our revenue for the year ended December 31, 2017. Many of our current customers have worked with us since our inception and have integrated our fleet scheduling with their well development programs. This high degree of operational alignment and their continued support have allowed us to maintain relatively high utilization rates over time. As our customers increase activity levels, we expect to continue to leverage these strong relationships to keep our fleet fully utilized and selectively expand our platform in response to specific customer demand. +• +Standardized fleet of modern, well‑maintained equipment. We have a large, homogenous fleet of modern equipment that is configured to handle the Permian Basin’s most complex, highest‑intensity, hydraulic fracturing jobs. We believe that our fleet design is a key advantage compared to many of our competitors who have fracturing units that are not optimized for Permian Basin conditions. Our fleet is largely standardized across units to facilitate efficient maintenance and repair, reducing equipment downtime and +5 +improving labor efficiency. Furthermore, our strong relationships with a variety of key suppliers and vendors provide us with the reliable access to the equipment necessary to support our continued organic growth strategy. +• +Proven cross‑cycle financial performance. Over the past several years, we have maintained relatively high cross‑cycle fleet utilization rates. Since September 2016, our fleet has been 100% utilized, and for each of the years ended December 31, 2015, 2016 and 2017, we operated in excess of 65% utilization. Our consistent track record of steady organic growth, coupled with our ability to quickly deploy new HHP on a dedicated and fully utilized basis, has resulted in revenue growth across industry cycles. We believe that we will be able to grow faster than our competitors while preserving attractive EBITDA margins as a result of our differentiated service offerings and a robust backlog of demand for our services. Furthermore, we believe that our philosophy of maintaining modest financial leverage and a healthy balance sheet has left us more conservatively capitalized than our peers. We expect that improving market fundamentals, our superior execution and our customer‑focused approach should result in strong financial performance. +• +Seasoned management and operating team. We have a seasoned executive management team, with our three most senior members contributing more than 100 years of collective industry and financial experience. Members of our management team founded our business and seeded our company with a portion of our original investment capital. We believe their track record of successfully building premier oilfield service companies in the Permian Basin, as well as their deep roots and relationships throughout the West Texas community, provide a meaningful competitive advantage for our business. In addition, our management team has assembled a loyal group of highly‑motivated and talented managers and field personnel, and we have had virtually no manager‑level turnover in our core service divisions over the past three years. We employ a balanced decision‑making structure that empowers managerial and field personnel to work directly with customers to develop solutions while leveraging senior management’s oversight. This collaborative approach fosters strong customer links at all levels of the organization and effectively institutionalizes customer relationships beyond the executive suite. +Strategy +Our strategy is to: +• +Capture an increasing share of rising demand for hydraulic fracturing services in the Permian Basin. We intend to continue to position ourselves as a Permian Basin‑focused hydraulic fracturing business, as we believe the Permian Basin hydraulic fracturing market offers supportive long‑term growth fundamentals. These fundamentals are characterized by increased demand for our HHP, driven by increasing drilling activity and well completion intensity levels. We are currently operating at 100% utilization, and we believe we are strategically positioned to deploy additional hydraulic fracturing equipment as our customers continue to develop their assets in the Midland Basin and Delaware Basin. W e have deployed two new hydraulic fracturing units into service through March of 2018, bringing our current fleet total to 18 deployed units or 780,000 HHP. +• +Capitalize on improving pricing and efficiency gains. The increase in demand for HHP coupled with expected competitor equipment attrition is expected to drive more favorable hydraulic fracturing supply and demand fundamentals. We believe this market tightening may lead to a general increase in prices for hydraulic fracturing services. Furthermore, our consistently high fleet utilization levels and 24 hours per day, seven days per week operating schedule (with approximately 78% of our fleet operating on such a schedule at December 31, 2017) should result in greater revenue opportunity and enhanced margins as fixed costs are spread over a broader revenue base. We believe that any incremental future fleet additions will benefit from these trends and associated economies of scale. +• +Cross‑sell our complementary services. In addition to our hydraulic fracturing services, we offer a broad range of complementary services in support of our customers’ development activities, including cementing, acidizing, coiled tubing, flowback services, surface air drilling and drilling. These complementary services create operational efficiencies for our customers, and allow us to capture a greater percentage of their +6 +capital spending across the lifecycle of an unconventional well. We believe that, as our customers increase spending levels, we are well positioned to continue cross‑selling and growing our complementary service offerings. +• +Maintain financial stability and flexibility to pursue growth opportunities. Consistent with our historical practices, we plan to continue to maintain a conservative balance sheet, which will allow us to better react to potential changes in industry and market conditions and opportunistically grow our business. In the near term, we intend to continue our past practice of aligning our growth capital expenditures with visible customer demand, by strategically deploying new equipment on a long‑term, dedicated basis in response to inbound customer requests. We will also selectively evaluate potential strategic acquisitions that increase our scale and capabilities or diversify our operations. +Our Customers +Our customers consist primarily of oil and natural gas producers in North America. Our top five customers accounted for approximately 66%, 58% and 53% of our revenue, for the years ended December 31, 2017, 2016 and 2015, respectively. For the year ended December 31, 2017, Surge Operating, LLC, XTO Energy, CrownQuest Operating, LLC, Diamondback E&P, LLC and Parsley Energy Operations, LLC accounted for 15.0%, 13.8%, 12.7%, 12.6% and 11.8%, respectively, of total revenue. No other customer accounted for more than 10% of total revenue for the year ended December 31, 2017. +Competition +The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services that meet the specific needs of oil and natural gas exploration and production companies at competitive prices. Competitive factors impacting sales of our services are price, reputation and technical expertise, service and equipment quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies’ criteria in choosing a service provider. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our deep local roots, operational expertise, equipment’s ability to handle the most complex Permian Basin well completions, and commitment to safety and reliability. +We provide our services primarily in the Permian Basin, and we compete against different companies in each service and product line we offer. Our competition includes many large and small oilfield service companies, including the largest integrated oilfield services companies. Our major competitors for hydraulic fracturing services, which make up the majority of our revenues, include C&J Energy Services, Halliburton, Patterson‑UTI Energy Inc., RPC, Inc., Schlumberger, Keane Group, Inc., Liberty Oilfield Services, Superior Energy Services and a number of locally oriented businesses. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the fourth quarter, relating to the conclusion of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather during which we may experience declines in our operating results. +Operating Risks and Insurance +Our operations are subject to hazards inherent in the oilfield services industry, such as accidents, blowouts, explosions, fires and spills and releases that can cause personal injury or loss of life, damage or destruction of property, equipment, natural resources and the environment and suspension of operations. +In addition, claims for loss of oil and natural gas production and damage to formations can occur in the oilfield services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in us being named as a defendant in lawsuits asserting large claims. +7 +Because our business involves the transportation of heavy equipment and materials, we may also experience traffic accidents which may result in spills, property damage and personal injury. +Despite our efforts to maintain safety standards, we from time to time have suffered accidents in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations. +We maintain commercial general liability, workers’ compensation, business auto, commercial property, umbrella liability, in certain instances, excess liability, and directors and officers insurance policies providing coverages of risks and amounts that we believe to be customary in our industry. Further, we have pollution legal liability coverage for our business entities, which would cover, among other things, third party liability and costs of clean up relating to environmental contamination on our premises while our equipment are in transit and while on our customers’ job site. With respect to our hydraulic fracturing operations, coverage would be available under our pollution legal liability policy for any surface or subsurface environmental clean‑up and liability to third parties arising from any surface or subsurface contamination. We also have certain specific coverages for some of our businesses, including for our hydraulic fracturing services. +Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of the high premium costs relative to perceived risk. Further, insurance rates have in the past been subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us. See “Risk Factors” for a description of certain risks associated with our insurance policies. +Environmental and Occupational Health and Safety Regulations +Our operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection, and occupational health and safety. Numerous federal, state and local governmental agencies issue regulations that often require difficult and costly compliance measures that could carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non compliance. These laws and regulations may, for example, restrict the types, quantities and concentrations of various substances that can be released into the environment, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas and other protected areas, or require action to prevent or remediate pollution from current or former operations. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental, health and safety laws and regulations occur frequently, and any changes that result in more stringent and costly requirements could materially adversely affect our operations and financial position. We have not experienced any material adverse effect from compliance with these requirements. This trend, however, may not continue in the future. +Below is an overview of some of the more significant environmental, health and safety requirements with which we must comply. Our customers’ operations are subject to similar laws and regulations. Any material adverse effect of these laws and regulations on our customers’ operations and financial position may also have an indirect material adverse effect on our operations and financial position. +Waste Handling. We handle, transport, store and dispose of wastes that are subject to the Resource Conservation and Recovery Act (“RCRA”) and comparable state laws and regulations, which affect our activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non hazardous wastes. With federal approval, the individual states administer some or all of the +8 +provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although certain petroleum production wastes are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non hazardous waste provisions. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non hazardous wastes or recategorize some non hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to recategorize certain oil and natural gas exploration, development and production wastes as hazardous wastes. Several environmental organizations have also petitioned the EPA to modify existing regulations to recategorize certain oil and natural gas exploration, development and production wastes as hazardous. Any such changes in these laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) and analogous state laws generally impose liability without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Liability for the costs of removing or remediating previously disposed wastes or contamination, damages to natural resources, the costs of conducting certain health studies, amongst other things, is strict and joint and several. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state laws. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such hazardous substances have been released. +One of our facilities in Midland, Texas is located within the boundaries of the West County Road 112 federal Superfund site, which site and the associated investigation and cleanup is being managed by EPA Region 6. The site’s soil and groundwater is contaminated with chromium and hexavalent chromium as a result of historic site operations unaffiliated with the Company and unassociated with the Company’s operations. Toxic tort claims also have been asserted as a result of this groundwater contamination against various unaffiliated parties. In 2013, in order to reduce the Company’s risk of incurring any future liabilities in connection with this site, the Company negotiated and obtained a bona fide prospective purchaser (“BFPP”) letter from EPA Region 6 in connection with a reorganization of the facility site ownership and lease. The BFPP letter generally acknowledges and provides that the Company is unaffiliated with any potentially responsible parties or known contamination that is the subject of the Superfund action, the Company agrees to comply with any future land use restrictions that may be imposed in connection with a site remedy (none have been imposed to date), and the Company agrees to cooperate with and provide access and assistance to EPA Region 6 in connection with the remediation. In exchange for these undertakings, the Company will not be subject to any CERCLA action by the EPA. In addition, the Company separately obtained a 10‑year environmental pollution legal liability insurance policy, effective March 4, 2013, with an aggregate limit of $20 million to insure against potential third‑party claims and any known or unknown pre‑existing conditions at the site, including Superfund or toxic tort liabilities. Both prior to and since obtaining the BFPP letter and the insurance policy, no claims have been made or threatened against the Company or any of its affiliated persons or entities with regard to this Superfund site or any related liabilities, and the Company has not incurred any significant expenses in connection with this matter. +NORM. In the course of our operations, some of our equipment may be exposed to naturally occurring radioactive materials (“NORM”) associated with oil and gas deposits and, accordingly may result in the generation of wastes and other materials containing NORM. NORM exhibiting levels of naturally occurring radiation in excess +9 +of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. +Water Discharges. The Clean Water Act, Safe Drinking Water Act, Oil Pollution Act and analogous state laws and regulations impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into regulated waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Also, spill prevention, control and countermeasure plan requirements require appropriate containment berms and similar structures to help prevent the contamination of regulated waters. +Air Emissions. The Clean Air Act (“CAA”) and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other emissions control requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants from specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. These and other laws and regulations may increase the costs of compliance for some facilities where we operate. Obtaining or renewing permits also has the potential to delay the development of oil and natural gas projects. +Climate Change. The EPA has determined that GHGs present an endangerment to public health and the environment because such gases contribute to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA has adopted and implemented, and continues to adopt and implement, regulations that restrict emissions of GHGs under existing provisions of the CAA. The EPA also requires the annual reporting of GHG emissions from certain large sources of GHG emissions in the United States, including certain oil and gas production facilities. The U.S. Congress has from time to time considered adopting legislation to reduce emissions of GHGs and almost one‑half of the states have already taken legal measures to reduce emissions of GHGs primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. And in December 2015, the United States joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of greenhouse gases. The Paris Agreement entered into force in November 2016. On June 1, 2017, President Trump announced that the United States planned to withdraw from the Paris Agreement and to seek negotiations either to reenter the Paris Agreement on different terms or establish a new framework agreement. The Paris Agreement provides for a four‑year exit process beginning when it took effect in November 2016, which would result in an effective exit date of November 2020. The United States’ adherence to the exit process is uncertain and/or the terms on which the United States may reenter the Paris Agreement or a separately negotiated agreement are unclear at this time. +Moreover, climate change may cause more extreme weather conditions and increased volatility in seasonal temperatures. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Endangered and Threatened Species. Environmental laws such as the Endangered Species Act (“ESA”) and analogous state laws may impact exploration, development and production activities in areas where we operate. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and various state analogs. The U.S. Fish and Wildlife Service may identify previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us or our customers to incur additional costs or become subject to operating restrictions or operating bans in the affected areas. +Regulation of Hydraulic Fracturing and Related Activities. Our hydraulic fracturing operations are a significant component of our business. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding +10 +rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. For example, in May 2014, the EPA issued an Advanced Notice of Proposed Rulemaking seeking comment on the development of regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. Beginning in August 2012, the EPA issued a series of rules under the CAA that establish new emission control requirements for certain oil and natural gas production and natural gas processing operations and associated equipment. And in March 2015, the Bureau of Land Management (“BLM”) finalized a rule governing hydraulic fracturing on federal lands. In June 2016, a federal district court judge in Wyoming struck down the final rule, finding that the BLM lacked congressional authority to promulgate the rule. The BLM appealed that ruling. However, in July 2017, the BLM initiated a rulemaking to rescind the final rule and reinstate the regulations that existed immediately before the published effective date of the rule. In light of the BLM’s proposed rulemaking, in September 2017, the U.S. Court of Appeals for the Tenth Circuit dismissed the appeal and remanded with directions to vacate the lower court’s opinion, leaving the final rule in place. BLM’s current rulemaking is subject to public notice and comment, as well as judicial challenges. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in recent sessions of Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +More recently, federal and state governments have begun investigating whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In March 2016, the United States Geological Survey identified six states with the most significant hazards from induced seismicity, including Oklahoma, Kansas, Texas, Colorado, New Mexico and Arkansas. The United States Geological Survey also noted the potential for induced seismicity in Ohio and Alabama. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma issued new rules for wastewater disposal wells in 2014 that imposed certain permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has developed and implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission released well completion seismicity guidelines in December 2016 for operators in the SCOOP and STACK that call for hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, in February 2017, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission adopted similar rules in 2014. In addition, in December 2016, the EPA released its final report regarding the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources under certain circumstances such as water withdrawals for fracturing in times or areas of low water availability, surface spills during the management of fracturing fluids, chemicals or produced water, injection of fracturing fluids into wells with inadequate mechanical integrity, injection of fracturing fluids directly into groundwater resources, discharge of inadequately treated fracturing wastewater to surface waters, and disposal or storage of fracturing wastewater in unlined pits. The results of these studies could lead federal and state governments and agencies to develop and implement additional regulations. +Increased regulation of hydraulic fracturing and related activities (whether as a result of the EPA study results or resulting from other factors) could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and record keeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. +11 +OSHA Matters. The Occupational Safety and Health Act (“OSHA”) and comparable state statutes regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. +Employees +As of December 31, 2017, we employed 986 people. None of our employees are represented by labor unions or subject to collective bargaining agreements. +We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s web site at www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on their public reference room. Our SEC filings are also available to the public on our website at www.propetroservices.com. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Annual Report on Form 10-K or the documents incorporated by reference in this Annual Report on Form 10-K. This Annual Report on Form 10-K also contains summaries of the terms of certain agreements that we have entered into that are filed as exhibits to this Annual Report on Form 10-K or other reports that we have filed with the SEC. The descriptions contained in this Annual Report on Form 10-K of those agreements do not purport to be complete and are subject to, and qualified in their entirety by reference to, the definitive agreements. You may request a copy of the agreements described herein at no cost by writing or telephoning us at the following address: ProPetro Holding Corp., Attention: Investor Relations, P.O. Box 873, Midland, Texas 79702, phone number (432) 688-0012. +12 \ No newline at end of file diff --git a/raw/filings/0001680247/2017/0001680247-18-000021/item13.txt b/raw/filings/0001680247/2017/0001680247-18-000021/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..bc54dce5542a9004cc605535fa1ae737fbe18170 --- /dev/null +++ b/raw/filings/0001680247/2017/0001680247-18-000021/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Party Transactions, and Director Independence. +The information required by this Item concerning certain relationships and related person transactions and director independence is incorporated herein by reference from our definitive Proxy Statement for our 2018 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year. \ No newline at end of file diff --git a/raw/filings/0001680247/2017/0001680247-18-000021/item9a.txt b/raw/filings/0001680247/2017/0001680247-18-000021/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..bae677c22953bc68fd967205f79ff9fd4521233e --- /dev/null +++ b/raw/filings/0001680247/2017/0001680247-18-000021/item9a.txt @@ -0,0 +1,9 @@ +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer, principal financial officer and principal accounting officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer, principal financial officer and principal accounting officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2017 . +Management’s Report on Internal Control over Financial Reporting +We are required to comply with the SEC’s rules implementing Section 302 of the Sarbanes‑Oxley Act of 2002, which requires our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. We will not be required to make our first assessment of our internal control over financial reporting until the year of our second annual report required to be filed with the SEC. +Our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal controls over financial reporting, and will not be required to do so for as long as we are an “emerging growth company” pursuant to the provisions of the JOBS Act. +Changes in Internal Control over Financial Reporting +No changes in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001680247/2017/0001680247-18-000021/rp_note.txt b/raw/filings/0001680247/2017/0001680247-18-000021/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0001680247/2017/0001680247-18-000021/rpt_disclosure.txt b/raw/filings/0001680247/2017/0001680247-18-000021/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..cc639a10890d2d3202ef3bbe84dfcee82bcb0603 --- /dev/null +++ b/raw/filings/0001680247/2017/0001680247-18-000021/rpt_disclosure.txt @@ -0,0 +1,42 @@ +Certain Relationships and Related Party Transactions +Related Party Transactions +We lease our corporate offices from PD Properties, an entity owned by Dale Redman, pursuant to a five-year lease agreement with a five-year +extension option requiring a base rent of $72,000 per year. We also lease five properties adjacent to the corporate office from South Midkiff Partners LLC, an entity owned jointly by Dale +Redman, David Sledge, Spencer Armour and Jeff Smith, with annual base rents of $30,000, $30,000, $90,000, $90,000 and $180,000. +We +paid Dale Redman, our Chief Executive Officer, $393,034 for the year ended December 31, 2018, for reimbursement of costs incurred through use of his aircraft. +We +rent certain flowback equipment from PD Properties, an entity owned by Dale Redman, our Chief Executive Officer. For the year ended December 31, 2017, we paid $192,000 under +this lease. +We +lease a property adjacent to our corporate headquarters from Industrial Loop Partners, LLC, an entity wholly owned by an affiliate of Bandera Ventures. For the year ended +December 31, 2018, we paid $345,250 under the lease. The lease has a remaining term of approximately six years. Mr. Blackwell, one of our directors, through his approximately 33% +interest in Bandera Ventures, may be deemed an indirect beneficiary of this lease. +Jordan +Frosch is our Sales Manager and the son-in-law of Dale Redman. Mr. Frosch received total compensation of approximately $530,511 for his services for the year ended +December 31, 2018. +Sam +Sledge is our Investor Relations Director and the son of David Sledge. Sam Sledge received total compensation of approximately $717,481 for his services for the year ended +December 31, 2018. +Morgan +Stovall is our Corporate Controller and the daughter of Jeffrey Smith. Ms. Stovall received total compensation of approximately $338,873 for her services for the year ended +December 31, 2018. +In +November 2017, we entered into a five-year extension to an existing sand supply agreement to provide Texas-sourced frac sand ("Texas sand"), which is in high demand from our +customers. Texas sand provided under the supply agreement will primarily be sourced from a mine located on land owned by an oil and gas exploration company in which our Chief Executive Officer, Dale +Redman, owns a 44% interest. Accordingly, Mr. Redman may be considered an indirect beneficiary of payments made under the lease between our supplier and the landowner. The supply agreement was +negotiated by officers of the Company without the involvement of Mr. Redman, and reviewed and approved by the Audit Committee pursuant to its authority under our Related Party Transactions +Policy. In considering the approval of the supply agreement, the Audit Committee retained independent legal and commercial expertise to assist in the evaluation of the agreement's commercial terms. +Following its evaluation, the Audit Committee determined that the pricing and other provisions of the agreement reflected market terms, that the agreement reflected an arm's length negotiation, and +that entry into the agreement was advisable and in the best interests of the Company. For the year ended December 31, 2018, the Company purchased $10,300,000 of Texas sand under the supply +agreement, and Mr. Redman was an indirect beneficiary of approximately $300,000 in royalty payments. +Policies and Procedures for Related Party Transactions +Any request for us to enter into a transaction with an executive officer, director, principal stockholder or any of such persons' immediate +family members or affiliates, among others, in which the amount involved exceeds $120,000, must first be presented to our Audit Committee for review, consideration and approval. All of our directors +and executive officers are required to report to the +42 +Audit +Committee chair any such related person transaction. In approving or rejecting the proposed agreement, our Audit Committee shall consider the facts and circumstances available and deemed +relevant to the Audit Committee, including, but not limited to, whether the transaction is on terms comparable to those that could be obtained in arm's-length dealings with an unrelated third party, +the extent of the related party's interest in the transaction and the conflicts of interest and corporate opportunity provisions of our certificate of incorporation. If we should discover related +person transactions that have not been approved, the Audit Committee will be notified and will determine the appropriate action, including ratification, revision or termination of such transaction. \ No newline at end of file diff --git a/raw/filings/0001680247/2018/0001680247-19-000016/filing.txt b/raw/filings/0001680247/2018/0001680247-19-000016/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..30958bf5a4e5a56618252d13af6497b4bb9dcebc --- /dev/null +++ b/raw/filings/0001680247/2018/0001680247-19-000016/filing.txt @@ -0,0 +1,3824 @@ +10-K +1 +a10-k2018.htm +Document +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +______________________________ +FORM 10-K +______________________________ +ý +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2018 +or +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number: 001-38035 +______________________________ +ProPetro Holding Corp. +(Exact name of registrant as specified in its charter) +______________________________ +Delaware +26-3685382 +(State or other jurisdiction of +incorporation or organization) +(I.R.S. Employer +Identification No.) +1706 South Midkiff, Bldg. B +Midland, Texas 79701 +(Address of principal executive offices) +Registrant’s telephone number, including area code: (432) 688-0012 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange on which registered +Common Stock ($0.001 par value) +New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: +None +______________________________________________________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. +Large accelerated filer +ý +Accelerated filer +o +Non-accelerated filer +o (Do not check if a smaller reporting company) +Smaller reporting company +o +Emerging growth company +o +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý +The aggregate market value of the Company’s Common Stock held by nonaffiliates on June 30, 2018 , determined using the per share closing price on the New York Stock Exchange Composite tape of $15.68 on that date, was approximately $ 838.7 million . +The number of the registrant’s common shares, par value $0.001 per share, outstanding at February 18, 2019 , was 100,257,626 . +TABLE OF CONTENTS +PART I +BUSINESS +2 +RISK FACTORS +13 +UNRESOLVED STAFF COMMENTS +26 +PROPERTIES +26 +LEGAL PROCEEDINGS +26 +MINE SAFETY DISCLOSURES +26 +PART II +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +26 +SELECTED FINANCIAL DATA +29 +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +31 +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +47 +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +51 +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +80 +CONTROLS AND PROCEDURES +80 +OTHER INFORMATION +80 +PART III +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +80 +EXECUTIVE COMPENSATION +81 +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +82 +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +83 +PRINCIPAL ACCOUNTING FEES AND SERVICES +83 +PART IV +EXHIBITS AND FINANCIAL SCHEDULES +83 +FORM 10-K SUMMARY +83 +SIGNATURES +83 +EXHIBIT INDEX +85 +FORWARD‑LOOKING STATEMENTS +This annual report on Form 10-K contains forward‑looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “may,” “could,” “plan,” “project,” “budget,” “predict,” “pursue,” “target,” “seek,” “objective,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” and other expressions that are predictions of, or indicate, future events and trends and that do not relate to historical matters identify forward‑looking statements. Our forward‑looking statements include, among other matters, statements about our business strategy, industry, future profitability, expected capital expenditures and the impact of such expenditures on our performance and capital programs. +A forward‑looking statement may include a statement of the assumptions or bases underlying the forward‑looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward‑looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward‑looking statements include: +• the level of production of crude oil, natural gas and other hydrocarbons and the resultant market prices of crude oil, natural gas, natural gas liquids and other hydrocarbons; +• changes in general economic and geopolitical conditions; +• competitive conditions in our industry; +• changes in the long‑term supply of and demand for oil and natural gas; +• actions taken by our customers, suppliers, competitors and third‑party operators; +• changes in the availability and cost of capital; +• our ability to successfully implement our business plan; +• large or multiple customer defaults, including defaults resulting from actual or potential insolvencies; +• the price and availability of debt and equity financing (including changes in interest rates); +• our ability to complete growth projects on time and on budget; +• changes in our tax status; +• technological changes; +• operating hazards, natural disasters, weather‑related delays, casualty losses and other matters beyond our control; +• the effects of existing and future laws and governmental regulations (or the interpretation thereof); and +• the effects of future litigation. +You should not place undue reliance on our forward‑looking statements. Although forward‑looking statements reflect our good faith beliefs at the time they are made, forward‑looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under “Risk Factors,” which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward‑looking statements. We undertake no obligation to publicly update or revise any forward‑looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law. +Unless the context indicates otherwise, all references to “we,” “our” or “us” refer to ProPetro Holding Corp. and its consolidated subsidiary, ProPetro Services, Inc. +1 +PART I +Item 1. Business. +Our Company +We are a growth‑oriented, Midland, Texas‑based oilfield services company providing hydraulic fracturing and other complementary services to leading upstream oil and gas companies engaged in the exploration and production, or E&P, of North American unconventional oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as the most prolific oil‑producing area in the United States, and we believe we are one of the leading providers of hydraulic fracturing services in the region by hydraulic horsepower, or HHP. During the year ended December 31, 2018 , we purchased and deployed four newbuild hydraulic fracturing units, bringing our total horse power to 905,000 HHP, or 20 deployed fleets. +On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer Natural Resources USA, Inc. (“Pioneer”) and Pioneer Natural Resources Pumping Services, LLC (“Pioneer Pumping Services”). Prior to the purchase, the pressure pumping assets exclusively provided integrated pressure pumping services to Pioneer’s completion and production operations. The acquisition cost of the assets was comprised of $110.0 million of cash and 16.6 million shares of our common stock. In connection with the consummation of transaction, we became a strategic long-term service provider to Pioneer, providing pressure pumping and related services for a term of up to 10 years. +The pressure pumping assets acquired include eight hydraulic fracturing fleets with a total of 510,000 HHP, four coiled tubing units and an associated equipment maintenance facility. Through this acquisition, we expanded our existing presence in the Permian Basin, and increased our pumping capacity by 56%, to 28 hydraulic fracturing fleets with a total of 1,415,000 HHP, further strengthening our position as one of the largest pure-play provider of integrated well completion services in the Permian Basin. +Our modern hydraulic fracturing fleet has been designed to handle the most challenging Permian Basin operating conditions and the region’s increasingly high‑intensity well completions, which are characterized by longer horizontal wellbores, more frac stages per lateral and increasing amounts of proppant per well. +In addition to our core hydraulic fracturing operations, we also offer a suite of complementary well completion and production services, including cementing, coiled tubing, flowback services and drilling. We believe these complementary services create operational efficiencies for our customers and allow us to capture a greater portion of their capital spending across the lifecycle of an unconventional well. +Our primary business objective is to serve as a strategic long-term partner to our customers. We achieve this objective by providing reliable, high‑quality services that are tailored to our customers’ needs and synchronized with their well development programs. This alignment assists our customers in optimizing the long‑term development of their unconventional resources. Over the past three years, we have leveraged our strong relationships in the Permian Basin to significantly grow our installed HHP capacity and organically build our cementing and coiled tubing lines of business. Consistent with past performance, we believe our substantial market presence will continue to yield a variety of actionable growth opportunities allowing us to expand both our hydraulic fracturing and complementary services going forward. To this end, we intend to continue to differentiate ourselves, consistent with our past practice, by opportunistically deploying new equipment on a long‑term dedicated basis. +Our Services +We conduct our business through five operating segments: hydraulic fracturing (inclusive of acidizing), cementing, coil tubing, flowback and drilling. For reporting purposes, the hydraulic fracturing and cementing operating segments are aggregated into our one reportable segment: pressure pumping. For additional financial information on our reportable segment, please see Part II - Item 8. Financial Statements and Supplementary Data. +2 +Pressure Pumping +Hydraulic Fracturing +We primarily provide hydraulic fracturing services to E&P companies in the Permian Basin. These services are intended to optimize hydrocarbon flow paths during the completion phase of horizontal shale wellbores. We have significant expertise in multi‑stage fracturing of horizontal oil‑producing wells in unconventional geological formations. During the year ended December 31, 2018, we continued to organically grow our hydraulic fracturing business to a total of 20 hydraulic fracturing fleets with an aggregate of 905,000 HHP. Following the consummation of our acquisition of pressure pumping assets from Pioneer Pressure Pumping Services, we increased our hydraulic fracturing business to a total 28 fleets, or 1,415,000 HHP. +The fracturing process consists of pumping a fracturing fluid into a well at sufficient pressure to fracture the formation. Materials known as proppants, which in our business are comprised primarily of sand, are suspended in the fracturing fluid and are pumped into the fracture to prop it open. The fracturing fluid is designed to “break,” or loosen viscosity, and be forced out of the formation by its pressure, leaving the proppants suspended in the fractures created, thereby increasing the mobility of the hydrocarbons. As a result of the fracturing process, production rates are usually enhanced substantially, thus increasing the rate of return of hydrocarbons for the operator. +We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We also refer to all of our fracturing units, other equipment and vehicles necessary to perform a fracturing job as a “fleet” and the personnel assigned to each fleet as a “crew.” Each hydraulic fracturing unit consist primarily of a high pressure hydraulic pump, diesel engine, transmission and various hoses, valves, tanks and other supporting equipment that are typically mounted to a flatbed trailer. +We provide dedicated equipment, personnel and services that are tailored to meet each of our customer’s needs. Each fleet has a designated team of personnel, which allows us to provide responsive and customized services, such as project design, proppant and other consumables procurement, real‑time data provision and post‑completion analysis for each of our jobs. Many of our hydraulic fracturing fleets and associated personnel have continuously worked with the same customer for the past several years promoting deep relationships and a high degree of coordination and visibility into future customer activity levels. Furthermore, in light of our substantial market presence and historically high fleet utilization levels, we have established a variety of entrenched relationships with key equipment, sand and other downhole consumable suppliers, including over 30 sand suppliers utilized in 2018. These strategic relationships ensure ready access to equipment, parts and materials on a timely and economic basis and allow our dedicated procurement logistics team to ensure consistently safe and reliable operations. +Cementing +We provide cementing services for completion of new wells and remedial work on existing wells. Cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Cementing provides isolation between fluid zones behind the casing to minimize potential damage to hydrocarbon bearing formations or the integrity of freshwater aquifers, and provides structural integrity for the casing by securing it to the earth. Cementing is also done when recompleting wells, where one zone is plugged and another is opened. +As of December 31, 2018 , we operated a total of 20 cementing units, with 13 units operating in the Permian Basin and 7 units operating in the Uinta‑Piceance Basin. We believe that our cementing segment provides an organic growth opportunity for us to expand our service offerings within our existing customer base. +3 +Other Services +Coiled Tubing +Coiled tubing services involve injecting coiled tubing into wells to perform various completion well intervention operations. Coiled tubing is a flexible steel pipe with a diameter of typically less than three inches and manufactured in continuous lengths of thousands of feet. It is wound or coiled on a truck‑mounted reel for onshore applications. Due to its small diameter, coiled tubing can be inserted into existing production tubing and used to perform a variety of services to enhance the flow of oil or natural gas. +The principal advantages of using coiled tubing include the ability to (i) continue production from the well without interruption, thus reducing the risk of formation damage, (ii) move continuous coiled tubing in and out of a well significantly faster than conventional pipe used with a workover rig, which must be jointed and unjointed, (iii) direct fluids into a wellbore with more precision, allowing for improved stimulation fluid placement, (iv) provide a source of energy to power a downhole motor or manipulate down‑hole tools and (v) enhance access to remote fields due to the smaller size and mobility. +As of December 31, 2018 , we had 8 coiled tubing units of various sizes. We believe these units are well suited for the performance requirements of the unconventional resource markets we serve. +Flowback Services +Our flowback services consist of production testing, solids control, hydrostatic testing and torque services. Flowback involves the process of allowing fluids to flow from the well following a treatment, either in preparation for an impending phase of treatment or to return the well to production. Our flowback equipment consists of manifolds, accumulators, valves, flare stacks and other associated equipment that combine to form up to a total of five well‑testing spreads. We provide flowback services in the Permian Basin and mid‑continent markets. +Surface Air Drilling +We operated a surface air drilling operation in the Uinta‑Piceance Basin, which offered pre‑set surface air drilling services to target depths of approximately 4,000 feet in areas of fragile geology. Air drilling is a technique in which oil, natural gas, or geothermal wells are drilled by creating a pressure within the well that is lower than the reservoir pressure, which results in increased rates of penetration, reduced formation damage and reduced drilling costs. +On August 31, 2018, we divested our surface air drilling operations, included in our "all other" operating segment category in our financial statements, in order to continue to position ourselves as a Permian Basin-focused pressure pumping business because we believe the pressure pumping market in the Permian Basin offers more supportive long-term growth fundamentals. The divestiture of our surface air drilling operations did not qualify for presentation and disclosure as discontinued operations, and accordingly we have recorded the resulting loss on disposal of our surface air drilling of $0.3 million, as part of our loss on disposal of asset in our statement of operations included in this annual report. The divestiture of our surface air drilling operations resulted in a reduction in the number of our current operating segments. The change in the number of our operating segments did not impact our reportable segment information reported in the financial statements included in this annual report. +Competitive Strengths +Our primary business objective is to serve as a strategic long-term partner for our customers. We achieve this objective by providing reliable, high‑quality services that are tailored to our customers’ needs and synchronized with their well development programs. This alignment assists our customers in optimizing the long‑term development of their unconventional resources. We believe that the following competitive strengths differentiate us from our peers and uniquely position us to achieve our primary business objective. +4 +• +Strong market position in the Permian Basin. We believe we are one of the largest hydraulic fracturing provider by HHP in the Permian Basin, which is the most prolific oil producing area in the United States. Our longstanding customer relationships and substantial Permian Basin market presence uniquely position us to continue growing in tandem with the basin’s ongoing development. The Permian Basin is a mature, liquids‑rich basin with well known geology and a large, exploitable resource base that delivers attractive E&P producer economics at or below current commodity prices. As a result of its significant size, coupled with the presence of multiple prospective geologic benches and other favorable characteristics, the Permian Basin has become widely recognized as the most attractive and economic oil resource in North America. +Our operational focus has historically been in the Permian Basin’s Midland sub‑basin in support of our customers’ core operations. More recently, however, many of our customers have made sizeable acquisitions in the Delaware Basin, and we have expanded our services into the Delaware Basin to help develop their acreage. Further, we believe that we are uniquely positioned to capture a large addressable growth opportunity as the basin develops. For the foreseeable future, we expect both the Midland Basin and the Delaware Basin to continue to command a disproportionate share of future North American E&P spending. +• +Hydraulic fracturing is highly levered to increasing drilling activity and completion intensity levels. The combination of an expanding Permian Basin horizontal rig count and more complex well completions has a compounding effect on HHP demand growth. Horizontal drilling has become the default method for E&P operators to most economically extract unconventional resources, and the number of horizontal rigs has increased from 22% of the total Permian Basin rig count in December 2011 to approximately 91% of the Permian Basin rig count at December 31, 2018. As the horizontal rig count has grown, well completion intensity levels have also increased as a result of longer wellbore lateral lengths, more fracturing stages per foot of lateral and increasing amounts of proppant per stage. Furthermore, the ongoing improvement in drilling and completion efficiencies, driven by innovations such as multi‑well pads and zipper fracs, have further increased the demand for HHP. Taken together, these demand drivers have helped contribute to the full utilization of our fleet and have us well positioned to capture future growth opportunities and enhanced pricing for our services. +• +Deep relationships and operational alignment with high‑quality, Permian Basin‑focused customers. Our deep local roots, operational expertise and commitment to safe and reliable service have allowed us to cultivate longstanding customer relationships with the most active and well‑capitalized Permian Basin operators. Many of our current customers have worked with us since our inception and have integrated our fleet scheduling with their well development programs. This high degree of operational alignment and their continued support have allowed us to maintain relatively high utilization rates over time. As our customers increase activity levels, we expect to continue to leverage these strong relationships to keep our fleet fully utilized and selectively expand our platform in response to specific customer demand. +• +Standardized fleet of modern, well‑maintained equipment. We have a large, homogenous fleet of modern equipment that is configured to handle the Permian Basin’s most complex, highest‑intensity, hydraulic fracturing jobs. We believe that our fleet design is a key advantage compared to many of our competitors who have fracturing units that are not optimized for Permian Basin conditions. Our fleet is largely standardized across units to facilitate efficient maintenance and repair, reducing equipment downtime and improving labor efficiency. Furthermore, our strong relationships with a variety of key suppliers and vendors provide us with the reliable access to the equipment necessary to support our continued organic growth strategy. +• +Proven cross‑cycle financial performance. Over the past several years, we have maintained high cross‑cycle fleet utilization rates. Since September 2016 our fleet has consistently recorded a utilization rate of approximately 100%. Our consistent track record of steady growth, coupled with our ability to quickly deploy new HHP on a dedicated and fully utilized basis, has resulted in revenue growth across the industry’s cycles. We believe that we will be able to continue to grow faster than our competitors while preserving attractive EBITDA margins as a result of our differentiated service offerings and a robust backlog of demand for our services. Furthermore, we believe that our philosophy of maintaining modest +5 +financial leverage and a healthy balance sheet has left us more conservatively capitalized than our peers. We expect that improving market fundamentals, our superior execution and our customer‑focused approach should result in strong financial performance. +• +Seasoned management and operating team. We have a seasoned executive management team, with our senior members contributing more than 100 years of collective industry and financial experience. Members of our management team founded our business and seeded our company with a portion of our original investment capital. We believe their track record of successfully building premier oilfield service companies in the Permian Basin, as well as their deep roots and relationships throughout the West Texas community, provide a meaningful competitive advantage for our business. In addition, our management team has assembled a loyal group of highly‑motivated and talented managers and field personnel, and we have had minimal manager‑level turnover in our core service divisions over the past three years. We employ a balanced decision‑making structure that empowers managerial and field personnel to work directly with customers to develop solutions while leveraging senior management’s oversight. This collaborative approach fosters strong customer links at all levels of the organization and effectively institutionalizes customer relationships beyond the executive suite. +Strategy +Our strategy is to: +• +Capture an increasing share of rising demand for hydraulic fracturing services in the Permian Basin. We intend to continue to position ourselves as a Permian Basin‑focused hydraulic fracturing business, as we believe the Permian Basin hydraulic fracturing market offers supportive long‑term growth fundamentals. These fundamentals are characterized by increased demand for our HHP, driven by increasing drilling activity and well completion intensity levels. We are currently operating at approximately 100% utilization, and we believe we are strategically positioned to deploy additional hydraulic fracturing equipment as our customers continue to develop their assets in the Midland Basin and Delaware Basin. +• +Capitalize on improving efficiency gains. We intend to continue to work with our customers and vendors to improve our operational efficiencies and enhance our margins. We believe that improving our efficiencies will result in greater revenue and enhanced margins as fixed costs are spread over a broader revenue base. +• +Cross‑sell our complementary services. In addition to our hydraulic fracturing services, we offer a broad range of complementary services in support of our customers’ development activities, including cementing, coiled tubing, flowback services and drilling. These complementary services create operational efficiencies for our customers, and allow us to capture a greater percentage of their capital spending across the lifecycle of an unconventional well. We believe that, as our customers increase spending levels, we are well positioned to continue cross‑selling and growing our complementary service offerings. +• +Maintain financial stability and flexibility to pursue growth opportunities. Consistent with our historical practices, we plan to continue to maintain a conservative balance sheet, which will allow us to better react to potential changes in industry and market conditions and opportunistically grow our business. In the near term, we intend to continue our past practice of aligning our growth capital expenditures with visible customer demand by strategically deploying new equipment on a long‑term, dedicated basis in response to inbound customer requests. We will also selectively evaluate potential strategic acquisitions that increase our scale and capabilities or diversify our operations. +Our Customers +Our customers consist primarily of oil and natural gas producers in North America. Our top five customers accounted for approximately 68.7% , 66.0% and 58.0% of our revenue, for the years ended December 31, 2018 , 2017 and 2016 , respectively. For the year ended December 31, 2018 , XTO Energy, Parsley Energy Operations, LLC and +6 +CrownQuest Operating, LLC, accounted for 24.1%, 16.5%, and 12.2%, respectively, of total revenue. No other customer accounted for more than 10% of total revenue for the year ended December 31, 2018 . +Competition +The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services that meet the specific needs of oil and natural gas exploration and production companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, service and equipment quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies’ criteria in choosing a service provider. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our deep local roots, operational expertise, equipment’s ability to handle the most complex Permian Basin well completions, and commitment to safety and reliability. +We provide our services primarily in the Permian Basin, and we compete against different companies in each service and product line we offer. Our competition includes many large and small oilfield service companies, including the largest integrated oilfield services companies. Our major competitors for hydraulic fracturing services include C&J Energy Services, Halliburton, Patterson‑UTI Energy Inc., RPC, Inc., Schlumberger, Keane Group, Inc., Liberty Oilfield Services, FTS International, Inc., Superior Energy Services and a number of locally oriented businesses. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the fourth quarter, relating to the conclusion of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather during which we may experience declines in our operating results. +Operating Risks and Insurance +Our operations are subject to hazards inherent in the oilfield services industry, such as accidents, blowouts, explosions, fires and spills and releases that can cause personal injury or loss of life, damage or destruction of property, equipment, natural resources and the environment and suspension of operations. +In addition, claims for loss of oil and natural gas production and damage to formations can occur in the oilfield services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in us being named as a defendant in lawsuits asserting large claims. +Our business involves the transportation of heavy equipment and materials, and as a result, we may also experience traffic accidents which may result in spills, property damage and personal injury. +Despite our efforts to maintain safety standards, we from time to time have suffered accidents in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations. +We maintain commercial general liability, workers’ compensation, business auto, commercial property, umbrella liability, excess liability, and directors and officers insurance policies providing coverages of risks and amounts that we believe to be customary in our industry. Further, we have pollution legal liability coverage for our business entities, which would cover, among other things, third party liability and costs of clean up relating to environmental contamination on our premises while our equipment is in transit and on our customers’ job site. With respect to our hydraulic fracturing operations, coverage would be available under our pollution legal liability policy +7 +for any surface or subsurface environmental clean‑up and liability to third parties arising from any surface or subsurface contamination. We also have certain specific coverages for some of our businesses, including our hydraulic fracturing services. +Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of the high premium costs relative to perceived risk. Further, insurance rates have in the past been subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us. See “Risk Factors” for a description of certain risks associated with our insurance policies. +Environmental and Occupational Health and Safety Regulations +Our operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection, and occupational health and safety. Numerous federal, state and local governmental agencies issue regulations that often require difficult and costly compliance measures that could carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non compliance. These laws and regulations may, for example, restrict the types, quantities and concentrations of various substances that can be released into the environment, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas and other protected areas, or require action to prevent or remediate pollution from current or former operations. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental, health and safety laws and regulations occur frequently, and any changes that result in more stringent and costly requirements could materially adversely affect our operations and financial position. We have not experienced any material adverse effect from compliance with these requirements, however, this trend may not continue in the future. +Below is an overview of some of the more significant environmental, health and safety requirements with which we must comply. Our customers’ operations are subject to similar laws and regulations. Any material adverse effect of these laws and regulations on our customers’ operations and financial position may also have an indirect material adverse effect on our operations and financial position. +Waste Handling. We handle, transport, store and dispose of wastes that are subject to the Resource Conservation and Recovery Act (“RCRA”) and comparable state laws and regulations, which affect our activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although certain petroleum production wastes are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non hazardous waste provisions. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non hazardous wastes or recategorize some non hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to recategorize certain oil and natural gas exploration, development and production wastes as hazardous wastes. Several environmental organizations have also petitioned the EPA to modify existing regulations to recategorize certain oil and natural gas exploration, development and production wastes as hazardous. Any such changes in these laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +8 +Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) and analogous state laws generally impose liability without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Liability for the costs of removing or remediating previously disposed wastes or contamination, damages to natural resources, the costs of conducting certain health studies, amongst other things, is strict and joint and several. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state laws. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such hazardous substances have been released. +One of our facilities in Midland, Texas is located within the boundaries of the West County Road 112 federal Superfund site, which site and the associated investigation and cleanup is being managed by EPA Region 6. The site’s soil and groundwater is contaminated with chromium and hexavalent chromium as a result of historic site operations unaffiliated with the Company and unassociated with the Company’s operations. Toxic tort claims also have been asserted as a result of this groundwater contamination against various unaffiliated parties. In 2013, in order to reduce the Company’s risk of incurring any future liabilities in connection with this site, the Company negotiated and obtained a bona fide prospective purchaser (“BFPP”) letter from EPA Region 6 in connection with a reorganization of the facility site ownership and lease. The BFPP letter generally acknowledges and provides that the Company is unaffiliated with any potentially responsible parties or known contamination that is the subject of the Superfund action, the Company agrees to comply with any future land use restrictions that may be imposed in connection with a site remedy (none have been imposed to date), and the Company agrees to cooperate with and provide access and assistance to EPA Region 6 in connection with the remediation. In exchange for these undertakings, the Company will not be subject to any CERCLA action by the EPA. In addition, the Company separately obtained a 10‑year environmental pollution legal liability insurance policy, effective March 4, 2013, with an aggregate limit of $20 million to insure against potential third‑party claims and any known or unknown pre‑existing conditions at the site, including Superfund or toxic tort liabilities. Both prior to and since obtaining the BFPP letter and the insurance policy, no claims have been made or threatened against the Company or any of its affiliated persons or entities with regard to this Superfund site or any related liabilities, and the Company has not incurred any significant expenses in connection with this matter. +NORM. In the course of our operations, some of our equipment may be exposed to naturally occurring radioactive materials (“NORM”) associated with oil and gas deposits and, accordingly may result in the generation of wastes and other materials containing NORM. NORM exhibiting levels of radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. +Water Discharges. The Clean Water Act, Safe Drinking Water Act, Oil Pollution Act and analogous state laws and regulations impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into regulated waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Also, spill prevention, control and countermeasure plan requirements require appropriate containment berms and similar structures to help prevent the contamination of regulated waters. +Air Emissions. The Clean Air Act (“CAA”) and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other emissions control requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants from specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. These and other laws and regulations may increase the costs of compliance for some facilities where we operate. Obtaining or renewing permits also has the potential to delay the development of oil and natural gas projects. +9 +Climate Change. The EPA has determined that greenhouse gases (“GHGs”) present an endangerment to public health and the environment because such gases contribute to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA has adopted and implemented, and continues to adopt and implement, regulations that restrict emissions of GHGs under existing provisions of the CAA. The EPA also requires the annual reporting of GHG emissions from certain large sources of GHG emissions in the United States, including certain oil and gas production facilities. The U.S. Congress has from time to time considered adopting legislation to reduce emissions of GHGs and almost one‑half of the states have already taken legal measures to reduce emissions of GHGs primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. In December 2015, the United States joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of greenhouse gases. The Paris Agreement entered into force in November 2016. On June 1, 2017, President Trump announced that the United States planned to withdraw from the Paris Agreement and to seek negotiations either to reenter the Paris Agreement on different terms or establish a new framework agreement. The Paris Agreement provides for a four‑year exit process beginning when it took effect in November 2016, which would result in an effective exit date of November 2020. The United States’ adherence to the exit process is uncertain and/or the terms on which the United States may reenter the Paris Agreement or a separately negotiated agreement are unclear at this time. +Moreover, climate change may cause more extreme weather conditions and increased volatility in seasonal temperatures. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Endangered and Threatened Species. Environmental laws such as the Endangered Species Act (“ESA”) and analogous state laws may impact exploration, development and production activities in areas where we operate. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and various state analogs. The U.S. Fish and Wildlife Service may identify previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us or our customers to incur additional costs or become subject to operating restrictions or operating bans in the affected areas. +Regulation of Hydraulic Fracturing and Related Activities. Our hydraulic fracturing operations are a significant component of our business. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. For example, in May 2014, the EPA issued an Advanced Notice of Proposed Rulemaking seeking comment on the development of regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. Beginning in August 2012, the EPA issued a series of rules under the CAA that establish new emission control requirements for certain oil and natural gas production and natural gas processing operations and associated equipment. After several attempts to delay implementation, in September 2018 the EPA issued a proposal to amend and reduce such requirements. In March 2015, the Bureau of Land Management (“BLM”) finalized a rule governing hydraulic fracturing on federal lands. In June 2016, a federal district court judge in Wyoming struck down the final rule, finding that the BLM lacked congressional authority to promulgate the rule. However, in July 2017, the BLM initiated a rulemaking to rescind the final rule and reinstate the regulations that existed immediately before the published effective date of the rule. In light of the BLM’s proposed rulemaking, in September 2017, the U.S. Court of Appeals for the Tenth Circuit dismissed the appeal and remanded with directions to vacate the lower court’s opinion, leaving the final rule in place. The BLM initiated a rulemaking to rescind the final rule in December 2017. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in recent sessions of Congress. Several +10 +states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +More recently, federal and state governments have begun investigating whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In March 2016, the United States Geological Survey identified six states with the most significant hazards from induced seismicity, including Oklahoma, Kansas, Texas, Colorado, New Mexico and Arkansas. The United States Geological Survey also noted the potential for induced seismicity in Ohio and Alabama. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma issued new rules for wastewater disposal wells in 2014 that imposed certain permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has developed and implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission released well completion seismicity guidelines in December 2016 for operators in the SCOOP and STACK that call for hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, in February 2017, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission adopted similar rules in 2014. In addition, in December 2016, the EPA released its final report regarding the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources under certain circumstances such as water withdrawals for fracturing in times or areas of low water availability, surface spills during the management of fracturing fluids, chemicals or produced water, injection of fracturing fluids into wells with inadequate mechanical integrity, injection of fracturing fluids directly into groundwater resources, discharge of inadequately treated fracturing wastewater to surface waters, and disposal or storage of fracturing wastewater in unlined pits. The results of these studies could lead federal and state governments and agencies to develop and implement additional regulations. +Increased regulation of hydraulic fracturing and related activities (whether as a result of the EPA study results or resulting from other factors) could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and record keeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. +OSHA Matters. The Occupational Safety and Health Act (“OSHA”) and comparable state statutes regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. +Employees +As of December 31, 2018 , we employed 1,579 people. None of our employees are represented by labor unions or subject to collective bargaining agreements. +We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s web site at www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on their public reference room. Our SEC filings are also available to the public on our website at www.propetroservices.com. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Annual Report on Form 10-K or the documents incorporated by reference in this Annual Report on Form 10-K. This Annual Report on Form 10-K also contains summaries of the terms of certain agreements that we have entered into that are filed as exhibits to this Annual Report on Form 10-K or other reports that we have filed with the SEC. The descriptions contained in this Annual Report on Form 10-K of +11 +those agreements do not purport to be complete and are subject to, and qualified in their entirety by reference to, the definitive agreements. You may request a copy of the agreements described herein at no cost by writing or telephoning us at the following address: ProPetro Holding Corp., Attention: Investor Relations, P.O. Box 873, Midland, Texas 79702, phone number (432) 688-0012. +12 +Item 1A. Risk Factors. +The following is a description of significant factors that could cause actual results to differ materially from those contained in forward-looking statement made in this Annual Report on Form 10-K and presented elsewhere by management from time to time. Such factors may have a material adverse effect on our business, financial condition and results of operations. It is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete statement of all our potential risks or uncertainties. Due to these, and other factors, past performance should not be considered an indication of future performance. +Our business and financial performance depends on the oil and natural gas industry and particularly on the level of capital spending and exploration and production activity within the United States and in the Permian Basin, and a decline in prices for oil and natural gas may have an adverse effect on our revenue, cash flows, profitability and growth. +Demand for most of our services depends substantially on the level of capital expenditures in the Permian Basin by companies in the oil and natural gas industry. As a result, our operations are dependent on the levels of capital spending and activity in oil and gas exploration, development and production. A prolonged reduction in oil and gas prices would generally depress the level of oil and natural gas exploration, development, production, and well completion activity and would result in a corresponding decline in the demand for the hydraulic fracturing services that we provide. The significant decline in oil and natural gas prices during 2015 and 2016 caused a reduction in our customers’ spending and associated drilling and completion activities, which had an adverse effect on our revenue. If prices were to decline, similar declines in our customers’ spending would have an adverse effect on our revenue. In addition, a worsening of these conditions may result in a material adverse impact on certain of our customers’ liquidity and financial position resulting in further spending reductions, delays in the collection of amounts owing to us and similar impacts. +Many factors over which we have no control affect the supply of, and demand for, and our customers’ willingness to explore, develop and produce oil and natural gas, and therefore, influence prices for our services, including: +• +the domestic and foreign supply of, and demand for, oil and natural gas; +• +the level of prices, and expectations about future prices, of oil and natural gas; +• +the level of global oil and natural gas exploration and production; +• +the cost of exploring for, developing, producing and delivering oil and natural gas; +• +the supply of and demand for drilling and hydraulic fracturing equipment; +• +the expected decline rates of current production; +• +the price and quantity of foreign imports; +• +political and economic conditions in oil and natural gas producing countries and regions, including the United States, the Middle East, Africa, South America and Russia; +• +actions by the members of Organization of Petroleum Exporting Countries with respect to oil production levels and announcements of potential changes in such levels; +• +speculative trading in crude oil and natural gas derivative contracts; +• +the level of consumer product demand; +• +the discovery rates of new oil and natural gas reserves; +• +contractions in the credit market; +13 +• +the strength or weakness of the U.S. dollar; +• +available pipeline and other transportation capacity; +• +the levels of oil and natural gas storage; +• +weather conditions and other natural disasters; +• +domestic and foreign tax policy; +• +domestic and foreign governmental approvals and regulatory requirements and conditions; +• +the continued threat of terrorism and the impact of military and other action, including military action in the Middle East; +• +technical advances affecting energy consumption; +• +the proximity and capacity of oil and natural gas pipelines and other transportation facilities; +• +the price and availability of alternative fuels; +• +the ability of oil and natural gas producers to raise equity capital and debt financing; +• +merger and divestiture activity among oil and natural gas producers; and +• +overall domestic and global economic conditions. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. Such a decline would have a material adverse effect on our business, results of operation and financial condition. +The cyclical nature of the oil and natural gas industry may cause our operating results to fluctuate. +We derive our revenues from companies in the oil and natural gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices. We have experienced, and may in the future experience, significant fluctuations in operating results as a result of the reactions of our customers to changes in oil and natural gas prices. For example, prolonged low commodity prices experienced by the oil and natural gas industry during 2015 and 2016, combined with adverse changes in the capital and credit markets, caused many exploration and production companies to reduce their capital budgets and drilling activity. This resulted in a significant decline in demand for oilfield services and adversely impacted the prices oilfield services companies could charge for their services. In addition, a majority of the service revenue we earn is based upon a charge for a relatively short period of time (for example, a day, a week or a month) for the actual period of time the service is provided to our customers. By contracting services on a short‑term basis, we are exposed to the risks of a rapid reduction in market prices and utilization and resulting volatility in our revenues. +The majority of our operations are located in the Permian Basin, making us vulnerable to risks associated with operating in one major geographic area. +Our operations are geographically concentrated in the Permian Basin. For the years ended December 31, 2018 , 2017 and 2016 , approximately 99%, 97% and 97%, respectively, of our revenues were attributable to our operations in the Permian Basin. As a result of this concentration, we may be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in the Permian Basin caused by significant governmental regulation, processing or transportation capacity constraints, market limitations, curtailment of production or interruption of the processing or transportation of oil and natural gas produced from the wells in these areas. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil and natural gas producing areas such as the Permian Basin, which may cause these +14 +conditions to occur with greater frequency or magnify the effects of these conditions. Due to the concentrated nature of our operations, we could experience any of the same conditions at the same time, resulting in a relatively greater impact on our revenue than they might have on other companies that have more geographically diverse operations. +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our business, results of operations and financial condition. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we fail to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re‑market or otherwise use the production could have a material adverse effect on our business, results of operations and financial condition. The depressed oil and natural gas prices in 2015 and 2016 negatively impacted the financial condition and liquidity of our customers, and future declines, sustained lower prices, or continued volatility could impact their ability to meet their financial obligations to us. +We face significant competition that may cause us to lose market share. +The oilfield services industry is highly competitive and has relatively few barriers to entry. The principal competitive factors impacting sales of our services are price, reputation and technical expertise, equipment and service quality and health and safety standards. The market is also fragmented and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial and other resources than we do. Our larger competitors’ greater resources could allow those competitors to compete more effectively than we can. For instance, our larger competitors may offer services at below‑market prices or bundle ancillary services at no additional cost to our customers. We compete with large national and multi‑national companies that have longer operating histories, greater financial, technical and other resources and greater name recognition than we do. Several of our competitors provide a broader array of services and have a stronger presence in more geographic markets. In addition, we compete with several smaller companies capable of competing effectively on a regional or local basis. +Some jobs are awarded on a bid basis, which further increases competition based on price. Pricing is often the primary factor in determining which qualified contractor is awarded a job. The competitive environment may be further intensified by mergers and acquisitions among oil and natural gas companies or other events that have the effect of reducing the number of available customers. As a result of competition, we may lose market share or be unable to maintain or increase prices for our present services or to acquire additional business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. +Our competitors may be able to respond more quickly to new or emerging technologies and services and changes in customer requirements. The amount of equipment available may exceed demand, which could result in active price competition. In addition, depressed commodity prices lower demand for hydraulic fracturing equipment, which results in excess equipment and lower utilization rates. In addition, some exploration and production companies have commenced completing their wells using their own hydraulic fracturing equipment and personnel. Any increase in the development and utilization of in‑house fracturing capabilities by our customers could decrease the demand for our services and have a material adverse impact on our business. +Furthermore, competition among oilfield service and equipment providers is affected by each provider’s reputation for safety and quality. We cannot assure that we will be able to maintain our competitive position. +New technology may cause us to become less competitive. +The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. Although we believe our equipment and processes currently give us a competitive advantage, as competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. Further, we may face competitive pressure to develop, implement or acquire certain new +15 +technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, effectively use and implement new and emerging technologies could have a material adverse effect on our business, financial condition, prospects or results of operations. +Our business depends upon our ability to obtain specialized equipment, parts and key raw materials, including frac sand and chemicals, from third‑party suppliers, and we may be vulnerable to delayed deliveries and future price increases. +We purchase specialized equipment, parts and raw materials (including, for example, frac sand, chemicals and fluid ends) from third party suppliers and affiliates. At times during the business cycle, there is a high demand for hydraulic fracturing and other oil field services and extended lead times to obtain equipment and raw materials needed to provide these services. Should our current suppliers be unable or unwilling to provide the necessary equipment, parts or raw materials or otherwise fail to deliver the products timely and in the quantities required, any resulting delays in the provision of our services could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, future price increases for this type of equipment, parts and raw materials could negatively impact our ability to purchase new equipment, to update or expand our existing fleet, to timely repair equipment in our existing fleet or meet the current demands of our customers. +Reliance upon a few large customers may adversely affect our revenue and operating results. +The majority of our revenue is generated from our hydraulic fracturing services. Due to the large percentage of our revenue historically derived from our hydraulic fracturing services with recurring customers and the limited availability of our fracturing units, we have had some degree of customer concentration. Our top ten customers represented approximately 85.5% , 87.0% and 83.0% of our consolidated revenue for the years ended December 31, 2018 , 2017 and 2016 , respectively. It is likely that we will depend on a relatively small number of customers for a significant portion of our revenue in the future. If a major customer fails to pay us, revenue would be impacted and our operating results and financial condition could be harmed. Additionally, if we were to lose any material customer, we may not be able to redeploy our equipment at similar utilization or pricing levels and such loss could have an adverse effect on our business until the equipment is redeployed at similar utilization or pricing levels. +Certain of our completion services, particularly our hydraulic fracturing services, are substantially dependent on the availability of water. Restrictions on our or our customers’ ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows. +Water is an essential component of unconventional shale oil and natural gas production during both the drilling and hydraulic fracturing processes. Over the past several years, certain of the areas in which we and our customers operate have experienced extreme drought conditions and competition for water in such areas is growing. In addition, some state and local governmental authorities have begun to monitor or restrict the use of water subject to their jurisdiction for hydraulic fracturing to ensure adequate local water supply. For instance, some states require E&P companies to report certain information regarding the water they use for hydraulic fracturing and to monitor the quality of groundwater surrounding some wells stimulated by hydraulic fracturing. Generally, our water requirements are met by our customers from sources on or near their sites, but there is no assurance that our customers will be able to obtain a sufficient supply of water from sources in these areas. Our or our customers’ inability to obtain water from local sources or to effectively utilize flowback water could have an adverse effect on our financial condition, results of operations and cash flows. +We rely on a few key employees whose absence or loss could adversely affect our business. +Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services could adversely affect our business. In particular, the loss of the services of one or more members of our executive team, such as our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Accounting Officer and General Counsel could disrupt our operations. We do not maintain “key person” life +16 +insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees. +If we are unable to employ a sufficient number of skilled and qualified workers, our capacity and profitability could be diminished and our growth potential could be impaired. +The delivery of our services requires skilled and qualified workers with specialized skills and experience who can perform physically demanding work. As a result of the volatility of the oilfield services industry and the demanding nature of the work, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled labor force. The demand for skilled workers is high, and the supply is limited. As a result, competition for experienced oilfield service personnel is intense, and we face significant challenges in competing for crews and management with large and well‑established competitors. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. If either of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired. +Our operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms, or at all, which could limit our ability to grow. +The oilfield services industry is capital intensive. In conducting our business and operations, we have made, and expect to continue to make, substantial capital expenditures. Our total capital expenditures incurred were approximately $592.6 million , $305.3 million and $46.0 million during the years ended December 31, 2018 , 2017 and 2016 . We have historically financed capital expenditures primarily with funding from cash on hand, cash flow from operations, equipment and vendor financing and borrowings under our credit facilities. We may be unable to generate sufficient cash from operations and other capital resources to maintain planned or future levels of capital expenditures which, among other things, may prevent us from acquiring new equipment or properly maintaining our existing equipment. Further, any disruptions or continuing volatility in the global financial markets may lead to an increase in interest rates or a contraction in credit availability impacting our ability to finance our operations. This could put us at a competitive disadvantage or interfere with our growth plans. Further, our actual capital expenditures could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount we have available, we could be required to seek additional sources of capital, which may include debt financing, joint venture partnerships, sales of assets, offerings of debt or equity securities or other means. We may not be able to obtain any such alternative source of capital. We may be required to curtail or eliminate contemplated activities. If we can obtain alternative sources of capital, the terms of such alternative may not be favorable to us. In particular, the terms of any debt financing may include covenants that significantly restrict our operations. Our inability to grow as planned may reduce our chances of maintaining and improving profitability. +Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, geopolitical issues, interest rates, inflation, the availability and cost of credit and the United States and foreign financial markets have contributed to increased economic uncertainty and diminished expectations for the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have precipitated an economic slowdown. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish further, which could impact the price at which oil, natural gas and natural gas liquids can be sold, which could affect the ability of our customers to continue operations and adversely impact our results of operations, liquidity and financial condition. +17 +Our indebtedness and liquidity needs could restrict our operations and make us more vulnerable to adverse economic conditions. +Our existing and future indebtedness, whether incurred in connection with acquisitions, operations or otherwise, may adversely affect our operations and limit our growth, and we may have difficulty making debt service payments on such indebtedness as payments become due. Our level of indebtedness may affect our operations in several ways, including the following: +• +increasing our vulnerability to general adverse economic and industry conditions; +• +the covenants that are contained in the agreements governing our indebtedness could limit our ability to borrow funds, dispose of assets, pay dividends and make certain investments; +• +our debt covenants could also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry; +• +any failure to comply with the financial or other debt covenants, including covenants that impose requirements to maintain certain financial ratios, could result in an event of default, which could result in some or all of our indebtedness becoming immediately due and payable; +• +our level of debt could impair our ability to obtain additional financing, or obtain additional financing on favorable terms, in the future for working capital, capital expenditures, acquisitions or other general corporate purposes; and +• +our business may not generate sufficient cash flow from operations to enable us to meet our obligations under our indebtedness. +Restrictions in our ABL Credit Facility (as defined herein) and any future financing agreements may limit our ability to finance future operations or capital needs or capitalize on potential acquisitions and other business opportunities. +The operating and financial restrictions and covenants in our credit facility and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities. For example, our ABL Credit Facility restricts or limits our ability to: +• +grant liens; +• +incur additional indebtedness; +• +engage in a merger, consolidation or dissolution; +• +enter into transactions with affiliates; +• +sell or otherwise dispose of assets, businesses and operations; +• +materially alter the character of our business as currently conducted; and +• +make acquisitions, investments and capital expenditures. +Furthermore, our ABL Credit Facility contains certain other operating and financial covenants. Our ability to comply with the covenants and restrictions contained in the ABL Credit Facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in our ABL Credit Facility, a significant portion of our indebtedness may become immediately due and payable and our lenders’ commitment to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Any subsequent replacement of our ABL Credit Facility or any new indebtedness could have similar or greater restrictions. Please +18 +read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facility and Other Financing Arrangements .” +We may become more leveraged and our indebtedness could adversely affect our operations and financial condition. +Our business is capital intensive and we may seek to raise debt capital to fund our business and growth strategy. Indebtedness could have negative consequences that could materially and adversely affect our business, financial condition, results of operations, cash flows and prospects, such as: +• +requiring us to dedicate a substantial portion of our cash flow from operating activities to payments on our indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, research and development efforts, potential strategic acquisitions and other general corporate purposes; +• +limiting our ability to obtain additional financing to fund growth, working capital or capital expenditures, or to fulfill debt service requirements or other cash requirements; +• +increasing our vulnerability to economic downturns and changing market conditions; +• +placing us at a competitive disadvantage relative to competitors that have less debt; and +• +to the extent that our debt is subject to floating interest rates, increasing our vulnerability to fluctuations in market interest rates. +Our operations are subject to unforeseen interruptions and hazards inherent in the oil and natural gas industry, for which we may not be adequately insured and which could cause us to lose customers and substantial revenue. +Our operations are exposed to the risks inherent to our industry, such as equipment defects, vehicle accidents, fires, explosions, blowouts, surface cratering, uncontrollable flows of gas or well fluids, pipe or pipeline failures, abnormally pressured formations and various environmental hazards, such as oil spills and releases of, and exposure to, hazardous substances. For example, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives. In addition, our operations are exposed to potential natural disasters, including blizzards, tornadoes, storms, floods, other adverse weather conditions and earthquakes. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean‑up responsibilities, regulatory investigations and penalties or other damage resulting in curtailment or suspension of our operations. The cost of managing such risks may be significant. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our environmental or safety record as unacceptable, which could cause us to lose customers and substantial revenues. +Our insurance may not be adequate to cover all losses or liabilities we may suffer. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased and could escalate further. In addition, sub‑limits have been imposed for certain risks. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our business, results of operations and financial condition. In addition, we may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. +Since hydraulic fracturing activities are part of our operations, they are covered by our insurance against claims made for bodily injury, property damage and clean‑up costs stemming from a sudden and accidental pollution event. +19 +However, we may not have coverage if we are unaware of the pollution event and unable to report the “occurrence” to our insurance company within the time frame required under our insurance policy. In addition, these policies do not provide coverage for all liabilities, and the insurance coverage may not be adequate to cover claims that may arise, or we may not be able to maintain adequate insurance at rates we consider reasonable. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +A terrorist attack or armed conflict could harm our business. +Terrorist activities, anti‑terrorist efforts and other armed conflicts involving the United States could adversely affect the U.S. and global economies and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants, refineries or transportation facilities are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas, which, in turn, could also reduce the demand for our services. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies. +Increasing trucking regulations may increase our costs and negatively impact our results of operations. +In connection with our business operations, including the transportation and relocation of our hydraulic fracturing equipment and shipment of frac sand, we operate trucks and other heavy equipment. As such, we operate as a motor carrier in providing certain of our services and therefore are subject to regulation by the United States Department of Transportation and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations, driver licensing, insurance requirements, financial reporting and review of certain mergers, consolidations and acquisitions, and transportation of hazardous materials (HAZMAT). Our trucking operations are subject to possible regulatory and legislative changes that may increase our costs. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive or work in any specific period, onboard black box recorder device requirements or limits on vehicle weight and size. +Interstate motor carrier operations are subject to safety requirements prescribed by the United States Department of Transportation. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Matters such as the weight and dimensions of equipment are also subject to federal and state regulations. From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +Certain motor vehicle operators require registration with the Department of Transportation. This registration requires an acceptable operating record. The Department of Transportation periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria that could result in a suspension of operations. +We are subject to environmental laws and regulations, and future compliance, claims, and liabilities relating to such matters may have a material adverse effect on our results of operations, financial position or cash flows. +The nature of our operations, including the handling, transporting and disposing of a variety of fluids and substances, including hydraulic fracturing fluids and other regulated substances, air emissions, and wastewater discharges exposes us to some risks of environmental liability, including the release of pollutants from oil and natural gas wells and associated equipment to the environment. The cost of compliance with these laws can be significant. Failure to properly handle, transport or dispose of these materials or otherwise conduct our operations in accordance with these and other environmental laws could expose us to substantial liability for administrative, civil and criminal penalties, cleanup and site restoration costs and liability associated with releases of such materials, damages to natural resources and other damages, as well as potentially impair our ability to conduct our operations. Such liability is commonly on a strict, joint and several liability basis, without regard to fault. Liability may be +20 +imposed as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Neighboring landowners and other third parties may file claims against us for personal injury or property damage allegedly caused by the release of pollutants into the environment. Environmental laws and regulations have changed in the past, and they may change in the future and become more stringent. Current and future claims and liabilities may have a material adverse effect on us because of potential adverse outcomes, defense costs, diversion of management resources, unavailability of insurance coverage and other factors. The ultimate costs of these liabilities are difficult to determine and may exceed any reserves we may have established. If existing environmental requirements or enforcement policies change, we may be required to make significant unanticipated capital and operating expenditures. +The adoption of climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating costs and reduced demand for oil and natural gas. +The EPA has determined that GHGs present an endangerment to public health and the environment because such gases contribute to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA has adopted and implemented, and continues to adopt and implement, regulations that restrict emissions of GHGs under existing provisions of the Clean Air Act (“CAA”). The EPA also requires the annual reporting of GHG emissions from certain large sources of GHG emissions in the United States, including certain oil and gas production facilities. The EPA has also taken steps to limit methane emissions from oil and gas production facilities. In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of GHGs and almost one‑half of the states have already taken legal measures to reduce emissions of GHGs primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. And in December 2015, the United States joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of greenhouse gases. The Paris Agreement entered into force in November 2016. On June 1, 2017, President Trump announced that the United States planned to withdraw from the Paris Agreement and to seek negotiations either to reenter the Paris Agreement on different terms or establish a new framework agreement. The Paris Agreement provides for a four‑year exit process beginning when it took effect in November 2016, which would resulting in an effective exit date of November 2020. The United States’ adherence to the exit process is uncertain and/or the terms on which the United States may reenter the Paris Agreement or a separately negotiated agreement are unclear at this time. +Moreover, climate change may cause more extreme weather conditions and increased volatility in seasonal temperatures. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +Our hydraulic fracturing operations are a significant component of our business, and it is an important and common practice that is used to stimulate production of hydrocarbons, particularly oil and natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. For example, in May 2014, the EPA issued an Advanced Notice of Proposed Rulemaking seeking comment on the development of regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. Beginning in August 2012, the EPA issued a series of rules under the CAA that establish new emission control requirements for emissions of volatile organic compounds and methane from certain oil and natural gas production and natural gas processing operations and equipment. After several attempts to delay implementation, in September 2018 the EPA issued a proposal to amend and reduce such requirements. In March 2015, the Bureau of Land Management (“BLM”) finalized a rule governing hydraulic fracturing on federal lands. In June 2016, a federal district court judge in Wyoming struck down the final rule, finding that the BLM lacked congressional authority to promulgate the rule. The BLM appealed that ruling. In September 2017, the U.S. Court of Appeals for the Tenth Circuit dismissed the appeal and remanded with +21 +directions to vacate the lower court’s opinion, leaving the final rule in place. The BLM initiated a rulemaking to rescind the final rule in December 2017. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in recent sessions of Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +More recently, federal and state governments have begun investigating whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In March 2016, the United States Geological Survey identified six states with the most significant hazards from induced seismicity, including Oklahoma, Kansas, Texas, Colorado, New Mexico and Arkansas. The United States Geological Survey also noted the potential for induced seismicity in Ohio and Alabama. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma issued new rules for wastewater disposal wells in 2014 that imposed certain permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has developed and implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission released well completion seismicity guidelines in December 2016 for operators in the SCOOP and STACK that call for hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, in February 2017, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission adopted similar rules in 2014. In addition, in December 2016, the EPA released its final report regarding the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources under certain circumstances such as water withdrawals for fracturing in times or areas of low water availability, surface spills during the management of fracturing fluids, chemicals or produced water, injection of fracturing fluids into wells with inadequate mechanical integrity, injection of fracturing fluids directly into groundwater resources, discharge of inadequately treated fracturing wastewater to surface waters, and disposal or storage of fracturing wastewater in unlined pits. The results of these studies could lead federal and state governments and agencies to develop and implement additional regulations. +Increased regulation of hydraulic fracturing and related activities (whether as a result of the EPA study results or resulting from other factors) could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. +Conservation measures, commercial development and technological advances could reduce demand for oil and natural gas and our services. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas, resulting in reduced demand for oilfield services. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +The commercial development of economically‑viable alternative energy sources and related products (such as electric vehicles, wind, solar, geothermal, tidal, fuel cells and biofuels) could have a similar effect. In addition, certain U.S. federal income tax deductions currently available with respect to oil and natural gas exploration and development, including the allowance of percentage depletion for oil and natural gas properties, may be eliminated as a result of proposed legislation. Any future decreases in the rate at which oil and natural gas reserves are +22 +discovered or developed, whether due to the passage of legislation, increased governmental regulation leading to limitations, or prohibitions on exploration and drilling activity, including hydraulic fracturing, or other factors, could have a material adverse effect on our business and financial condition, even in a stronger oil and natural gas price environment. +We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition and results of operations. +We operate with most of our customers under master service agreements, or MSAs. We endeavor to allocate potential liabilities and risks between the parties in the MSAs. Generally, under our MSAs, including those relating to our hydraulic fracturing services, we assume responsibility for, including control and removal of, pollution or contamination which originates above surface and originates from our equipment or services. Our customer assumes responsibility for, including control and removal of, all other pollution or contamination which may occur during operations, including that which may result from seepage or any other uncontrolled flow of drilling fluids. We may have liability in such cases if we are negligent or commit willful acts. Generally, our customers also agree to indemnify us against claims arising from their employees’ personal injury or death to the extent that, in the case of our hydraulic fracturing operations, their employees are injured or their properties are damaged by such operations, unless resulting from our gross negligence or willful misconduct. Similarly, we generally agree to indemnify our customers for liabilities arising from personal injury to or death of any of our employees, unless resulting from gross negligence or willful misconduct of the customer. In addition, our customers generally agree to indemnify us for loss or destruction of customer‑owned property or equipment and in turn, we agree to indemnify our customers for loss or destruction of property or equipment we own. Losses due to catastrophic events, such as blowouts, are generally the responsibility of the customer. However, despite this general allocation of risk, we might not succeed in enforcing such contractual allocation, might incur an unforeseen liability falling outside the scope of such allocation or may be required to enter into an MSA with terms that vary from the above allocations of risk. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in our being named as a defendant in lawsuits asserting large claims. As a result, we may incur substantial losses which could materially and adversely affect our financial condition and results of operation. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. For example, we depend on digital technologies to perform many of our services and process and record operational and accounting data. At the same time, cyber incidents, including deliberate attacks or unintentional events, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary information, personal information and other data, or other disruption of our business operations. In addition, certain cyber incidents, such as unauthorized surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks, including cyberattacks, may not be sufficient and may not protect against or cover all of the losses we may experience as a result of the realization of such risks. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate the effects of cyber incidents. +Our certificate of incorporation and bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock. +Our certificate of incorporation authorizes our board of directors to issue preferred stock without shareholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our shareholders, including: +23 +• +limitations on the removal of directors; +• +limitations on the ability of our shareholders to call special meetings; +• +advance notice provisions for shareholder proposals and nominations for elections to the board of directors to be acted upon at meetings of shareholders; +• +providing that the board of directors is expressly authorized to adopt, or to alter or repeal our bylaws; and +• +establishing advance notice and certain information requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by shareholders at shareholder meetings. +We may grow through acquisitions and our failure to properly plan and manage those acquisitions may adversely affect our performance. +We have completed and may in the future pursue, asset acquisitions or acquisitions of businesses. Any acquisition of assets or businesses involves potential risks, including the failure to realize expected profitability, growth or accretion; environmental or regulatory compliance matters or liability; title or permit issues; the incurrence of significant charges, such as impairment of goodwill, or property, plant and equipment or restructuring charges; and the incurrence of unanticipated liabilities and costs for which indemnification is unavailable or inadequate. The process of upgrading acquired assets to our specifications and integrating acquired assets or businesses may also involve unforeseen costs and delays or other operational, technical and financial difficulties and may require a significant amount time and resources and may divert management’s attention from existing operations or other priorities. +We must plan and manage any acquisitions effectively to achieve revenue growth and maintain profitability in our evolving market. Any failure to manage acquisitions effectively or integrate acquired assets or businesses into our existing operations successfully, or to realize the expected benefits from an acquisition or minimize any unforeseen operational difficulties, could have a material adverse effect on our business, financial condition, prospects or results of operations. +Our ability to use our net operating loss carryforwards may be limited. +As of December 31, 2018 , we had approximately $516.0 million of federal net operating loss carryforwards that will begin to expire in 2032 and state net operating losses of approximately $50.0 million that will begin to expire in 2024 . Utilization of these net operating loss carryforwards (“NOLs”) depends on many factors, including our future income, which cannot be assured. In addition, Section 382 (“Section 382”) of the Internal Revenue Code of 1986, as amended (the “Code”), generally imposes an annual limitation on the amount of taxable income that may be offset by NOLs when a corporation has undergone an “ownership change” (as determined under Section 382). Generally, a change of more than 50% in the ownership of a corporation’s stock, by value, over a three‑year period constitutes an ownership change for U.S. federal income tax purposes. Any unused annual limitation may, subject to certain limitations, be carried over to later years. We have experienced ownership changes, which may result in annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long‑term tax‑exempt rate as defined in Section 382, increased under certain circumstances as a result of recognizing built‑in gains in our assets existing at the time of the ownership change. The limitations arising from ownership changes may prevent utilization of our NOLs prior to their expiration. Future ownership changes or regulatory changes could further limit our ability to utilize our NOLs. To the extent we are not able to offset our future income with our NOLs, this could adversely affect our operating results and cash flows if we attain profitability. +Future regulations relating to and interpretations of the recently enacted Tax Cuts and Jobs Act may have a material impact on our financial condition and results of operations. +The Tax Cuts and Jobs Act of 2017, or the Tax Act, was signed into law on December 22, 2017. Among other things, the Tax Act reduces the U.S. corporate tax rate from 35% to 21%, imposes significant additional limitations +24 +on the deductibility of interest, and allows the expensing of capital expenditures. The Tax Act is highly complex and subject to interpretation. The presentation of our financial condition and results of operations is based upon our current interpretation of the provisions contained in the Tax Act. The Treasury Department and the Internal Revenue Service continue to release regulations relating to and interpretive guidance of the legislation contained in the Tax Act. Any significant variance of our current interpretation of such legislation from any future regulations or interpretive guidance could result in a change to the presentation of our financial condition and results of operations and could negatively affect our business. +Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents. +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our shareholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations. +We are subject to certain requirements of Section 404 of the Sarbanes-Oxley Act. If we fail to comply with the requirements of Section 404 or if we or our auditors identify and report material weaknesses in internal control over financial reporting, our investors may lose confidence in our reported information and our stock price may be negatively affected. +We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404. Section 404 requires that we document and test our internal control over financial reporting and issue our management’s assessment of our internal control over financial reporting. This section also requires that our independent registered public accounting firm issue an attestation report on such internal control. If we fail to comply with the requirements of Section 404, or if we or our auditors identify and report material weaknesses in our internal control over financial reporting, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. +25 +Item 1B. Unresolved Staff Comments. +None. +Item 2. Properties +Our corporate headquarters are located at 1706 S. Midkiff, Bldg. B, Midland, Texas 79701. In addition to our headquarters, we also own and lease other properties that are used for field offices, yards or storage in the Permian Basin. We believe that our facilities are adequate for our current operations. +Item 3. Legal Proceedings. +From time to time we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings that we believe would have a material adverse effect on our financial position, results of operations or cash flows and are not aware of any material legal proceedings contemplated by governmental authorities. +Item 4. Mine and Safety Disclosures +None. +Part II +Item 5. +Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +On March 22, 2017, we consummated our initial public offering, or IPO, of our common stock at a price of $14.00 per share. Our common stock is traded on the New York Stock Exchange under the symbol “PUMP.” Prior to our IPO, there was no public market for our stock. We have set forth in the table below the quarterly information with respect to the high and low prices for each quarter in 2018 and 2017 . +Price Per Share +of Common Stock +Dividends +Per Share +High +Low +2018 +Fourth quarter +$ +19.61 +$ +11.68 +N/A +Third quarter +$ +17.33 +$ +14.54 +N/A +Second quarter +$ +20.49 +$ +14.20 +N/A +First quarter +$ +22.49 +$ +15.25 +N/A +Price Per Share +of Common Stock +Dividends +Per Share +High +Low +2017 +Fourth quarter +$ +20.49 +$ +13.81 +N/A +Third quarter +$ +14.48 +$ +10.92 +N/A +Second quarter +$ +14.70 +$ +11.93 +N/A +First quarter +$ +14.50 +$ +12.47 +N/A +26 +Holders +As of December 31, 2018 , there were 100,190,126 shares of common stock outstanding, held of record by 4 holders. The number of record holders of our common stock does not include DTC participants or beneficial owners holding shares through nominee names. +Dividend +We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the growth of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon then‑existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory restrictions on our ability to pay dividends and other factors our board of directors may deem relevant. In addition, our ABL Credit Facility places restrictions on our ability to pay cash dividends. +Equity Compensation Plan Information +The following table sets forth our issuance of awards under our 2013 Stock Option Plan and 2017 Incentive Award Plan as of December 31, 2018 : +Plan Category +Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) +Weighted average exercise price of outstanding options, warrants and rights +Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) +(a) +(b) +(c) +Equity compensation plans approved by security holders +5,727,911 +5.14 +3,874,852 +Equity compensation plans not approved by security holders +N/A +N/A +N/A +Total +5,727,911 +5.14 +3,874,852 +___________________ +(1) Includes 3,802,763 option awards under the 2013 Stock Option Plan, and 754,423 option awards, 473,505 restricted share unit awards and 697,220 performance stock unit awards (assuming achievement of maximum payout) that have been granted under the 2017 Incentive Award Plan. The weighted average exercise price in column (b) does not take the restricted share unit awards or performance stock unit awards into account. +Performance Graph +The quarterly changes for the periods shown in the following graph are based on the assumption that $100 had been invested in our common stock, the Russell 2000 Index (“Russell 2000”) and a self-constructed peer group Index of comparable companies (“Peer Group”) on March 17, 2017 (the first trading date of our common stock), and that all dividends were reinvested at the closing prices of the dividend payment dates. The relevant companies included in our Peer Group consists of Keane Group, Inc., RPC, Inc., C&J Energy Services, Inc., Basic Energy Services, Inc., Calfrac Well Services Ltd., Patterson-UTI Energy, Inc., Superior Energy Services, Inc and Mammoth Energy services. We included Mammoth Energy Services to our peer group in 2018 because we believe they are a relevant peer in assessing our performance. Subsequent measurement points are the last trading days of each quarter in 2017. We did not provide a five-year graph because we became a publicly traded company in March of 2017. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on the +27 +last trading date of 2018 . The calculations exclude trading commissions and taxes. The stock price performance on the following graph and table is not necessarily indicative of future stock price performance. +Date +Peer Group +Russell 2000 +ProPetro Holding Corp. +3/17/2017 +$ +100.0 +$ +100.0 +$ +100.0 +3/31/2017 +$ +97.3 +$ +99.6 +$ +88.9 +6/30/2017 +$ +90.4 +$ +101.7 +$ +96.3 +9/29/2017 +$ +97.3 +$ +107.1 +$ +99.0 +12/29/2017 +$ +104.2 +$ +110.4 +$ +139.0 +3/29/2018 +$ +83.4 +$ +109.9 +$ +109.6 +6/29/2018 +$ +78.6 +$ +118.1 +$ +108.1 +9/28/2018 +$ +74.8 +$ +121.9 +$ +113.7 +12/31/2018 +$ +43.9 +$ +96.9 +$ +85.0 +28 +Item 6. Selected Historical Financial Data. +The following table presents the available selected historical financial data of ProPetro Holding Corp. for the years indicated. There were no factors that materially affect the comparability of the information in the selected historical financial data presented. +The selected historical consolidated financial and operating data presented below should be read in conjunction with “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes and other financial data included elsewhere in this annual report. +29 +Year Ended December 31, +(In thousands, except for per share data) +2018 +2017 +2016 +2015 +Statement of Operations Data: +Revenue +$ +1,704,562 +$ +981,865 +$ +436,920 +$ +569,618 +Pressure pumping +1,658,403 +945,040 +409,014 +510,198 +All other +46,159 +36,825 +27,906 +59,420 +Costs and Expenses: +Cost of services (1) +1,270,577 +813,823 +404,140 +483,338 +General and administrative (2) +53,958 +49,215 +26,613 +27,370 +Depreciation and amortization +88,138 +55,628 +43,542 +50,134 +Property and equipment impairment expense +— +— +6,305 +36,609 +Goodwill impairment expense +— +— +1,177 +— +Loss on disposal of assets +59,220 +39,086 +22,529 +21,268 +Total costs and expenses +1,471,893 +957,752 +504,306 +618,719 +Operating Income (Loss) +232,669 +24,113 +(67,386 +) +(49,101 +) +Other Income (Expense): +Interest expense +(6,889 +) +(7,347 +) +(20,387 +) +(21,641 +) +Gain on extinguishment of debt +— +— +6,975 +— +Other expense +(663 +) +(1,025 +) +(321 +) +(499 +) +Total other expense +(7,552 +) +(8,372 +) +(13,733 +) +(22,140 +) +Income (loss) before income taxes +225,117 +15,741 +(81,119 +) +(71,241 +) +Income tax (expense) benefit +(51,255 +) +(3,128 +) +27,972 +25,388 +Net income (loss) +$ +173,862 +$ +12,613 +$ +(53,147 +) +$ +(45,853 +) +Per Share Information +Net income (loss) per common share: +Basic +$ +2.08 +$ +0.17 +$ +(1.19 +) +$ +(1.31 +) +Diluted +$ +2.00 +$ +0.16 +$ +(1.19 +) +$ +(1.31 +) +Weighted average common shares outstanding: +Basic +83,460 +76,371 +44,787 +34,993 +Diluted +87,046 +79,583 +44,787 +34,993 +Balance Sheet Data as of: +Cash and cash equivalents +$ +132,700 +$ +23,949 +$ +133,596 +$ +34,310 +Property and equipment — net of accumulated depreciation +$ +912,846 +$ +470,910 +$ +263,862 +$ +291,838 +Total assets +$ +1,274,522 +$ +719,032 +$ +541,422 +$ +446,454 +Long-term debt — net of deferred loan costs +$ +70,000 +$ +57,178 +$ +159,407 +$ +236,876 +Total shareholders’ equity +$ +797,355 +$ +413,252 +$ +221,009 +$ +69,571 +Cash Flow Statement Data: +Net cash provided by operating activities +$ +393,079 +$ +109,257 +$ +10,659 +$ +81,230 +Net cash used in investing activities +$ +(280,604 +) +$ +(281,469 +) +$ +(41,688 +) +$ +(62,776 +) +Net cash provided by (used in) financing activities +$ +(3,724 +) +$ +62,565 +$ +130,315 +$ +(15,216 +) +(1) +Exclusive of depreciation and amortization. +(2) +Inclusive of stock‑based compensation. +30 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward‑looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis. +Basis of Presentation +Unless otherwise indicated, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “ProPetro Holding Corp.,” “the Company,” “we,” “our,” “us” or like terms refer to ProPetro Holding Corp. and its subsidiary. +Overview +Our Business +We are a growth‑oriented, Midland, Texas‑based oilfield services company providing hydraulic fracturing and other complementary services to leading upstream oil and gas companies engaged in the exploration and production, or E&P, of North American unconventional oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. Further, our fleet has been designed to handle the highest intensity and most complex fracturing jobs. During the ended December 31, 2018, we continued our organic growth by purchasing and deploying four newbuild hydraulic fracturing units, bringing our hydraulic horsepower, or HHP capacity to 905,000 HHP, or 20 fleets. The Permian Basin is widely regarded as the most prolific oil‑producing area in the United States, and following our acquisition of pressure pumping and related assets from Pioneer and Pioneer Pumping Services, we believe we are currently the largest provider of hydraulic fracturing services in the region by HHP, with total horse power of 1,415,000 HHP, or 28 fleets. +Acquisition of Pioneer Pressure Pumping Assets +On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer and Pioneer Pumping Services. Prior to the purchase, the pressure pumping assets exclusively provided integrated pressure pumping services to Pioneer’s completion and production operations. The acquisition cost of the assets was comprised of $110.0 million of cash and 16.6 million shares of our common stock. In connection with the consummation of the transaction, we became a strategic long-term service provider to Pioneer, providing pressure pumping and related services for a term of up to 10 years. +The pressure pumping assets acquired include eight hydraulic fracturing fleets with a total of 510,000 HHP, four coiled tubing units and an associated equipment maintenance facility. Through this acquisition we expanded our existing presence in the Permian Basin, and increased our pumping capacity by 56%, to 28 hydraulic fracturing fleets with a total of 1,415,000 HHP, further strengthening our position as the largest pure-play provider of integrated well completion services in the Permian Basin. +31 +2018 Operational Highlights +Over the course of the year ended December 31, 2018 , we: +• +Purchased and put into service four newbuild hydraulic fracturing fleets; +• +Consummated the acquisition of pressure pumping and related assets from Pioneer and Pioneer Pumping Services, adding eight hydraulic fracturing fleets, or 510,000 HHP, and ancillary equipment, expanding our total horse power to 1,415,000 HHP or 28 hydraulic fracturing fleets after giving effect to the acquisition; +• +In connection with the asset acquisition, entered into a long-term strategic relationship with Pioneer, an industry leading E&P company, to provide pressure pumping and related services for a term of up to 10 years; +• +Increased our ABL Credit Facility from $200.0 million to $300.0 million, while extending the term of the facility; and +• +Maintained a conservative balance sheet and sufficient liquidity. +• +Regional sand pumped increased significantly in 2018 from 14.7% in January 2018 to 71.6% in December 2018, which slightly impacted sand revenue offset by increased margin percentage. +2018 Financial Highlights +Among other financial highlights, for the year ended December 31, 2018 : +• +Revenue increased $722.7 million , or 73.6% , to $1,704.6 million , as compared to $981.9 million for the year ended December 31, 2017 , primarily as a result of the increase in our fleet size; +• +Cost of services (exclusive of depreciation and amortization) increased $456.8 million or 56.1% to $1,270.6 million, as compared to $813.8 million for the year ended December 31, 2017 , primarily as a result of the increase in fleet size, resulting in higher activity levels. Cost of services as a percentage of revenue decreased to 74.5% in 2018 compared to 82.9% for the year ended December 31, 2017 ; +• +General and administrative expenses, inclusive of stock-based compensation (“G&A”), increased $4.7 million , or 9.6% to $54.0 million , as compared to $49.2 million for the December 31, 2017 . G&A as a percentage of revenue decreased to 3.2% in 2018 from 5.0% for the year ended December 31, 2017 ; +• +Diluted net income per common share was $2.00 , compared to $0.16 for the year ended December 31, 2017 . +2019 Outlook +In 2019 , we continue to focus on providing best-in-class service to our customers, helping our customer improve their well economics while continuing to enhance the Company’s profitability. We expect to achieve these objectives through: +• +continuing to enhance our dedicated customer model to drive production efficiencies; +• +maintaining full utilization of our hydraulic fracturing fleets; +• +pursuing operational efficiencies and cost reduction strategies; +• +pursuing expansion opportunities for our non-hydraulic fracturing operations; +• +maintaining our existing relationships with our vendors and developing strategic relationships with new suppliers to ensure continuity; +• +exploring potential opportunities for mergers or acquisitions, focused on our growth, market opportunities and creating value to our shareholders. +32 +Our Assets and Operations +Through our pressure pumping segment, which includes cementing operations, we primarily provide hydraulic fracturing services (inclusive of acidizing services) to E&P companies in the Permian Basin. Our modern hydraulic fracturing fleet has been designed to handle Permian Basin specific operating conditions and the region’s increasingly high‑intensity well completions, which are characterized by longer horizontal wellbores, more frac stages per lateral and increasing amounts of proppant per well. We have fully maintained our equipment throughout the recent industry downturn to ensure optimal performance and reliability. +In addition to our core pressure pumping segment operations, we also offer a suite of complementary well completion and production services, including coiled tubing and flowback services. We believe these complementary services create operational efficiencies for our customers and allow us to capture a greater portion of their capital spending across the lifecycle of a well. Additionally, we believe that these complementary services should benefit from a continued industry recovery and that we are well positioned to continue expanding these offerings in response to our customers’ increasing service needs and spending levels. +How We Generate Revenue +We generate revenue primarily through our pressure pumping segment, and more specifically, by providing hydraulic fracturing services to our customers. We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We also provide personnel and services that are tailored to meet each of our customers’ needs. We charge our customers on a per‑job basis, in which we set pricing terms after receiving full specifications for the requested job, including the lateral length of the customer’s wellbore, the number of frac stages per well, the amount of proppant to be employed and other parameters of the job. +In addition to hydraulic fracturing services, we generate revenue through the complementary services that we provide to our customers, including cementing, coiled tubing and flowback services. These complementary services are provided through various contractual arrangements, including on a turnkey contract basis, in which we set a price to perform a particular job, or a daywork contract basis, in which we are paid a set price per day for our services. We are also sometimes paid by the hour for these complementary services. +Our revenue, profitability and cash flows are highly dependent upon prevailing crude oil prices and expectations about future prices. For many years, oil prices and markets have been extremely volatile. Prices are affected by many factors beyond our control. West Texas Intermediate (“WTI”) oil prices which declined significantly in 2015 and 2016, but recovered somewhat during 2017 and 2018. The average WTI oil prices per barrel was $65.1, $50.8 and $43.3 for the years ended December 31, 2018 , 2017 and 2016 , respectively. As a result of the recent recovery in oil prices, our industry has experienced a significant increase in both drilling and pressure pumping activity levels. Looking forward, if oil prices increase, we believe U.S. rig counts will also increase, which may result in an increase in demand for drilling and pressure pumping services. Higher oil and natural gas prices do not necessarily result in increased activity because demand for our services is generally driven by our customers’ expectations of future oil and natural gas prices, as well as rig count. +The historical average Permian Basin rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows: +Year Ended December 31 +Drilling Type (Permian Basin) +2018 +2017 +2016 +Directional +6 +6 +2 +Horizontal +418 +311 +154 +Vertical +43 +39 +26 +Total +467 +356 +182 +33 +Costs of Conducting our Business +The principal direct costs involved in operating our business are expendables, other direct costs, and direct labor costs. Generally, we price each job to reflect a predetermined margin over our expendables and direct labor costs. Our fixed costs are relatively low and a large portion of the costs described below are only incurred as we perform jobs for our customers. +Expendables. Expendables are the largest expenses incurred, and include the product and freight costs associated with proppant, chemicals and other consumables used in our pressure pumping and other operations. These costs comprise a substantial variable component of our service costs, particularly with respect to the quantity and quality of sand and chemicals demanded when providing hydraulic fracturing services. Expendable product costs comprised approximately 56.0%, 61.3% and 61.0% of total costs of service for the years ended December 31, 2018 , 2017 and 2016 , respectively. The decrease in our expendable product cost as a percentage of revenue in 2018 is primarily attributable to the increase in the number of customers self-sourcing these expendables and an increase in the use of less expensive regional sand. +Other Direct Costs. We incur other direct expenses related to our service offerings, including the costs of fuel, repairs and maintenance, general supplies, equipment rental and other miscellaneous operating expenses. Fuel is consumed both in the operation and movement of our hydraulic fracturing fleet and other equipment. Repairs and maintenance costs are expenses directly related to upkeep of equipment, which have been amplified by the demand for higher horsepower jobs. Capital expenditures to upgrade or extend the useful life of equipment are not included in other direct costs. Other direct costs were 30.9%, 26.5% and 24.4% of total costs of service for the years ended December 31, 2018 , 2017 and 2016 , respectively. +Direct Labor Costs. Payroll and benefit expenses related to our crews and other employees that are directly attributable to the effective delivery of services are included in our operating costs. Direct labor costs amounted to 13.1%, 12.2% and 14.5% of total costs of service for the years ended December 31, 2018 , 2017 and 2016 , respectively. +How We Evaluate Our Operations +Our management uses a variety of financial and operating metrics to evaluate and analyze the performance of our business, including Adjusted EBITDA or Adjusted EBITDA margin. +Adjusted EBITDA and Adjusted EBITDA margin +We view Adjusted EBITDA or Adjusted EBITDA margin as important indicators of performance. We define EBITDA as our net income (loss), before (i) interest expense, (ii) income taxes and (iii) depreciation and amortization. We define Adjusted EBITDA as EBITDA, plus (i) loss/(gain) on disposal of assets, (ii) (gain) on extinguishment of debt, (iii) stock based compensation, and (iv) other unusual or non‑recurring (income)/expenses, such as impairment and costs related to our initial public offering. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues. +Adjusted EBITDA or Adjusted EBITDA margin are supplemental measures utilized by our management and other users of our financial statements such as investors, commercial banks, and research analysts, to assess our financial performance because it allows us and other users to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), nonrecurring (income)/expenses and items outside the control of our management team (such as income tax rates). Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income/(loss), operating income/(loss), cash flow from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”). +34 +Note Regarding Non‑GAAP Financial Measures +Adjusted EBITDA and Adjusted EBITDA margin are usually not financial measures presented in accordance with GAAP (“non-GAAP”), except when specifically required to be disclosed by GAAP in the financial statements. We believe that the presentation of Adjusted EBITDA or Adjusted EBITDA margin provide useful information to investors in assessing our financial condition and results of operations because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure, asset base, nonrecurring expenses (income) and items outside the control of the Company. Net income is the GAAP measure most directly comparable to Adjusted EBITDA. Adjusted EBITDA or Adjusted EBITDA margin should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some, but not all, items that affect the most directly comparable GAAP financial measures. You should not consider Adjusted EBITDA or Adjusted EBITDA margin in isolation or as a substitute for an analysis of our results as reported under GAAP. Because Adjusted EBITDA or Adjusted EBITDA margin may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. +Reconciliation of net income (loss) to Adjusted EBITDA: +($ in thousands) +Pressure +Pumping +All Other +Total +Year ended December 31, 2018 +Net income (loss) +$ +253,196 +$ +(79,334 +) +$ +173,862 +Depreciation and amortization +83,404 +4,734 +88,138 +Interest expense +— +6,889 +6,889 +Income tax expense +— +51,255 +51,255 +Loss (gain) on disposal of assets +59,962 +(742 +) +59,220 +Stock‑based compensation +— +5,482 +5,482 +Other expense +— +663 +663 +Other general and administrative expense (1) +2 +203 +205 +Deferred IPO Bonus +1,832 +977 +2,809 +Adjusted EBITDA +$ +398,396 +$ +(9,873 +) +$ +388,523 +35 +($ in thousands) +Pressure +Pumping +All Other +Total +Year ended December 31, 2017 +Net income (loss) +$ +50,417 +$ +(37,804 +) +$ +12,613 +Depreciation and amortization +51,155 +4,473 +55,628 +Interest expense +— +7,347 +7,347 +Income tax expense +— +3,128 +3,128 +Loss on disposal of assets +38,059 +1,027 +39,086 +Stock‑based compensation +— +9,489 +9,489 +Other expense +— +1,025 +1,025 +Other general and administrative expense (1) +— +722 +722 +Deferred IPO Bonus +5,491 +2,914 +8,405 +Adjusted EBITDA +$ +145,122 +$ +(7,679 +) +$ +137,443 +Pressure +Pumping +All Other +Total +Year ended December 31, 2016 +Net loss +$ +(45,316 +) +$ +(7,831 +) +$ +(53,147 +) +Depreciation and amortization +37,282 +6,260 +43,542 +Interest expense +— +20,387 +20,387 +Income tax benefit +— +(27,972 +) +(27,972 +) +Loss on disposal of assets +23,690 +(1,161 +) +22,529 +Property and equipment impairment expense +— +6,305 +6,305 +Goodwill impairment expense +— +1,177 +1,177 +Gain on extinguishment of debt +— +(6,975 +) +(6,975 +) +Stock‑based compensation +— +1,649 +1,649 +Other expense +— +321 +321 +Adjusted EBITDA +$ +15,656 +$ +(7,840 +) +$ +7,816 +(1) +Other general and administrative expense relates to legal settlement expense. +36 +Results of Operations +We conduct our business through five operating segments: hydraulic fracturing, cementing, coil tubing, flowback and drilling. For reporting purposes, the hydraulic fracturing (which now includes our acidizing operations) and cementing operating segments are aggregated into our one reportable segment, pressure pumping. On August 31, 2018, we divested our surface air drilling segment in order to continue to position ourselves as a Permian Basin-focused pressure pumping business because we believe the pressure pumping market in the Permian Basin offers more supportive long-term growth fundamentals. In addition, with increased focus on our pressure pumping operations, we expect revenues and costs of services related to our drilling operating segment to comprise a lower percentage of total revenues and total costs of service in future results of operations when compared to historic results. Accordingly, we anticipate the financial significance of our drilling segment relative to the financial results from pressure pumping and other service offerings to continue to decline. +Year Ended December 31, 2018 Compared to Year Ended December 31, 2017 +($ in thousands, except percentages) +YEAR ENDED +CHANGE +2018 +2017 +Variance +% +Revenue +$ +1,704,562 +$ +981,865 +$ +722,697 +73.6 +% +Cost of services (1) +1,270,577 +813,823 +456,754 +56.1 +% +General and administrative expense (2) +53,958 +49,215 +4,743 +9.6 +% +Depreciation and amortization +88,138 +55,628 +32,510 +58.4 +% +Loss on disposal of assets +59,220 +39,086 +20,134 +51.5 +% +Interest expense +6,889 +7,347 +(458 +) +(6.2 +)% +Other expense +663 +1,025 +(362 +) +(35.3 +)% +Income tax expense +51,255 +3,128 +48,127 +1,538.6 +% +Net income +$ +173,862 +$ +12,613 +$ +161,249 +1,278.4 +% +Adjusted EBITDA (3) +$ +388,523 +$ +137,443 +$ +251,080 +182.7 +% +Adjusted EBITDA Margin (3) +22.8 +% +14.0 +% +8.8 +% +62.9 +% +Pressure pumping segment results of operations: +Revenue +$ +1,658,403 +$ +945,040 +$ +713,364 +75.5 +% +Cost of services +$ +1,236,262 +$ +784,349 +$ +451,912 +57.6 +% +Adjusted EBITDA +$ +398,396 +$ +145,122 +$ +253,274 +174.5 +% +Adjusted EBITDA Margin (4) +24.0 +% +15.4 +% +8.6 +% +55.8 +% +____________________ +(1) +Exclusive of depreciation and amortization. +(2) +Inclusive of stock‑based compensation. +(3) +For definitions of the non‑GAAP financial measures of Adjusted EBITDA and Adjusted EBITDA margin and reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to our most directly comparable financial measures calculated in accordance with GAAP, please read “How We Evaluate Our Operations”. +(4) +The non‑GAAP financial measure of Adjusted EBITDA margin for the pressure pumping segment is calculated by taking Adjusted EBITDA for the pressure pumping segment as a percentage of our revenues for the pressure pumping segment. +37 +Revenue. Revenue increased 73.6% , or $722.7 million , to $1,704.6 million for the year ended December 31, 2018 , as compared to $981.9 million for the year ended December 31, 2017 . The increase was primarily attributable to the increase in activity levels resulting from increase in fleet size and demand for our services. Our pressure pumping segment revenues increased 75.5% , or $ 713.4 million for the year ended December 31, 2018 , as compared to the year ended December 31, 2017 . Revenues from services other than pressure pumping increased 25.3% , or $9.3 million , for the year ended December 31, 2018 , as compared to the year ended December 31, 2017 . The increase in revenues from services other than pressure pumping during the year ended December 31, 2018 , was primarily attributable to the increase in demand for our flowback and coil tubing services. +Cost of Services. Cost of services increased 56.1% , or $456.8 million , to $1,270.6 million for the year ended December 31, 2018 , from $813.8 million during the year ended December 31, 2017 . Cost of services in our pressure pumping segment increased $ 451.9 million during the year ended December 31, 2018 , as compared to the year ended December 31, 2017 . The increases were primarily attributable to higher activity levels, coupled with an increase in personnel headcount following the increased activity levels. As a percentage of pressure pumping segment revenues, pressure pumping cost of services decreased to 74.5% for the year ended December 31, 2018 , as compared to 83.0% for the year ended December 31, 2017 . The decrease in cost of services as a percentage of revenue in our pressure pumping segment is attributed to the increased revenue from operational efficiencies and our cost control initiatives, which resulted in significantly higher realized Adjusted EBITDA margins during the year ended December 31, 2018 . +General and Administrative Expenses. General and administrative expenses increased 9.6% , or $4.7 million , to $54.0 million for the year ended December 31, 2018 , as compared to $49.2 million for the year ended December 31, 2017 . The net increase was primarily attributable to increases in payroll, insurance, property taxes, legal and professional fees, traveling expenses, subscriptions and dues and other general and administrative expenses totaling $14.3 million, and offset by a decrease in stock compensation expense of $4.0 million and deferred IPO cash bonus of $5.6 million. +Depreciation and Amortization. Depreciation and amortization increased 58.4% , or $32.5 million , to $88.1 million for the year ended December 31, 2018 , as compared to $55.6 million for the year ended December 31, 2017 . The increase was primarily attributable to additional property and equipment purchased and put into service in the year ended December 31, 2018 . We calculate depreciation of property and equipment using the straight-line method. +Loss on Disposal of Assets. Loss on the disposal of assets increased 51.5% , or $20.1 million , to $59.2 million for the year ended December 31, 2018 , as compared to $39.1 million for the year ended December 31, 2017 . The increase was primarily attributable to increase in our fleet size and greater intensity of jobs completed. +Interest Expense. Interest expense decreased 6.2% , or $0.5 million , to $6.9 million for the year ended December 31, 2018 , as compared to $7.3 million for the year ended December 31, 2017 . The decrease in interest expense was primarily attributable to a reduction of our average debt balance in 2018 compared to 2017. +Other Expense. Other expense was $0.7 million for the year ended December 31, 2018 , as compared to $1.0 million for the year ended December 31, 2017 . The decrease was primarily attributable to a decrease in lenders related expenses, non-recurring listing related expenses, and the loss associated with the change in the fair value of our extinguished interest rate swap liability. +Income Tax Expense. Income tax expense was $51.3 million for the year ended December 31, 2018 , as compared to $3.1 million for the year ended December 31, 2017 . The increase in our provision for income tax expense is primarily attributable to the increase in book income in 2018 compared to 2017 . Additionally, the income tax expense during the year ended December 31, 2017 , included a one-time deferred tax benefit offset of $3.4 million, resulting from the U.S. government enacted tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). +38 +Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 +YEAR ENDED +CHANGE +($ in thousands, except percentages) +2017 +2016 +Variance +% +Revenue +$ +981,865 +$ +436,920 +$ +544,945 +124.7 +% +Cost of services (1) +813,823 +404,140 +409,683 +101.4 +% +General and administrative expense (2) +49,215 +26,613 +22,602 +84.9 +% +Depreciation and amortization +55,628 +43,542 +12,086 +27.8 +% +Property and equipment impairment +— +6,305 +(6,305 +) +(100.0 +)% +Goodwill impairment +— +1,177 +(1,177 +) +(100.0 +)% +Loss on disposal of assets +39,086 +22,529 +16,557 +73.5 +% +Interest expense +7,347 +20,387 +(13,040 +) +(64.0 +)% +Gain on extinguishment of debt +— +(6,975 +) +(6,975 +) +(100.0 +)% +Other expense +1,025 +321 +704 +219.3 +% +Income tax expense (benefit) +3,128 +(27,972 +) +(31,100 +) +(111.2 +)% +Net income (loss) +$ +12,613 +$ +(53,147 +) +$ +65,760 +123.7 +% +Adjusted EBITDA (3) +$ +137,443 +$ +7,816 +$ +129,627 +1,658.5 +% +Adjusted EBITDA Margin (3) +14.0 +% +1.8 +% +12.2 +% +677.8 +% +Pressure pumping segment results of operations: +Revenue +$ +945,040 +$ +409,014 +$ +536,025 +131.1 +% +Cost of services +$ +784,349 +$ +379,815 +$ +404,534 +106.5 +% +Adjusted EBITDA +$ +145,122 +$ +15,656 +$ +129,466 +826.9 +% +Adjusted EBITDA Margin (4) +15.4 +% +3.8 +% +11.6 +% +305.3 +% +____________________ +(1) +Exclusive of depreciation and amortization. +(2) +Inclusive of stock‑based compensation. +(3) +For definitions of the non‑GAAP financial measures of Adjusted EBITDA and Adjusted EBITDA margin and reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to our most directly comparable financial measures calculated in accordance with GAAP, please read ““How We Evaluate Our Operations”. +(4) +The non‑GAAP financial measure of Adjusted EBITDA margin for the pressure pumping segment is calculated by taking Adjusted EBITDA for the pressure pumping segment as a percentage of our revenues for the pressure pumping segment. +Revenue. Revenue increased 124.7%, or $544.9 million, to $981.9 million for the year ended December 31, 2017, as compared to $436.9 million for the year ended December 31, 2016. The increase was primarily attributable to the increase in customer activity, fleet size and demand for our services, which led to an increase in pricing for our hydraulic fracturing and other services. Our pressure pumping segment revenues increased 131.1%, or $536.0 million for the year ended December 31, 2017, as compared to the year ended December 31, 2016. Revenues from services other than pressure pumping increased 32.0%, or $8.9 million, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. The increase in revenues from services other than pressure pumping during the year ended December 31, 2017 was primarily attributable to the increase in revenues and customer demand for our flowback, coil tubing and surface drilling services, offset by the decrease in revenue from idling of our drilling rigs. +39 +Cost of Services. Cost of services increased 101.4%, or $409.7 million, to $813.8 million for the year ended December 31, 2017, from $404.1 million during the year ended December 31, 2016. Cost of services in our pressure pumping segment increased $404.5 million during the year ended December 31, 2017, as compared to the year ended December 31, 2016. The increases were primarily attributable to higher activity levels, coupled with an increase in personnel headcount following the increased activity levels. As a percentage of pressure pumping segment revenues, pressure pumping cost of services decreased to 83.0% for the year ended December 31, 2017, as compared to 92.9% for the year ended December 31, 2016. The decrease in cost of services as a percentage of revenue for the pressure pumping segment resulted from greater pricing power as demand for our services increased, without a corresponding increase in certain costs, which resulted in significantly higher realized Adjusted EBITDA margins during the year ended December 31, 2017. +General and Administrative Expenses. General and administrative expenses increased 84.9%, or $22.6 million, to $49.2 million for the year ended December 31, 2017, as compared to $26.6 million for the year ended December 31, 2016. The net increase was primarily attributable to increases in payroll, insurance, advertising, communication, office expense, travel and legal costs, totaling $8.3 million, and an IPO bonus of $8.4 million to key employees, along with $7.8 million increase in stock compensation recorded during the year ended December 31, 2017, and offset by a decrease in property taxes of $1.6 million, and other remaining general and administrative expenses of $0.3 million. General and administrative expenses as a percentage of total revenues decreased to 5.0% for the year ended December 31, 2017, as compared to 6.1% for the year ended December 31, 2016, excluding non-recurring deferred IPO bonus of $8.4 million and stock compensation expense of $6.8 million, general and administrative expenses as a percentage of total revenues decreased to 3.5% for the year ended December 31, 2017, as compared to 6.1% for the year ended December 31, 2016. The decrease in general and administrative expenses as a percentage of total revenue is as a result of the higher revenue during the year ended December 31, 2017. +Depreciation and Amortization. Depreciation and amortization increased 27.8%, or $12.1 million, to $55.6 million for the year ended December 31, 2017, as compared to $43.5 million for the year ended December 31, 2016. The increase was primarily attributable to additional property and equipment purchased and put into service in the year ended December 31, 2017. We calculate depreciation of property and equipment using the straight-line method. +Property and Equipment Impairment Expense. There was no property and equipment impairment expense during the year ended December 31, 2017, compared to $6.3 million during the year ended December 31, 2016. The non‑cash impairment expense in 2016 was associated with our drilling rigs, and was recognized as a result of depressed commodity prices and a negative future near‑term outlook for these assets. +Goodwill Impairment Expense. There was no goodwill impairment expense during the year ended December 31, 2017, compared to $1.2 million during the year ended December 31, 2016. The non‑cash goodwill impairment expense in 2016 was as a result of the write‑down of goodwill related to our surface drilling reporting unit. +Loss on Disposal of Assets. Loss on the disposal of assets increased 73.5%, or $16.6 million, to $39.1 million for the year ended December 31, 2017, as compared to $22.5 million for the year ended December 31, 2016. The increase was primarily attributable to greater service intensity of jobs completed, coupled with higher fleet size, activity levels and utilization of our equipment. +Interest Expense. Interest expense decreased 64.0%, or $13.0 million, to $7.3 million for the year ended December 31, 2017, as compared to $20.4 million for the year ended December 31, 2016. The decrease in interest expense was primarily attributable to a reduction in our average debt balance during 2017 due to the early retirement of our term loan and revolving credit facility in the first quarter of 2017. +Gain on Extinguishment of Debt. There was no debt extinguishment gain or loss during the year ended December 31, 2017, compared to the gain on extinguishment of debt, net of cost, of $7.0 million during the year ended December 31, 2016. The gain on extinguishment of debt during 2016 was as a result of the auction process with our lenders to repurchase $37.5 million of our term loan at a 20% discount to par value. +40 +Other Expense. Other expense was $1.0 million for the year ended December 31, 2017, as compared to $0.3 million for the year ended December 31, 2016. The increase was primarily attributable to an increase in lenders related expenses, non-recurring listing related expenses, and partially offset by an increase in the unrealized gain resulting from the change in the fair value of our interest rate swap liability at December 31, 2017 compared to December 31, 2016. +Income Tax Expense/(Benefit). Income tax expense was $3.1 million for the year ended December 31, 2017, compared to income tax benefit of $28.0 million, for the year ended December 31, 2016. The change from an income tax benefit to income tax expense is primarily due to the Company’s reporting income before taxes during the year ended December 31, 2017, compared to a loss before taxes recorded during the year ended December 31, 2016. The income before taxes generated is attributable to the increase in our revenue during the year ended December 31, 2017, compared to December 31, 2016. Additionally, the income tax expense during the year ended December 31, 2017, included a one-time deferred tax benefit offset of $3.4 million, resulting from the U.S. government enacted tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). +Liquidity and Capital Resources +Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows and (iii) borrowings under our ABL Credit Facility. Our primary uses of cash will be to continue to fund our operations, support growth opportunities and satisfy debt payments. As of December 31, 2018 , our total liquidity consists of cash and cash equivalents of $132.7 million , and $125.0 million of availability under our ABL Credit Facility. +There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Future cash flows are subject to a number of variables, and are highly dependent on the drilling, completion, and production activity by our customers, which in turn is highly dependent on oil and gas prices. Depending upon market conditions and other factors, we may issue equity and debt securities or take other actions necessary to fund our business or meet our future long-term liquidity requirements. +Cash and Cash Flows +The following table sets forth our net cash provided by (used in) operating, investing and financing activities during the year at December 31, 2018 , 2017 and 2016 , respectively. +Year Ended December 31, +($ in thousands) +2018 +2017 +2016 +Net cash provided by operating activities +$ +393,079 +$ +109,257 +$ +10,659 +Net cash used in investing activities +$ +(280,604 +) +$ +(281,469 +) +$ +(41,688 +) +Net cash (used in) provided by financing activities +$ +(3,724 +) +$ +62,565 +$ +130,315 +Operating Activities +Net cash provided by operating activities was $393.1 million for the year ended December 31, 2018 , as compared to $109.3 million for the year ended December 31, 2017 . The net increase of $283.8 million was primarily due to the increase in our revenue generating assets (fleet size), which has resulted in increases in revenue and net income in the year, offset by our working capital needs resulting from higher fleet size and expanding activity levels. +Net cash provided by operating activities was $109.3 million for the year ended December 31, 2017, as compared to $10.7 million for the year ended December 31, 2016. The net increase of $98.6 million was primarily due to an increase in revenue and net income in the year, resulting from an increase in customer activity, fleet size and demand for our services, and partially offset by the increase in our working capital needs resulting from higher fleet size and expanding activity levels. +41 +Investing Activities +Net cash used in investing activities decreased to $280.6 million for the year ended December 31, 2018 , from $281.5 million for the year ended December 31, 2017 . The slight decrease was primarily attributable to the decrease in cash payment for capital expenditures during the year ended December 31, 2018 , compared to the year ended December 31, 2017 . +Net cash used in investing activities increased to $281.5 million for the year ended December 31, 2017, from $41.7 million for the year ended December 31, 2016. The increase was primarily attributable to the additional hydraulic fracturing units and other ancillary equipment purchased and a marginal increase in maintenance capital expenditures, during the year ended December 31, 2017, compared to the year ended December 31, 2016. +Financing Activities +Net cash used in financing activities was $3.7 million for the year ended December 31, 2018 , compared to net cash provided of $62.6 million for the year ended December 31, 2017 . Our net cash used in financing activities during the year ended December 31, 2018 was primarily driven by cash used for repayment of borrowings of $80.9 million , repayment of insurance financing of $4.5 million , debt issuance cost of $1.7 million , which was partially offset by cash proceeds from insurance financing $5.8 million and borrowings of $77.4 million . Our net cash provided by financing activities during the year ended December 31, 2017 was primarily from borrowings of $60.0 million , insurance financing proceeds of $4.1 million and initial public offerings (IPO) proceeds of $185.5 million , partially offset by repayment of borrowings of $166.5 million , repayment of insurance financing of $3.8 million , debt issuance of $1.7 million and IPO costs of $15.1 million . +Net cash provided by financing activities was $62.6 million for the year ended December 31, 2017, compared to $130.3 million for the year ended December 31, 2016. The net decrease in cash provided from financing activities was primarily attributable to the repayment of borrowings $166.5 million, repayment of insurance financing of $3.8 million, debt issuance cost of $1.7 million, payment of IPO costs of $15.1 million and offset by the receipt of $185.5 million of IPO proceeds, insurance financing proceeds of $4.1 million and proceeds from borrowings of $60.0 million during the year ended December 31, 2017, compared to net cash used of $71.3 million for repayment of borrowings, repayment of insurance financing of $4.5 million, payment of preferred equity financing costs of $7.5 million, debt extinguishment, debt issuance and IPO costs of $1.0 million, offset by insurance financing proceeds of $4.1 million, equity capitalization proceeds of $40.4 million and proceeds from preferred equity capitalization of $170.0 million during the year ended December 31, 2016. +Credit Facility and Other Financing Arrangements +ABL Credit Facility +On March 22, 2017, we entered into a new revolving credit facility with a $150 million borrowing capacity, or the ABL Credit Facility. Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either LIBOR or base rate, plus the applicable margin, which ranges from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans, with no LIBOR floor. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. The ABL Credit Facility has a term of 5 years and a borrowing base of 85% of eligible accounts receivable less customary reserves. Under this facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. In addition, the ABL Credit Facility includes a Springing Fixed Charge Coverage Ratio of 1.0x when excess availability is less than the greater of (i) 10% of the lesser of the facility size and the Borrowing Base and (ii) $12 million. The ABL has a commitment fee of 0.375%, which reduces to 0.25% if utilization is greater than 50% of the borrowing base. +42 +On February 22, 2018, we entered into a first amendment with our lenders to increase the capacity of the ABL Credit Facility. The amendment increased total capacity under the facility from $150.0 million to $200.0 million. The first amendment to ABL Credit Facility modified the Springing Fixed Charge Coverage Ratio to apply when excess availability is less than the greater of (i) 10% of the lesser of the facility size and the Borrowing Base and (ii) $15 million. +On December 19, 2018, we entered into a second amendment with our lenders to further increase the capacity of the ABL Credit Facility. The second amendment increased total capacity under the facility from $200.0 million to $300.0 million and extended the maturity date of the ABL Credit Facility from March 22, 2022 until December 19, 2023. The second amendment to the ABL Credit Facility further modified the Springing Fixed Charge Coverage Ratio to apply when excess availability is less than the greater of (i) 10% of the lesser of the facility size and the Borrowing Base and (ii) $22.5 million. +Equipment Financing Arrangements +On November 24, 2015, we entered into a 36‑month equipment financing arrangement for three hydraulic fracturing units, and received proceeds of $25.0 million. A portion of the proceeds were used to pay off manufacturer notes, and the remainder was used for additional liquidity. As of December 31, 2018, we have fully repaid all outstanding balance and met all obligations under this financing arrangement +On June 30, 2017, we entered into a financing arrangement for the purchase of light vehicles. As of December 31, 2018, we have fully repaid all outstanding balance and met all obligations under this financing arrangement. +Off Balance Sheet Arrangements +We had no off balance sheet arrangements as of December 31, 2018 . +Capital Requirements +Capital expenditures incurred were $592.6 million during the year ended December 31, 2018 , as compared to $305.3 million during the year ended December 31, 2017 . The increase was primarily attributable to our acquisition of Pioneer’s pressure pumping assets, which includes eight hydraulic fracturing fleets, four coiled tubing units and an associated equipment maintenance building. +Capital expenditures incurred were $305.3 million during the year ended December 31, 2017 as compared to $46.0 million during the year ended December 31, 2016. The increase was primarily attributable to additional property and equipment purchased. +Contractual Obligations +The following table presents our contractual obligations and other commitments as of December 31, 2018 . +($ in thousands) +Payment Due by Period +Total +1 year or less +2 - 3 years +4 - 5 years +More than +5 years +ABL Credit Facility (1) +$ +70,000 +$ +— +$ +— +$ +70,000 +$ +— +Operating leases (2) +5,313 +892 +1,442 +2,979 +— +Total contractual obligations +$ +75,313 +$ +892 +$ +1,442 +$ +72,979 +$ +— +____________________ +(1) +The ABL Credit Facility balance outstanding is exclusive of future commitment fees, interest or other fees since our potential future obligations thereunder are based on future events and cannot be reasonably estimated. +(2) Operating leases include agreements for various office and maintenance locations. +43 +Recent Accounting Pronouncements +Disclosure concerning recently issued accounting standards is incorporated by reference to Note 2 of our Consolidated Financial Statements contained in this Form 10-K. +Critical Accounting Policies and Estimates +The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally acceptable in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported revenues and expenses during the years. We evaluate these estimates and assumptions on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates. +Listed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved, and that we believe are critical to the understanding of our operations. +Property and Equipment +Our property and equipment are recorded at cost, less accumulated depreciation. +Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in earnings. +We retired certain components of equipment rather than entire pieces of equipment, which resulted in a net loss on disposal of assets of $59.2 million , $39.1 million and $22.5 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. +Depreciation of property and equipment is provided on the straight‑line method over estimated useful lives as shown in the table below. The estimated useful lives and salvage values of property and equipment is subject to key assumptions such as maintenance, utilization and job variation. Unanticipated future changes in these assumptions could negatively or positively impact our net income. A 10% change in the useful lives of our property and equipment would have resulted in approximately $8.8 million impact on pre-tax income during the year ended December 31, 2018 . +Land +Indefinite +Buildings and property improvements +5 - 30 years +Vehicles +1 ‑ 5 years +Equipment +1 ‑ 20 years +Leasehold improvements +5 ‑ 20 years +Impairment of Long-Lived Assets +In accordance with the Financial Accounting Standards Board Accounting Standards Codification (ASC) 360 regarding Accounting for the Impairment or Disposal of Long‑Lived Assets , we review the long‑lived assets to be held and used whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future undiscounted cash flows attributable +44 +to the assets is less than the carrying amount of such assets. In this circumstance, we recognize an impairment loss for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Our cash flow forecasts require us to make certain judgements regarding long‑term forecasts of future revenue and costs and cash flows related to the assets subject to review. The significant assumption in our cash flow forecasts is our future growth expectations. The significant assumption is uncertain in that it is driven by future demand for our services and utilization which could be impacted by crude oil market prices, future market conditions and technological advancements. Our fair value estimates for certain long‑lived assets require us to use significant other observable inputs among others, including significant assumptions related to market approach based on recent auction sales or selling prices of comparable equipment. The estimates of fair value are also subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future. No events or changes in circumstances occurred that would indicate an impairment of our property and equipment during the year ended December 31, 2018 . +If the crude oil market declines or the demand for vertical drilling does not recover, and if the equipment remains idle or under‑utilized, the estimated fair value of such equipment may decline, which could result in future impairment charges. Though the impacts of variations in any of these factors can have compounding or off‑setting impacts, a 10% decline in the estimated fair value of our drilling assets at December 31, 2018 would result in additional impairment of $0.5 million , and a 10% decline in the estimated future cash flows for our other asset groups would not indicate an impairment. +Income Taxes +Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. +We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and the results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. In determining the reasonableness of our valuation allowance as of December 31, 2018 , we have considered and made judgments and estimates regarding estimated future taxable income. These estimates and judgments include some degree of uncertainty and changes in these estimates and assumptions could require us to adjust the valuation allowances for our deferred tax assets and the ultimate realization of tax assets depends on the generation of sufficient taxable income. +On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to (1) reducing the U.S. federal corporate tax rate from 35% to 21%, (2) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized, (3) creating a new limitation on deductible interest expense, (4) changes to bonus depreciation, and (5) changing rules related to use and limitations of net operating loss carryforwards for tax years beginning after December 31, 2017. The only material items that impacted the Company’s consolidated financial statements in 2017 were bonus depreciation and the corporate rate reduction. While the corporate rate reduction is effective January 1, 2018, we accounted for this anticipated rate change during the year ended December 31, 2017, the year of enactment. Consequently, we recorded a $3.4 million decrease to the net deferred tax liability, with a corresponding net adjustment to deferred tax benefit in our consolidated financial statements for the year ended December 31, 2017. +Our methodology for recording income taxes requires a significant amount of judgment in the use of assumptions and estimates. Additionally, we forecast certain tax elements, such as future taxable income, as well as +45 +evaluate the feasibility of implementing tax planning strategies. Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results. Unforeseen events may significantly impact these variables, and changes to these variables could have a material impact on our income tax accounts. The final determination of our income tax liabilities involves the interpretation of local tax laws and related authorities in each jurisdiction. Changes in the operating environments, including changes in tax law, could impact the determination of our income tax liabilities for a tax year. +46 +Item 7A. Quantitative and Qualitative Disclosure of Market Risks +Market risk is the risk of loss arising from adverse changes in market rates and prices. Historically, our risks have been predominantly related to potential changes in the fair value of our long‑term debt due to fluctuations in applicable market interest rates. Going forward our market risk exposure generally will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non‑operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes. +Commodity Price Risk +Our material and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our pressure pumping services such as proppants, chemicals, guar, trucking and fluid supplies. Our fuel costs consist primarily of diesel fuel used by our various trucks and other motorized equipment. The prices for fuel and the raw materials in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Historically, we have generally been able to pass along price increases to our customers; however, we may be unable to do so in the future. We do not engage in commodity price hedging activities. +Interest Rate Risk +We may be subject to interest rate risk on variable rate debt under our credit facility. The impact of a 1% increase in interest rates on our variable rate debt as of December 31, 2018 , 2017 and 2016 would have resulted in an increase in interest expense and corresponding decrease in pre‑tax income of approximately $0.7 million , $0.2 million and $2.1 million , for the years ended December 31, 2018 , 2017 and 2016 , respectively. +Credit Risk +Financial instruments that potentially subject us to concentrations of credit risk are trade receivables. We extend credit to customers and other parties in the normal course of business. We have established various procedures to manage our credit exposure, including credit evaluations and maintaining an allowance for doubtful accounts. +47 +MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING +The management of ProPetro Holding Corp. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. ProPetro Holding Corp. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States of America. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and any instances of fraud, if any, within the Company will be detected. Further, the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our internal control over financial reporting as of December 31, 2018 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management’s assessment is that ProPetro Holding Corp. maintained effective internal control over financial reporting as of December 31, 2018 . The independent registered public accounting firm, Deloitte & Touche LLP, has audited the consolidated financial statements as of and for the year ended December 31, 2018 , and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this report on page 50. +/s/ Dale Redman +Dale Redman +Chief Executive Officer and Director +(Principal Executive Officer) +/s/ Jeffrey Smith +Jeffrey Smith +Chief Financial Officer +(Principal Financial Officer) +Midland, Texas +February 28, 2019 +48 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the shareholders and the Board of Directors of +ProPetro Holding Corp. and Subsidiary +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of ProPetro Holding Corp. and Subsidiary (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of income, shareholders' equity and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with, accounting principles generally accepted in the United States of America. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2019 , expressed an unqualified opinion on the Company's internal control over financial reporting. +Basis for Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ DELOITTE & TOUCHE LLP +Houston, Texas +February 28, 2019 +We have served as the Company's auditor since 2013. +49 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the shareholders and the Board of Directors of +ProPetro Holding Corp. and Subsidiary +Opinion on Internal Control over Financial Reporting +We have audited the internal control over financial reporting of ProPetro Holding Corp. and Subsidiary (the “Company”) as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated February 28, 2019 , expressed an unqualified opinion on those financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ DELOITTE & TOUCHE LLP +Houston, Texas +February 28, 2019 +50 +Item 8. Financial Statements and Supplementary Data. +PROPETRO HOLDING CORP. AND SUBSIDIARY +CONSOLIDATED BALANCE SHEETS +AS OF DECEMBER 31, 2018 AND 2017 +(In thousands, except share data) +2018 +2017 +ASSETS +CURRENT ASSETS: +Cash and cash equivalents +$ +132,700 +$ +23,949 +Accounts receivable - net of allowance for doubtful accounts of $100 and $443, respectively +202,956 +199,656 +Inventories +6,353 +6,184 +Prepaid expenses +6,610 +5,123 +Other current assets +638 +748 +Total current assets +349,257 +235,660 +PROPERTY AND EQUIPMENT - Net of accumulated depreciation +912,846 +470,910 +OTHER NONCURRENT ASSETS: +Goodwill +9,425 +9,425 +Intangible assets - net of amortization +13 +301 +Deferred revenue rebate - net of amortization +— +615 +Other noncurrent assets +2,981 +2,121 +Total other noncurrent assets +12,419 +12,462 +TOTAL ASSETS +$ +1,274,522 +$ +719,032 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES: +Accounts payable +$ +214,460 +$ +211,149 +Accrued liabilities +138,089 +16,607 +Current portion of long-term debt +— +15,764 +Accrued interest payable +211 +76 +Total current liabilities +352,760 +243,596 +DEFERRED INCOME TAXES +54,283 +4,881 +LONG-TERM DEBT +70,000 +57,178 +OTHER LONG-TERM LIABILITIES +124 +125 +Total liabilities +477,167 +305,780 +COMMITMENTS AND CONTINGENCIES (Note 17) +SHAREHOLDERS’ EQUITY: +Preferred stock, $0.001 par value, 30,000,000 shares authorized, none issued, respectively +— +— +Common stock, $0.001 par value, 200,000,000 shares authorized,100,190,126 and 83,039,854 shares issued, respectively +100 +83 +Additional paid-in capital +817,690 +607,466 +Accumulated deficit +(20,435 +) +(194,297 +) +Total shareholders’ equity +797,355 +413,252 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ +1,274,522 +$ +719,032 +51 +PROPETRO HOLDING CORP. AND SUBSIDIARY +CONSOLIDATED STATEMENTS OF OPERATIONS +FOR THE YEARS ENDED DECEMBER 31, 2018 , 2017 AND 2016 +(In thousands, except per share data) +2018 +2017 +2016 +REVENUE - Service revenue +$ +1,704,562 +$ +981,865 +$ +436,920 +COSTS AND EXPENSES: +Cost of services (exclusive of depreciation and amortization) +1,270,577 +813,823 +404,140 +General and administrative (inclusive of stock‑based compensation) +53,958 +49,215 +26,613 +Depreciation and amortization +88,138 +55,628 +43,542 +Property and equipment impairment expense +— +— +6,305 +Goodwill impairment expense +— +— +1,177 +Loss on disposal of assets +59,220 +39,086 +22,529 +Total costs and expenses +1,471,893 +957,752 +504,306 +OPERATING INCOME (LOSS) +232,669 +24,113 +(67,386 +) +OTHER INCOME (EXPENSE): +Interest expense +(6,889 +) +(7,347 +) +(20,387 +) +Gain on extinguishment of debt +— +— +6,975 +Other expense +(663 +) +(1,025 +) +(321 +) +Total other income (expense) +(7,552 +) +(8,372 +) +(13,733 +) +INCOME (LOSS) BEFORE INCOME TAXES +225,117 +15,741 +(81,119 +) +INCOME TAX (EXPENSE)/BENEFIT +(51,255 +) +(3,128 +) +27,972 +NET INCOME (LOSS) +$ +173,862 +$ +12,613 +$ +(53,147 +) +NET INCOME (LOSS) PER COMMON SHARE: +Basic +$ +2.08 +$ +0.17 +$ +(1.19 +) +Diluted +$ +2.00 +$ +0.16 +$ +(1.19 +) +WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: +Basic +83,460 +76,371 +44,787 +Diluted +87,046 +79,583 +44,787 +See notes to consolidated financial statements. 52 +PROPETRO HOLDING CORP. AND SUBSIDIARY +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +FOR THE YEARS ENDED DECEMBER 31, 2018 , 2017 AND 2016 (In thousands) +Preferred Stock +Common Stock +Shares +Amount +Preferred +Additional +Paid‑In +Capital +Shares +Amount +Additional +Paid‑In +Capital +Accumulated +Deficit +Total +BALANCE - January 1, 2016 +— +$ +— +$ +— +34,621 +$ +35 +$ +223,299 +$ +(153,763 +) +$ +69,571 +Stock‑based compensation cost +— +— +— +— +— +1,649 +— +1,649 +Additional equity capitalization, net of costs +— +— +— +18,007 +18 +40,407 +— +40,425 +Preferred equity capitalization, net of costs +17,000 +17 +162,494 +— +— +— +— +162,511 +Net loss +— +— +— +— +— +— +(53,147 +) +(53,147 +) +BALANCE - December 31, 2016 +17,000 +17 +162,494 +52,628 +53 +265,355 +(206,910 +) +221,009 +Stock‑based compensation cost +— +— +— +— +— +9,489 +— +9,489 +Initial Public Offering net of costs +— +— +— +13,250 +13 +170,128 +— +170,141 +Conversion of preferred stock to common stock at Initial Public Offering +(17,000 +) +(17 +) +(162,494 +) +17,000 +17 +162,494 +— +— +Issuance of equity award—net +— +— +— +162 +— +— +— +— +Net income +— +— +— +— +— +— +12,613 +12,613 +BALANCE - December 31, 2017 +— +— +— +83,040 +83 +607,466 +(194,297 +) +413,252 +Stock‑based compensation cost +— +— +— +— +— +5,482 +— +5,482 +Issuance of equity award—net +— +— +— +550 +1 +246 +— +247 +Issuance of common stock +— +— +— +16,600 +16 +204,496 +— +204,512 +Net income +— +— +— +— +— +— +173,862 +173,862 +BALANCE - December 31, 2018 +— +$ +— +$ +— +100,190 +$ +100 +$ +817,690 +$ +(20,435 +) +$ +797,355 +See notes to consolidated financial statements. 53 +PROPETRO HOLDING CORP. AND SUBSIDIARY +CONSOLIDATED STATEMENTS OF CASH FLOWS +FOR THE YEARS ENDED DECEMBER 31, 2018 , 2017 AND 2016 (In thousands) +2018 +2017 +2016 +CASH FLOWS FROM OPERATING ACTIVITIES: +Net income (loss) +$ +173,862 +$ +12,613 +$ +(53,147 +) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depreciation and amortization +88,138 +55,628 +43,542 +Gain on extinguishment of debt +— +— +(6,975 +) +Property and equipment impairment expense +— +— +6,305 +Goodwill impairment expense +— +— +1,177 +Deferred income tax expense (benefit) +49,704 +3,430 +(27,972 +) +Amortization of deferred revenue rebate +615 +1,846 +1,846 +Amortization of deferred debt issuance costs +403 +3,403 +2,091 +Stock‑based compensation +5,482 +9,489 +1,649 +Loss on disposal of assets +59,220 +39,086 +22,529 +Gain loss on interest rate swap +— +(251 +) +(205 +) +Changes in operating assets and liabilities: +Accounts receivable +(3,300 +) +(84,477 +) +(24,888 +) +Other current assets +207 +3,304 +(563 +) +Inventories +(168 +) +(1,472 +) +3,859 +Prepaid expenses +(1,418 +) +(468 +) +(62 +) +Accounts payable +9,720 +64,228 +37,049 +Accrued liabilities +9,853 +2,930 +4,392 +Accrued interest +761 +(32 +) +32 +Net cash provided by operating activities +393,079 +109,257 +10,659 +CASH FLOWS FROM INVESTING ACTIVITIES: +Capital expenditures +(284,197 +) +(285,891 +) +(42,832 +) +Proceeds from sale of assets +3,593 +4,422 +1,144 +Net cash used in investing activities +(280,604 +) +(281,469 +) +(41,688 +) +CASH FLOWS FROM FINANCING ACTIVITIES: +Proceeds from borrowings +77,378 +60,045 +— +Repayments of borrowings +(80,946 +) +(166,546 +) +(41,295 +) +Proceeds from insurance financing +5,824 +4,125 +4,126 +Repayments of insurance financing +(4,495 +) +(3,807 +) +(4,527 +) +Extinguishment of debt +— +— +(30,000 +) +Payment of debt extinguishment costs +— +— +(525 +) +Payment of debt issuance costs +(1,732 +) +(1,653 +) +(140 +) +Proceeds from exercise of equity awards +247 +— +— +Proceeds from additional common equity capitalization +— +— +40,425 +Proceeds from preferred equity capitalization +— +— +170,000 +Payment of preferred equity capitalization costs +— +— +(7,489 +) +Proceeds from IPO +— +185,500 +— +Payment of deferred IPO costs +— +(15,099 +) +(260 +) +Net cash (used in) provided by financing activities +(3,724 +) +62,565 +130,315 +NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS +108,751 +(109,647 +) +99,286 +CASH AND CASH EQUIVALENTS — Beginning of year +23,949 +133,596 +34,310 +CASH AND CASH EQUIVALENTS — End of year +$ +132,700 +$ +23,949 +$ +133,596 +See notes to consolidated financial statements. 54 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +1. ORGANIZATION AND HISTORY +ProPetro Holding Corp. (“Holding”), a Texas corporation was formed on April 14, 2007, to serve as a holding company for its wholly owned subsidiary ProPetro Services, Inc. (“Services”), a Texas corporation. Services provides hydraulic fracturing (inclusive of acidizing), cementing, coil tubing, drilling and flowback services to oil and gas producers, located primarily in Texas, Oklahoma, New Mexico, Utah, Colorado, and Wyoming. Holding was converted and incorporated to a Delaware Corporation on March 8, 2017. +Holding and Services are collectively referred to as the “Company” in the accompanying consolidated financial statements. +On December 22, 2016, the Company restated and amended the Company’s Shareholders Agreement and certificate of formation in the state of Texas, approving a reverse stock split, such that each holder of common stock of the Company shall receive one share of common stock for every 170.4667 shares of previous common stock held. In conjunction, the Company amended the amount of authorized shares to 230,000,000 , of which 200,000,000 are common and 30,000,000 are preferred. +On March 22, 2017, we consummated our initial public offering (“IPO”) in which 25,000,000 shares of our common stock, par value $0.001 per share, were sold at a public offering price of $14.00 per share, with 13,250,000 shares issued and sold by the Company and 11,750,000 shares sold by existing stockholders. We received net proceeds of approximately $170.1 million after deducting $10.9 million of underwriting discounts and commissions, and $4.5 million of other offering expenses. At closing, we used the proceeds (i) to repay $71.8 million in outstanding borrowings under the term loan, (ii) $86.8 million to fund the purchase of additional hydraulic fracturing units and other equipment, and (iii) the remaining for general corporate purposes. +In connection with the IPO, the Company executed a stock split, such that each holder of common stock of the Company received 1.45 shares of common stock for every one share of previous common stock, and all 16,999,990 shares of our outstanding Series A preferred stock converted to common stock on a 1 :1 basis. +Accordingly, any information related to or dependent upon the share or option counts in the 2018 , 2017 and 2016 consolidated financial statements and Note 13 Net Income (loss) Per Share , Note 14 Stock‑Based Compensation , Note 18 Equity Capitalization and Note 19 Quarterly Financial Data (Unaudited) have been updated to reflect the effect of the reverse stock split in December 2016 and the stock split in March 2017, as applicable. +On December 31, 2018, we consummated the purchase of pressure pumping and related assets of Pioneer and Pioneer Pumping Services. The pressure pumping assets acquired were used to provide integrated well completion services in the Permian Basin to Pioneer’s completion and production operations. The acquisition cost of the assets was comprised of $110.0 million of cash and 16.6 million shares of our common stock. The incremental direct cost of $3.4 million incurred to consummate the transaction was capitalized as part of the acquisition cost. In connection with the acquisition, we became a long-term service provider to Pioneer, providing pressure pumping and related services for a term of up to 10 years. The pressure pumping assets acquired include eight hydraulic fracturing fleets with 510,000 HHP, four coiled tubing units and the associated equipment maintenance facility. We evaluated and determined that the acquisition did not meet the definition of a Business under GAAP because substantially all of the assets acquired are concentrated in a group of similar assets. Accordingly, we have accounted for the acquisition as an asset purchase. +55 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +2. SIGNIFICANT ACCOUNTING POLICIES +A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements are as follows: +Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Holding and its wholly owned subsidiary, Services. All intercompany accounts and transactions have been eliminated in consolidation. +Basis of Presentation — The accompanying consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America (“GAAP”). +Use of Estimates — Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Such estimates include, but are not limited to, allowance for doubtful accounts, depreciation of property and equipment, estimates of fair value of property and equipment, estimates related to fair value of reporting units for purposes of assessing goodwill, estimates related to deferred tax assets and liabilities, including any related valuation allowances, and estimates of fair value of stock‑based compensation. Actual results could differ from those estimates. +Revenue Recognition — The Company’s services are sold based upon contracts with customers. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The following is a description of the principal activities, separated by reportable segment and all other, from which the Company generates its revenue. +Pressure Pumping — Pressure pumping consists of downhole pumping services, which includes hydraulic fracturing (inclusive of acidizing services) and cementing. +Hydraulic fracturing is a well-stimulation technique intended to optimize hydrocarbon flow paths during the completion phase of shale wellbores. The process involves the injection of water, sand and chemicals under high pressure into shale formations. Hydraulic fracturing contracts with our customer have one performance obligation, which is the contracted total stages, satisfied over time. We recognize revenue over time using a progress output method, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed faithfully depicts how our hydraulic fracturing services are transferred to our customers over time. +Acidizing, which is part of our hydraulic fracturing operating segment, involves a well-stimulation technique where acid is injected under pressure into formations to form or expand fissures. Acidizing provides downhole solutions, and contracts with customers have one performance obligation, which is satisfied at a point-in-time upon completion of the contracted service when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize acidizing revenue at a point-in-time, upon completion of the performance obligation. +Our cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Cementing involves well bonding solutions, and contracts with customers have one performance obligation, which is satisfied at a point-in-time upon completion of the contracted service when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize cementing revenue at a point-in-time, upon completion of the performance obligation. The transaction price for each performance obligation for all our pressure pumping services are fixed per our contract with customer. +All Other — All other services consist of our surface drilling, drilling, coil tubing and flowback, which are downhole well stimulation and completion/remedial services. The performance obligation for each of the services +56 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +has a fixed transaction price which is satisfied at a point-in-time upon completion of the service when control is transferred to the customer. Accordingly, we recognize revenue at a point-in-time, upon completion of the service and transfer of control to the customer. +Accounts Receivable — Accounts receivables are stated at the amount billed and billable to customers. Payment is typically due in full upon completion of the job for all of our services to customers. At December 31, 2018 and 2017 accrued revenue (unbilled receivable) included as part of our accounts receivable was $18.0 million and $24.8 million , respectively. At December 31, 2018 , the transaction price allocated to the remaining performance obligation for our partially completed hydraulic fracturing operations was $43.9 million , which is expected to be completed and recognized in one month following the current period balance sheet date, in our pressure pumping reportable segment. At December 31, 2017 the transaction price allocated to the remaining performance obligation for our then partially completed hydraulic fracturing operations was $26.4 million , which was recorded as part of our pressure pumping segment revenue for the year ended December 31, 2018 . +At December 31, 2018 , 2017 and 2016 , the allowance for doubtful accounts was $0.1 million , $0.4 million and $0.6 million , respectively. During the year, additional allowance for doubtful accounts was $0.1 million and the allowance no longer required was 0.4 million . +Inventories — Inventories, which consists only of raw materials, are stated at lower of average cost and net realizable value. +Property and Equipment — The Company’s property and equipment are recorded at cost, less accumulated depreciation. +Depreciation — Depreciation of property and equipment is provided on the straight‑line method over the following estimated useful lives: +Land +Indefinite +Buildings and property improvements +5 - 30 years +Vehicles +1 ‑ 5 years +Equipment +1 ‑ 20 years +Leasehold improvements +5 ‑ 20 years +Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in the statement of operations. The Company recorded a loss on disposal of assets of $59.2 million , $39.1 million and $22.5 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. +Impairment of Long‑Lived Assets — In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360, Accounting for the Impairment or Disposal of Long‑Lived Assets , the Company reviews its long‑lived assets to be held and used whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. +An impairment loss is indicated if the sum of the expected future undiscounted cash flows attributable to the asset group is less than the carrying amount of such asset group. In this circumstance, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. No impairment was recorded in the years ended December 31, 2018 and 2017 . The impairment recorded in 2016 was $6.3 million for property and equipment relating to the drilling asset group. +57 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +The Company accounts for long‑lived assets to be disposed of at the lower of their carrying amount or fair value, less cost to sell once management has committed to a plan to dispose of the assets. +Goodwill — Goodwill is the excess of the consideration transferred over the fair value of the tangible and identifiable intangible assets and liabilities recognized. Goodwill is not amortized. We perform an annual impairment test of goodwill as of December 31, or more frequently if circumstances indicate that impairment may exist. The determination of impairment is made by comparing the carrying amount of a reporting unit with its fair value, which is generally calculated using a combination of market and income approaches. If the fair value of the reporting unit exceeds the carrying value, no further testing is performed. If the fair value of the reporting unit is less than the carrying value, we consider goodwill to be impaired, and the amount of impairment loss is estimated and recorded in the statement of operations. +In 2014, we acquired Blackrock Drilling, Inc. (“Blackrock”) for $1.8 million . The assets acquired from Blackrock were recorded as $0.6 million of equipment with the excess of the purchase price over the fair value of the assets recorded as goodwill of $1.2 million . The acquisition complemented our existing drilling operations. The transaction has been accounted for using the acquisition method of accounting and, accordingly, assets and liabilities assumed were recorded at their fair values as of the acquisition date. Based on our goodwill impairment test as of December 31, 2016, the Company concluded that there was an impairment of goodwill of $1.2 million related to the Blackrock acquisition. Accordingly, a $1.2 million impairment expense was recorded during the year ended December 31, 2016, to fully write-down the goodwill related to Blackrock. Prior to the impairment write‑down, the goodwill related to the Blackrock acquisition of $1.2 million was recorded in our all other reportable segment. +In 2011, we acquired Technology Stimulation Services, LLC (“TSS”) for $24.4 million . The assets acquired from TSS were recorded as $15.0 million of equipment with the excess of the purchase price over fair value of the assets recorded as goodwill of $9.4 million . The acquisition complemented our existing pressure pumping business. The transaction has been accounted for using the acquisition method of accounting and, accordingly, assets and liabilities assumed were recorded at their fair values as of the acquisition date. Based on our goodwill impairment tests as of December 31, 2018 , 2017 and 2016 , we concluded that the goodwill related to TSS acquisition was not impaired. The goodwill related to the TSS acquisition of $9.4 million is recorded in our pressure pumping reportable segment. +Intangible Assets — Intangible assets with finite useful lives are amortized on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized, which is generally on a straight‑line basis over the asset’s estimated useful life. +Income Taxes — Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. +We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidences, including future reversals of existing taxable temporary differences, projected future taxable income, and the results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. +Advertising Expense — All advertising costs are expensed as incurred. For the years ended December 31, 2018 , 2017 and 2016 , advertising expense was $1.3 million , $0.8 million and $0.4 million , respectively. +58 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +Deferred Loan Costs — The Company capitalized certain costs in connection with obtaining its borrowings, including lender, legal, and accounting fees. These costs are being amortized over the term of the related loan using the straight‑line method. Deferred loan costs amortization is included in interest expense. Unamortized deferred loan costs associated with loans paid off or refinanced with different lenders are expensed in the period in which such an event occurs. Deferred loan costs are classified as a reduction of long‑term debt or in certain instance as an asset in the consolidated balance sheet. Amortization of deferred loan costs is recorded as interest expense in the statement of operations, and during the years ended December 31, 2018 , 2017 and 2016 , the amount of expense recorded was $0.4 million , $3.4 million and $2.1 million , respectively. +Stock-Based Compensation — The Company recognizes the cost of stock‑based awards on a straight‑line basis over the requisite service period of the award, which is usually the vesting period under the fair value method. Total compensation cost is measured on the grant date using fair value estimates. +Insurance Financing — The Company annually renews its commercial insurance policies and records a prepaid insurance asset and amortizes it monthly over the coverage period. The Company may choose to finance a portion of the premiums and will make repayments monthly over ten months in equal installments. +Concentration of Credit Risk — The Company’s assets that are potentially subject to concentrations of credit risk are cash and cash equivalents and trade accounts receivable. Cash balances are maintained in financial institutions, which at times exceed federally insured limits. The Company monitors the financial condition of the financial institutions in which accounts are maintained and has not experienced any losses in such accounts. The receivables of the Company are spread over a number of customers, a majority of which are credible operators and suppliers to the oil and natural gas industries. The Company performs ongoing credit evaluations as to the financial condition of its customers with respect to trade receivables. +Recently Issued Accounting Standards Adopted in 2018 +In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) . ASU No. 2014-09 requires entities to recognize revenue to depict transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 requires entities to disclose both qualitative and quantitative information that enables users of the consolidated financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including disclosure of significant judgments affecting the recognition of revenue. ASU No. 2014-09 was effective for annual periods beginning after December 15, 2017, using either the full retrospective or modified retrospective method. We adopted ASU No. 2014-09 effective January 1, 2018, using the modified retrospective method. The adoption of this guidance had no impact on our prior period results of operations. This is because prior to the effective date of the new revenue guidance, substantially all of our performance obligations per our contracts with customers, except for hydraulic fracturing, were completed at a point-in-time, and revenue recognized when control was transferred to the customers, which is consistent with ASU No. 2014-09. Our hydraulic fracturing segment performance obligation is satisfied over time. Prior to the effective date of the new revenue standards, our hydraulic fracturing segment revenue was recognized based on actual stages completed, i.e. using the output method, which faithfully depicts how our services are transferred over time to our customers and is consistent with the requirements of the new guidance, ASU No. 2014-09. Accordingly, no adjustments to our consolidated financial statements were required, other than the additional disclosures included as part of Note 2 in our consolidated financial statements. +Recently Issued Accounting Standards Not Yet Adopted in 2018 +In February 2016, the FASB issued ASU No. 2016-02, Leases . This ASU introduces a lessee model that brings most leases on the balance sheet. This new standard increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as Right of Use ("ROU") Assets and Lease Liabilities. Leases will be classified as either finance or operating, which will impact the pattern of +59 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +expense recognition on the income statement. This ASU also requires additional qualitative and quantitative disclosures to better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This ASU is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. W e adopted this new lease standard effective January 1, 2019 and intend to elect the modified retrospective transition method. As such, the comparative financial information will not be restated and will continue to be reported under the lease standard in effect during those periods. We also intend to elect other practical expedients provided by the new standard, including the package of practical expedients, the short-term lease recognition practical expedient in which leases with a term of 12 months or less will not be recognized on the balance sheet, and the practical expedient to not separate lease and non-lease components for the majority of our leases. We believe that the adoption of this standard will result in an amount no greater than $10.0 million of additional assets and liabilities on our consolidated balance sheet representing the recognition of operating lease right-of-use assets and operating lease liabilities. +In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment , which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. As a result, under this ASU, an entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. Although, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for impairment tests in fiscal years beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We believe that the adoption of this guidance will not materially affect our consolidated financial statements. +60 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +3. SUPPLEMENTAL CASH FLOWS INFORMATION +December 31, +($ in thousands) +2018 +2017 +2016 +Supplemental cash flows disclosures +Interest paid +$ +5,068 +$ +3,966 +$ +18,249 +Income taxes paid +$ +— +$ +— +$ +3 +Supplemental disclosure of non‑cash investing and financing activities +Capital expenditures included in accounts payable and accrued liabilities +$ +137,647 +$ +33,850 +$ +3,176 +Conversion of preferred stock to common stock at Initial Public Offering +$ +— +$ +162,511 +$ +— +Non-cash purchases of property and equipment +$ +204,512 +$ +— +$ +— +4. FAIR VALUE MEASUREMENTS +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. +In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used, when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions other market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows: +Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment. +Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. +Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. +A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. +Assets and Liabilities Measured at Fair Value on a Recurring Basis +Our financial instruments include cash and cash equivalents, accounts receivable and accounts payable, accrued liabilities and long-term debt. The estimated fair value of our financial instruments — cash and cash equivalent, accounts receivable and accounts payable and accrued liabilities at December 31, 2018 and 2017 approximates their +61 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +4. FAIR VALUE MEASUREMENTS (Continued) +carrying value as reflected in our consolidated balance sheets because of their short‑term nature. In 2018, we did not have a derivate financial instrument. Prior to 2018, we used a derivative financial instrument, an interest rate swap, to manage interest rate risk. Our policies do not permit the use of derivative financial instruments for speculative purposes. We did not designate the interest rate swap as a hedge for accounting purposes. We record all derivatives as of the end of our reporting period in our consolidated balance sheet at fair value, which is based on quoted market prices, which represents a level 1 in the fair value measurement hierarchy. Based on quoted market prices as of December 31, 2017 and 2016 , for contracts with similar terms and maturity date, as provided by the counterparty, we recorded a gain of $0.3 million and $0.2 million , respectively, in our consolidated statement of operations. The fair value of the interest rate swap liability at December 31, 2017 and 2016 was $0 and $0.3 million , respectively. +Assets Measured at Fair Value on a Nonrecurring Basis +No assets were measured at fair value on a nonrecurring basis at December 31, 2018 and 2017 , respectively. +No impairment was recorded for our property and equipment during the year ended December 31, 2018 and 2017 . In 2016, the depressed cash flows and continued decline in utilization of our drilling assets were indicative of potential impairment, resulting in the Company comparing the carrying value of the drilling assets with its estimated fair value. We determined that the carrying value of the drilling assets was greater than its estimated fair value and accordingly, an impairment expense was recorded. In 2016, the non‑cash asset impairment charges for drilling was $6.3 million , which had a net carrying value of $15.0 million prior to the impairment write‑down. See Note 7, “Impairment of Long‑Lived Assets.” +We generally apply fair value techniques to our reporting units on a nonrecurring basis associated with valuing potential impairment loss related to goodwill. Our estimate of the reporting unit fair value is based on a combination of income and market approaches, Level 1 and 3, respectively, in the fair value hierarchy. The income approach involves the use of a discounted cash flow method, with the cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies market multiples in estimating the fair value. Significant assumptions include projected revenue growth, capital expenditures, utilization, gross margins, discount rates, terminal growth rates, and weight allocation between income and market approaches. If the reporting unit's carrying amount exceeds its fair value, we consider goodwill impaired, and the impairment loss is recorded in the period. There were no additions to, or disposal of, goodwill during the year ended December 31, 2018 , 2017 and 2016 . Based on our annual goodwill impairment test, no impairment of goodwill was recorded for the year ended December 31, 2018 and 2017 . At December 31, 2016, we estimated the fair value of our surface air drilling reporting unit to be $3.8 million and its carrying value was $4.2 million . As a result of the potential impairment with the carrying value exceeding the estimated fair value, we then further determined the implied fair value of the surface drilling goodwill to be $0 . Accordingly, we recorded an impairment expense of $1.2 million . The impairment expense was attributable to the challenging oil and gas market and slow recovery of crude oil prices, all of which adversely impacted on our expected future cash flows for the surface air drilling reporting unit. +5. INTANGIBLE ASSETS +Intangible assets are composed of internally developed software. Intangible assets are amortized on a straight‑line basis with a useful life of five years. Amortization expense included in net income (loss) for the years ended December 31, 2018 , 2017 and 2016 was $0.3 million , $0.3 million and $0.3 million , respectively. At December 31, 2018 and 2017 , respectively, the company’s intangible assets subject to amortization are as follows: +($ in thousands) +2018 +2017 +Internally developed software +$ +1,440 +$ +1,440 +Less accumulated amortization +1,427 +1,139 +Intangible assets — net +$ +13 +$ +301 +62 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +Estimated remaining amortization expense for each of the subsequent fiscal years is expected to be as follows: +($ in thousands) +Year +Estimated +Future +Amortization +Expense +2019 +$ +13 +2020 +— +Total +$ +13 +The average amortization period remaining is approximately 0.05 years . +6. PROPERTY AND EQUIPMENT +Property and equipment consisted of the following at December 31, 2018 and 2017 , respectively: +($ in thousands) +2018 +2017 +Land +$ +7,669 +$ +— +Building +23,840 +— +Equipment and vehicles +1,105,380 +646,800 +Leasehold improvements +5,559 +4,987 +Subtotal +1,142,448 +651,787 +Less accumulated depreciation +229,602 +180,877 +Property and equipment — net +$ +912,846 +$ +470,910 +7. IMPAIRMENT OF LONG‑LIVED ASSETS +Whenever events or circumstances indicate that the carrying value of long‑lived assets may not be recoverable, the Company reviews the carrying value of long‑lived assets, such as property and equipment and other assets to determine if they are recoverable. If any long‑lived assets are determined to be unrecoverable, an impairment expense is recorded in the period. Asset recoverability is estimated using undiscounted future net cash flows at the lowest identifiable level, excluding interest expense and one‑time other income and expense adjustments. During the year, the Company determined the lowest level of identifiable cash flows to be at the asset group level, which consists of hydraulic fracturing (inclusive of acidizing), cementing, coil tubing, flowback and drilling. +During the year ended December 31, 2018 and 2017 , no impairment expense was recorded for any of our asset groups. During the year ended December 31, 2016, the gradual shift from vertical to horizontal drilling rigs in the Permian Basin led to the deterioration in utilization of our drilling rigs, and we expected undiscounted future cash flows to be lower than the carrying value of the drilling assets. Given that the carrying value of the drilling assets may not be recoverable, the Company estimated the fair value of the asset group and compared it to its carrying value. Potential impairment exists if the estimated undiscounted future net cash flows for a given asset group is less than the carrying amount of the asset group. The impairment expense is determined by comparing the estimated fair value with the carrying value of the related asset, and any excess amount by which the carrying value exceeds the fair value is recorded as an impairment expense in the period. At December 31, 2016 , the estimated fair value of the drilling asset group of $8.7 million was determined using the market approach, which represents a level 2 in the fair value measurement hierarchy. Our fair value estimates required us to use significant other observable inputs including assumptions related to replacement cost, among others. Accordingly, an impairment expense of $6.3 +63 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +7. IMPAIRMENT OF LONG-LIVED ASSETS (Continued) +million was recorded in 2016 as the carrying value of the drilling asset group of $15.0 million was greater than its then estimated fair value. All other assets group carrying values were determined to be recoverable in 2016. +8. DEFERRED REVENUE REBATE +In November 2011, the Company acquired certain oilfield fracturing equipment from a customer and agreed to provide future fracturing services to the customer for a period of 78 months in exchange for a 12% $25.0 million note payable to the customer. The Company recorded the fracturing equipment at its estimated fair value of approximately $13.0 million and assigned the remaining value of approximately $12.0 million to a deferred revenue rebate account to be amortized over the customer’s 78 ‑month service period. In March 2013, the Company repaid the note payable to the customer. For each of the years ended December 31, 2018 , 2017 and 2016 the Company recorded $0.6 million , $1.8 million and $1.8 million , respectively, of amortization rebate as a reduction of revenue. +9. LONG‑TERM DEBT +2013 Term Loan and Revolving Credit Facility +On September 30, 2013, we entered into a term loan in the amount of $220 million ("Term Loan") with a $40 million revolving credit line ("Revolving Credit Facility" ) . Borrowings under the Term Loan and Revolving Credit Facility accrued interest at LIBOR plus 6.25% , subject to a 1% LIBOR floor, and were secured by a first priority lien and security interest in all assets of the Company. The Term Loan and Revolving Credit Facility were scheduled to mature on September 30, 2019 and September 30, 2018, respectively, with quarterly and monthly payments of principal and interest, respectively. +Under the Term Loan and Revolving Credit Facility we were required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to reporting, insurance, collateral maintenance, change of control, transactions with affiliates, distributions, and limitations on additional indebtedness. In addition, the Term Loan and Revolving Credit Facility included a maximum leverage ratio of 3.5 x EBITDA (earnings before interest, taxes, depreciation, and amortization) to total debt, which became effective March 31, 2014. +In 2015, given the then near-term economic uncertainty and volatility of commodity prices, we determined that we were likely to be out of compliance with the leverage ratio covenant under the Term Loan and Revolving Credit Facility at the March 31, 2016 test date. Accordingly, the Company and its then equity sponsor, Energy Capital Partners ("ECP"), commenced negotiations with the lenders to amend the covenants and leverage ratio in the Term Loan and Revolving Credit Facility. The resulting amendment and waiver agreement was executed on June 8, 2016. Under the terms of the amendment, ECP infused $40.0 million of additional equity into the Company, $10.0 million of which was reserved for working capital, with up to $30.0 million available to repurchase debt. A minority shareholder also infused $0.4 million alongside ECP to prevent dilution. The amendment and waiver also suspended the leverage ratio test until June 30, 2017, and provided us with 30 days to deliver any past-due financial statements. +Gain on Extinguishment of Debt +In connection with the amendment to the Term Loan and Revolving Credit Facility, we initiated an auction process with the lenders to repurchase a portion of debt for a price of $0.80 , a 20% discount to par value. The auction settled on June 16, 2016 as the Company repurchased a total amount of $37.5 million of debt for $30.0 million plus $0.5 million in debt extinguishment auction costs, leading to a gain on extinguishment of debt of $7.0 million . +On January 13, 2017, we repaid $75.0 million of the outstanding balance under the Term Loan and repaid the remaining balance of $13.5 million under the Revolving Credit Facility using a portion of the proceeds from our private placement offering. On March 22, 2017, we retired the $71.8 million remaining balance of the Term Loan, along with accrued interest, using a portion of the proceeds from our IPO. Each of the Term Loan and Revolving Credit Facility were terminated in accordance with their terms upon the repayment of outstanding borrowings. +64 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +9. LONG‑TERM DEBT (Continued) +Equipment Financing +On November 24, 2015, we entered into a 36 months financing arrangement for three hydraulic fracturing units in the amount of $25.0 million , and a portion of the proceeds were used to pay off the previous manufacturer notes, with the remainder being used for additional liquidity. As of December 31, 2018, we have fully repaid all outstanding balance and met all obligations under this financing arrangement. +On June 30, 2017, we entered into a financing arrangement for the purchase of light vehicles. As of December 31, 2018 , we have fully repaid all outstanding balance and met all obligations under this financing arrangement. +ABL Credit Facility +On March 22, 2017, we entered into a new revolving credit facility with a $150.0 million borrowing capacity ("ABL Credit Facility"). Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either LIBOR or base rate, plus the applicable margin, which ranges from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans, with no LIBOR floor. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. The ABL Credit Facility has a term of 5 years and a borrowing base of 85% of eligible accounts receivable less customary reserves. Under this facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. In addition, the ABL Credit Facility includes a Springing Fixed Charge Coverage Ratio of 1.0 x when excess availability is less than the greater of (i) 10% of the lesser of the facility size and the Borrowing Base and (ii) $12.0 million . The ABL has a commitment fee of 0.38% , which reduces to 0.25% if utilization is greater than 50% of the borrowing base. +On February 22, 2018, we entered into a first amendment with our lenders to increase the capacity of the ABL Credit Facility. The amendment increased total capacity under the facility from $150.0 million to $200.0 million . The first amendment to the ABL Credit Facility modified the Springing Fixed Charge Coverage Ratio to apply when excess availability is less than the greater of (i) 10% of the lesser of the facility size and the Borrowing Base and (ii) $15 million . +On December 19, 2018, we entered into a second amendment with our lenders to further increase the capacity of the ABL Credit Facility. The second amendment increased total capacity under the facility from $200.0 million to $300.0 million and extended the maturity date of the ABL Credit Facility from March 22, 2022 until December 19, 2023. The second amendment to the ABL Credit Facility modified the Springing Fixed Charge Coverage Ratio to apply when excess availability is less than the greater of (i) 10% of the lesser of the facility size and the Borrowing Base and (ii) $22.5 million . +The fair values of the ABL Credit Facility and equipment financing approximate their carrying values. +65 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +9. LONG‑TERM DEBT (Continued) +Total debt consisted of the following notes at December 31, 2018 and 2017 , respectively: +($ in thousands) +2018 +2017 +ABL Credit Facility +$ +70,000 +$ +55,000 +Equipment financing +— +17,942 +Total debt +70,000 +72,942 +Less current portion of long-term debt +— +15,764 +Total long-term debt +$ +70,000 +$ +57,178 +The loan origination costs relating to the ABL Credit Facility are classified as an asset in the balance sheet. +Annual Maturities — Scheduled annual maturities of total debt are as follows at December 31, 2018 : +($ in thousands) +2019 +$ +— +2020 +— +2021 +— +2022 +— +2023 and thereafter +70,000 +Total +$ +70,000 +10. ACCRUED LIABILITIES +Accrued liabilities consisted of the following at December 31, 2018 and 2017 , respectively: +($ in thousands) +2018 +2017 +Accrued capital expenditure +$ +109,832 +$ +— +Accrued insurance +3,905 +2,762 +Accrued payroll and related expenses +15,854 +10,110 +Accrued taxes and others +8,498 +3,735 +Total +$ +138,089 +$ +16,607 +66 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +11. EMPLOYEE BENEFIT PLAN +The Company has a 401(k) plan whereby all employees with six months of service may contribute up to $15,000 to the plan annually. The employees vest in the Company contributions to the 401(k) plan 25% per year, beginning in the employee’s second year of service, with full vesting occurring after five years of service. The employees are fully vested in their contributions when made. The Company matches employee contributions 20 cents on the dollar up to 10% of gross salary. During the years ended December 31, 2018 , 2017 and 2016 , the recorded expense under the plan was $0.3 million , $0.2 million and $0.2 million , respectively. Effectively January 1, 2019, we modified our 401(k) plan whereby all employees with sixty days of service may contribute up to $19,000 to the plan annually. The employees vest in the Company contributions to the 401(k) plan 25% per year, beginning in the employee’s first year of service, with full vesting occurring after four years of service. The employees are fully vested in their contributions when made. The Company matches 100% of the employee contributions up to 6% of gross salary. +12. REPORTABLE SEGMENT INFORMATION +The Company has five operating segments for which discreet financial information is readily available: hydraulic fracturing (inclusive of acidizing), cementing, coil tubing, flowback, and drilling. These operating segments represent how the Chief Operating Decision Maker evaluates performance and allocates resources. +On August 31, 2018, we divested our surface air drilling operations, included in our "all other" category, in order to continue to focus and position ourselves as a Permian Basin-focused pressure pumping business because we believe the pressure pumping market in the Permian Basin offers more supportive long-term growth fundamentals. The divestiture of our surface air drilling operations did not qualify for presentation and disclosure as discontinued operations, and accordingly, we have recorded the resulting loss on disposal of our surface air drilling of $0.3 million as part of our loss on disposal of asset in our consolidated statement of operations. The divestiture of our surface air drilling operations resulted in a reduction in the number of our current operating segments to five . The change in the number of our operating segments did not impact our reportable segment information reported for the years ended December 31, 2018 , 2017 and 2016 . +In accordance with Accounting Standards Codification 280— Segment Reporting , the Company has one reportable segment (pressure pumping) comprised of the hydraulic fracturing and cementing operating segments. All other operating segments and corporate administrative expenses are included in the ‘‘all other’’ category in the table below. Inter-segment revenues are not material and are not shown separately in the table below. +The Company manages and assesses the performance of the reportable segment by its adjusted EBITDA (earnings before other income (expense), interest, taxes, depreciation & amortization, stock-based compensation expense, impairment expense, (gain)/loss on disposal of assets and other unusual or nonrecurring expenses or income). A reconciliation from segment level financial information to the consolidated statement of operations is provided in the table below. +67 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +12. REPORTABLE SEGMENT INFORMATION (Continued) +($ in thousands) +Pressure +Pumping +All Other +Total +Year ended and as of December 31, 2018 +Service revenue +$ +1,658,403 +$ +46,159 +$ +1,704,562 +Adjusted EBITDA +$ +398,396 +$ +(9,873 +) +$ +388,523 +Depreciation and amortization +$ +83,404 +$ +4,734 +$ +88,138 +Capital expenditures +$ +577,171 +$ +15,431 +$ +592,602 +Goodwill +$ +9,425 +$ +— +$ +9,425 +Total assets +$ +1,230,830 +$ +43,692 +$ +1,274,522 +Pressure +Pumping +All Other +Total +Year ended and as of December 31, 2017 +Service revenue +$ +945,040 +$ +36,825 +$ +981,865 +Adjusted EBITDA +$ +145,122 +$ +(7,679 +) +$ +137,443 +Depreciation and amortization +$ +51,155 +$ +4,473 +$ +55,628 +Capital expenditures +$ +300,406 +$ +4,893 +$ +305,299 +Goodwill +$ +9,425 +$ +— +$ +9,425 +Total assets +$ +688,279 +$ +30,753 +$ +719,032 +Pressure +Pumping +All Other +Total +Year ended and as of December 31, 2016 +Service revenue +$ +409,014 +$ +27,906 +$ +436,920 +Adjusted EBITDA +$ +15,656 +$ +(7,840 +) +$ +7,816 +Depreciation and amortization +$ +37,282 +$ +6,260 +$ +43,542 +Property and equipment impairment expense +$ +— +$ +6,305 +$ +6,305 +Goodwill impairment expense +$ +— +$ +1,177 +$ +1,177 +Capital expenditures +$ +45,473 +$ +535 +$ +46,008 +Goodwill +$ +9,425 +$ +— +$ +9,425 +Total assets +$ +501,906 +$ +39,516 +$ +541,422 +68 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +12. REPORTABLE SEGMENT INFORMATION (Continued) +Reconciliation of net income (loss) to adjusted EBITDA: +($ in thousands) +Pressure +Pumping +All Other +Total +Year ended December 31, 2018 +Net income (loss) +$ +253,196 +$ +(79,334 +) +$ +173,862 +Depreciation and amortization +83,404 +4,734 +88,138 +Interest expense +— +6,889 +6,889 +Income tax expense +— +51,255 +51,255 +Loss (gain) on disposal of assets +59,962 +(742 +) +59,220 +Stock‑based compensation +— +5,482 +5,482 +Other expense +— +663 +663 +Other general and administrative expense (1) +2 +203 +205 +Deferred IPO Bonus +1,832 +977 +2,809 +Adjusted EBITDA +$ +398,396 +$ +(9,873 +) +$ +388,523 +Year ended December 31, 2017 +Pressure +Pumping +All Other +Total +Net income (loss) +$ +50,417 +$ +(37,804 +) +$ +12,613 +Depreciation and amortization +51,155 +4,473 +55,628 +Interest expense +— +7,347 +7,347 +Income tax expense +— +3,128 +3,128 +Loss on disposal of assets +38,059 +1,027 +39,086 +Stock‑based compensation +— +9,489 +9,489 +Other expense +— +1,025 +1,025 +Other general and administrative expense (1) +— +722 +722 +Deferred IPO Bonus +5,491 +2,914 +8,405 +Adjusted EBITDA +$ +145,122 +$ +(7,679 +) +$ +137,443 +Pressure +Pumping +All Other +Total +Year ended December 31, 2016 +Net loss +$ +(45,316 +) +$ +(7,831 +) +$ +(53,147 +) +Depreciation and amortization +37,282 +6,260 +43,542 +Interest expense +— +20,387 +20,387 +Income tax benefit +— +(27,972 +) +(27,972 +) +Loss on disposal of assets +23,690 +(1,161 +) +22,529 +Property and equipment impairment expense +— +6,305 +6,305 +Goodwill impairment expense +— +1,177 +1,177 +Gain on extinguishment of debt +— +(6,975 +) +(6,975 +) +Stock‑based compensation +— +1,649 +1,649 +Other expense +— +321 +321 +Adjusted EBITDA +$ +15,656 +$ +(7,840 +) +$ +7,816 +(1) Other general and administrative expense relates to legal settlement expense. +69 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +12. REPORTABLE SEGMENT INFORMATION (Continued) +Major Customers +For the years ended December 31, 2018 , 2017 and 2016 , the Company had revenue from the following significant customers that accounted for the following percentages of the Company’s total revenue: +2018 +2017 +2016 +Customer A +24.1 +% +15.0 +% +18.0 +% +Customer B +16.5 +% +13.8 +% +12.5 +% +Customer C +12.2 +% +12.7 +% +8.7 +% +Customer D +8.9 +% +12.6 +% +7.0 +% +Customer E +7.1 +% +11.8 +% +— +% +For the year ended December 31, 2018 , pressure pumping made up 97.4% of Customer A, 98.3% of Customer B, 100.0% of Customer C, 100.0% of Customer D and 100.0% of customer E. For the year ended December 31, 2017 , pressure pumping made up 99.9% of Customer A, 99.2% of Customer B, 99.9% of Customer C, 99.8% of Customer D and 95.5% of customer E. For the year ended December 31, 2016 , pressure pumping made up 96.0% of Customer A, 99.0% of Customer B, 100.0% of Customer C and 99.0% of Customer D. +13. NET INCOME (LOSS) PER SHARE +Basic net income (loss) per common share is computed by dividing the net income (loss) relevant to the common stockholders by the weighted-average number of shares outstanding during the year. Diluted net income (loss) per common share uses the same net income (loss) divided by the sum of the weighted-average number of shares of common stock outstanding during the period, plus dilutive effects of options, performance and restricted stocks units outstanding during the period calculated using the treasury method and the potential dilutive effects of preferred stocks (if any) calculated using the if-converted method. The table below shows the calculations for years ended December 31, 2018 , 2017 and 2016 . +(In thousands, except for per share data) +2018 +2017 +2016 +Numerator (both basic and diluted) +Net income (loss) relevant to common stockholders +$ +173,862 +$ +12,613 +$ +(53,147 +) +Denominator +Denominator for basic income (loss) per share +83,460 +76,371 +44,787 +Dilutive effect of stock options +3,129 +2,903 +— +Dilutive effect of performance stock units +277 +59 +— +Dilutive effect of non-vested restricted stock units +180 +250 +— +Denominator for diluted income (loss) per share +87,046 +79,583 +44,787 +Basic net income (loss) per common share +$ +2.08 +$ +0.17 +$ +(1.19 +) +Diluted net income (loss) per common share +$ +2.00 +$ +0.16 +$ +(1.19 +) +As shown in the table below, the following non-vested restricted stock units, preferred stock, performance stock units, and stock options have not been included in the calculation of diluted income (loss) per share for years ended December 31, 2018 , 2017 and 2016 as they would be anti-dilutive to the calculation above. +70 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +13. NET INCOME (LOSS) PER SHARE (Continued) +(Count in thousands) +2018 +2017 +2016 +Stock options +— +— +4,646 +Preferred stock +— +— +17,000 +Performance stock units +— +— +— +Non-vested restricted stock units +— +— +372 +— +— +22,018 +14. STOCK‑BASED COMPENSATION +Effective March 4, 2013, we adopted the ProPetro Stock Option Plan pursuant to which our Board of Directors may grant stock options or other stock-based awards to key employees, consultants, and directors. The Plan, as amended, is authorized to grant up to 4,645,884 shares of common stock to be issued upon exercise of the options. The Company’s share price used to estimate the fair value of the option at the grant date was based on a combination of income and market approaches, which are highly complex and sensitive. The income approach involves the use of a discounted cash flow method, with cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies market multiples in estimating the fair value of the Company’s stock. The expected term used to calculate the fair value of all options considers the vesting date and the grant’s expiration date. The expected volatility was estimated by considering comparable public companies, and the risk free rate is based on the U.S treasury yield curve as of the grant date. The dividend assumption is based on historical experience. After becoming a public company, the market price was used to determine the market value of our common stock. Prior to 2015, the Company had granted a total of 3,499,228 options with an exercise price of $3.96 per option, and all options expire 10 years from the date of grant. +On June 14, 2013, we granted 2,799,408 stock option awards to certain key employees and directors that shall vest and become exercisable based upon the achievement of a service requirement. The options vest in 25% increments for each year of continuous service and an option becomes fully vested upon the optionee’s completion of the fourth year of service. The contractual term for the options awarded is 10 years. The fair value of each option award granted is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of the options was estimated at the date of grant using the following assumptions: +Expected volatility +45 +% +Expected dividends +$ +— +Expected term (in years) +6.25 +Risk free rate +1.35 +% +On December 1, 2013, we granted 699,820 stock option awards to certain key employees which were scheduled to vest in four substantially equal annual installments, subject to service and performance requirements and acceleration upon a change in control. As of December 31, 2016 and 2015 the performance requirements were not considered to be probable of achievement for any of the outstanding option awards and 114,456 options were forfeited during the year ended December 31, 2016. Effective March 16, 2017, we terminated the options in connection with our IPO and approved a cash bonus totaling $5.1 million to the holders of the options. +The contractual term for the options awarded is 10 years. The fair value of each option award granted is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of the options was estimated at the date of grant using the following assumptions: +71 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +14. STOCK‑BASED COMPENSATION (Continued) +Expected volatility +45 +% +Expected dividends +$ +— +Expected term (in years) +6.25 +Risk free rate +1.83 +% +On July 19, 2016, we granted 1,274,549 stock option awards to certain key employees and directors which are scheduled to vest in five substantially equal semi-annual installments commencing in December 2016, subject to a continuing services requirement. The contractual term for the options awarded is 10 years. We fully accelerated vesting of the options in connection with our IPO. +The fair value of each option award granted is estimated on the date of grant using the Black- Scholes option-pricing model. The fair value of the options was estimated at the date of grant using the following assumptions: +Expected volatility +55 +% +Expected dividends +$ +— +Expected term (in years) +5.8 +Risk free rate +1.22 +% +In March 2017, our shareholders approved the ProPetro 2017 Incentive Award Plan ("IAP") pursuant to which our Board of Directors may grant stock options, restricted stock units ("RSUs"), performance stock units ("PSUs"), or other stock-based awards to key employees, consultants, directors and employees. The IAP authorizes up to 5,800,000 shares of common stock to be issued under awards granted pursuant to the plan. On March 16, 2017, we granted 793,738 stock option awards to certain key employees and directors pursuant to the IAP which are scheduled to vest in four substantially equal annual installments, subject to a continuing service requirement. The contractual term for the options awarded is 10 years. +The fair value of each stock option award granted is estimated on the date of grant using the Black- Scholes option-pricing model. The fair value of the options was estimated at the date of grant using the following assumptions: +Expected volatility +18 +% +Expected dividends +$ +— +Expected term (in years) +6.25 +Risk free rate +2.23 +% +72 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +14. STOCK‑BASED COMPENSATION (Continued) +A summary of the stock option activity during the year ended December 31, 2018 is presented below. +Number +of Shares +Weighted +Average +Exercise +Price +Outstanding at January 1, 2018 +4,636,353 +$ +5.20 +Granted +— +— +Exercised +(49,912 +) +$ +4.95 +Forfeited +(29,255 +) +$ +14.00 +Expired +— +$ +— +Canceled +— +$ +— +Outstanding at December 31, 2018 +4,557,186 +$ +5.14 +Exercisable at December 31, 2018 +3,994,990 +$ +3.90 +The weighted average grant-date fair value of stock options granted during the years ended December 31, 2018 , 2017 and 2016 was $0 , $3.35 and $1.77 , respectively. As of December 31, 2018 , the aggregate intrinsic value for our outstanding stock options was $34.0 million , and the aggregate intrinsic value for our exercisable stock options was $34.0 million . The aggregate intrinsic value for the exercised stock options during the year was $0.7 million . The remaining contractual term for the outstanding and exercisable stock options as of December 31, 2018 , were 5.9 years and 5.6 years, respectively. For the years ended December 31, 2018 , 2017 and 2016 , the Company recognized $0.6 million , $2.9 million and $1.6 million , respectively, in compensation expense related to all stock options. +Restricted Stock Units (Non-Vested Stock) and Performance Stock Units +On September 30, 2013, our Board of Directors authorized and granted 372,335 restricted stock units (RSUs) to a key executive. Each RSU represents the right to receive one share of common stock of the Company at par value $0.001 per share. Under the terms of the award, the shares of common stock subject to the RSUs were to be paid to the grantee upon change in control, regardless of whether the grantee was affiliated with the Company on the settlement date. The fair value of the RSUs is measured as the price of the Company’s shares on the grant date, which was estimated to be $3.89 . The share price used to estimate the fair value of the RSU at the grant date was based on a combination of income and market approaches, which are highly complex and sensitive. The income approach involves the use of a discounted cash flow method, with the cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies market multiples in estimating the fair value of the Company’s stock. Effective March 22, 2017, the Board of Directors canceled these RSUs and issued 372,335 new RSUs to the grantee. These issued RSUs are effectively identical to the RSUs granted in 2013, provided, however, that the RSUs was payable in full on March 22, 2018. The fair value of the RSUs issued on March 22, 2017, was based on the Company's closing stock market price at the grant date. In connection with the IPO, we fully recognized the stock compensation expense related to the re-issued RSUs. +In 2018, our Board of Directors granted 319,250 RSUs to employees, directors and executives pursuant to the Incentive Award Plan ("IAP"). Each RSU represents the right to receive one share of common stock. The fair value of the RSUs is based on the closing share price of our common stock on the date of grant. For the years ended December 31, 2018 , 2017 and 2016 the recorded stock compensation expense for all RSUs was $2.9 million , $6.2 million and $0 , respectively. As of December 31, 2018 , the total unrecognized compensation expense for all RSUs was approximately $5.7 million , and is expected to be recognized over a weighted-average period of approximately 1.6 years . +73 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +14. STOCK‑BASED COMPENSATION (Continued) +The following table summarizes the restricted stock units activity during the year December 31, 2018 : +Number of +Shares +Weighted +Average +Grant Date +Fair Value +Outstanding at January 1, 2018 +688,744 +$ +13.66 +Granted +319,250 +$ +18.49 +Vested +(500,360 +) +$ +13.87 +Exercised +— +$ +— +Forfeited +(34,129 +) +$ +15.99 +Expired +— +$ +— +Canceled +— +$ +— +Outstanding at December 31, 2018 +473,505 +$ +16.52 +Effective June 5, 2017, our Board of Directors authorized and granted performance stock unit awards to certain key employees under the IAP. The actual number of shares that may be issued under the performance stock unit awards ranges from zero up to a maximum of twice the target number of performance stock unit awards (“PSUs”) granted to the participant, based on our total shareholder return relative to a designated peer group from the date of our IPO through December 31, 2019. Effective April 18, 2018, our Board of Directors authorized and granted PSUs to certain key employees under the IAP. The actual number of shares that may be issued under the PSUs ranges from zero up to a maximum of twice the target number of performance stock unit awards granted to the participant, based on our total shareholder return relative to a designated peer group from January 1, 2018 through December 31, 2020. Compensation expense is recorded ratably over the corresponding requisite service period. The fair value of performance stock unit awards is determined using a Monte Carlo probability model. Grant recipients do not have any shareholder rights until performance relative to the peer group has been determined following the completion of the performance period and shares have been issued. For the years ended December 31, 2018 , 2017 and 2016 the recorded stock compensation expense for the performance stock units was $2.0 million , $0.4 million and $0 , respectively. +The following table summarizes the performance stock units activity during the year ended December 31, 2018 : +Period +Granted +Target Shares +Outstanding at +Beginning +of Year +Target +Shares +Granted +Target Shares Vested +Target +Shares +Forfeited +Target Shares +Outstanding +at End +of Year +Weighted +Average +Grant Date +Fair Value per +Share +2017 +169,635 +— +— +— +169,635 +$ +10.73 +2018 +— +178,975 +— +— +178,975 +$ +27.51 +Total +169,635 +178,975 +— +— +348,610 +$ +19.34 +The total stock compensation expense for the years ended December 31, 2018 , 2017 and 2016 for all stock awards was $5.5 million , $9.5 million and $1.6 million , respectively. The total unrecognized compensation expense as of December 31, 2018 is approximately $11.5 million , and is expected to be recognized over a weighted-average period of approximately 2.0 years . +74 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +15. INCOME TAXES +The components of the provision for income taxes for the years ended December 31, 2018 , 2017 and 2016 are as follows: +($ in thousands) +2018 +2017 +2016 +Federal: +Current +$ +— +$ +(376 +) +$ +— +Deferred +48,738 +3,634 +(29,082 +) +48,738 +3,258 +(29,082 +) +State: +Current +1,551 +74 +— +Deferred +966 +(204 +) +1,110 +2,517 +(130 +) +1,110 +Total expense (benefit) +$ +51,255 +$ +3,128 +$ +(27,972 +) +Reconciliation between the amounts determined by applying the federal statutory rate of 21% for year ended December 31, 2018 and 35% for the years ended December 31, 2017 and 2016 to income tax (expense)/benefit is as follows: +($ in thousands) +2018 +2017 +2016 +Tax at federal statutory rate +$ +47,275 +$ +5,510 +$ +(28,392 +) +State taxes, net of federal benefit +1,874 +176 +(216 +) +Non-deductible expenses +2,423 +1,582 +498 +Stock-based compensation +(426 +) +(655 +) +— +Valuation allowance +(1,151 +) +273 +879 +Effect of change in enacted Tax Act +— +(3,448 +) +— +Other +1,260 +(310 +) +(741 +) +Total expense (benefit) +$ +51,255 +$ +3,128 +$ +(27,972 +) +75 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +15. INCOME TAXES (Continued) +Deferred tax assets and liabilities are recognized for estimated future tax effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. The significant items giving rise to deferred tax assets (liabilities) at December 31, 2018 and 2017 , respectively, are as follows: +($ in thousands) +2018 +2017 +Deferred Income Tax Assets +Accrued liabilities +$ +769 +$ +1,264 +Allowance for doubtful accounts +21 +94 +Goodwill and other intangible assets +4,010 +5,304 +Stock‑based compensation +2,632 +2,960 +Net operating losses +111,580 +56,788 +Other +63 +69 +Noncurrent deferred tax assets +119,075 +66,479 +Total deferred tax assets +119,075 +66,479 +Valuation allowance +— +(1,151 +) +Total deferred tax assets — net +119,075 +65,328 +Deferred Income Tax Liabilities +Property and equipment +(172,164 +) +(68,811 +) +Prepaid expenses +(1,194 +) +(965 +) +Other +— +(131 +) +Noncurrent deferred tax liabilities +(173,358 +) +(69,907 +) +Net deferred tax liability +$ +(54,283 +) +$ +(4,579 +) +At December 31, 2018 , the Company had approximately $516.0 million of federal net operating loss carryforwards that will begin to expire in 2032 and state net operating losses of approximately $50.0 million that will begin to expire in 2024 . Utilization of net operating loss carryforwards may be limited due to past or future ownership changes. As of December 31, 2018, the Company was no longer in a cumulative book loss for the current and two prior years. Based on its estimate of future taxable income, the Company determined it is more likely than not that it will utilize its deferred tax assets. Accordingly, the valuation allowance against its state deferred tax assets was reversed. +The Company’s U.S. federal income tax returns for the years ended December 31, 2015 through December 31, 2017 remain open to examination by the Internal Revenue Service under the applicable U.S. federal statute of limitations provisions. The various states in which the Company is subject to income tax are generally open to examination for the tax years ended after December 31, 2014. +On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to (1) reducing the U.S. federal corporate tax rate from 35% to 21%, (2) eliminating the corporate alternative minimum tax (“AMT’’) and changing how existing AMT credits can be realized, (3) creating a new limitation on deductible interest expense, (4) changes to bonus depreciation, and (5) changing rules related to use and limitations of net operating loss carryforwards for tax years beginning after December 31, 2017. We have completed our analysis of the Tax Act. The only material items that impacted the Company’s consolidated financial statements in 2017 were bonus depreciation and the corporate rate reduction. While the corporate rate reduction was effective January 1, 2018, we accounted for the effect of the rate change during the year ended December 31, 2017, +76 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +15. INCOME TAXES (Continued) +the year of enactment. Consequently, we recorded a $3.4 million decrease to the net deferred tax liability, with a corresponding net adjustment to deferred tax benefit. +In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (subsequently codified as ASC 740‑10, Income Taxes, Under FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 ). ASC 740‑10 prescribes a comprehensive model for recognizing, measuring, presenting, and disclosing in the consolidated financial statements tax positions taken or expected to be taken on a tax return, including a decision to file or not to file in a particular jurisdiction. +The Company evaluated all tax positions and determined that the aggregate exposure under ASC 740‑10 did not have a material effect on the consolidated financial statements during the year ended December 31, 2018 , 2017 and 2016 . Therefore, no adjustments have been made to the consolidated financial statements related to the implementation of ASC 740‑10. The Company will continue to evaluate its tax positions in accordance with ASC 740‑10 and will recognize any future effect as a charge to income in the applicable period. +Income tax penalties and interest assessments recognized under ASC 740‑10 are accrued as a tax expense in the period that the Company’s taxes are in an uncertain tax position. Any accrued tax penalties or interest assessments will remain until the uncertain tax position is resolved with the taxing authorities or until the applicable statute of limitations has expired. +16. RELATED‑PARTY TRANSACTIONS +The Company leases its corporate offices from a related party pursuant to a five ‑year lease agreement with a five ‑year extension option requiring a base rent of $0.1 million per year. The Company also leases five properties adjacent to the corporate office from related parties with annual base rents of $0.03 million , $0.03 million , $0.1 million , $0.1 million , and $0.2 million . +For the years ended December 31, 2018 , 2017 and 2016 , the Company paid approximately $0.4 million , $0.3 million and $0.2 million , respectively, for the use of transportation services from a related party. +The Company also rents equipment in Elk City, Oklahoma from a related party. For the years ended December 31, 2018 , 2017 and 2016 , the Company paid $0.2 million , $0.2 million and $0.2 million , respectively. +At December 31, 2018 , 2017 and 2016 , the Company had $0.01 million , $0.02 million and $0 in payables, respectively, and approximately $0 , $0 and $0.04 million in receivables, respectively, for related parties for services provided. +All agreements pertaining to realty property and equipment were entered into during periods where the Company had limited liquidity and related parties secured them on behalf of the Company. All related party receivables and payables are immaterial and have not been separately shown on the face of the financial statements. +17. COMMITMENTS AND CONTINGENCIES +Operating Lease — The Company has various operating leases for office space and certain property and equipment. For the years ended December 31, 2018 , 2017 and 2016 , the Company recorded operating lease expense of $1.7 million , $1.4 million and $1.4 million , respectively. Required remaining lease payments for each fiscal year are as follows: +77 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +17. COMMITMENTS AND CONTINGENCIES (Continued) +($ in thousands) +2019 +$ +892 +2020 +721 +2021 +721 +2022 +721 +2023 and thereafter +2,258 +Total +$ +5,313 +Contingent Liabilities — The Company may be subject to various legal actions, claims, and liabilities arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a materially adverse effect on the Company’s financial position, results of operations, or liquidity. +18. EQUITY CAPITALIZATION +Credit Amendment Equity Infusion +In connection with the Term Loan and Revolving Credit Facility amendment dated June 8, 2016 (see Note 9), ECP and its related affiliates along with other shareholders infused $40.4 million of equity into the Company and we issued 18,007,328 additional shares of common stock. +On November 9, 2017, ECP sold 13,800,000 shares of its common stock holdings in a secondary offering at $15.07 per share, and sold all of their remaining holdings in October of 2018. +Convertible Preferred Stock +On December 27, 2016, we completed a private placement offering of $170.0 million , issuing 16,999,990 shares of Series A nonparticipating convertible preferred stock, par value $0.001 per share. Costs associated with the offering were approximately $7.0 million , resulting in net proceeds to the Company of approximately $163.0 million . +As of December 31, 2016, 16,999,990 shares of Series A convertible preferred stock were issued and outstanding, convertible into common stock at the conversion price per the private placement agreement. In connection with our IPO, all 16,999,990 shares of our outstanding Series A Preferred Stock converted to common stock on a 1 :1 basis. +Initial Public Offering +On March 22, 2017, we consummated our IPO in which 25,000,000 shares of our common stock, par value $0.001 per share, were sold at a public offering price of $14.00 per share, with 13,250,000 shares issued and sold by the Company and $11,750,000 shares sold by existing stockholders. +At December 31, 2018 and 2017 , the Company had 100,190,126 and 83,039,854 shares outstanding, respectively. +78 +PROPETRO HOLDING CORP. AND SUBSIDIARY +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED +DECEMBER 31, 2018, 2017 AND 2016 +19. QUARTERLY FINANCIAL DATA (UNAUDITED) +The following table sets forth our unaudited quarterly results for each of the last four quarters for the years ended December 31, 2018 and 2017 . This unaudited quarterly information has been prepared on the same basis as our annual audited financial statements and includes all adjustments, consisting only of normal recurring adjustments that are necessary to present fairly the financial information for the fiscal quarters presented. +2018 +(In thousands, except for per share data) +First Quarter +Second Quarter +Third Quarter +Fourth Quarter +Service revenue +$ +385,219 +$ +459,888 +$ +434,041 +$ +425,414 +Gross profit +$ +87,097 +$ +108,000 +$ +113,895 +$ +124,993 +Net income +$ +36,708 +$ +39,091 +$ +46,285 +$ +51,778 +Net income per common share: +Basic +$ +0.44 +$ +0.47 +$ +0.55 +$ +0.62 +Diluted +$ +0.42 +$ +0.45 +$ +0.53 +$ +0.59 +Weighted average common shares outstanding: +Basic +83,081 +83,447 +83,544 +83,758 +Diluted +86,848 +86,878 +86,878 +87,218 +2017 +(In thousands, except for per share data) +First Quarter +Second Quarter +Third Quarter +Fourth Quarter +Service revenue +$ +171,931 +$ +213,492 +$ +282,730 +$ +313,712 +Gross profit +$ +22,366 +$ +36,715 +$ +57,297 +$ +51,664 +Net income (loss) +$ +(24,351 +) +$ +4,921 +$ +21,965 +$ +10,078 +Net income (loss) per common share: +Basic +$ +(0.43 +) +$ +0.06 +$ +0.26 +$ +0.12 +Diluted +$ +(0.43 +) +$ +0.06 +$ +0.25 +$ +0.12 +Weighted average common shares outstanding: +Basic +55,996 +83,040 +83,040 +83,040 +Diluted +55,996 +86,279 +86,264 +86,818 +79 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer, principal financial officer and principal accounting officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer, principal financial officer and principal accounting officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2018 . +Management’s Report on Internal Control over Financial Reporting +Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). See page 48 for Management’s Report on Internal Control Over Financial Reporting. Deloitte & Touche LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2018 , as stated in their report, which is included herein. See page 50 for Report of Independent Registered Public Accounting Firm on its assessment of our internal control over financial reporting. +Changes in Internal Control over Financial Reporting +No changes in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +None. +Part III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by this Item concerning our Executive Officers, Directors and nominees for Director, Audit Committee members and financial expert(s) and concerning disclosure of delinquent filers under Section 16(a) of the Exchange Act and our Standards of Business Conduct is incorporated herein by reference from our definitive Proxy Statement for our 2019 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year. +80 +Item 11. Executive Compensation +The information required by this Item concerning Executive Compensation, material transactions involving Executive Officers and Directors and Compensation Committee interlocks, as well as the Compensation Committee Report, are incorporated herein by reference from our definitive Proxy Statement for our 2019 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year. +81 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by this Item concerning the stock ownership of management and five percent beneficial owners and securities authorized for issuance under equity compensation plans is incorporated herein by reference from our definitive Proxy Statement for our 2019 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year. +82 +Item 13. Certain Relationships and Related Party Transactions, and Director Independence. +The information required by this Item concerning certain relationships and related person transactions and director independence is incorporated herein by reference from our definitive Proxy Statement for our 2019 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year. +Item 14. Principal Accounting Fees and Services. +The information required by this Item concerning principal accounting fees and services is incorporated herein by reference from our definitive Proxy Statement for our 2019 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year. +Part IV +Item 15. Exhibits and Financial Statement Schedules. +(a)(1) Financial Statements +The Financial Statements in Item 8 are filed as part of this Annual Report on Form 10-K. +(a)(2) Financial Statement Schedules +None +(a)(3) Exhibits +The exhibit index attached hereto is incorporated herein by reference. +(b) See Exhibit Index +(c) None +Item 16. Form 10-K Summary. [Note: Move this item and the Signatures section to appear after the Exhibit Index] +None. +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on February 28, 2019 . +ProPetro Holding Corp. +/s/ Dale Redman +Dale Redman +Chief Executive Officer and Director +83 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated on the date indicated. +Signature +Title +Date +/s/ Dale Redman +Chief Executive Officer and Director (Principal Executive Officer) +February 28, 2019 +Dale Redman +/s/ Jeff Smith +Chief Financial Officer (Principal Financial Officer) +February 28, 2019 +Jeff Smith +/s/ Ian Denholm +Chief Accounting Officer (Principal Accounting Officer) +February 28, 2019 +Ian Denholm +/s/ Spencer D. Armour +Chairman +February 28, 2019 +Spencer D. Armour, III +/s/ Steve Beal +Director +February 28, 2019 +Steve Beal +/s/ Anthony Best +Director +February 28, 2019 +Anthony Best +/s/ Pryor Blackwell +Director +February 28, 2019 +Pryor Blackwell +/s/ Alan E. Douglas +Director +February 28, 2019 +Alan E. Douglas +/s/ Jack Moore +Director +February 28, 2019 +Jack Moore +/s/ Royce W. Mitchell +Director +February 28, 2019 +Royce W. Mitchell +/s/ Mark Berg +Director +February 28, 2019 +Mark Berg +84 +EXHIBIT INDEX +Exhibit +number +Description +2.1 +Purchase and Sale Agreement, dated as of November 12, 2018, by and among Pioneer Natural Resources Pumping Services LLC, Pioneer Natural Resources USA, Inc. and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 2.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 31, 2018). +3.1 +Certificate of Incorporation of ProPetro Holding Corp., as amended March 16, 2017 (incorporated by reference herein to Exhibit 3.1 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017). +3.2 +Bylaws of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 3.3 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated March 10, 2017 (Registration No. 333-215940)). +4.1 +Specimen Stock Certificate (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940). +4.5 +Investor Rights Agreement, dated as of December 31, 2018, by and between Pioneer Natural Resources Pumping Services LLC and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 31, 2018). +4.6 +Registration Rights Agreement, dated as of December 31, 2018, by and between Pioneer Natural Resources Pumping Services LLC and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 4.2 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 31, 2018.) +10.1 +Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 8, 2017 (Registration No. 333-215940)). +10.2 +Credit Agreement, dated as of March 22, 2017 by and among ProPetro Holding Corp., ProPetro Services, Inc., Barclays Bank PLC, as the Agent, the Collateral Agent, a Letter of Credit Issuer and the Swingline Lender, and each of the Lenders from time to time party thereto (incorporated by reference herein to Exhibit 10.2 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 28, 2017). +10.3# +Employment Agreement, dated April 17, 2013, by and between ProPetro Holding Corp. and Dale Redman (incorporated by reference herein to Exhibit 10.3 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.4# +Employment Agreement, dated April 17, 2013, by and between ProPetro Holding Corp. and David Sledge (incorporated by reference herein to Exhibit 10.4 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.5# +Employment Agreement, dated April 17, 2013, by and between ProPetro Holding Corp. and Jeffrey Smith (incorporated by reference herein to Exhibit 10.5 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.6# +Stock Option Plan of ProPetro Holding Corp., dated March 4, 2013 (incorporated by reference herein to Exhibit 10.6 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.7# +First Amendment to the Stock Option Plan of ProPetro Holding Corp., dated June 14, 2013 (incorporated by reference herein to Exhibit 10.7 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.8# +Second Amendment to the Stock Option Plan of ProPetro Holding Corp., dated December 2, 2016 (incorporated by reference herein to Exhibit 10.8 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.9# +Non‑Qualified Stock Option Agreement, dated June 14, 2013, by and between ProPetro Holding Corp. and Dale Redman (incorporated by reference herein to Exhibit 10.9 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +85 +10.10# +Non‑Qualified Stock Option Agreement, dated June 14, 2013, by and between ProPetro Holding Corp. and David Sledge (incorporated by reference herein to Exhibit 10.10 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.11# +Non‑Qualified Stock Option Agreement, dated June 14, 2013, by and between ProPetro Holding Corp. and Jeffrey Smith (incorporated by reference herein to Exhibit 10.11 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.12# +Non‑Qualified Stock Option Agreement, dated June 14, 2013, by and between ProPetro Holding Corp. and Spencer D. Armour, III (incorporated by reference herein to Exhibit 10.12 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.13# +Non‑Qualified Stock Option Agreement, dated July 19, 2016, by and between ProPetro Holding Corp. and Dale Redman (incorporated by reference herein to Exhibit 10.13 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.14# +Non‑Qualified Stock Option Agreement, dated July 19, 2016, by and between ProPetro Holding Corp. and David Sledge (incorporated by reference herein to Exhibit 10.14 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.15# +Non‑Qualified Stock Option Agreement, dated July 19, 2016, by and between ProPetro Holding Corp. and Jeffrey Smith (incorporated by reference herein to Exhibit 10.15 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.16# +Non‑Qualified Stock Option Agreement, dated July 19, 2016, by and between ProPetro Holding Corp. and Spencer D. Armour, III (incorporated by reference herein to Exhibit 10.16 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.17# +Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement, dated September 30, 2013, by and between ProPetro Holding Corp. and Dale Redman (incorporated by reference herein to Exhibit 10.17 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940). +10.18# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1, dated March 7, 2017 (Registration No. 333-215940)). +10.19# +Form of ProPetro Holding Corp. Senior Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +10.20# +Form of ProPetro Holding Corp. Non‑Employee Director Compensation Policy (incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +10.21# +Form of ProPetro Holding Corp. Director Stock Ownership Policy (incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +10.22# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement (incorporated by reference to Exhibit 10.22 to the Company’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +10.23# +Form of ProPetro Holding Corp. Amendment to Non‑Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +10.24# +Amendment to Employment Agreement, by and between ProPetro Holding Corp. and Dale Redman (incorporated by reference herein to Exhibit 10.24 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +10.25# +Employment Agreement, dated February 17, 2017, by and between ProPetro Holding Corp. and Mark Howell (incorporated by reference herein to Exhibit 10.25 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940)). +86 +10.26# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan Performance Restricted Stock Unit Award Grant Notice and Performance Stock Unit Award Agreement (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017). +10.27# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan Restricted Stock Unit Award Grant Notice and Performance Stock Unit Award Agreement (incorporated by reference herein to Exhibit 10.2 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017). +10.28# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan Director Restricted Stock Unit Award Grant Notice and Director Stock Unit Award Agreement (incorporated by reference herein to Exhibit 10.3 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017). +10.29 +Amendment No. 1 to Credit Agreement, dated as of February 22, 2018 by and among ProPetro Holding Corp., ProPetro Services, Inc., the Incremental Lenders therein, the Required Lenders and Barclays Bank PLC, as Administrative Agent for the Lenders (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated February 22, 2018). +10.30 +Amendment No. 2 to Credit Agreement, dated as of December 19, 2018, by and among ProPetro Holding Corp., ProPetro Services, Inc., the Incremental Lenders therein, the Required Lenders and Barclays Bank PLC, as Administrative Agent for the Lenders (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 19, 2018). +10.31 +Pressure Pumping Services Agreement dated December 31, 2018, between Pioneer Natural Resources USA, Inc. and ProPetro Services, Inc. +10.32 +Form of Indemnification Agreement for Pioneer Designated Directors. +10.33 +Form of Indemnification Agreement for Officers and Directors of ProPetro Holding Corp. +21.1 +List of Subsidiaries of ProPetro Holding Corp. +23.1 +Consent of Independent Registered Public Accounting Firm. +31.1 +Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +31.2 +Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1 +Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2 +Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +# Compensatory plan, contract or arrangement. +87 \ No newline at end of file diff --git a/raw/filings/0001680247/2018/0001680247-19-000016/rpt_disclosure.txt b/raw/filings/0001680247/2018/0001680247-19-000016/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..cc639a10890d2d3202ef3bbe84dfcee82bcb0603 --- /dev/null +++ b/raw/filings/0001680247/2018/0001680247-19-000016/rpt_disclosure.txt @@ -0,0 +1,42 @@ +Certain Relationships and Related Party Transactions +Related Party Transactions +We lease our corporate offices from PD Properties, an entity owned by Dale Redman, pursuant to a five-year lease agreement with a five-year +extension option requiring a base rent of $72,000 per year. We also lease five properties adjacent to the corporate office from South Midkiff Partners LLC, an entity owned jointly by Dale +Redman, David Sledge, Spencer Armour and Jeff Smith, with annual base rents of $30,000, $30,000, $90,000, $90,000 and $180,000. +We +paid Dale Redman, our Chief Executive Officer, $393,034 for the year ended December 31, 2018, for reimbursement of costs incurred through use of his aircraft. +We +rent certain flowback equipment from PD Properties, an entity owned by Dale Redman, our Chief Executive Officer. For the year ended December 31, 2017, we paid $192,000 under +this lease. +We +lease a property adjacent to our corporate headquarters from Industrial Loop Partners, LLC, an entity wholly owned by an affiliate of Bandera Ventures. For the year ended +December 31, 2018, we paid $345,250 under the lease. The lease has a remaining term of approximately six years. Mr. Blackwell, one of our directors, through his approximately 33% +interest in Bandera Ventures, may be deemed an indirect beneficiary of this lease. +Jordan +Frosch is our Sales Manager and the son-in-law of Dale Redman. Mr. Frosch received total compensation of approximately $530,511 for his services for the year ended +December 31, 2018. +Sam +Sledge is our Investor Relations Director and the son of David Sledge. Sam Sledge received total compensation of approximately $717,481 for his services for the year ended +December 31, 2018. +Morgan +Stovall is our Corporate Controller and the daughter of Jeffrey Smith. Ms. Stovall received total compensation of approximately $338,873 for her services for the year ended +December 31, 2018. +In +November 2017, we entered into a five-year extension to an existing sand supply agreement to provide Texas-sourced frac sand ("Texas sand"), which is in high demand from our +customers. Texas sand provided under the supply agreement will primarily be sourced from a mine located on land owned by an oil and gas exploration company in which our Chief Executive Officer, Dale +Redman, owns a 44% interest. Accordingly, Mr. Redman may be considered an indirect beneficiary of payments made under the lease between our supplier and the landowner. The supply agreement was +negotiated by officers of the Company without the involvement of Mr. Redman, and reviewed and approved by the Audit Committee pursuant to its authority under our Related Party Transactions +Policy. In considering the approval of the supply agreement, the Audit Committee retained independent legal and commercial expertise to assist in the evaluation of the agreement's commercial terms. +Following its evaluation, the Audit Committee determined that the pricing and other provisions of the agreement reflected market terms, that the agreement reflected an arm's length negotiation, and +that entry into the agreement was advisable and in the best interests of the Company. For the year ended December 31, 2018, the Company purchased $10,300,000 of Texas sand under the supply +agreement, and Mr. Redman was an indirect beneficiary of approximately $300,000 in royalty payments. +Policies and Procedures for Related Party Transactions +Any request for us to enter into a transaction with an executive officer, director, principal stockholder or any of such persons' immediate +family members or affiliates, among others, in which the amount involved exceeds $120,000, must first be presented to our Audit Committee for review, consideration and approval. All of our directors +and executive officers are required to report to the +42 +Audit +Committee chair any such related person transaction. In approving or rejecting the proposed agreement, our Audit Committee shall consider the facts and circumstances available and deemed +relevant to the Audit Committee, including, but not limited to, whether the transaction is on terms comparable to those that could be obtained in arm's-length dealings with an unrelated third party, +the extent of the related party's interest in the transaction and the conflicts of interest and corporate opportunity provisions of our certificate of incorporation. If we should discover related +person transactions that have not been approved, the Audit Committee will be notified and will determine the appropriate action, including ratification, revision or termination of such transaction. \ No newline at end of file diff --git a/raw/filings/0001680247/2021/0001680247-22-000007/filing.txt b/raw/filings/0001680247/2021/0001680247-22-000007/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..4222a5bde2cacb3403a185fd56fddcfeffd8e2ea --- /dev/null +++ b/raw/filings/0001680247/2021/0001680247-22-000007/filing.txt @@ -0,0 +1,1885 @@ +pump-20211231 +0001680247 false FY 2021 true http://fasb.org/us-gaap/2021-01-31#ServiceMember http://fasb.org/us-gaap/2021-01-31#ServiceMember http://fasb.org/us-gaap/2021-01-31#ServiceMember http://fasb.org/us-gaap/2021-01-31#ServiceMember http://fasb.org/us-gaap/2021-01-31#ServiceMember http://fasb.org/us-gaap/2021-01-31#ServiceMember http://fasb.org/us-gaap/2021-01-31#ServiceMember 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+______________________________ +FORM 10-K +______________________________ +☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2021 +or +☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number: 001-38035 +______________________________ +ProPetro Holding Corp. +(Exact name of registrant as specified in its charter) +______________________________ +Delaware 26-3685382 +(State or other jurisdiction of +incorporation or organization) (I.R.S. Employer +Identification No.) +1706 South Midkiff , +Midland , Texas 79701 +(Address of principal executive offices) +Registrant’s telephone number, including area code: ( 432 ) 688-0012 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock ($0.001 par value) PUMP New York Stock Exchange +Preferred Stock Purchase Rights N/A New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: +None +______________________________________________________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities A ct. Yes ý No ¨ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. +Large accelerated filer +ý +Accelerated filer ☐ +Non-accelerated filer +☐ (Do not check if a smaller reporting company) +Smaller reporting company ☐ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý +The aggregate market value of the Company’s Common Stock held by nonaffiliates on June 30, 2021, determined using the per share closing price on the New York Stock Exchange Composite tape of $9.16 on that date, was app roximately $ 664.5 million. +The number of the registrant’s common shares, par value $0.001 per share, outstanding at February 18, 2022, was 103,706,217 . +TABLE OF CONTENTS +FORWARD-LOOKING STATEMENTS +i +SUMMARY OF RISK FACTORS +iii +PART I +BUSINESS +1 +RISK FACTORS +11 +UNRESOLVED STAFF COMMENTS +29 +PROPERTIES +29 +LEGAL PROCEEDINGS +29 +MINE SAFETY DISCLOSURES +29 +PART II +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +30 +SELECTED FINANCIAL DATA +33 +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +34 +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +48 +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +49 +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +77 +CONTROLS AND PROCEDURES +78 +OTHER INFORMATION +79 +DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +79 +PART III +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +80 +EXECUTIVE COMPENSATION +81 +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +82 +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +83 +PRINCIPAL ACCOUNTING FEES AND SERVICES +84 +PART IV +EXHIBITS AND FINANCIAL SCHEDULES +85 +FORM 10-K SUMMARY +88 +SIGNATURES +89 +i +FORWARD‑LOOKING STATEMENTS +This Annual Report on Form 10-K (the "Annual Report") contains forward‑looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words "may," "could," "plan," "project," "budget," "predict," "pursue," "target," "seek," "objective," "believe," "expect," "anticipate," "intend," "estimate," and other expressions that are predictions of, or indicate, future events and trends and that do not relate to historical matters identify forward‑looking statements. Our forward‑looking statements include, among other matters, statements about our business strategy, industry, future profitability, expected capital expenditures and the impact of such expenditures on our performance and capital programs. +A forward‑looking statement may include a statement of the assumptions or bases underlying the forward‑looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward‑looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward‑looking statements include: +• the severity and duration of world health events, including the coronavirus ("COVID-19") pandemic and the related economic repercussions; +• the actions taken by the members of the Organization of the Petroleum Exporting Countries ("OPEC") and Russia (together with OPEC and other allied producing countries, "OPEC+") with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations; +• actions taken by the Biden Administration, such as executive orders or new regulations, that may negatively impact the future production of oil and natural gas in the United States and may adversely affect our future operations; +• the level of production and resulting market prices for crude oil, natural gas and other hydrocarbons; +• changes in general economic and geopolitical conditions, including the rate of inflation; +• the effects of existing and future laws and governmental regulations (or the interpretation thereof) on us and our customers; +• cost increases and supply chain constraints related to our services; +• competitive conditions in our industry; +• changes in the long-term supply of, and demand for, oil and natural gas; +• actions taken by our customers, suppliers, competitors and third-party operators and the possible loss of customers or work to our competitors; +• technological changes, including lower emissions oilfield services equipment and similar advancements; +• changes in the availability and cost of capital; +• our ability to successfully implement our business plan; +• large or multiple customer defaults, including defaults resulting from actual or potential insolvencies; +• the effects of consolidation on our customers or competitors; +• the price and availability of debt and equity financing (including changes in interest rates) for the Company and our customers; +• our ability to complete growth projects on time and on budget; +• operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; +• changes in our tax status; +• regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our services; +i +• new or expanded regulations that materially limit our customers’ access to federal and state lands for oil and gas development, thereby reducing demand for our services in the affected areas; +• growing demand for electric vehicles that result in reduced demand for gasoline and therefore the demand for our services; +• our ability to successfully implement technological developments and enhancements, including our new Tier IV DGB equipment and other lower-emissions equipment we may acquire or that may be sought by our customers; +• operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control, which risks may be self-insured, or may not be fully covered under our insurance programs; +• acts of terrorism, war or political or civil unrest in the United States or elsewhere; +• the effects of current and future litigation, including the Logan Lawsuit; and +• the potential impact on our business and stock price of any announcements regarding the Logan Lawsuit. +You should not place undue reliance on our forward‑looking statements. Although forward‑looking statements reflect our good faith beliefs at the time they are made, forward‑looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under "Item 1A. Risk Factors" of this Annual Report, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward‑looking statements. We undertake no obligation to publicly update or revise any forward‑looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law. +Unless the context indicates otherwise, all references to "ProPetro Holding Corp.," "the Company," "we," "our" or "us" or like terms refer to ProPetro Holding Corp. and its consolidated subsidiary, ProPetro Services, Inc. +ii +SUMMARY RISK FACTORS +Our business is subject to varying degrees of risk and uncertainty. Investors should consider the risks and uncertainties summarized below, as well as the risks and uncertainties discussed in Part I, "Item 1A. Risk Factors" of this Annual Report on Form 10-K. Additional risks not presently known to us or that we currently deem immaterial may also affect us. If any of these risks occur, our business, financial condition or results of operations could be materially and adversely affected. +Our business is subject to the following principal risks and uncertainties: +Risks Inherent in Our Business and Industry +• Our business and financial performance depends on the historically cyclical oil and natural gas industry and particularly on the level of capital spending and exploration and production activity within the United States and in the Permian Basin, and a decline in prices for oil and natural gas may cause fluctuation in operating results or otherwise have an adverse effect on our revenue, cash flows, profitability and growth. +• Events outside of our control, including an epidemic or outbreak of an infectious disease, such as COVID-19, may materially adversely affect our business. +• The majority of our operations are located in the Permian Basin, making us vulnerable to risks associated with operating in one major geographic area. +• Our business may be adversely affected by a deterioration in general economic conditions or a weakening of the broader energy industry. +• New technology may cause us to become less competitive. +• Our operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms, or at all, which could limit our ability to grow. +• Restrictions in our Asset Backed Loan (ABL) Credit Facility (as defined herein) and any future financing agreements may limit our ability to finance future operations or capital needs or capitalize on potential acquisitions and other business opportunities. +• We may incur debt and our indebtedness could adversely affect our operations and financial condition. +• We may record losses or impairment charges related to goodwill and long-lived assets. +• Our operations are subject to unforeseen interruptions and hazards inherent in the oil and natural gas industry, for which we may not be adequately insured and which could cause us to lose customers and substantial revenue. +• We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition and results of operations. +• We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +• We may grow through acquisitions and our failure to properly plan and manage those acquisitions may adversely affect our performance. +• The Logan Lawsuit could have a material adverse effect on our business, financial condition, results of operation, and cash flows. +Risks Related to Customers, Suppliers and Competition +• Reliance upon a few large customers may adversely affect our revenue and operating results. +• We face significant competition that may cause us to lose market share, and competition in our industry has intensified during the recent industry downturn. +iii +• We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our business, results of operations and financial conditions. +• Our business depends upon the ability to obtain specialized equipment, parts and key raw materials, including sand and chemicals, from third‑party suppliers, and we may be vulnerable to delayed deliveries and future price increases. +• We may be required to pay fees to certain of our sand suppliers based on minimum volumes under long-term contracts regardless of actual volumes received. +Risks Related to Employees +• We rely on a few key employees whose absence or loss could adversely affect our business. +• If we are unable to employ a sufficient number of skilled and qualified workers, our capacity and profitability could be diminished and our growth potential could be impaired. +Risks Related to Regulatory Matters +• We are subject to environmental laws and regulations, and future compliance, claims, and liabilities relating to such matters may have a material adverse effect on our results of operations, financial position or cash flows. +• Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide. +• Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +• Increasing trucking regulations may increase our costs and negatively impact our results of operations. +• Increased attention to environmental, social and governance matters, conservation measures, commercial development and technological advances could reduce demand for oil and natural gas and our services. +• Certain of our completion services, particularly our hydraulic fracturing services, are substantially dependent on the availability of water. Restrictions on our or our customers’ ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows. +Risks Related to our Tax Matters +• Our ability to use our net operating loss carryforwards may be limited. +Risks Inherent to an Investment in our Common Stock +• We are subject to certain requirements of Section 404 of the Sarbanes-Oxley Act ("Section 404"). If we or our auditors identify and report material weaknesses in internal control over financial reporting, our investors may lose confidence in our reported information and our stock price may be negatively affected. +• The market price of our common stock is subject to volatility. +• There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock. +iv +PART I +Item 1. Business. +Our Company +We are a Midland, Texas‑based oilfield services company providing hydraulic fracturing and other complementary services to leading upstream oil and gas companies engaged in the exploration and production ("E&P") of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil‑producing areas in the United States, and we believe we are one of the leading providers of hydraulic fracturing services in the region by hydraulic horsepower ("HHP"). +Our total available HHP at December 31, 2021 wa s 1,423,000 HHP, which was comprised of 90 ,000 HHP of our Tier IV Dynamic Gas Blending ("DGB") equipment, 1,225,000 HHP of conventional Tier II equipment and 108,000 HHP of our DuraStim® electric hydraulic fracturing equipment. Our fleet could range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsites. With the industry transition to lower emissions equipment and simultaneous hydraulic fracturing ("Simul-Frac"), in addition to several other changes to our customers' job designs, we believe that our available fleet capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at the wellsites. In September 2021, we placed an order with our equipment manufacturers for 125,000 HHP of Tier IV DGB equipment for additional conversions, which we expect to be delivered at different times through the first half of 2022. +In 2019, we entered into a purchase commitment for 108,000 HHP of DuraStim® electric powered hydraulic fracturing equipment. In addition to DuraStim® fleets, we are also evaluating other electric and alternative pressure pumping solutions. In December 2021, we disposed of our two gas turbines initially purchased to provide electrical power to our DuraStim® fleets as we determined they were an inefficient power solution in the field. In the future, we may lease electrical power equipment from a third party or rely on our customers to provide power solutions for our electric equipment. +Our competitors include many large and small oilfield services companies, including Halliburton Company, Liberty Oilfield Services Inc., Nextier Oilfield Solutions Inc., Patterson-UTI Energy Inc., RPC, Inc., FTS International Inc. and a number of private and locally-oriented businesses. The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies' criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company's selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the service industry because of the capital requirements, and the depressed pricing experienced by the service industry. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +Our substantial market presence in the Permian Basin positions us well to capitalize on drilling and completion activity in the region. Primarily, our operational focus has been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have recently increased our operations in the Delaware sub-basin and are well-positioned to support further increases to our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending. +Through our pressure pumping segment (which also includes our cementing operations), we primarily provide hydraulic fracturing services to E&P companies in the Permian Basin. Our hydraulic fracturing fleet has been designed to handle the operating conditions commonly utilized in the Permian Basin and the region's increasingly high-intensity well completions (including Simul-Frac, which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. +1 +In addition to our core pressure pumping segment operations, which includes our cementing operations, we also offer coiled tubing services. Through our coiled tubing services segment, we seek to create operational efficiencies for our customers, which could allow us to capture a greater portion of their capital spending across the lifecycle of a well. +Commodity Price and Other Economic Conditions +The oil and gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, political instability in oil producing countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. +The global public health crisis associated with the COVID-19 pandemic could continue to have an adverse effect on global economic activity for the foreseeable future. Some of the challenges resulting from the COVID-19 pandemic that have impacted our business include restrictions on movement of personnel and associated gatherings, shortage of skilled labor, cost inflation and supply chain disruptions. Additionally, with most of the large, capitalized E&P companies in the United States, including our customers, closely managing their operating budget and exercising capital discipline, we do not currently expect significant increases in crude oil production over the short-to-medium term. Furthermore, OPEC+ has indicated that they will continue with their plans to manage production levels by gradually increasing crude oil output. With the tightness in crude oil production and growing demand for crude oil, there has been a significant increase in rig count and WTI crude oil prices have increased to ov er $90 per barrel in February 2022 from its lowest point of $20 per barrel in March 2020. The Permian Basin rig count has increased significantly from approximately 179 at the beginning of 2021 to approximately 294 at the end of 2021, according to Baker Hughes. Although crude oil prices are currently at a 7-year high, the oilfield services industry, including the pressure pumping segment, has not fully recovered as evidenced by continued depressed pricing for most of our services, and shortages of skilled labor force in the Permian Basin, coupled with rising inflationary costs. However, we still believe that the Permian Basin, our primary area of operation, will be the most attractive basin to E&P companies and should command higher prices and associated profitability, if the overall demand for crude oil and our services continues to increase. +Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including the upstream and oilfield services companies. As a result, we are working with our customers and equipment manufacturers to transition to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB, electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. If we are unable to quickly transition to lower emissions equipment and meet our and our customers’ emissions goals, the demand for our services could be adversely impacted. +The Permian Basin rig count increase, WTI crude oil price increase and costs inflation could be indicative of an energy market recovery. I f the rig count and market conditions continue to improve, including improved customers' pricing and labor availability, and we are able to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also continue to improve. However, if market conditions do not improve, and we are unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows. Refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for more discussions on our current and future business environment and financial performance. +Our Services +We have historically conducted our business through three operating segments: hydraulic fracturing, cementing, and coiled tubing. For reporting purposes, the hydraulic fracturing and cementing operating segments are aggregated into one reportable segment—"Pressure Pumping". Our coiled tubing operating segment and corporate administrative expense are aggregated into our "All Other" segment. For additional financial information on our reportable segments, please see reportable segment information in Part II - Item 8, "Financial Statements and Supplementary Data." +2 +Pressure Pumping +Hydraulic Fracturing +We primarily provide hydraulic fracturing services to E&P companies in the Permian Basin. These services are intended to optimize hydrocarbon flow paths during the completion phase of horizontal shale wellbores. We have significant expertise in multi‑stage fracturing of horizontal oil‑producing wells in unconventional geological formations. Our total available HHP at December 31, 2021 was 1,423,000 HHP, which was comprised o f 90,000 HHP of our Tier IV DGB equipment, 1,225,000 HHP of conventional Tier II equipment and 108,000 HHP of our DuraStim® hydraulic fracturing equipment. Our DuraStim® hydraulic fracturing equipment has been tested on a limited scale basis with certain of our customers and we are evaluating the appropriate strategy to continue such field testing, including whether field testing will be conducted in 2022. +The hydraulic fracturing process consists of pumping a fracturing fluid into a well at sufficient pressure to fracture the formation. Materials known as proppants, which in our business are comprised primarily of sand, are suspended in the fracturing fluid and are pumped into the fracture to prop it open. The fracturing fluid is designed to break, or loosen viscosity, and be forced out of the formation by its pressure, leaving the proppants suspended in the fractures created, thereby increasing the mobility of the hydrocarbons. As a result of the fracturing process, production rates are usually enhanced substantially, thus increasing the rate of return of hydrocarbons for the operator. +We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We also refer to all of our fracturing units, other equipment and vehicles necessary to perform a fracturing job as a " fleet " and the personnel assigned to each fleet as a " crew. " On average, one hydraulic fracturing fleet consists of approximately 50,000 to 80,000 HHP , depending on job design and customer demand. Our hydraulic fracturing units consist primarily of a high pressure hydraulic pump, diesel or dual gas engine, transmission and various hoses, valves, tanks and other supporting equipment like blenders, irons, hoses and datavans. Our DuraStim® hydraulic fracturing fleet is electrically driven and can be powered by turbines, generators or similar equipment that can generate electricity. In December 2021, we sold our two turbines for cash consideration of $36.0 million, and the net book value of the turbines prior to the sale was approximately $39.5 million. Our two turbines were initially purchase d to provide power to our DuraStim® equipment. In the future, we may lease or purchase alternative power solutions for our electric equipment. +We provide dedicated equipment, personnel and services that are tailored to meet each of our customer’s needs. Each fleet has a designated team of personnel, which allows us to provide responsive and customized services, such as project design, proppant and other consumables procurement, real‑time data provision and post‑completion analysis for each of our jobs. Many of our hydraulic fracturing fleets and associated personnel have worked continuously with the same customer for the past several years promoting deep relationships and a high degree of coordination and visibility into future customer activity levels. Furthermore, in light of our substantial market presence and historically high fleet utilization levels, we have established a variety of trusted relationships with key equipment, sand and other downhole consumable suppliers. We believe these strategic relationships position us to acquire equipment, parts and materials on a timely and economic basis and allow our dedicated procurement and logistics team to support consistently safe and reliable operations. +Cementing +We provide cementing services for completion of new wells and remedial work on existing wells. Cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Cementing provides isolation between fluid zones behind the casing to minimize potential damage to hydrocarbon bearing formations or the integrity of freshwater aquifers, and provides structural integrity for the casing by securing it to the earth. Cementing is also done when re-completing wells, where one zone is plugged and another is opened. +We believe that our cementing segment provides an organic growth opportunity for us to expand our service offerings within our existing customer base. +3 +Other Services +Coiled Tubing +Coiled tubing services involve injecting coiled tubing into wells to perform various completion well intervention operations. Coiled tubing is a flexible steel pipe with a diameter of typically less than three inches and manufactured in continuous lengths of thousands of feet. It is wound or coiled on a truck‑mounted reel for onshore applications. Due to its small diameter, coiled tubing can be inserted into existing production tubing and used to perform a variety of services (including drillout of plugs) to enhance the flow of oil or natural gas. +The principal advantages of using coiled tubing include the ability to (i) continue production from the well without interruption, thus reducing the risk of formation damage, (ii) move continuous coiled tubing in and out of a well significantly faster than conventional pipe used with a workover rig, which must be jointed and unjointed, (iii) direct fluids into a wellbore with more precision, allowing for improved stimulation fluid placement, (iv) provide a source of energy to power a downhole motor or manipulate downhole tools, and (v) enhance access to remote fields due to the smaller size and mobility. +Our Customers +Our customers consist primarily of oil and natural gas producers in North America. Our top five customers accounted for approximately 85.7%, 86.5% and 77.1% of our revenue, for the years ended December 31, 2021, 2020 and 2019, respectively. For the year ended December 31, 2021, Pioneer Natural Resources USA Inc. ("Pioneer") and Endeavor Energy Resources accounted for 54.2% and 14.6%, respectively, of total revenue. No other customer accounted for more than 10% of our total revenue for the year ended December 31, 2021. +Competition +The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies’ criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company’s selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the oilfield service industry because of the capital requirements and the continuing depressed pricing experienced by the service industry. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +We provide our services primarily in the Permian Basin, and we compete against different companies in each service and product line we offer. Our competition includes many large and small oilfield services companies, including the largest integrated oilfield services companies. Our major competitors for hydraulic fracturing services include Halliburton Company, Liberty Oilfield Services Inc., Nextier Oilfield Solutions Inc., Patterson‑UTI Energy Inc., RPC, Inc., FTS International, Inc. and a number of private and locally-oriented businesses. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the fourth quarter, relating to the conclusion of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather during which we may experience declines in our operating results. +Operating Risks and Insurance +Our operations are subject to hazards inherent in the oilfield services industry, such as accidents, blowouts, explosions, fires and spills and releases that can cause personal injury or loss of life, damage or destruction of property, equipment, natural resources and the environment and suspension of operations. +4 +In addition, claims for loss of oil and natural gas production and damage to formations can occur in the oilfield services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in us being named as a defendant in lawsuits asserting large claims. +Our business involves the transportation of heavy equipment and materials, and as a result, we may also experience traffic accidents which may result in spills, property damage and personal injury. +Despite our efforts to maintain safety standards, we have suffered accidents from time to time in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations. +We maintain commercial general liability, workers’ compensation, business automobile, commercial property, umbrella liability, excess liability, and directors and officers insurance policies providing coverages of risks and amounts that we believe to be customary in our industry. Further, we have pollution legal liability coverage for our business entities, which would cover, among other things, third party liability and costs of clean up relating to environmental contamination on our premises while our equipment is in transit and on our customers’ job site. With respect to our hydraulic fracturing operations, coverage would be available under our pollution legal liability policy for any surface or subsurface environmental clean‑up and liability to third parties arising from any surface or subsurface contamination. We also have certain specific coverages for some of our businesses, including our hydraulic fracturing services. +We maintain directors and officers insurance; however, our insurance coverage is subject to certain exclusions (including, for example, any required SEC disgorgement or penalties) and we are responsible for meeting certain deductibles under the policies. Moreover, we cannot assure you that our insurance coverage will adequately protect us from claims made in the Logan Lawsuit or any future claims. +Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of the high premium costs relative to perceived risk. Further, insurance rates have in the past been subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us. See “Risk Factors” for a description of certain risks associated with our insurance policies. +Environmental and Occupational Health and Safety Regulations +Our operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection, and occupational health and safety. Numerous federal, state and local governmental agencies issue regulations that often require difficult and costly compliance measures that could carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may, for example, restrict the types, quantities and concentrations of various substances that can be released into the environment, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas and other protected areas, or require action to prevent or remediate pollution from current or former operations. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental, health and safety laws and regulations occur frequently, and any changes that result in more stringent and costly requirements could materially adversely affect our operations and financial position. For example, following the election of President Biden and Democratic control in both houses of Congress, it is possible that our operations may be subject to greater environmental, health and safety restrictions, particularly with regards to hydraulic fracturing, permitting and greenhouse gases ( " GHG " ) emissions. We have not experienced any material adverse effect from compliance with current requirements; however, this trend may not continue in the future. +Below is an overview of some of the more significant environmental, health and safety requirements with which we must comply. Our customers’ operations are subject to similar laws and regulations. Any material adverse effect of these laws and regulations on our customers’ operations and financial position may also have an indirect material adverse effect on our operations and financial position. +5 +Waste Handling. We handle, transport, store and dispose of wastes that are subject to the Resource Conservation and Recovery Act ( " RCRA " ) and comparable state laws and regulations, which affect our activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although certain petroleum production wastes are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. Moreover, the U.S. Environmental Protection Agency ( " EPA " ) or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or recategorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to recategorize certain oil and natural gas exploration, development and production wastes as hazardous wastes. Several environmental organizations have also petitioned the EPA to modify existing regulations to recategorize certain oil and natural gas exploration, development and production wastes as hazardous. Any such changes in these laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act ( " CERCLA " or " Superfund " ) and analogous state laws generally impose liability without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Liability for the costs of removing or remediating previously disposed wastes or contamination, damages to natural resources, the costs of conducting certain health studies, amongst other things, is strict and joint and several. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state laws. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such hazardous substances have been released. +NORM. In the course of our operations, some of our equipment may be exposed to naturally occurring radioactive materials ( " NORM " ) associated with oil and gas deposits and, accordingly, may result in the generation of wastes and other materials containing NORM. NORM exhibiting levels of radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. +Water Discharges. The Clean Water Act, Safe Drinking Water Act, Oil Pollution Act and analogous state laws and regulations impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into regulated waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Also, spill prevention, control and countermeasure plan requirements require appropriate containment berms and similar structures to help prevent the contamination of regulated waters. +Air Emissions. The Clean Air Act ( " CAA " ) and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other emissions control requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants from specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. These and other laws and regulations may increase the costs of compliance for some facilities where we operate. Obtaining or renewing permits also has the potential to delay the development of oil and natural gas projects. +Climate Change. In the United States, no comprehensive climate change legislation has been implemented at the federal level. However, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, implement New Source Performance Standards directing the reduction of certain pollutants from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the Department of Transportation ("DOT"), implementing GHG emissions limits on +6 +vehicles manufactured for operation in the United States. In September 2020, the Trump Administration revised prior regulations to rescind certain methane standards and remove the transmission and storage segments from the source category for certain regulations. However, subsequently, the U.S. Congress approved, and President Biden signed into law, a resolution under the Congressional Review Act to repeal the September 2020 revisions to the methane standards, effectively reinstating the prior standards. Additionally in November 2021, the EPA issued a proposed rule that, if finalized, would establish OOOO(b) new source and OOOO(c) first-time existing source of standards of performance for methane and volatile organic compound emissions for oil and gas facilities. Operators of affected facilities will have to comply with specific standards of performance to include leak detection using optical gas imaging and subsequent repair equipment, and reduction of emissions by 95% through capture and control systems. The EPA plans to issue a supplemental proposal in 2022 containing additional requirements not included in the November 2021 proposed rule and anticipates the issuance of a final rule by the end of the year. +Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas such as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored " Paris Agreement, " requires member states to submit non-binding, individually-determined reduction goals known as Nationally Determined Contributions (“NDCs”) every five years after 2020. Following President Biden’s executive order in January 2021, the United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. Additionally, at the 26th Conference of the Parties (“COP26”) in Glasgow in November 2021, the United States and the European Union jointly announced the launch of the Global Methane Pledge; an initiative committing to a collective goal of reducing global methane emissions by at least 30 percent from 2020 levels by 2030, including “all feasible reductions” in the energy sector. However, the impacts of these actions are unclear at this time. +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, including climate-change-related pledges made by certain candidates for public office. On January 27, 2021, President Biden issued an executive order that commits to substantial action on climate change, calling for, among other things, the increased use of zero-emissions vehicles by the federal government, the elimination of subsidies provided to the fossil fuel industry and an increased emphasis on climate-related risk across government agencies and economic sectors. The executive order also suspends the issuance of new leases for oil and gas development on federal land; for more information, see our regulatory disclosure titled " Regulation of Hydraulic Fracturing and Related Activities. " Other actions that the Biden Administration may take include the imposition of more restrictive requirements for the development of pipeline infrastructure or liquefied natural gas export facilities or more restrictive GHG emissions limitations for oil and gas facilities. Litigation risks are also increasing as a number of parties have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. +The adoption and implementation of new or more stringent international, federal or state legislation, regulations or other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate GHG emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for, oil and natural gas, which could reduce demand for our services and products. +Moreover, climate change may result in various physical risks, such as the increased frequency or intensity of extreme weather events or changes in the meteorological and hydrological patterns, that could adversely impact us, our customers’ and our suppliers’ operations. Such physical risks may result in damage to our customers’ facilities or otherwise adversely impact our operations, such as if facilities are subject to water use curtailments in response to drought, or demand for our customers’ products, such as to the extent warmer winters reduce the demand for energy for heating purposes, which may ultimately reduce demand for the products and services we provide. Such physical risks may also impact our suppliers, which may adversely affect out ability to provide our products and services. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Endangered and Threatened Species. Environmental laws such as the Endangered Species Act ( " ESA " ) and analogous state laws may impact exploration, development and production activities in areas where we operate. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and various state analogs. The U.S. Fish and Wildlife Service ( " FWS " ) may identify previously unidentified endangered or threatened species or may designate +7 +critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species. For example, the dunes sagebrush lizard, which is found only in the active and semi-stable shinnery oak dunes of southeastern New Mexico and adjacent portions of Texas (including areas where our customers operate), was a candidate species for listing under the ESA by the FWS for many years. As a result of a recent settlement with certain environmental groups, the FWS, in July 2020, acted on a petition to list the dunes sagebrush lizard finding sufficient information to warrant a formal one-year review to consider listing the species. While that deadline has been missed, the listing review is reportedly ongoing; additionally, FWS has also solicited comments on a proposed conservation agreement that would implement certain protective practices for the species and authorize incidental take of the species resulting from certain covered activities, including exploration and development of oil and gas fields. However, to the extent any protections are implemented for this or any other species, it could cause us or our customers to incur additional costs or become subject to operating restrictions or operating bans in the affected areas. +Regulation of Hydraulic Fracturing and Related Activities. Our hydraulic fracturing operations are a significant component of our business. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has previously issued a series of rules under the CAA that establish new emission control requirements for certain oil and natural gas production and natural gas processing operations and associated equipment. Separately, the Bureau of Land Management ( " BLM " ) previously finalized a rule governing hydraulic fracturing on federal lands, but that rule was subsequently rescinded. Although several of these rulemakings have been rescinded, modified or subjected to legal challenges, new or more stringent regulations may be promulgated by the Biden administration. For example, in January 2021, President Biden issued an executive order suspending new leasing activities, but not operations under existing leases, for oil and gas exploration and production on non-Indian federal lands pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices that take into consideration potential climate and other impacts associated with oil and gas activities on such lands and waters. Although the federal court for the Western District of Louisiana issued a preliminary injunction against the leasing pause, in response to the executive order, the Department of the Interior ( " DOI " ) issued a report recommending various changes to the federal leasing program, though many such changes would require Congressional action. As a result, we cannot predict the final scope of regulations or restrictions that may apply to oil and gas operations on federal lands. However, any regulations that ban or effectively ban such operations may adversely impact demand for our products and services. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have previously been proposed in Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +Federal and state governments have also investigated whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for wastewater disposal wells that impose permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission’s well completion seismicity guidelines for operators in the SCOOP and STACK require hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division has previously issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission ( "TRRC") has adopted similar rules and, in September 2021, issued a notice to disposal well operators in the Gardendale Seismic Response Area near Midland, Texas to reduce daily injection volumes following multiple earthquakes above a 3.5 magnitude over an 18 month period. The notice also required disposal well operators to provide injection data to TRRC staff to further analyze seismicity in the area. Subsequently, the TRRC ordered the indefinite suspension of all deep oil and gas produced water injection wells in the area, effective December 31, 2021. While we cannot predict the ultimate outcome of these actions, any action that temporarily or permanently restricts the availability of disposal capacity for produced water or other oilfield fluids may increase our customers’ costs or require them to suspend operations, which may adversely impact demand for our products and services. +8 +Increased regulation of hydraulic fracturing and related activities could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and record keeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. +OSHA Matters. The Occupational Safety and Health Act ( " OSHA " ) and comparable state statutes regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. +Human Capital +Our employees are our key asset. Our primary human capital management objectives are to effectively engage, develop, retain and reward our employees. As of December 31, 2021, we employed approximatel y 1,500 people , none of which are unionized. Of the total population over 80% of our headcount worked for or supports our pressure pumping segment. Our employees are a key component of our ability to attract and retain customers as a result of their operational excellence in the field. +Some examples of significant programs and initiatives that are focused to attract, develop and retain our diverse workforce include: +• Diversity and inclusion. We believe that in order to attract and retain talent with the skill sets and expertise required to maximize our operational efficiencies across all levels in the Company, it is in our best interest to attempt to recruit and develop a diverse team and create a culture that is inclusive and provides equal opportunities for hiring and advancement for all employees and prospective employees. Some examples of this effort include; +◦ a commitment to conducting business in a manner that respects all human rights in compliance within the requirements of applicable laws; +◦ efforts to promote and encourage respect for human rights and fundamental freedoms for all without distinctions of any kind such as race, color, sex, language, religion, political or other opinions; +◦ working in partnership with personnel, business parties and other parties directly linked to our operations that share our commitment to these same principles; +◦ efforts in our employment practices, including through our code of conduct, our equal employment opportunity employer policy, and our anti-harassment policy; and +◦ to make it possible for grievances regarding health and safety to be addressed early and remediated directly, in confidence and without fear of retaliation; the Company provides an anonymous Ethics and Compliance hotline that is promoted internally and accessible from our intranet and internet. +• Training and Safety. We offer in-depth, role-appropriate safety training upon hiring and as part of the continuous development of our employees. The safety of our employees, our customers, and the communities in which we operate is paramount. We track and evaluate safety incidents at wellsites and offices, and if an accident does occur, we take actions to mitigate similar incidents from reoccurring in the future. The Company incentivizes employees to focus on conducting operations in accordance with our strict safety standards and encourages employees to immediately report any breach of safety protocol. Ten percent of our executive officers’ annual target bonuses under the 2021 annual incentive program were based upon the Company’s achievement of certain safety goals, including a target total recordable incident rate of less than 0.75. +• Professional Development. In 2021 ProPetro introduced a Tuition Reimbursement Program to encourage employees to pursue professional development interests that will help strengthen skills and competencies required for their current position or future roles in the business. This program is designed to provide assistance and offset related training expense. +9 +• Health, Wellness and Benefits. Our employee benefit offerings are designed to meet the varied and evolving needs of a diverse workforce across the Company and we believe are consistent with those provided by our peer companies with which we compete for talent. The Company provides employees with the ability to participate in health and welfare plans, including medical, dental, life, accidental death and dismemberment and short-term and long-term disability insurance plans. Since the beginning of COVID-19, we have implemented processes and procedures to help address COVID-19 matters. Below are some of the adjustments we made to address the COVID-19 pandemic; +◦ instituted periodic update, guidelines and questionnaires to all employees to address and identify COVID-19 related matters; +◦ initially instituted a temporary remote work environment in response to COVID-19 and have retained the flexibility for employees to work remotely when necessary or advisable; +◦ encouraged all employees to adhere to guidelines provided by the Centers for Disease Control and Prevention; and +◦ provided coverage for COVID-19 testing and vaccination under the Company’s medical plan at no cost to our employees. +In 2021, we performed an extensive review of our health-related benefits program to ensure that our offerings are market competitive and effectively utilized by employees. Based on that review, we made comprehensive adjustments to our health-related benefits programs, which improved the cost and quality of coverage. We significantly increased the number of employee meetings to provide education and encourage individuals to maximize the value of benefits offered, resulting in an overall increase in participation and positive feedback from employees. +We have also recently initiated a plan to review our 401(k) plan and implement improvements in 2022 with a focus on improving plan structure, reducing program administration, providing employee education and increasing plan participation. +Availability of Filings +Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the " Exchange Act " ), are made available free of charge on our internet web site at www.propetroservices.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the SEC. The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is www.sec.gov. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Annual Report or the documents incorporated by reference in this Annual Report. +10 +Item 1A. Risk Factors. +The following is a description of significant factors that could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report and presented elsewhere by management from time to time. Such factors may have a material adverse effect on our business, financial condition and results of operations. It is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete statement of all our potential risks or uncertainties. Due to these, and other factors, past performance should not be considered an indication of future performance. +Risks Inherent in Our Business and Industry +Our business and financial performance depends on the historically cyclical oil and natural gas industry and particularly on the level of capital spending and exploration and production activity within the United States and in the Permian Basin, and a decline in prices for oil and natural gas may cause fluctuation in operating results or otherwise have an adverse effect on our revenue, cash flows, profitability and growth. +Demand for most of our services depends substantially on the level of capital expenditures in the Permian Basin by companies in the oil and natural gas industry. As a result, our operations are dependent on the levels of capital spending and activity in oil and gas exploration, development and production. Demand for our services is largely dependent on oil and natural gas prices, and our customers’ completion budgets and rig count. Prolonged low oil and gas prices would generally depress the level of oil and natural gas exploration, development, production, and well completion activity and would result in a corresponding decline in the demand for the hydraulic fracturing services that we provide. Historically, oil prices and markets have been extremely volatile. Prices are affected by many factors beyond our control. WTI oi l price declined significantly in 2015 and 2016 to approximately $30 per barrel, but subsequently recovered in 2017. Furthermore, in March 2020, WTI oil price declined to a low of approximately $20 per barrel and then subsequently recovered. The average WTI oil prices per barrel were approximately $68, $39 and $57 for the years ended December 31, 2021, 2020 and 2019, respectively. Recently, WTI oil price reached a 7-year high of over $90 per barrel in February 2022. In the last three years, the highly volatile and unpredictable nature of oil and natural gas prices caused a reduction in our customers’ spending and associated drilling and completion activities, which has had and may continue to have an adverse effect on our revenue and cash flows, if WTI oil prices remain highly volatile or decline in the future. +Many factors over which we have no control affect the supply of, and demand for our services, and our customers’ willingness to explore, develop and produce oil and natural gas, and therefore, influence prices for our services, including: +• the severity and duration of world health events, including the COVID-19 pandemic, related economic repercussions; +• the actions by the members of OPEC+ with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations; +• the domestic and foreign supply of, and demand for, oil and natural gas; +• the level of prices, and expectations about future prices, of oil and natural gas; +• the level of global oil and natural gas exploration and production; +• the cost of exploring for, developing, producing and delivering oil and natural gas; +• the supply of and demand for drilling and hydraulic fracturing equipment, including the supply and demand for lower emissions hydraulic fracturing equipment; +• cost increases and supply chain constraints related to our services; +• the expected decline rates of current production; +• the price and quantity of foreign imports; +• political and economic conditions in oil and natural gas producing countries and regions, including the United States, the Middle East, Africa, South America and Russia; +11 +• operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; +• speculative trading in crude oil and natural gas derivative contracts; +• the level of consumer product demand; +• the discovery rates of new oil and natural gas reserves; +• contractions in the credit market; +• the strength or weakness of the U.S. dollar; +• available pipeline and other transportation capacity; +• the levels of oil and natural gas storage; +• weather conditions and other natural disasters; +• domestic and foreign tax policy; +• domestic and foreign governmental approvals and regulatory requirements and conditions, including tighter emissions standards in the energy industry; +• the continued threat of terrorism and the impact of military and other action, including military action in the Middle East; +• political or civil unrest in the United States or elsewhere; +• technical advances affecting energy consumption; +• the proximity and capacity of oil and natural gas pipelines and other transportation facilities; +• the price and availability of alternative fuels; +• the ability of oil and natural gas producers to raise equity capital and debt financing; +• merger and divestiture activity among oil and natural gas producers; and +• overall domestic and global economic conditions. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. For example, in 2020, Saudi Arabia and Russia failed to agree on a plan to cut production of oil and gas within OPEC and Russia. Subsequently, Saudi Arabia announced plans to increase production and reduce the prices at which they sell oil. These events, combined with the COVID-19 pandemic that has negatively impacted the economic activity and disrupted the supply chains of certain of our customers, have contributed to the unpredictable nature of crude oil prices. +12 +The cyclical nature of the oil and natural gas industry may cause our operating results to fluctuate. +We derive our revenues from companies in the oil and natural gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices. We have experienced, and may in the future experience, significant fluctuations in operating results as a result of the reactions of our customers to changes in oil and natural gas prices. For example, the decline in and unpredictable nature of oil and gas prices in 2019 and 2020, combined with adverse changes in the capital and credit markets and the COVID-19 pandemic in 2020, caused many exploration and production companies to significantly reduce their 2020 and 2021 capital budgets and drilling activity. This resulted in a significant decline in demand for oilfield services and adversely impacted the prices oilfield services companies can charge for their services. These factors have materially and adversely affected our business, results of operations and financial condition. In addition, a majority of the service revenue we earn is based upon a charge for a relatively short period of time (for example, a day, a week or a month) for the actual period of time the service is provided to our customers. By contracting services on a short‑term basis, we are exposed to the risks of a rapid reduction in market prices and utilization and resulting volatility in our revenues. +Events outside of our control, including an epidemic or outbreak of an infectious disease, such as COVID-19, may materially adversely affect our business. +We face risks related to epidemics, outbreaks or other public health events that are outside of our control, and could significantly disrupt our operations and adversely affect our financial condition. The global or national outbreak of an illness or any other communicable disease, or any other public health crisis, such as COVID-19, may cause disruptions to our business and operational plans, which may include (i) shortages of employees, (ii) unavailability of contractors and subcontractors, (iii) interruption of supplies from third parties upon which we rely, (iv) recommendations of, or restrictions imposed by, government and health authorities, including quarantines, and (v) restrictions that we and our contractors, subcontractors and our customers impose, including facility shutdowns, to ensure the safety of employees. For example, in response to COVID-19, we made adjustments to some of our business processes that helped and will continue to help address the impact to the COVID-19 pandemic. +The COVID-19 pandemic has spread across the globe and impacted financial markets and worldwide economic activity and adversely affected our operations in the recent years. In addition, the effects of COVID-19 across the globe have negatively impacted the domestic and international demand for crude oil and natural gas, which has contributed to price volatility, impacted the operations and activity levels of our customers and materially and adversely affected the demand for oilfield services. These factors also negatively impacted our current suppliers and their ability or willingness to provide the necessary equipment, parts or raw materials, and they may fail to deliver the products timely and in the quantities required. Any resulting delays or restrictions from COVID-19 on the provision of our services could have a material adverse effect on our business, financial condition, results of operations and cash flows. As the potential impact from COVID-19 is difficult to predict, the extent to which it may negatively affect our operating results or the duration of any potential business disruption is uncertain. Any potential impact will depend on future developments and new information that may emerge regarding the COVID-19 infection rate or the efficacy and distribution of COVID-19 vaccines, and the actions taken by authorities to contain it or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our business, results of operations and financial condition. +The majority of our operations are located in the Permian Basin, making us vulnerable to risks associated with operating in one major geographic area. +Our operations are geographically concentrated in the Permian Basin. For the years ended December 31, 2021, 2020 and 2019, approximately 98.7% , 99.5% and 99.4%, respectively, of our revenues were attributable to our operations in the Permian Basin. As a result of this concentration, we may be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in the Permian Basin caused by significant governmental regulation, processing or transportation capacity constraints, market limitations, curtailment of production or interruption of the processing or transportation of oil and natural gas produced from the wells in these areas. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil and natural gas producing areas such as the Permian Basin, which may cause these conditions to occur with greater frequency or magnify the effects of these conditions. Due to the concentrated nature of our operations, we could experience any of the same conditions at the same time, resulting in a relatively greater impact on our revenue than they might have on other companies that have more geographically diverse operations. +13 +Our business may be adversely affected by a deterioration in general economic conditions or a weakening of the broader energy industry. +A prolonged economic slowdown or recession in the United States, adverse events relating to the energy industry or regional, national and global economic conditions and factors, particularly a further slowdown in the exploration and production industry, could negatively impact our operations and therefore adversely affect our results. The risks associated with our business are more acute during periods of economic slowdown or recession because such periods may be accompanied by decreased exploration and development spending by our customers, decreased demand for oil and natural gas and decreased prices for oil and natural gas. In 2020, the COVID-19 pandemic and the turmoil between the members of OPEC+ caused oil prices to fall substantially and adversely impacted the global economy; a recurrence of similar events would heighten the risk of a prolonged economic slowdown or recession in the United States. +New technology may cause us to become less competitive. +The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. As competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. The transition to lower emissions equipment is capital intensive and could require us to convert our conventional Tier II equipment to lower emissions equipment. If we are unable to quickly transition to lower emissions equipment, the demand for our services could be adversely impacted. For example, many E&P companies, including our customers, are transitioning to a lower emissions operating environment and may require us to invest in pressure pumping equipment with lower emissions profile. Further, we may face competitive pressure to develop, implement or acquire and deploy certain technology improvements at a substantial cost, such as our DuraStim® fleets or the cost of implementing or purchasing a technology like DuraStim® may be substantially higher than anticipated, and we may not be able to successfully implement the DuraStim® fleets or other technologies we may purchase. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, effectively use and implement new and emerging technologies could have a material adverse effect on our business, financial condition, prospects or results of operations. +Our operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms, or at all, which could limit our ability to grow. +The oilfield services industry is capital intensive. In conducting our business and operations, we have made, and expect to continue to make, substantial capital expenditures. Our total capital expenditures incurred were approximately $165.2 million , $81.2 million and $400.7 million during the years ended December 31, 2021, 2020 and 2019. We have historically financed capital expenditures primarily with funding from cash on hand, cash flow from operations, equipment and vendor financing and borrowings under our credit facility. We may be unable to generate sufficient cash from operations and other capital resources to maintain planned or future levels of capital expenditures which, among other things, may prevent us from acquiring new equipment (including equipment with a lower emissions profile) or properly maintaining our existing equipment. Any disruptions or volatility in the global financial markets may lead to an increase in interest rates or a contraction in credit availabil ity impacting our ability to finance our operations. Our borrowing base changed from $61.1 million as of December 31, 2021 to approximate ly $79.0 million as of February 18, 2022 due to a change in our eligible accounts receivable. If our customer activity levels decline in the future resulting in a decrease in our eligible accounts receivable, our borrowing base could decline. This could put us at a competitive disadvantage or interfere with our growth plans. Further, our actual capital expenditures could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of liquidity we have available, we could be required to seek additional sources of capital, which may include debt financing, joint venture partnerships, sales of assets, offerings of debt or equity securities or other means. We may not be able to obtain any such alternative source of capital. We may be required to curtail or eliminate contemplated activities. If we can obtain alternative sources of capital, the terms of such alternative may not be favorable to us. In particular, the terms of any debt financing may include covenants that significantly restrict our operations. Our inability to grow as planned may reduce our chances of maintaining and improving profitability. +Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, geopolitical issues, public health crises (including the COVID-19 pandemic), interest rates, inflation, the availability and cost of credit in the United States and foreign financial markets have contributed to increased economic uncertainty and diminished expectations for the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, could +14 +precipitate an economic slowdown. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. T he historically unpredictable nature of oil and natural gas prices, and particularly the volatility over the past two years have caused a reduction in our customers’ spending and associated drilling and completion activities, which had and may continue to have an adverse effect on our revenue and cash flows. If the economic climate in the United States or abroad deteriorates or remains uncertain, worldwide demand for petroleum products could diminish, which could impact the price at which oil, natural gas and natural gas liquids can be sold, which could affect the ability of our customers to continue operations and adversely impact our results of operations, liquidity and financial condition. +Our indebtedness and liquidity needs could restrict our operations and make us more vulnerable to adverse economic conditions. +Our existing and future indebtedness, whether incurred in connection with acquisitions, operations or otherwise, may adversely affect our operations and limit our growth, and we may have difficulty making debt service payments on such indebtedness as payments become due. Our level of indebtedness may affect our operations in several ways, including the following: +• increasing our vulnerability to general adverse economic and industry conditions; +• the covenants that are contained in the agreements governing our indebtedness could limit our ability to borrow funds, dispose of assets, pay dividends and make certain investments; +• our debt covenants could also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry; +• any failure to comply with the financial or other debt covenants, including covenants that impose requirements to maintain certain financial ratios, could result in an event of default, which could result in some or all of our indebtedness becoming immediately due and payable; +• our level of debt could impair our ability to obtain additional financing, or obtain additional financing on favorable terms in the future for working capital, capital expenditures, acquisitions or other general corporate purposes; and +• our business may not generate sufficient cash flow from operations to enable us to meet our obligations under our indebtedness. +Restrictions in our ABL Credit Facility and any future financing agreements may limit our ability to finance future operations or capital needs or capitalize on potential acquisitions and other business opportunities. +The operating and financial restrictions and covenants in our credit facility and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities. For example, our ABL Credit Facility restricts or limits our ability to: +• grant liens; +• incur additional indebtedness; +• engage in a merger, consolidation or dissolution; +• enter into transactions with affiliates; +• sell or otherwise dispose of assets, businesses and operations; +• materially alter the character of our business as currently conducted; and +• make acquisitions, investments and capital expenditures. +Furthermore, our ABL Credit Facility contains certain other operating and financial covenants. Our ability to comply with the covenants and restrictions contained in the ABL Credit Facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in our ABL Credit Facility, a significant portion of our indebtedness may become immediately due and +15 +payable and our lenders’ commitment to make further loans to us may terminate. Further, our borrowing base, as redetermined monthly, is tied to 85.0% of eligible accounts receivable. Changes to our operational activity levels or customer concentration levels have an impact on our total eligible accounts receivable, which could result in significant changes to our borrowing base and therefore our availability under our ABL Credit Facility. For example, our borrowing base changed from $61.1 million as of December 31, 2021 to approximatel y $79.0 million as of February 18, 2022 due to a change in our eligible accounts receivable. If our customer activity declines in the future, our borrowing base could decline. If our borrowing base is reduced below the amount of our outstanding borrowings, we will be required to re pay the excess borrowings immediately on demand by the lenders. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Any subsequent replacement of our ABL Credit Facility or any new indebtedness could have similar or greater restrictions. Please read " Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facility and Other Financing Arrangements. " +We may incur debt and our indebtedness could adversely affect our operations and financial condition. +Our business is capital intensive and we may seek to raise debt capital to fund our business and growth strategy. Indebtedness could have negative consequences that could materially and adversely affect our business, financial condition, results of operations, cash flows and prospects, such as: +• requiring us to dedicate a substantial portion of our cash flow from operating activities to payments on our indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, research and development efforts, potential strategic acquisitions and other general corporate purposes; +• limiting our ability to obtain additional financing to fund growth, working capital or capital expenditures, or to fulfill debt service requirements or other cash requirements; +• increasing our vulnerability to economic downturns and changing market conditions; and +• placing us at a competitive disadvantage relative to competitors that have less debt. +Furthermore, interest rates on future indebtedness could be higher than current levels, causing our financing costs to increase accordingly. In addition, LIBOR and other “benchmark” rates are subject to ongoing national and international regulatory scrutiny and reform. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of June 2023 for US dollars setting. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and we are unable to predict the effect of any such alternatives on our business and results of operations. However, if LIBOR is phased out without a replacement benchmark, our only option under the ABL Credit Facility will be to borrow at the Base Rate (as defined in the ABL Credit Facility) until an alternative benchmark rate is selected. Changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our shares, and a rising interest rate environment could have an adverse impact on the price of our shares, our ability to issue equity or incur debt. +We may record losses or impairment charges related to goodwill and long-lived assets. +Changes in future market conditions and prolonged periods of low utilization, changes in technology or the sale of assets below their carrying value may cause us to experience losses in our results of operations. These events could result in the recognition of impairment charges or losses from asset sales that negatively impact our financial results. Significant impairment charges or losses from asset sales as a result of a decline in market conditions or otherwise could have a material adverse effect on our results of operations in future periods. For example, in 2021, we recorded loss on disposal of asset $3.5 million in connection with the sale of our two turbines . In addition, our DuraStim® equipment remains under evaluation and has yet to be commercialized. If w e are not able to successfully commercialize the DuraStim® equipment, and are not able to deploy the equipment for alternative uses, we will incur impairment losses on the carrying value of the DuraStim® equipment. As of December 31, 2021, the carrying value of our DuraStim® equipment is approximately $90 million. If oil and natural gas prices trade at depressed price levels as experienced in the first half of 2020, and our equipment remains idle or under-utilized, the estimated fair value of such equipment may decline, which will result in additional impairment expense in the future. +Our operations are subject to unforeseen interruptions and hazards inherent in the oil and natural gas industry, for which we may not be adequately insured and which could cause us to lose customers and substantial revenue. +Our operations are exposed to the risks inherent to our industry, such as equipment defects, vehicle accidents, worksite injuries to our or third-party personnel, fires, explosions, blowouts, surface cratering, uncontrollable flows of gas or well fluids, pipe or pipeline failures, abnormally pressured formations and various environmental hazards, such as oil +16 +spills and releases of, and exposure to, hazardous substances. For example, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including hydrochloric acid and other chemical additives. In addition, our operations are exposed to potential natural disasters, including blizzards, tornadoes, storms, floods, other adverse weather conditions and earthquakes. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean‑up responsibilities, regulatory investigations and penalties or other damage resulting in curtailment or suspension of our operations or the loss of customers. The cost of managing such risks may be significant. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our environmental or safety record as unacceptable, which could cause us to lose customers and substantial revenues. +Our insurance may not be adequate to cover all losses or liabilities we may suffer. We are also self-insured up to $10 million per occurrence for certain losses arising from or attributable to fire and/or explosion at the wellsites. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased and could escalate further. In addition, sub‑limits have been imposed for certain risks. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our business, results of operations and financial condition. In addition, we may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. +Since hydraulic fracturing activities are part of our operations, they are covered by our insurance against claims made for bodily injury, property damage and clean‑up costs stemming from a sudden and accidental pollution event. However, we may not have coverage if we are unaware of the pollution event and unable to report the " occurrence” to our insurance company within the time frame required under our insurance policy. In addition, these policies do not provide coverage for all liabilities, and the insurance coverage may not be adequate to cover claims that may arise, or we may not be able to maintain adequate insurance at rates we consider reasonable. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +A terrorist attack, armed conflict or political or civil unrest could harm our business. +Terrorist activities, anti‑terrorist efforts, other armed conflicts and political or civil unrest could adversely affect the U.S. and global economies and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants, refineries or transportation facilities are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas, which, in turn, could also reduce the demand for our services. Terrorist activities, the threat of potential terrorist activities, political or civil unrest and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies. +We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition and results of operations. +We operate with most of our customers under master service agreements ( " MSAs " ). We endeavor to allocate potential liabilities and risks between the parties in the MSAs. Generally, under our MSAs, including those relating to our hydraulic fracturing services, we assume responsibility for, including control and removal of, pollution or contamination which originates above surface and originates from our equipment or services. Our customer assumes responsibility for, including control and removal of, all other pollution or contamination which may occur during operations, including that which may result from seepage or any other uncontrolled flow of drilling fluids. We may have liability in such cases if we are negligent or commit willful acts. Generally, our customers also agree to indemnify us against claims arising from their employees’ personal injury or death to the extent that, in the case of our hydraulic fracturing operations, their employees are injured or their properties are damaged by such operations, unless resulting from our gross negligence or willful misconduct. Similarly, we generally agree to indemnify our customers for liabilities arising from personal injury to or death of any of our employees, unless resulting from gross negligence or willful misconduct of the customer. In addition, our customers generally agree to indemnify us for loss or destruction of customer‑owned property or equipment and in turn, we agree to indemnify our customers for loss or destruction of property or equipment we own. Losses due to catastrophic events, such as blowouts, are generally the responsibility of the customer. However, despite this general allocation of risk, we might not succeed in enforcing such contractual allocation, might incur an unforeseen liability +17 +falling outside the scope of such allocation or may be required to enter into an MSA with terms that vary from the above allocations of risk. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in our being named as a defendant in lawsuits asserting large claims. As a result, we may incur substantial losses which could materially and adversely affect our financial condition and results of operation. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. For example, we depend on digital technologies to perform many of our services and process and record operational and accounting data. At the same time, cyber incidents, including deliberate attacks or unintentional events, have increased. The U.S. government has issued public warnings indicating that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary information, personal information and other data, or other disruption of our business operations. In addition, certain cyber incidents, such as unauthorized surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks, including cyberattacks, may not be sufficient and may not protect against or cover all of the losses we may experience as a result of the realization of such risks. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate the effects of cyber incidents. +We may grow through acquisitions and our failure to properly plan and manage those acquisitions may adversely affect our performance. +We have completed and may in the future pursue, asset acquisitions or acquisitions of businesses. Any acquisition of assets or businesses involves potential risks, including the failure to realize expected profitability, growth or accretion; environmental or regulatory compliance matters or liability; title or permit issues; the incurrence of significant charges, such as impairment of goodwill, or property and equipment or restructuring charges; and the incurrence of unanticipated liabilities and costs for which indemnification is unavailable or inadequate. The process of upgrading acquired assets to our specifications and integrating acquired assets or businesses may also involve unforeseen costs and delays or other operational, technical and financial difficulties and may require a significant amount of time and resources and may divert management’s attention from existing operations or other priorities. +We must plan and manage any acquisitions effectively to achieve revenue growth and maintain profitability in our evolving market. Any failure to manage acquisitions effectively or integrate acquired assets or businesses into our existing operations successfully, or to realize the expected benefits from an acquisition or minimize any unforeseen operational difficulties, could have a material adverse effect on our business, financial condition, prospects or results of operations. +The Logan Lawsuit could have a material adverse effect on our business, financial condition, results of operation, and cash flows. +In September 2019, a complaint, captioned Richard Logan, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. ProPetro Holding Corp., et al., (the "Logan Lawsuit"), was filed against the Company and certain of its then current and former officers and directors in the U.S. District Court for the Western District of Texas. +In July 2020, the Logan Lawsuit Lead Plaintiffs Nykredit Portefølje Administration A/S, Oklahoma Firefighters Pension and Retirement System, Oklahoma Law Enforcement Retirement System, Oklahoma Police Pension and Retirement System, and Oklahoma City Employee Retirement System, and additional named plaintiff Police and Fire Retirement System of the City of Detroit, individually and on behalf of a putative class of shareholders who purchased the Company’s common stock between March 17, 2017 and March 13, 2020, filed a third amended class action complaint in the U.S. District Court for the Western District of Texas, alleging violations of Sections 10(b) and 20(a) of the Exchange Act, as amended, and Rule l0b-5 promulgated thereunder, and Sections 11 and 15 of the Securities Act of 1933, as amended, based on allegedly inaccurate or misleading statements, or omissions of material facts, about the Company’s business, operations and prospects against the Company, certain former officers and current and former directors. On September 13, 2021, the Court partially granted and partially denied motions to dismiss filed by the Company and the individual defendants. Discovery is still ongoing. +In May 2020, the U.S. District Court for the Western District of Texas consolidated two shareholder derivative lawsuits previously filed against the Company and certain of its current and former officers and directors into a single lawsuit captioned In re ProPetro Holding Corp. Derivative Litigation (the "Shareholder Derivative Lawsuit"). In August +18 +2020, the plaintiffs in the Shareholder Derivative Lawsuit filed a consolidated complaint alleging (i) breaches of fiduciary duties, (ii) unjust enrichment and (iii) contribution. The plaintiffs did not quantify any alleged damages in their complaint but, in addition to attorneys’ fees and costs, they seek various forms of relief, including (i) damages sustained by the Company as a result of the alleged misconduct, (ii) punitive damages and (iii) equitable relief in the form of improvements to the Company’s governance and controls. On September 15, 2021, the Court granted the Company's motion to dismiss the complaint in its entirety, without prejudice. +On November 19, 2021, the Company received a demand letter from a law firm representing one of the purported shareholders of the Company that previously filed the dismissed Shareholder Derivative Lawsuit. The demand letter alleged facts and claims substantially similar to the Shareholder Derivative Lawsuit. The Board of Directors has constituted a committee to evaluate the demand letter and recommend a course of action to the Board of Directors, and the committee has retained counsel to assist with its review. The committee’s review is ongoing. +We are presently unable to predict the duration, scope or result of the Logan Lawsuit or any other related lawsuit or investigation. As of December 31, 2021, no provision was made by the Company in connection with this pending lawsuit as the final outcome cannot be reasonably estimated. +The ongoing Logan Lawsuit and any related future litigation give rise to risks and uncertainties that could adversely affect our business, results of operations and financial condition. Such risks and uncertainties include, but are not limited to, uncertainty as to the scope, timing and ultimate outcome of the lawsuit, including the potential impact to the Company in the event of an adverse outcome and on the market price of the Company’s common stock; the costs and expenses of the Logan Lawsuit including legal fees and possible settlement in the event of an adverse outcome; the risk of additional potential litigation or regulatory action arising from matters relating to this lawsuit. +The outcome of the Logan Lawsuit and any other litigation is necessarily uncertain. We could be forced to expend significant resources in the defense of this lawsuit or future ones, and we may not prevail. +We maintain director and officer insurance; however, our insurance coverage is subject to certain exclusions (including, for example, any required SEC disgorgement or penalties) and we are responsible for meeting certain deductibles under the policies. Moreover, we cannot assure you that our insurance coverage will adequately protect us from claims made in the Logan Lawsuit. Further, as a result of the pending litigation and investigation the costs of insurance may increase and the availability of coverage may decrease. As a result, we may not be able to maintain our current levels of insurance at a reasonable cost, or at all. +Risks Related to Customers, Suppliers and Competition +Reliance upon a few large customers may adversely affect our revenue and operating results. +The majority of our revenue is generated from our hydraulic fracturing services. Due to the large percentage of our revenue historically derived from our hydraulic fracturing services with recurring customers and the limited availability of our fracturing units, we have had some degree of customer concentration. Our top ten customers represented approximately 91.4% , 97.3% and 95.5% of our consolidated revenue for the years ended December 31, 2021, 2020 and 2019, respectively. It is likely that we will depend on a relatively small number of customers for a significant portion of our revenue in the future. If a major customer fails to pay us, revenue would be impacted and our operating results and financial condition could be harmed. +Additionally, if we were to lose any material customer, we may not be able to redeploy our equipment at similar utilization or pricing levels and such loss could have an adverse effect on our business until the equipment is redeployed at similar utilization or pricing levels. One customer, Pioneer, accounted for 54.2% of our revenue for the year ended December 31, 2021 . The revenue generated from our relationship with Pioneer is largely derived from pressure pumping and related services provided pursuant to the Pressure Pumping Services Agreement (the "Pioneer Services Agreement"). Although the Pioneer Services Agreement provides for the provision of services for a term of up to 10 years, Pioneer has the right to terminate the Pioneer Services Agreement in its sole discretion, in whole or part, effective as of December 31 of each of the calendar years of 2022, 2024 and 2026. While management believes our relationship with Pioneer will continue beyond December 31, 2022, if Pioneer elects to terminate the Pioneer Services Agreement effective December 31, 2022, or seeks to renegotiate the terms on which we provide services to Pioneer, it could have a material adverse effect on our financial condition, results of operations and cash flows. +19 +We face significant competition that may cause us to lose market share, and competition in our industry has intensified during the industry downturn. +The oilfield services industry is highly competitive and has relatively few barriers to entry. The principal competitive factors impacting sales of our services are price, reputation and technical expertise, equipment and service quality and health and safety standards. The market is also fragmented and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial and other resources than we do. Our larger competitors’ greater resources could allow those competitors to compete more effectively than we can. For instance, our larger competitors may offer services at below‑market prices or bundle ancillary services at no additional cost to our customers. We compete with large national and multi‑national companies that have longer operating histories, greater financial, technical and other resources and greater name recognition than we do. Several of our competitors provide a broader array of services and have a stronger presence in more geographic markets. In addition, we compete with several smaller companies capable of competing effectively on a regional or local basis. +Some jobs are awarded on a bid basis, which further increases competition based on price. Pricing is often the primary factor in determining which qualified contractor is awarded a job. The competitive environment may be further intensified by tighter emissions standards in the energy industry and mergers and acquisitions among oil and natural gas companies or other events that have the effect of reducing the number of available customers. As a result of competition, we may lose customers or customer work and lose market share or be unable to maintain or increase prices for our present services or to acquire additional business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. +Our competitors may be able to respond more quickly to new or emerging technologies and services and changes in customer requirements. The amount of equipment available may exceed demand, which could result in active price competition. In addition, some exploration and production companies have commenced completing their wells using their own hydraulic fracturing equipment and personnel. Any increase in the development and utilization of in‑house fracturing capabilities by our customers could decrease the demand for our services and have a material adverse impact on our business. +Pressure on pricing for our services resulting from the industry downturn has impacted, and may continue to impact, our ability to maintain utilization and pricing for our services or implement price increases. During periods of declining pricing for our services, we may not be able to reduce our costs accordingly, which could further adversely affect our results of operations. Also, we may not be able to successfully increase prices without adversely affecting our utilization levels. The inability to maintain our utilization and pricing levels, or to increase our prices as costs increase, could have a material adverse effect on our business, financial condition and results of operations. +Furthermore, competition among oilfield services and equipment providers is affected by each provider’s reputation for safety and quality. We cannot assure that we will be able to maintain our competitive position. +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our business, results of operations and financial condition. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we fail to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re‑market or otherwise use the production could have a material adverse effect on our business, results of operations and financial condition. In weak economic environments, we may experience increased delays and failures to pay due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets or other sources of capital. The unpredictable nature of oil and gas prices in recent years and the economic disruption from the COVID-19 pandemic may have negatively impacted the financial condition and liquidity of some of our customers, and future declines or continued volatility could impact their ability to meet their financial obligations to us. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, results of operations, and financial condition. +Our business depends upon the ability to obtain specialized equipment, parts and key raw materials, including sand and chemicals, from third‑party suppliers, and we may be vulnerable to delayed deliveries and future price increases. +We purchase specialized equipment, parts and raw materials (including, for example, frac sand, chemicals and fluid ends) from third party suppliers and affiliates. In some cases, our customers are responsible for supplying necessary raw +20 +materials (including frac sand), parts and/or equipment. At times during the business cycle, there is a high demand for hydraulic fracturing and other oilfield services and extended lead times to obtain equipment and raw materials needed to provide these services. For example, in 2021, we have seen significant disruption in supply chains around the world caused by the COVID-19 pandemic that have impacted our operations. Should our current suppliers (or our customers’ suppliers where applicable) be unable or unwilling to provide the necessary equipment, parts or raw materials or otherwise fail to deliver the products timely and/or in the quantities required, any resulting delays in the provision of our services could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, future price increases for this type of equipment, parts and raw materials could negatively impact our ability to purchase new equipment, to update or expand our existing fleets, to timely repair equipment in our existing fleets or meet the current demands of our customers. +We may be required to pay fees to certain of our sand suppliers based on minimum volumes under long-term contracts regardless of actual volumes received. +We enter into purchase agreements with sand suppliers (the " Sand suppliers " ) to secure supply of sand in the normal course of our business. The agreements with the Sand suppliers require that we purchase minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the mi nimum volumes or a fixed price per ton of unpurchased volumes. Our current agreements with Sand suppliers expire at different times prior to December 31, 2025. +Risks Related to Employees +We rely on a few key employees whose absence or loss could adversely affect our business. +Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services could adversely affect our business. In particular, the loss of the services of one or more members of our executive team, such as our Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer, Chief Accounting Officer and General Counsel could disrupt our operations. We do not maintain " key person " life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees. +If we are unable to employ a sufficient number of skilled and qualified workers, our capacity and profitability could be diminished and our growth potential could be impaired. +The delivery of our services requires skilled and qualified workers with specialized skills and experience who can perform physically demanding work. As a result of the volatility of the oilfield services industry and the demanding nature of the work, workers may choose to pursue employment in fields that offer a less challenging work environment at wage rates that are competitive. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled workers. As a result of the COVID-19 pandemic, we have experienced difficulties in attracting and retaining skilled workers. If demand for our services increases, we may experience difficulty in hiring or re-hiring skilled and unskilled workers in the future to meet that demand. At times, the demand for skilled workers in our geographic areas of operations is high, and the supply is limited. As a result, competition for experienced oilfield services personnel is intense, and we face significant challenges in competing for crews and management with large and well‑established competitors. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Furthermore, if we are unable to adjust wages to account for rapidly rising inflationary cost, there could be a reduction in the available skilled labor force we could attract or retain. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired. +Risks Related to Regulatory Matters +We are subject to environmental laws and regulations, and future compliance, claims, and liabilities relating to such matters may have a material adverse effect on our results of operations, financial position or cash flows. +The nature of our operations, including the handling, storing, transporting and disposing of a variety of fluids and substances, including hydraulic fracturing fluids, which can contain substances such as hydrochloric acid, and other regulated substances, air emissions and wastewater discharges exposes us to some risks of environmental liability, including the release of pollutants from oil and natural gas wells and associated equipment to the environment. The cost of compliance with these laws can be significant. Failure to properly handle, transport or dispose of these materials or +21 +otherwise conduct our operations in accordance with these and other environmental laws could expose us to substantial liability for administrative, civil and criminal penalties, cleanup and site restoration costs and liability associated with releases of such materials, damages to natural resources and other damages, as well as potentially impair our ability to conduct our operations. Such liability is commonly on a strict, joint and several liability basis, without regard to fault. Liability may be imposed as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Neighboring landowners and other third parties may file claims against us for personal injury or property damage allegedly caused by the release of pollutants into the environment. Environmental laws and regulations have changed in the past, and they may change in the future and become more stringent. For example, following the election of President Biden and Democratic control in both houses of Congress, President Biden has made climate change a focus of his administration. For more information, see our risk factor titled, “Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide.” Separately, current and future claims and liabilities may have a material adverse effect on us because of potential adverse outcomes, defense costs, diversion of management resources, unavailability of insurance coverage and other factors. The ultimate costs of these liabilities are difficult to determine and may exceed any reserves we may have established. If existing environmental requirements or enforcement policies change, we may be required to make significant unanticipated capital and operating expenditures. +Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide. +The threat of climate change continues to attract considerable attention in the United States and in foreign countries. Numerous proposals have been made and could continue to be made at the international, national, regional and state levels of government to monitor and limit existing emissions of GHGs as well as to restrict or eliminate future GHG emissions. As a result, our operations as well as the operations of our oil and natural gas exploration and production customers are subject to a series of regulatory, political, litigation, and financial risks associated with the production and processing of fossil fuels and emission of GHGs. +In the United States, no comprehensive climate change legislation has been implemented at the federal level. However, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States and together with the DOT, implementing GHG emissions limits on vehicles manufactured for operation in the United States. In September 2020, the Trump Administration revised prior regulations to rescind certain methane standards and remove the transmission and storage segment from the oil and natural gas source category and rescinded the methane-segments from the source category for certain regulations. However, subsequently, the U.S. Congress approved, and President Biden signed into law, a resolution under the Congressional Review Act to repeal the September 2020 revisions to the methane standards, effectively reinstating the prior standards. Additionally, in November 2021, the EPA issued a proposed rule that, if finalized, would establish OOOO(b) new source and OOOO(c) first-time existing source standards of performance for methane and volatile organic compound emissions for oil and gas facilities. Operators of affected facilities will have to comply with specific standards of performance to include leak detection using optical gas imaging and subsequent repair requirement, and reduction of emissions by 95% through capture and control systems. The EPA plans to issue a supplemental proposal in 2022 containing additional requirements not included in the November 2021 proposed rule and anticipates the issuance of a final rule by the end of the year. +Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored " Paris Agreement, " requires member states to submit non-binding, individually-determined reduction goals known as NDC’s every five years after 2020. Following President Biden’s executive order in January 2021, the United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. Additionally, at the COP26 in Glasgow in November 2021, the United States and the European Union jointly announced the launch of a Global Methane Pledge; an initiative committing to a collective goal of reducing global methane emissions by at least 30 percent from 2020 levels by 2030, including “all feasible reductions” in the energy sector. However, the impacts of these actions are unclear at this time. +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, including climate-change-related pledges made by certain +22 +candidates for public office. On January 27, 2021, President Biden issued an executive order that commits to substantial action on climate change, calling for, among other things, the increased use of zero-emissions vehicles by the federal government, the elimination of subsidies provided to the fossil fuel industry, and an increased emphasis on climate-related risk across government agencies and economic sectors. The executive order also suspends the issuance of new leases for oil and gas development on federal land; for more information, see our regulatory disclosure titled “Regulation of Hydraulic Fracturing and Related Activities. Other actions that the Biden Administration may take include the imposition of more restrictive requirements for the development of pipeline infrastructure or LNG export facilities, or more restrictive GHG emissions limitations for oil and gas facilities. Litigation risks are also increasing as a number of cities and other local governments have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. +There are also increasing financial risks for companies in the fossil fuel sector as shareholders currently invested in fossil-fuel energy companies concerned about the potential effects of climate change may elect in the future to shift some or all of their investments into non-fossil fuel related sectors. Institutional lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable lending practices and some of them may elect not to provide funding for fossil fuel energy companies. For example, at COP26, the Glasgow Financial Alliance for Net Zero ( " GFANZ " ) announced that commitments from over 450 firms across 45 countries had resulted in over $130 trillion in capital committed to net zero goals. The various sub-alliances of GFANZ generally require participants to set short-term, sector-specific targets to transition their financing, investing, and/or underwriting activities to net zero emissions by 2050. There is also a risk that financial institutions will be required to adopt policies that have the effect of reducing the funding provided to the fossil fuel sector. In late 2020, the Federal Reserve announced that it has joined the Network for Greening the Financial System ( " NGFS " ), a consortium of financial regulators focused on addressing climate-related risks in the financial sector. Subsequently, the Federal Reserve has issued a statement in support of the efforts of the NGFS to identify key issues and potential solutions for the climate-related challenges most relevant to central banks and supervisory authorities. Limitation of investments in and financings for fossil fuel energy companies could result in the restriction, delay or cancellation of drilling programs or development or production activities. Additionally, the United States Securities and Exchange Commission has announced an intention to promulgate rules requiring climate disclosures. Although the form and substance of these requirements is not yet known, this may result in additional costs to comply with any such disclosure requirements. +The adoption and implementation of new or more stringent international, federal or state legislation, regulations or other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate GHG emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for, oil and natural gas, which could reduce demand for our services and products. Additionally, political, litigation and financial risks may result in our oil and natural gas customers restricting or cancelling production activities, incurring liability for infrastructure damages as a result of climatic changes, or impairing their ability to continue to operate in an economic manner, which also could reduce demand for our services and products. One or more of these developments could have a material adverse effect on our business, financial condition and results of operation +Moreover, climate change may result in various physical risks, such as the increased frequency or intensity of extreme weather events or changes in meteorological and hydrological patterns, that could adversely impact us, our customers’ and our suppliers’ operations. Such physical risks may result in damage to our customers’ facilities or otherwise adversely impact our operations, such as if facilities are subject to water use curtailments in response to drought, or demand for our customers’ products, such as to the extent warmer winters reduce the demand for energy for heating purposes, which may ultimately reduce demand for the products and services we provide. Such physical risks may also impact our suppliers, which may adversely affect our ability to provide our products and services. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +23 +Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +Our hydraulic fracturing operations are a significant component of our business, and it is an important and common practice that is used to stimulate production of hydrocarbons, particularly oil and natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has previously issued a series of rules under the CAA that establish new emission control requirements for emissions of volatile organic compounds and methane from certain oil and natural gas production and natural gas processing operations and equipment. Separately, the BLM finalized a rule governing hydraulic fracturing on federal lands but this rule was subsequently rescinded. Although several of these rulemakings have been rescinded, modified or subjected to legal challenges, new or more stringent regulations may be promulgated by the Biden Administration. For example, in January 2021, President Biden issued an executive order suspending new leasing activities, but not operations under existing leases, for oil and gas exploration and production on non-Indian federal lands pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices that take into consideration potential climate and other impacts associated with oil and gas activities on such lands and waters. Although the federal court for the Western District of Louisiana issued a preliminary injunction against the leasing pause, in response to the executive order, the DOI issued a report recommending various changes to the federal leasing program, though many such changes would require Congressional action. As a result, we cannot predict the final scope of regulations or restrictions that may apply to oil and gas operations on federal lands. However, any regulations that ban or effectively ban such operations may adversely impact demand for our products and services. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in recent sessions of Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +Federal and state governments have also investigated whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for wastewater disposal wells in 2014 that imposed certain permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission released well completion seismicity guidelines for operators in the SCOOP and STACK require hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division has previously issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The TRRC has adopted similar rules and, in September 2021, issued a notice to disposal well operators in the Gardendale Seismic Response Area near Midland, Texas to reduce daily injection volumes following multiple earthquakes above a 3.5 magnitude over an 18 month period. The notice also required disposal well operators to provide injection data to TRRC staff to further analyze seismicity in the area. Subsequently, the TRRC ordered the indefinite suspension of all deep oil and gas produced water injection wells in the area, effective December 31, 2021. While we cannot predict the ultimate outcome of these actions, any action that temporarily or permanently restricts the availability of disposal capacity for produced water or other oilfield fluids may increase our customers’ costs or require them to suspend operations, which may adversely impact demand for our products and services +Increased regulation of hydraulic fracturing and related activities could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. +24 +Increasing trucking regulations may increase our costs and negatively impact our results of operations. +In connection with our business operations, including the transportation and relocation of our hydraulic fracturing equipment and shipment of frac sand, we operate trucks and other heavy equipment. As such, we operate as a motor carrier in providing certain of our services and therefore are subject to regulation by the DOT and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations, driver licensing, insurance requirements, financial reporting and review of certain mergers, consolidations and acquisitions, and transportation of hazardous materials. Our trucking operations are subject to possible regulatory and legislative changes that may increase our costs. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive or work in any specific period, onboard black box recorder device requirements or limits on vehicle weight and size. +Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Matters such as the weight and dimensions of equipment are also subject to federal and state regulations. From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +Certain motor vehicle operators require registration with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria that could result in a suspension of operations. +Increased attention to environmental, social and governance (“ESG”) matters, conservation measures, commercial development and technological advances could reduce demand for oil and natural gas and our services. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, increased attention to climate change and other ESG matters, and technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas, resulting in reduced demand for oilfield services. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +The commercial development of economically‑viable alternative energy sources and related products (such as electric vehicles, wind, solar, geothermal, tidal, fuel cells and biofuels) could have a similar effect. In addition, certain U.S. federal income tax deductions currently available with respect to oil and natural gas exploration and development, including the allowance of percentage depletion for oil and natural gas properties, may be eliminated as a result of proposed legislation. Any future decreases in the rate at which oil and natural gas reserves are discovered or developed, whether due to the passage of legislation, increased governmental regulation leading to limitations, or prohibitions on exploration and drilling activity, including hydraulic fracturing, or other factors, could have a material adverse effect on our business and financial condition, even in a stronger oil and natural gas price environment. +Moreover, while we may create and publish voluntary disclosures regarding ESG matters from time to time, certain statements in those voluntary disclosures may be based on hypothetical expectations and assumptions that may or may not be representative of current or actual risks or events or forecasts of expected risks or events, including the costs associated therewith. Such expectations and assumptions are necessarily uncertain and may be prone to error or subject to misinterpretation given the long timelines involved and the lack of an established single approach to identifying, measuring and reporting on many ESG matters. Additionally, we may announce various targets or product and service offerings in an attempt to improve our ESG profile. However, we cannot guarantee that we will be able to meet any such targets or that such targets or offerings will have the intended results on our ESG profile, including but not limited to as a result of unforeseen costs, consequences or technical difficulties associated with such targets or offerings. Also, despite any voluntary actions, we may receive pressure from certain investors, lenders or other groups to adopt more aggressive climate or other ESG-related goals or policies, but we cannot guarantee that we will be able to implement such goals because of potential costs or technical or operational obstacles. +In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings and recent activism directed at shifting funding away from companies with energy-related assets could lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital. Additionally, to the extent ESG matters negatively impact our +25 +reputation, we may not be able to compete as effectively to recruit or retain employees, which may adversely affect our operations. +Certain of our completion services, particularly our hydraulic fracturing services, are substantially dependent on the availability of water. Restrictions on our or our customers’ ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows. +Water is an essential component of unconventional shale oil and natural gas production during both the drilling and hydraulic fracturing processes. Over the past several years, certain of the areas in which we and our customers operate have experienced extreme drought conditions and competition for water in such areas is growing. In addition, some state and local governmental authorities have begun to monitor or restrict the use of water subject to their jurisdiction for hydraulic fracturing to ensure adequate local water supply. For instance, some states require E&P companies to report certain information regarding the water they use for hydraulic fracturing and to monitor the quality of groundwater surrounding some wells stimulated by hydraulic fracturing. Generally, our water requirements are met by our customers from sources on or near their sites, but there is no assurance that our customers will be able to obtain a sufficient supply of water from sources in these areas. Our or our customers’ inability to obtain water from local sources or to effectively utilize flowback water could have an adverse effect on our financial condition, results of operations and cash flows. +Risks Related to our Tax Matters +Our ability to use our net operating loss carryforwards may be limited. +The Tax Cuts and Jobs Act (the " TCJA " ) included a reduction to the maximum deduction allowed for net operating losses generated in tax years after December 31, 2017 and the elimination of carrybacks of net operating losses. Under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which modified the TCJA, U.S. federal net operating loss carryforwards ("NOLs") generated in taxable periods beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such NOLs in taxable years beginning after December 31, 2020, is limited to 80% of taxable income. As of December 31, 2021, we had approximately $408.0 million of federal NOLs, some of which will begin to expire in 2035. Approximately $219.5 million of our federal NOLs relate to pre-2018 periods. As of December 31, 2021, our state net operating losses were approximately $50.1 million and will begin to expire in 2024. +Utilization of these NOLs depends on many factors, including our future income, which cannot be assured. In addition, Section 382 ( " Section 382 " ) of the Internal Revenue Code of 1986, as amended (the " Code " ), generally imposes an annual limitation on the amount of taxable income that may be offset by NOLs when a corporation has undergone an " ownership change " (as determined under Section 382). Generally, a change of more than 50% in the ownership of a corporation’s stock, by value, over a three‑year period constitutes an ownership change for U.S. federal income tax purposes. Any unused annual limitation may, subject to certain limitations, be carried over to later years. We may experience ownership changes, which may result in annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long‑term tax‑exempt rate as defined in Section 382, increased under certain circumstances as a result of recognizing built‑in gains in our assets existing at the time of the ownership change. The limitations arising from ownership changes may prevent utilization of our NOLs prior to their expiration. Future ownership changes or regulatory changes could further limit our ability to utilize our NOLs. To the extent we are not able to offset our future income with our NOLs, this could adversely affect our operating results and cash flows if we attain profitability. +Risks Inherent to an Investment in our Common Stock +We are subject to certain requirements of Section 404 of the Sarbanes-Oxley Act ( " Section 404 " ). If we or our auditors identify and report material weaknesses in internal control over financial reporting, our investors may lose confidence in our reported information and our stock price may be negatively affected. +We are required to comply with certain provisions of Section 404, which requires that we document and test our internal control over financial reporting and issue our management’s assessment of our internal control over financial reporting. This section also requires that our independent registered public accounting firm issue an attestation report on such internal control. +If we or our auditors identify and report material weaknesses in our internal control over financial reporting, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and +26 +require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. +Certain provisions of our certificate of incorporation, and bylaws, as well as Delaware law, may discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock. +Our certificate of incorporation authorizes our board of directors (the " Board " ) to issue preferred stock without shareholder approval. If our Board elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our shareholders, including: +• limitations on the removal of directors; +• limitations on the ability of our shareholders to call special meetings; +• advance notice provisions for shareholder proposals and nominations for elections to the Board to be acted upon at meetings of shareholders; +• providing that the Board is expressly authorized to adopt, or to alter or repeal our bylaws; and +• establishing advance notice and certain information requirements for nominations for election to our Board or for proposing matters that can be acted upon by shareholders at shareholder meetings. +Our business could be negatively affected as a result of the actions of activist shareholders. +Publicly traded companies have increasingly become subject to campaigns by investors seeking to increase shareholder value by advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases, sales of assets or even sale of the entire company. Given our shareholder composition and other factors, it is possible such shareholders or future activist shareholders may attempt to effect such changes or acquire control over us. Responding to proxy contests and other actions by such activist shareholders or others in the future would be costly and time-consuming, disrupt our operations and divert the attention of our Board and senior management from the pursuit of business strategies, which could adversely affect our results of operations and financial condition. Additionally, perceived uncertainties as to our future direction as a result of shareholder activism or changes to the composition of the Board may lead to the perception of a change in the direction of our business, instability or lack of continuity which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. If customers choose to delay, defer or reduce transactions with us or transact with our competitors instead of us because of any such issues, then our business, financial condition, revenues, results of operations and cash flows could be adversely affected. +Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to pursue actions in another judicial forum for disputes with us or our directors, officers, employees or agents. +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our shareholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the " DGCL " ), our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. +The exclusive forum provision would not apply to suits brought to enforce any liability or duty created by the Securities Act or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. +27 +The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation or similar governing documents has been challenged in legal proceedings, and it is possible that a court could find the choice of forum provisions contained in our certificate of incorporation to be inapplicable or unenforceable, including with respect to claims arising under the U.S. federal securities laws. +Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our certificate of incorporation regarding exclusive forum. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations. +The market price of our common stock is subject to volatility. +The market price of our common stock could be subject to wide fluctuations in response to, and the level of trading of our common stock may be affected by, numerous factors, many of which are beyond our control. These factors include, among other things, our limited trading volume, the concentration of holdings or our common stock, actual or anticipated variations in our operating results and cash flow, the nature and content of our earnings releases, announcements or events that impact our products, customers, competitors or markets, business conditions in our markets and the general state of the securities markets, volatility in oil and gas prices and the market for energy-related stocks, as well as general economic and market conditions and other factors that may affect our future results, including those described in this report. Significant sales of our common stock, or the expectation of these sales, by significant shareholders, officers or directors could materially and adversely affect the market price of our common stock. +There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock. +We are not restricted from issuing additional common stock, including securities that are convertible into or exchangeable for, or that represent a right to receive, common stock. Any issuance of additional shares of our common stock or convertible securities will dilute the ownership interest of our common stockholders. Sales of a substantial number of shares of our common stock or other equity-related securities in the public market, or the perception that these sales could occur, could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our common stock or other equity-related securities would have on the market price of our common stock. +28 +Item 1B. Unresolved Staff Comments. +None. +Item 2. Properties +Our corporate headquarters is located at 1706 S. Midkiff, Midland, Texas 79701. In addition to our headquarters, we also own and lease other properties that are used for field offices, yards or storage in the Permian Basin. We believe that our facilities are adequate for our current operations. +Item 3. Legal Proceedings. +Disclosure concerning legal proceedings is incorporated by reference to "Note 15. Commitments and Contingencies— Contingent Liabilities " o f our Consolidated Financial Statements contained in this Annual Report. +From time to time, we may be subject to various other legal proceedings and claims incidental to or arising in the ordinary course of our business. +Item 4. Mine and Safety Disclosures +None. +29 +Part II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +On March 22, 2017, we consummated our initial public offering ( " IPO " ) of our common stock at a price of $14.00 per share. Our common stock is traded on the New York Stock Exchange under the symbol “PUMP”. +Holders +As of December 31, 2021, there were 103,437,177 shares of common stock outstanding, held of record by six holders. The number of record holders of our common stock does not include Depository Trust Company participants or beneficial owners holding shares through nominee names. +Dividend +We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the growth of our business and repay borrowings under our ABL Credit Facility, if any. Our future dividend policy is within the discretion of our Board and will depend upon then‑existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory restrictions on our ability to pay dividends and other factors our Board may deem relevant. In addition, our ABL Credit Facility places certain restrictions on our ability to pay cash dividends. +Performance Graph +The quarterly changes for the periods shown in the following graph are based on the assumption that $100 had been invested in our common stock, the Russell 2000 Index ("Russell 2000") and a self-constructed peer group index of comparable companies ("Peer Group") on March 17, 2017 (the first trading date of our common stock), and that all dividends were reinvested at the closing prices of the dividend payment dates. The relevant companies included in our Peer Group consists of Liberty Oilfield Services Inc., Nextier Oilfield Solutions Inc., RPC, Inc., Calfrac Well Services Ltd., Patterson-UTI Energy, Inc. and Mammoth Energy Services, Inc. Subsequent measurement points are the last trading days of each quarter. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on the last trading date of 2021. The calculations exclude trading commissions and taxes. The stock price performance on the following graph and table is not necessarily indicative of future stock price performance. +30 +31 +Date Peer Group Russell 2000 ProPetro Holding Corp. +3/17/2017 $ 100.0 $ 100.0 $ 100.0 +3/31/2017 $ 97.0 $ 100.1 $ 88.9 +6/30/2017 $ 93.2 $ 102.6 $ 96.3 +9/29/2017 $ 105.2 $ 108.4 $ 99.0 +12/29/2017 $ 114.3 $ 112.0 $ 139.0 +3/29/2018 $ 91.0 $ 111.9 $ 109.6 +6/29/2018 $ 86.9 $ 120.6 $ 108.1 +9/28/2018 $ 85.1 $ 124.9 $ 113.7 +12/31/2018 $ 52.9 $ 99.7 $ 85.0 +3/31/2019 $ 65.2 $ 114.2 $ 155.4 +6/30/2019 $ 47.5 $ 116.6 $ 142.8 +9/30/2019 $ 35.1 $ 113.8 $ 62.7 +12/31/2019 $ 38.8 $ 125.1 $ 77.6 +3/31/2020 $ 9.7 $ 86.8 $ 17.2 +6/30/2020 $ 16.2 $ 108.9 $ 35.5 +9/30/2020 $ 15.5 $ 114.3 $ 28.0 +12/31/2020 $ 23.8 $ 150.1 $ 51.0 +3/31/2021 $ 29.5 $ 169.2 $ 73.5 +6/30/2021 $ 35.4 $ 176.5 $ 63.2 +9/30/2021 $ 31.9 $ 168.8 $ 59.7 +12/31/2021 $ 27.5 $ 172.4 $ 55.9 +32 +Item 6. [Reserved] +33 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward‑looking statements that involve risks and uncertainties. You should read the " Risk Factors " section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis. +Basis of Presentation +This discussion of our results of operations omits our results of operations for the year ended December 31, 2019 and the comparison of our results of operations for the years ended December 31, 2020 and 2019, which may be found in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 5, 2021. +Unless otherwise indicated, references in this " Management’s Discussion and Analysis of Financial Condition and Results of Operations " to " ProPetro Holding Corp., " " the Company, " " we, " " our, " " us " or like terms refer to ProPetro Holding Corp. and its subsidiary. +Overview +Our Business +We are a Midland, Texas‑based oilfield services company providing hydraulic fracturing and other complementary services to leading upstream oil and gas companies engaged in the E&P of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil‑producing areas in the United States, and we believe we are one of the leading providers of hydraulic fracturing services in the region by HHP . +Our total available HHP at December 31, 2021 was 1,423,000 HHP, which was comprised of 90,000 HHP of our Tier IV DGB equipment, 1,225,000 HHP of conventional Tier II equipment and 108,000 HHP of our DuraStim® electric hydraulic fracturing equipment. Our fleet could range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsites. With the industry transition to lower emissions equipment and Simul-Frac, in addition to several other changes to our customers' job designs, we believe that our available fleet capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at the wellsites. In September 2021, we placed an order with our equipment manufacturers for 125,000 HHP of Tier IV DGB equipment for additional conversions, which we expect to be delivered at different times through the first half of 2022. +In 2019, we entered into a purchase commitment for 108,000 HHP of DuraStim® electric powered hydraulic fracturing equipment. In addition to DuraStim® fleets, we are also evaluating other electric and alternative pressure pumping solutions. In December 2021, we disposed of our two gas turbines initially purchased to provide electrical power to our DuraStim® fleets but as determined they were an inefficient power solution in the field. In the future, we may lease electrical power equipment from a third party or rely on our customers to provide power solutions for our electric equipment. +Our substantial market presence in the Permian Basin positions us well to capitalize on drilling and completion activity in the region. Primarily, our operational focus has been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have recently increased our operations in the Delaware sub-basin and are well-positioned to support further increases to our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending. +34 +Through our pressure pumping segment (which also includes our cementing operations), we primarily provide hydraulic fracturing services to E&P companies in the Permian Basin. Our hydraulic fracturing fleet has been designed to handle the operating conditions commonly utilized in the Permian Basin and the region's increasingly high-intensity well completions (including Simul-Frac, which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. +In addition to our core pressure pumping segment operations, which includes our cementing operations, we also offer coiled tubing services. Through our coiled tubing services segment, we seek to create operational efficiencies for our customers, which could allow us to capture a greater portion of their capital spending across the lifecycle of a well. +Pioneer Pressure Pumping Acquisition +On December 31, 2018, we consummated the purchase of pressure pumping and related assets of Pioneer and Pioneer Pumping Services, LLC in the Pioneer Pressure Pumping Acquisition. The pressure pumping assets acquired included hydraulic fracturing pumps of 510,000 HHP, four coiled tubing units and the associated equipment maintenance facility. In connection with the acquisition, we became a long-term service provider to Pioneer under the Pioneer Services Agreement, providing pressure pumping and related services for a term of up to 10 years; provided, that Pioneer has the right to terminate the Pioneer Services Agreement, in whole or part, effective as of December 31 of each of the calendar years of 2022, 2024 and 2026. Pioneer can increase the number of committed fleets prior to December 31, 2022. Pursuant to the Pioneer Services Agreement, the Company is entitled to receive compensation if Pioneer were to idle committed fleets ("idle fees"); however, we are first required to use all economically reasonable efforts to deploy the idled fleets to another customer. At the present, we have eight fleets committed to Pioneer. During times when there is a significant reduction in overall demand for our services, the idle fees could represent a material portion of our revenues. +While management believes our relationship with Pioneer will continue beyond December 31, 2022, if Pioneer elects to terminate the Pioneer Services Agreement effective December 31, 2022, or seeks to renegotiate the terms on which we provide services to Pioneer, it could have a material adverse effect on our future financial condition, results of operations and cash flows. +Commodity Price and Other Economic Conditions +The oil and gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, political instability in oil producing countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. +The global public health crisis associated with the COVID-19 pandemic could continue to have an adverse effect on global economic activity for the foreseeable future. Some of the challenges resulting from the COVID-19 pandemic that have impacted our business include restrictions on movement of personnel and associated gatherings, shortage of skilled labor, cost inflation and supply chain disruptions. Additionally, with most of the large, capitalized E&P companies in the United States, including our customers, closely managing their operating budget and exercising capital discipline, we do not currently expect significant increases in crude oil production over the short-to-medium term. Furthermore, OPEC+ has indicated that they will continue with their plans to manage production levels by gradually increasing crude oil output. With the tightness in crude oil production and growing demand for crude oil, there has been a significant increase in rig count and WTI crude oil prices have increased to ov er $90 per barrel in February 2022 from its recent lowest point of $20 per barrel in March 2020. The Permian Basin rig count has increased significantly from approximately 179 at the beginning of 2021 to approximately 294 at the end of 2021, according to Baker Hughes. Although crude oil prices are currently +35 +at a 7-year high, the oilfield services industry, including the pressure pumping segment, has not fully recovered as evidenced by continued depressed pricing for most of our services, and shortages of skilled labor force in the Permian Basin, coupled with rising inflationary costs. However, we still believe that the Permian Basin, our primary area of operation, will be the most attractive basin to E&P companies and should command higher prices and associated profitability, if the overall demand for crude oil and our services continues to increase. +Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including the upstream and oilfield services companies. As a result, we are working with our customers and equipment manufacturers to transition to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB, electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. If we are unable to quickly transition to lower emissions equipment and meet our and our customers’ emissions goals, the demand for our services could be adversely impacted. +The Permian Basin rig count increase, WTI crude oil price increase and cost inflation could be indicative of an energy market recovery. I f the rig count and market conditions continue to improve, including improved customers' pricing and labor availability, and we are able to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also continue to improve. However, if market conditions do not improve, and we are unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows. +Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment. +2021 Operational Highlights +Over the course of the year ended December 31, 2021: +• although we gradually captured improved pricing during the year, the recent energy industry disruption and impact of COVID-19 pandemic continued to adversely impact overall demand for and pricing of our services; +• we experienced rapidly increasing inflationary cost resulting from labor and supply chain tightness, which negatively impacted our profitability and cash flows; +• our average effectively utilized fleet count was approximately 12 active fleets, a 20% increase from approximately 10 active fleets in 2020; +• we transitioned 90,000 HHP of our equipment portfolio to lower emissions, Tier IV DGB equipment. In 2022, we plan to convert an additional 125,000 HHP to Tier IV DGB equipment, with total conversion costs expected to approximate $74 million; and +• we continued to test and develop, alongside the equipment manufacturer, our existing DuraStim® equipment. +36 +2021 Financial Highlights +Financial highlights for the year ended December 31, 2021: +• revenue increased $85.3 million, or 10.8%, to $874.5 million, as compared to $789.2 million for the year ended December 31, 2020, primarily a result of the increase in demand for pressure pumping services following the depressed oil prices and economic slowdown caused by the COVID-19 pandemic that negatively impacted E&P completions activity; +• cost of services (exclusive of depreciation and amortization) increased $78.0 million or 13.3% to $662.3 million, as compared to $584.3 million for the year ended December 31, 2020, primarily a result of our higher utilization and activity levels, following the rebound from the depressed oil prices and economic slowdown caused by the COVID-19 pandemic that negatively impacted E&P completions activity in 2020; cost of services as a percentage of revenue increased to 75.7% in 2021 compared to 74.0% for the year ended December 31, 2020; +• general and administrative expenses, inclusive of stock-based compensation, decreased $3.8 million, or 4.4% to $82.9 million, as compared to $86.8 million for the year ended December 31, 2020; +• no impairment expense recorded during the year December 31, 2021, compared to $38.0 million during the year ended December 31, 2020; +• net loss was $54.2 million, compared to a net loss of $107.0 million for the year ended December 31, 2020. Diluted net loss per common share was $0.53, compared to diluted net loss per common share of $1.06 for the year ended December 31, 2020. Adjusted EBITDA was approximately $135.0 million, compared to $141.5 million for the year ended December 31, 2020 (see reconciliation of Adjusted EBITDA to net income in the subsequent section "How We Evaluate Our Operations"); +• generated cash of approximately $36.0 million from the sale of our two turbines in December 2021; +• our total liquidity was $169.3 million, consisting of cash of $111.9 million and remaining availability of $57.4 million under our ABL Credit Facility; and +• no debt as of December 31, 2021 under our ABL Credit Facility . +Actions to Address the Economic Impact of COVID-19 +Since March 2020, we initiated several actions to mitigate the anticipated adverse economic conditions for the immediate future and to support our financial position, liquidity and the efficient continuity of our operations as follows: +◦ Growth Capital: our operations were driven by more dedicated work from our customers. Our capital expenditure program was focused on maintaining existing dedicated demand for our equipment. We reduced capital investment in speculative growth. +◦ Other Expenditures : we strategically managed our maintenance program in line with our projected activity leve ls. We continued to seek lower pricing and cost saving measures for our expendable items, materials used in day-to-day operations and large component replacement parts. In addition, with the supply chain disruptions, we worked closely with our vendors to better plan our future needs and accelerated purchases of certain components and spare parts; +◦ Labor Force: we implemented several strategies including pay adjustments of approximately 8% to retain and attract skilled workforce that will support our operations; +37 +◦ Working Capital: we have negotiated more favorable payment terms with certain of our larger vendors, strategically disposed of certain assets to improve our liquidity position and continue to actively manage our portfolio of accounts receivables; and +◦ Customer Pricing: we continue to have ongoing pricing conversations with our customers to permit us to earn an appropriate return on our equipment and capital investments and to cover rising inflationary cost resulting from the impact of COVID-19 on labor force, supply chain and our operations in general. +Our Assets and Operations +Through our pressure pumping segment, which includes cementing operations, we primarily provide hydraulic fracturing services to E&P companies in the Permian Basin. Our hydraulic fracturing fleets have been designed to handle Permian Basin specific operating conditions and the region’s increasingly high‑intensity well completions, which are characterized by longer horizontal wellbores, more frac stages per lateral and increasing amounts of proppant per well. We plan to continually reinvest in our equipment to ensure optimal performance and reliability. +In addition to our core pressure pumping segment operations, we also offer a suite of complementary well completion and production services, including coiled tubing and other services. We believe these complementary services create operational efficiencies for our customers and could allow us to capture a greater portion of their capital spending across the lifecycle of a well in the future. +How We Generate Revenue +We generate revenue primarily through our pressure pumping segment, and more specifically, by providing hydraulic fracturing services to our customers. We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We also provide personnel and services that are tailored to meet each of our customers’ needs. We charge our customers on a per‑job basis, in which we set pricing terms after receiving full specifications for the requested job, including the lateral length of the customer’s wellbore, the number of frac stages per well, the amount of proppant and chemicals to be used and other parameters of the job. We also could generate revenue from idle fees from our customers in certain circumstances when committed fleets are idled. +In addition to hydraulic fracturing services, we generate revenue through the complementary services that we provide to our customers, including cementing, coiled tubing and other related services. These complementary services are provided through various contractual arrangements, including on a turnkey contract basis, in which we set a price to perform a particular job, or a daywork contract basis, in which we are paid a set price per day for our services. We are also sometimes paid by the hour for these complementary services. +Demand for our services is largely dependent on oil and natural gas prices, and our customers’ well completion budgets and rig count. Our revenue, profitability and cash flows are highly dependent upon prevailing crude oil prices and expectations about future prices. For many years, oil prices and markets have been extremely volatile. Prices are affected by many factors beyond our control. The average WTI oil prices per barrel were approximately $68, $39 and $57 for the years ended December 31, 2021, 2020 and 2019, respectively. In February 2022, the W TI oil price was over $90 per barrel. If the WTI oil price declines in the future or remains highly volatile, demand for our services may be negat ively impacted, which could result in a significant decrease in our future profitability and cash flows. We monitor the oil and natural gas prices and the Permian Basin rig count to enable us to more effectively plan our business and forecast the demand for our services. +38 +The historical weekly average Permian Basin rig count based on the Baker Hughes Company rig count information was as follows: +Year Ended December 31, +Drilling Rig Type (Permian Basin) 2021 2020 2019 +Directional 2 1 5 +Horizontal 227 212 405 +Vertical 11 8 32 +Total 240 221 442 +Average Permian Basin rig count to U.S rig count 50.5 % 51.0 % 46.9 % +Costs of Conducting our Business +The principal direct costs involved in operating our business are direct labor, expendables and other direct costs. +Direct Labor Costs. Payroll and benefit expenses related to our crews and other employees that are directly or indirectly attributable to the effective delivery of services are included in our operating costs. Direct lab or costs amounted to 22.4% and 22.7% of total costs of service for the years ended December 31, 2021 and 2020, respectively. +Expendables. Expendables include the product and freight costs associated with proppant, chemicals and other consumables used in our pressure pumping and other operations. These costs comprise a substantial variable component of our service costs, particularly with respect to the quantity and quality of sand and chemicals demanded when providing hydraulic fracturing services. Expendable pro duct costs comprised approximately 41.8%, and 37.6% of total costs of service for the years ended December 31, 2021 and 2020, respectively. The percentage increase in our expendable product cost in 2021 was primarily attributable to the increase in our activity levels and higher freight cost. +Other Direct Costs. We incur other direct expenses related to our service offerings, including the costs of fuel, repairs and maintenance, general supplies, equipment rental and other miscellaneous operating expenses. Fuel is consumed both in the operation and movement of our hydraulic fracturing fleet and other equipment. Repairs and maintenance costs are expenses directly related to upkeep of equipment, which have been amplified by the demand for higher horsepower jobs. Capital expenditures to upgrade or extend the useful life of equipment are capitalized and are not included in other direct costs. Other direct costs were 35.8 % and 39.7% of total costs of service for the years ended December 31, 2021 and 2020, respectively. The percentage decrease in 2021 was primarily driven by most of our customers directly sourcing diesel and pricing improvement. +How We Evaluate Our Operations +Our management uses Adjusted EBITDA or Adjusted EBITDA margin to evaluate and analyze the performance of our various operating segments. +Adjusted EBITDA and Adjusted EBITDA Margin +We view Adjusted EBITDA and Adjusted EBITDA margin as important indicators of performance. We define EBITDA as our earnings, before (i) interest expense, (ii) income taxes and (iii) depreciation and amortization. We define Adjusted EBITDA as EBITDA, plus (i) loss/(gain) on disposal of assets, (ii) stock-based compensation, and (iii) other unusual or nonrecurring (income)/expenses, such as impairment charges, severance, costs related to asset acquisitions, insurance recoveries, costs related to SEC investigation and class action lawsuits and one-time professional and advisory fees. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues. +39 +Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures utilized by our management and other users of our financial statements such as investors, commercial banks, and research analysts, to assess our financial performance because it allows us and other users to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), nonrecurring (income) expenses and items outside the control of our management team (such as income taxes). Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income (loss), operating income (loss), cash flow from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles in the United States of America ( " GAAP " ). +Note Regarding Non‑GAAP Financial Measures +Adjusted EBITDA and Adjusted EBITDA margin are not financial measures presented in accordance with GAAP ( " non-GAAP " ), except when specifically required to be disclosed by GAAP in the financial statements. We believe that the presentation of Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors in assessing our financial condition and results of operations because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure, asset base, nonrecurring (income) expenses and items outside the control of the Company. Net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA. Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some, but not all, items that affect the most directly comparable GAAP financial measures. You should not consider Adjusted EBITDA and Adjusted EBITDA margin in isolation or as a substitute for an analysis of our results as reported under GAAP. Because Adjusted EBITDA and Adjusted EBITDA margin may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. +Reconciliation of net (loss) income to Adjusted EBITDA ($ in thousands): +Pressure +Pumping +All Other +Total +Year ended December 31, 2021 +Net loss $ (12,723) $ (41,462) $ (54,185) +Depreciation and amortization +129,478 3,899 133,377 +Interest expense +— 614 614 +Income tax benefit — (14,252) (14,252) +Loss (gain) on disposal of assets 64,903 (257) 64,646 +Stock‑based compensation +— 11,519 11,519 +Other income — (873) (873) +Other general and administrative expense (1) +— (6,471) (6,471) +Severance expense 30 602 632 +Adjusted EBITDA +$ 181,688 $ (46,681) $ 135,007 +40 +Pressure +Pumping All Other Total +Year ended December 31, 2020 +Net loss $ (68,271) $ (38,749) $ (107,020) +Depreciation and amortization +148,659 4,631 153,290 +Interest expense +1 2,382 2,383 +Income tax benefit — (27,480) (27,480) +Loss on disposal of assets +56,659 1,477 58,136 +Impairment expense 36,907 1,095 38,002 +Stock‑based compensation +— 9,100 9,100 +Other expense +— 874 874 +Other general and administrative expense (1) +— 13,038 13,038 +Retention bonus and severance expense 75 1,065 1,140 +Adjusted EBITDA +$ 174,030 $ (32,567) $ 141,463 +Pressure +Pumping All Other Total +Year ended December 31, 2019 +Net income (loss) +$ 281,090 $ (118,080) $ 163,010 +Depreciation and amortization +139,348 5,956 145,304 +Interest expense +51 7,090 7,141 +Income tax expense — 50,494 50,494 +Loss on disposal of assets +106,178 633 106,811 +Impairment expense — 3,405 3,405 +Stock‑based compensation +— 7,776 7,776 +Other expense +— 717 717 +Other general and administrative expense (1) +— 25,208 25,208 +Deferred IPO bonus, retention bonus and severance expense 7,093 2,110 9,203 +Adjusted EBITDA +$ 533,760 $ (14,691) $ 519,069 +____________________ +(1) During the years ended December 31, 2021, 2020 and 2019, other general and administrative expense (net of reimbursement from insurance carriers) primarily relates to nonrecurring professional fees paid to external consultants in connection with our audit committee review, SEC investigation and shareholder litigation, net of insurance recoveries. During the years ended December 31, 2021, 2020 and 2019, we received reimbursement of approximately $9.8 million , $0.6 million and $0, respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. +41 +Results of Operations +We conduct our business through three operating segments: hydraulic fracturing, cementing and coiled tubing. For reporting purposes, the hydraulic fracturing and cementing operating segments are aggregated into our one reportable segment—pressure pumping. +Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 +($ in thousands, except percentages) +Year Ended December 31, Change +2021 2020 Variance % +Revenue $ 874,514 $ 789,232 $ 85,282 10.8 % +Less (Add): +Cost of services (1) +662,266 584,279 77,987 13.3 % +General and administrative expense (2) +82,921 86,768 (3,847) (4.4) % +Depreciation and amortization 133,377 153,290 (19,913) (13.0) % +Impairment expense — 38,002 (38,002) (100.0) % +Loss on disposal of assets 64,646 58,136 6,510 11.2 % +Interest expense 614 2,383 (1,769) (74.2) % +Other expense (income) (873) 874 1,747 199.9 % +Income tax benefit (14,252) (27,480) (13,228) (48.1) % +Net loss $ (54,185) $ (107,020) $ (52,835) (49.4) % +Adjusted EBITDA (3) +$ 135,007 $ 141,463 $ (6,456) (4.6) % +Adjusted EBITDA Margin (3) +15.4 % 17.9 % (2.5) % (14.0) % +Pressure pumping segment results of operations: +Revenue $ 857,642 $ 773,474 $ 84,168 10.9 % +Cost of services $ 647,570 $ 570,442 $ 77,128 13.5 % +Adjusted EBITDA $ 181,688 $ 174,030 $ 7,658 4.4 % +Adjusted EBITDA Margin (4) +21.2 % 22.5 % (1.3) % (5.8) % +____________________ +(1) Exclusive of depreciation and amortization. +(2) Inclusive of stock‑based compensation o f $11.5 million and $9.1 million for 2021 and 2020, respectively. +(3) For definitions of the non‑GAAP financial measures of Adjusted EBITDA and Adjusted EBITDA margin and reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to our most directly comparable financial measures calculated in accordance with GAAP, please read " How We Evaluate Our Operations. " Included in our Adjusted EBITDA is idle fees of $9.5 million and $47.2 million for the years ended December 31, 2021 and 2020, respectively. +(4) The non‑GAAP financial measure of Adjusted EBITDA margin for the pressure pumping segment is calculated by taking Adjusted EBITDA for the pressure pumping segment as a percentage of our revenues for the pressure pumping segment. +42 +Revenue. Revenue increased 10.8%, or $85.3 million, to $874.5 million for the year ended December 31, 2021, as compared to $789.2 million for the year ended December 31, 2020. Our pressure pumping segment revenues increased 10.9%, or $84.2 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020. The increases were primarily attributable to the significant increase in demand for pressure pumping services, following the rebound from the depressed oil prices and slowdown in economic activity resulting from the COVID-19 pandemic. The increase in demand for our pressure pumping services resulted in an approximate 20% increase in our average effectively utilized fleet count to approximately 12 active fleets in 2021 from 10 active fleets in 2020. Included in our revenue for the years ended December 31, 2021 and 2020 was revenue generated from idle fees charged to a certain customer of approximately $9.5 million and $47.2 million, respectively. +Revenues from services other than pressure pumping increased 7.1%, or approximately $1.1 million , for the year ended December 31, 2021, as compared to the year ended December 31, 2020. The increase in revenues from services other than pressure pumping during the year ended December 31, 2021, was primarily attributable to the increase in utilization experienced in our coiled tubing operations, which was driven by increased E&P completions activity following the rebound from the depressed oil prices and impact of the COVID-19 pandemic. +Cost of Services. Cost of services increased 13.3%, or $78.0 million, to $662.3 million for the year ended December 31, 2021, from $584.3 million during the year ended December 31, 2020. Cost of services in our pressure pumping segment increased $77.1 million during the year ended December 31, 2021, as compared to the year ended December 31, 2020 . The increases were primarily attributable to our higher utilization and activity levels, following the rebound from the depressed oil prices and economic slowdown caused by the COVID-19 pandemic that negatively impacted E&P completions activity in 2020. A s a percentage of pressure pumping segment revenues (including idle fees), pressure pumping cost of services increased to 75.5% for the year ended December 31, 2021, as compared to 73.8% for the year ended December 31, 2020. Excluding idle fees revenue of $9.5 million and $47.2 million for the years ended December 31, 2021 and 2020, respectively, our pressure pumping cost of services as a percentage of pressure pumpin g revenues for the years ended December 31, 2021 and 2020 was approximately 76.4% and 78.5%, respectively. The decrease was a result of increased customer activity levels, which is consistent with our increased fleet utilization, coupled with significant pricing pressure in 2020. +General and Administrative Expenses. General and administrative expenses decreased 4.4%, or $3.8 million, to $82.9 million for the year ended December 31, 2021, as compared to $86.8 million for the year ended December 31, 2020. The net decrease was primarily attributable to the decrease in (i) nonrecurring advisory and professional fees of $19.4 million, which was primarily attributable to the Company's expanded audit committee internal review, SEC investigation and shareholder litigation, (ii) legal and professional fees of $3.9 million, which was partially offset by net increases of (iii) $15.8 million in payroll expenses, (iv) $2.4 million of stock based compensation expense, (v) $1.2 million in insurance expense and (vi) $0.1 million in other remaining general and administrative expenses. +Depreciation and Amortization. Depreciation and amortization decreased 13.0%, or $19.9 million, to $133.4 million for the yea r ended December 31, 2021, as compared to $153.3 million for the year ended December 31, 2020. The decrease was primarily attributable to the overall decrease in our fixed asset base as of December 31, 2021, partly attributable to the impairment of certain fixed assets in 2020. +Impairment Expense. There was no impairment expense during the year ended December 31, 2021. During the year ended December 31, 2020, the depressed market conditions, crude oil prices and negative near-term outlook for the utilization of certain of our equipment, resulted in the Company recording an impairment expense of approximately $38.0 million, of which $9.4 million related to goodwill impairment and $28.6 million related to property and equipment impairment. The substantial portion of our impairment expense in 2020 related to our pressure pumping segment. +Loss on Disposal of Assets. Loss on the disposal of assets increased 11.2%, or $6.5 million, to $64.6 million for the year ended December 31, 2021, as compared to $58.1 million for the year ended December 31, 2020. The increase was primarily attributable to an increase in utilization resulting from an increase in the operational intensity of our equipment during 2021. Upon sale or retirement of property and equipment, including certain major +43 +components like fluid ends and power ends of our pressure pumping equipment that are replaced, the cost and related accumulated depreciation are removed from the balance sheet and the net amount is recognized as loss on disposal of assets. +Interest Expense. Interest expense decreased 74.2%, or $1.8 million, to $0.6 million for the year ended December 31, 2021, as compared to $2.4 million for t he year ended December 31, 2020. The decrease in interest expense was primarily attributable to a decrease in our financing arrangements and zero debt in 2021, compared to 2020. Our interest expense consist primarily of amortization of our original loan cost. In 2021, we have zero debt under our ABL Credit Facility. +Other Expense (Income). Other income increased to approximately $0.9 million for the year ended December 31, 2021, as compared to $0.9 million in expense for the year ended December 31, 2020. The increase in other income is primarily attributable to the net refund of approximately $2.1 million to the Company from a sales and excise and use tax audit and partially offset by an expense related to our lender's commitment fees during the year ended December 31, 2021, as compared to the year ended December 31, 2020. +Income Tax Benefit. Income tax benefit was $14.3 million for the year ended December 31, 2021, as compared to income tax benefit of $27.5 million for the year ended December 31, 2020. The reduction in income tax benefit recorded during the year ended December 31, 2021 is primarily attributable to the Company projecting a much lower pre-tax loss in 2021 as compared to that in 2020. Furthermore, there was no significant change in the effective tax rate from 20.8% during the year ended December 31, 2021, compared to 20.4% during the year ended December 31, 2020. +44 +Liquidity and Capital Resources +Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows and (iii) borrowings under our revolving credit facility ( " ABL Credit Facility " ). Our cash is primarily used to fund our operations, support growth opportunities and satisfy debt payments, if any. Our borrowing base, as redetermined monthly, is tied to 85.0% of eligible accounts receivable (the "borrowing base"). Our borrowing base as of December 31, 2021 was approximately $61.1 million and was approxi mately $79.0 million a s of February 18, 2022. Changes to our operational activity levels have an impact on our total eligible accounts receivable, which could result in significant changes to our borrowing base and therefore our availability under our ABL Credit Facility. We believe our remaining monthly availability under our ABL Credit Facility will be adversely impacted if oil and gas market conditions decline in the future. +As of December 31, 2021, we had no borrowings under our ABL Credit Facility and our total liquidity was $169.3 million, consisting of cash and cash equivalents of $111.9 million and $57.4 million of availability under our ABL Credit Facility. +As of February 18, 2022, we had no borrowings under our ABL Credit Facility and our total liquidity was approximately $151.3 million, consisting of cash and cash equivalents of $76.0 million and $75.3 million of availability under our ABL Credit Facility. +In 2020 when demand for our services was significantly depressed following the rapidly rising health crisis associated with the COVID-19 pandemic and the energy industry disruptions, the Company experienced a significant decrease in its liquidity. However, with the gradual recovery in the energy industry and increase in demand for our services in 2021, our liquidity position has gradually improved and this improvement has continued into the beginning of 2022, as market conditions have continued to improve, although we expect our overall liquidity to decline during 2022 as we make additional capital investments. Moreover, the current market conditions resulting from the COVID-19 pandemic have and may in the future change rapidly and there could be a new outbreak of a COVID-19 variant that could result in travel restrictions, business closure and institution of quarantining and/or other activity restrictions, which could negatively impact our future operations, revenue, profitability and cash flows if not contained or if the vaccines currently distributed and administered to people are not as effective as anticipated in curbing the spread of any such new COVID-19 variant. +There can be no assurance that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Future cash flows are subject to a number of variables, and are highly dependent on the drilling, completion, and production activity by our customers, which in turn is highly dependent on oil and natural gas prices. Depending upon market conditions and other factors, we may issue equity and debt securities or take other actions necessary to fund our business or meet our future long-term liquidity requirements. +Cash and Cash Flows +The following table sets forth our net cash provided by (used in) operating, investing and financing activities during the years ended December 31, 2021 and 2020, respectively. +Year Ended December 31, +($ in thousands) +2021 2020 +Net cash provided by operating activities +$ 154,714 $ 139,124 +Net cash used in investing activities +$ (104,292) $ (94,217) +Net cash used in financing activities +$ (7,276) $ (125,171) +Operating Activities +Net cash provided by operating activities was $154.7 million for the year ended December 31, 2021, as compared to $139.1 million for the year ended December 31, 2020. The net increase of $15.6 million was primarily due to the reduction in our net loss, resulting from an increase in our activity levels in 2021, and the rebound from the depressed oil prices and economic slowdown caused by the COVID-19 pandemic that negatively impacted our +o perations in 2020. The net increase in cash provided by operating activities was also slightly impacted by the timing of our receivable collections from our customers and payment to our vendors. +Investing Activities +Net cash used in investing activities increased to $104.3 million for the year ended December 31, 2021, from $94.2 million for the year ended December 31, 2020. The net increase in our cash used in investing activities was primarily attributable to our investment in Tier IV DGB equipment. Included in our net cash used for investing activities in 2021 was a cash payment of $45.3 million for new Tier IV DGB equipment. The remaining cash payments in 2021 were incurred in connection with our maintenance capital expenditures and other growth initiatives. Ou r cash flow from investing activities was partially offset by $36.0 million of cash generated from the sale of our two turbine generators in December 2021. +Financing Activities +Net cash used in financing activities was $7.3 million for the year ended December 31, 2021, compared to net cash used of $125.2 million for the year ended December 31, 2020. The net decrease in cash flow from financing activities during the year ended December 31, 2021 was primarily driven by no borrowings or repayments under our ABL Credit Facility in 2021 compared to repayment of borrowings of $130.0 million during the year ended December 31, 2020. During the year ended December 31, 2021, net cash outflow in connection with insurance financing was approximately $5.5 million, whereas during the year ended December 31, 2020 we received net cash inflow of $5.5 million. +Credit Facility and Other Financing Arrangements +ABL Credit Facility +Our ABL Credit Facility, as amended, has a total borrowing capacity of $300 million (subject to the borrowing base limit), with a maturity date of December 19, 2023. The ABL Credit Facility has a borrowing base of 85% of monthly eligible accounts receivable less customary reserves. The borrowing base as of December 31, 2021 was approximately $61.1 million . The ABL Credit Facility includes a Springing Fixed Charge Coverage Ratio to apply when excess availability is less than the greater of (i) 10% of the lesser of the facility size or the Borrowing Base or (ii) $22.5 million. Under this facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. +Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either LIBOR or base rate, plus the applicable margin, which ranges from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans, with a LIBOR floor of zero. +As of December 31, 2021, we had no borrowings outstanding under our ABL Credit Facility. +Off Balance Sheet Arrangements +We had no material off balance sheet arrangements as of December 31, 2021. +Capital Requirements, Future Sources and Use of Cash +Capital expenditures incurred were $165.2 million during the year ended December 31, 2021, as compared to $81.2 million during the year ended December 31, 2020. During the year ended December 31, 2020, we reduced our capital expenditures following the depressed demand for our pressure pumping services as a result of the COVID-19 pandemic and depressed energy market. The significant portion of our total capital expenditures were comprised of maintenance capital expenditures. +Our future material use of cash will be to fund our capital expenditures. Capital expenditures for 2022 are projected to be primarily related to maintenance capital expenditures to support our existing pressure pumping assets, costs to convert some existing equipment to lower emissions pressure pumping equipment, strategic purchases and other ancillary equipment purchases, subject to market conditions and customer demand. Our future capital expenditures depend on our projected operational activity, emission requirements and planned conversions to lower emissions equipment, among other factors, which could vary significantly throughout the year. Based on our current plan and projected activity levels for 2022, we expect our capital expenditures to range between $250.0 million to $300.0 million. We could incur significant additional capital expenditures if our projected activity levels increase during the course of the year, inflation and supply chain tightness continues to adversely impact on our operations or we invest in new or different lower emissions equipment. The Company will continue to evaluate the emissions profile of its fleet over the coming years and may, depending on market conditions, convert or retire additional conventional Tier II equipment in favor of lower emissions equipment. The Company’s decisions regarding the retirement or conversion of equipment or the addition of lower emissions equipment will be subject to a number of factors, including (among other factors) the availability of equipment, including parts and major components, supply chain disruptions, prevailing and expected commodity prices, customer demand and requirements and the Company’s evaluation of projected returns on conversion or other capital expenditures. Depending on the impacts of these factors, the Company may decide to retain conventional equipment for a longer period of time or accelerate the retirement, replacement or conversion of that equipment. +In addition, we have option agreements with our equipment manufacturer to purchase an additional 108,000 HHP of DuraStim® hydraulic fracturing equipment thr ough July 31, 2022. +We anticipate our capital expenditures will be funded by existing cash, cash flows from operations, and if needed, borrowings under our ABL Credit Facility. Our cash flows from operations will be generated from services we provide to our customers and idle fees if a customer (Pioneer) decides to idle committed fleets and we are not able to deploy the idled fleets to another customer. During times when there is a significant reduction in overall demand for our services, the idle fees could represent a material portion of our revenues and cash flows from operations. +Contractual Obligations +The following table presents our contractual obligations and other commitments as of December 31, 2021: +($ in thousands) +Period +Total 1 year or less More than I year +ABL Credit Facility (1) +$ — $ — $ — +Operating leases (2) +487 389 98 +Total $ 487 $ 389 $ 98 +____________________ +(1) As of December 31, 2021, we had no borrowings under our ABL Credit Facility. If we decide to borrow from our ABL Credit Facility in the future, interest expense will be charged based on the agreed contractual interest rates. However, we are obligated to pay agency and commitment fees on unused balance which could be up to approximately $1.2 million annually, depending on our utilization of the ABL Credit Facility. +(2) Operating leases exclude short-term leases and other commitments (see Note 14. Leases and Note 15. Commitments and Contingencies in the financial statements for additional disclosures). +We enter into purchase agreements with Sand suppliers to secure supply of sand in the normal course of our business. The agreements with the Sand suppliers require that we purchase minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the mi nimum volumes or a fixed price per ton of unpurchased volumes. Our current agreements with Sand suppliers expire at different times prior to December 31, 2025. Our agreed upon sand requirements or minimum volumes are based on certain future events such as our customer demand, which cannot be reasonably estimated. If the activity level of our customers declines and the future demand for our services is materially and adversely affected, we may be required to pay for more sand from one of our Sand suppliers than we need in the performance of our services, regardless of whether we take physical delivery of such sand. In such an event, we may be required to pay shortfall fees or other penalties under the purchase agreement, which could have a material adverse effect on our business, financial condition, or results of operations. +Recent Accounting Pronouncements +Disclosure concerning recently issued accounting standards is incorporated by reference to " Note 2- Significant Accounting Policies " of our Consolidated Financial Statements contained in this Annual Report. +Critical Accounting Policies and Estimates +The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally acceptable in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported revenues and expenses during the years. We evaluate these estimates and assumptions on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates. +Listed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved, and that we believe are critical to the understanding of our operations. +Property and Equipment +Our property and equipment are recorded at cost, less accumulated depreciation. +Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in earnings. +We primarily retired certain components of equipment such as fluid ends and power ends, rather than the entire pieces of equipment, and the associated loss is recorded in our statement of operations as part of net loss on disposal of assets, which was $64.6 million, $58.1 million and $106.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. +45 +The estimated useful lives and salvage values of property and equipment is subject to key assumptions such as maintenance, utilization and job variation. Unanticipated future changes in these assumptions could negatively or positively impact our net income (loss). A 10% change in the useful lives of our property and equipment would have resulted in approximately $13.3 million impact on pre-tax loss during the year ended December 31, 2021. Depreciation of property and equipment is provided on the straight‑line method over estimated useful lives as shown in the table below. +Land +Indefinite +Buildings and property improvements +5 - 30 years +Vehicles +1 ‑ 5 years +Equipment +1 ‑ 20 years +Leasehold improvements +5 ‑ 20 years +Impairment of Long-Lived Assets +In accordance with the Financial Accounting Standards Board ( " FASB " ) Accounting Standards Codification ( " ASC " ) 360 regarding Accounting for the Impairment or Disposal of Long‑Lived Assets , we review the long‑lived assets to be held and used whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future undiscounted cash flows attributable to the assets is less than the carrying amount of such assets. In this circumstance, we recognize an impairment loss for the amount by which the carrying amount of the assets exceeds the estimated fair value of the asset. Our cash flow forecasts require us to make certain judgments regarding long‑term forecasts of future revenue and costs and cash flows related to the assets subject to review. The significant assumption in our cash flow forecasts is our estimated equipment utilization and profitability. The significant assumption is uncertain in that it is driven by future demand for our services and utilization, which could be impacted by crude oil market prices, future market conditions and technological advancements. Our fair value estimates for certain long‑lived assets require us to use significant other observable inputs, including assumptions related to market based on recent auction sales or selling prices of comparable equipment. The estimates of fair value are also subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future. +If the crude oil market declines or the demand for our services does n ot recover, and if our equipment remains idle or under‑utilized, the estimated fair value of such equipment may decline, which could result in future impairment charges. Though the impacts of variations in any of these factors can have compounding or off‑setting impacts, a 10% decline in the estimated future cash flows of our existing asset groups will not indicate an impairment. +Our DuraStim® equipment is yet to be commercialized. If we are not able to successfully commercialize the DuraStim® equipment, and are not able to deploy the equipment for alternative uses, we will incur impairment losses on the carrying value of the DuraStim® equipment. As of December 31, 2021, the carrying value of our DuraStim® equipment is approximately $90 million. +Goodwill +Goodwill is the excess of the consideration transferred over the fair value of the tangible and identifiable intangible assets and liabilities recognized. Goodwill is not amortized. We perform an annual impairment test of goodwill as of December 31, or more frequently if circumstances indicate that impairment may exist. +There were no additions to, or disposal of, goodwill during the year ended December 31, 2021. The quantitative impairment test we perform for goodwill utilizes certain assumptions, including forecasted active fleet revenue and cost assumptions. Our discounted cash flow analysis includes significant assumptions regarding discount rates, fleet utilization, expected profitability margin, forecasted maintenance capital expenditures, the timing of an anticipated market recovery, and the timing of expected cash flow. As such, our goodwill analysis incorporates inherent uncertainties that are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecast. In March 2020, crude oil prices declined significantly, an indication that a triggering event has occurred, and as such, we recorded in our pressure pumping reportable segment, goodwill impairment expense of $9.4 million +46 +during the year ended December 31, 2020. There was no carrying value for goodwill in our balance sheet as of December 31, 2021 because our goodwill carrying value was fully written off during 2020. +Income Taxes +Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. +We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and the results of recent operations. If we determine that we would not be able to fully realize our deferred tax assets in the future in excess of their net recorded amount, we would record a valuation allowance, which would increase our provision for income taxes. In determining our need for a valuation allowance as of December 31, 2021, we have considered and made judgments and estimates regarding estimated future taxable income. These estimates and judgments include some degree of uncertainty and changes in these estimates and assumptions could require us to record additional valuation allowances for our deferred tax assets and the ultimate realization of tax assets depends on the generation of sufficient taxable income. +Our methodology for recording income taxes requires a significant amount of judgment in the use of assumptions and estimates. Additionally, we forecast certain tax elements, such as future taxable income, as well as evaluate the feasibility of implementing tax planning strategies. Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results. Unforeseen events may significantly impact these variables, and changes to these variables could have a material impact on our income tax accounts. The final determination of our income tax liabilities involves the interpretation of local tax laws and related authorities in each jurisdiction. Changes in the operating environments, including changes in tax law, could impact the determination of our income tax liabilities for a tax year. +47 +Item 7A. Quantitative and Qualitative Disclosure of Market Risks +Foreign Currency Exchange Risk +Our operations are currently conducted entirely within the U.S; therefore, we had no significant exposure to foreign currency exchange risk in 2021. +Commodity Price Risk +Our material and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our pressure pumping services such as proppants, chemicals, guar, trucking and fluid supplies. Our fuel costs consist primarily of diesel and natural gas used by our various trucks and other motorized equipment. The prices for fuel and materials in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Historically, we have generally been able to pass along a significant portion of our commodity price risk to our customers; however, we may be unable to do so in the future. We do not engage in commodity price hedging activities. +Interest Rate Risk +We may be subject to interest rate risk on variable rate borrowings under our ABL Credit Facility. We do not currently engage in interest rate derivatives to hedge our interest rate risk. The impact of a 1% increase in interest rates on our variable rate debt would have resulted in an increase in interest expense and corresponding (increase)/decrease in pre‑tax (loss)/income of approximately $0, $0.4 million and $1.3 million , for the years ended December 31, 2021, 2020 and 2019, respectively. +Credit Risk +Financial instruments that potentially subject us to concentrations of credit risk are trade receivables. We extend credit to customers and other parties in the normal course of business. We have established various procedures to manage our credit exposure, including maintaining an allowance for doubtful accounts. +48 +Item 8. Financial Statements and Supplementary Data. +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of +ProPetro Holding Corp. and Subsidiary +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of ProPetro Holding Corp. and Subsidiary (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively, referred to as, the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting. +Basis for Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Related-party transactions — Refer to Note 13 to the consolidated financial statements +Critical Audit Matter Description +The Company engages in various related party transactions, including leasing real estate, renting equipment, purchasing assets, obtaining equipment maintenance and repair services, and providing pressure pumping and related services. +We identified related-party transactions as a critical audit matter because of the number of related-party transactions and potential conflicts of interest. As a result, we believe the risk that related-party transactions were not timely identified and properly disclosed by the Company in the financial statements was elevated and required us to +49 +exercise significant auditor judgment and an increased extent of effort when designing and performing audit procedures on related-party transactions. +How the Critical Audit Matter Was Addressed in the Audit +Our audit procedures for related-party transactions included the following, among others: +• We evaluated the completeness of related-party transactions by obtaining the Company’s list of related-party relationships and transactions and performing the following: +◦ Comparing it to public filings, external news, third-party information or research reports, questionnaires completed by the Company’s directors and officers, and other sources. +◦ Searching for potential related-party transactions within the accounts receivable, accounts payable, and vendor listings master files and journal entries by searching for the name, vendor identification numbers, and customer identification numbers of the related parties. +◦ Inspecting the Company’s minutes from meetings of the Board of Directors and related committees. +◦ Making inquiries of executive officers, key members of management, and the Audit Committee of the Board of Directors regarding related party transactions. +/s/ DELOITTE & TOUCHE LLP +Houston, Texas +February 25, 2022 +We have served as the Company's auditor since 2013. +50 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of +ProPetro Holding Corp. and Subsidiary +Opinion on Internal Control over Financial Reporting +We have audited the internal control over financial reporting of ProPetro Holding Corp. and Subsidiary (the "Company" ) as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated February 25, 2022 , expressed an unqualified opinion on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ DELOITTE & TOUCHE LLP +Houston, Texas +February 25, 2022 +51 +PROPETRO HOLDING CORP. +CONSOLIDATED BALANCE SHEETS +AS OF DECEMBER 31, 2021 AND 2020 +(In thousands, except share data) +2021 2020 +ASSETS +CURRENT ASSETS: +Cash and cash equivalents +$ 111,918 $ 68,772 +Accounts receivable - net of allowance for credit losses of $ 217 and $ 1,497 , respectively +128,148 84,244 +Inventories +3,949 2,729 +Prepaid expenses +6,752 11,199 +Other current assets +297 782 +Total current assets +251,064 167,726 +PROPERTY AND EQUIPMENT - Net of accumulated depreciation +808,494 880,477 +OPERATING LEASE RIGHT-OF-USE ASSETS +409 709 +OTHER NONCURRENT ASSETS: +Other noncurrent assets +1,269 1,827 +Total other noncurrent assets +1,269 1,827 +TOTAL ASSETS +$ 1,061,236 $ 1,050,739 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES: +Accounts payable +$ 152,649 $ 79,153 +Accrued and other current liabilities +20,767 24,676 +Operating lease liabilities +369 334 +Total current liabilities +173,785 104,163 +DEFERRED INCOME TAXES +61,052 75,340 +NONCURRENT OPERATING LEASE LIABILITIES +97 465 +Total liabilities +234,934 179,968 +COMMITMENTS AND CONTINGENCIES (Note 15) +SHAREHOLDERS’ EQUITY: +Preferred stock, $ 0.001 par value, 30,000,000 shares authorized, none issued, respectively +— — +Common stock, $ 0.001 par value, 200,000,000 shares authorized, 103,437,177 and 100,912,777 shares issued, respectively +103 101 +Additional paid-in capital +844,829 835,115 +(Accumulated deficit) Retained earnings +( 18,630 ) 35,555 +Total shareholders’ equity +826,302 870,771 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ 1,061,236 $ 1,050,739 +See notes to consolidated financial statements. 52 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF OPERATIONS +FOR THE YEARS ENDED DECEMBER 31, 2021 , 2020 AND 2019 +(In thousands, except per share data) +2021 2020 2019 +REVENUE - Service revenue +$ 874,514 $ 789,232 $ 2,052,314 +COSTS AND EXPENSES: +Cost of services (exclusive of depreciation and amortization) +662,266 584,279 1,470,356 +General and administrative (inclusive of stock‑based compensation) +82,921 86,768 105,076 +Depreciation and amortization +133,377 153,290 145,304 +Impairment expense +— 38,002 3,405 +Loss on disposal of assets +64,646 58,136 106,811 +Total costs and expenses +943,210 920,475 1,830,952 +OPERATING (LOSS) INCOME +( 68,696 ) ( 131,243 ) 221,362 +OTHER EXPENSE: +Interest expense +( 614 ) ( 2,383 ) ( 7,141 ) +Other Income /(expense) +873 ( 874 ) ( 717 ) +Total other Income /(expense) +259 ( 3,257 ) ( 7,858 ) +(LOSS) INCOME BEFORE INCOME TAXES ( 68,437 ) ( 134,500 ) 213,504 +INCOME TAX BENEFIT/ (EXPENSE) +14,252 27,480 ( 50,494 ) +NET (LOSS) INCOME +$ ( 54,185 ) $ ( 107,020 ) $ 163,010 +NET (LOSS) INCOME PER COMMON SHARE: +Basic +$ ( 0.53 ) $ ( 1.06 ) $ 1.62 +Diluted +$ ( 0.53 ) $ ( 1.06 ) $ 1.57 +WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: +Basic +102,655 100,829 100,472 +Diluted +102,655 100,829 103,750 +See notes to consolidated financial statements. 53 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +FOR THE YEARS ENDED DECEMBER 31, 2021 , 2020 AND 2019 +(In thousands) +Common Stock +Shares Amount Additional +Paid‑In +Capital Retained Earnings (Accumulated +Deficit) Total +BALANCE - January 1, 2019 100,190 100 817,690 ( 20,435 ) 797,355 +Stock‑based compensation cost — — 7,776 — 7,776 +Issuance of equity award—net 434 1 1,163 — 1,164 +Net income — — — 163,010 163,010 +BALANCE - December 31, 2019 100,624 $ 101 $ 826,629 $ 142,575 $ 969,305 +Stock‑based compensation cost — — 9,100 — 9,100 +Issuance of equity awards—net 289 — — — — +Tax withholdings paid for net settlement of equity — — ( 614 ) — ( 614 ) +Net loss — — — ( 107,020 ) ( 107,020 ) +BALANCE - December 31, 2020 100,913 $ 101 $ 835,115 $ 35,555 $ 870,771 +Stock‑based compensation cost — — 11,519 — 11,519 +Issuance of equity awards—net 2,524 2 4,015 — 4,017 +Tax withholdings paid for net settlement of equity — — ( 5,820 ) — ( 5,820 ) +Net loss — — — ( 54,185 ) ( 54,185 ) +BALANCE - December 31, 2021 103,437 $ 103 $ 844,829 $ ( 18,630 ) $ 826,302 +See notes to consolidated financial statements. 54 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF CASH FLOWS +FOR THE YEARS ENDED DECEMBER 31, 2021 , 2020 AND 2019 +(In thousands) +2021 2020 2019 +CASH FLOWS FROM OPERATING ACTIVITIES: +Net (loss) income $ ( 54,185 ) $ ( 107,020 ) $ 163,010 +Adjustments to reconcile net (loss) income to net cash provided by operating activities: +Depreciation and amortization +133,377 153,290 145,304 +Impairment expense — 38,002 3,405 +Deferred income tax (benefit) expense ( 14,288 ) ( 27,701 ) 48,758 +Amortization of deferred debt issuance costs +542 543 542 +Stock‑based compensation +11,519 9,100 7,776 +Provision for credit losses 282 448 949 +Loss on disposal of assets +64,646 58,136 106,812 +Changes in operating assets and liabilities: +Accounts receivable +( 43,742 ) 127,491 ( 10,177 ) +Other current assets +310 1,978 1,351 +Inventories +( 1,220 ) ( 293 ) 3,917 +Prepaid expenses +4,463 ( 232 ) ( 4,386 ) +Accounts payable +51,764 ( 95,697 ) ( 25,242 ) +Accrued liabilities +1,246 ( 18,527 ) 13,088 +Accrued interest +— ( 394 ) 183 +Net cash provided by operating activities +154,714 139,124 455,290 +CASH FLOWS FROM INVESTING ACTIVITIES: +Capital expenditures +( 143,523 ) ( 100,603 ) ( 502,894 ) +Proceeds from sale of assets +39,231 6,386 7,595 +Net cash used in investing activities +( 104,292 ) ( 94,217 ) ( 495,299 ) +CASH FLOWS FROM FINANCING ACTIVITIES: +Proceeds from borrowings +— — 110,000 +Repayments of borrowings +— ( 130,000 ) ( 50,000 ) +Payment of finance lease obligation +— ( 30 ) ( 272 ) +Proceeds from insurance financing +— 6,821 — +Repayments of insurance financing +( 5,473 ) ( 1,348 ) ( 4,547 ) +Proceeds from exercise of equity awards +4,017 — 1,164 +Tax withholdings paid for net settlement of equity awards ( 5,820 ) ( 614 ) — +Net cash used in financing activities +( 7,276 ) ( 125,171 ) 56,345 +NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 43,146 ( 80,264 ) 16,336 +CASH AND CASH EQUIVALENTS — Beginning of year +68,772 149,036 132,700 +CASH AND CASH EQUIVALENTS — End of year +$ 111,918 $ 68,772 $ 149,036 +See notes to consolidated financial statements. 55 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. ORGANIZATION AND HISTORY +ProPetro Holding Corp. ("Holding"), a Texas corporation was formed on April 14, 2007, to serve as a holding company for its wholly owned subsidiary ProPetro Services, Inc. ("Services"), a Texas corporation. Services offers hydraulic fracturing, cementing and coiled tubing services to oil and gas producers, located primarily in Texas, New Mexico and Utah. Holding was converted and incorporated to a Delaware Corporation on March 8, 2017. +Unless otherwise indicated, references in these notes to consolidated financial statements to "ProPetro Holding Corp.," "the Company," "we," "our," "us" or like terms refer to ProPetro Holding Corp. and Services. +On December 31, 2018, we consummated the purchase of pressure pumping and related assets of Pioneer Natural Resources USA, Inc. ("Pioneer") and Pioneer Pumping Services, LLC (the "Pioneer Pressure Pumping Acquisition"). The pressure pumping assets acquired were used to provide integrated well completion services in the Permian Basin to Pioneer’s completion and production operations. The acquisition cost of the assets was comprised of $ 110.0 million of cash and 16.6 million shares of our common stock. The pressure pumping assets acquired included hydraulic fracturing pumps of 510,000 hydraulic horsepower ("HHP"), four coiled tubing units and the associated equipment maintenance facility. In connection with the acquisition, we became a long-term service provider to Pioneer under a pressure pumping services agreement (the "Pioneer Services Agreement"), providing pressure pumping and related services for a term of up to 10 years; provided, that Pioneer has the right to terminate the Pioneer Services Agreement, in whole or in part, effective as of December 31 of each of the calendar years of 2022, 2024 and 2026. Pioneer can increase the number of committed fleets prior to December 31, 2022. Pursuant to the Pioneer Services Agreement, the Company is entitled to receive compensation if Pioneer were to idle committed fleets ("idle fees"); however, we are first required to use all economically reasonable effort to deploy the idled fleets to another customer. At the present, we have eight fleets committed to Pioneer. +2. SIGNIFICANT ACCOUNTING POLICIES +A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements are as follows: +Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Holding and its wholly owned subsidiary, Services. All intercompany accounts and transactions have been eliminated in consolidation. +Basis of Presentation — The accompanying consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") and in conformity with accounting principles generally accepted in the United States of America ("GAAP"). +Use of Estimates — Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Such estimates include, but are not limited to, allowance for credit losses, useful lives for depreciation of property and equipment, estimates of fair value of property and equipment, estimates related to fair value of reporting units for purposes of assessing goodwill (if any), estimates related to deferred tax assets and liabilities, including any related valuation allowances, and estimates of fair value of stock‑based compensation. Actual results could differ from those estimates. +Revenue Recognition — The Company’s services are sold based upon contracts with customers. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The following is a description of the principal activities, aggregated into our one reportable segment—"Pressure Pumping" and "all other" category, from which the Company generates its revenue. +Pressure Pumping — Pressure pumping consists of downhole pumping services, which includes hydraulic fracturing (inclusive of acidizing services) and cementing. +Hydraulic fracturing is a well-stimulation technique intended to optimize hydrocarbon flow paths during the completion phase of shale wellbores. The process involves the injection of water, sand and chemicals under high pressure into shale formations. Our hydraulic fracturing contracts with our customers have one +56 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +performance obligation, which is the contracted total stages, satisfied over time. We recognize revenue over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed faithfully depicts how our hydraulic fracturing services are transferred to our customers over time. In addition, certain of our hydraulic fracturing equipment is entitled to daily idle fee charges if a customer were to idle committed hydraulic fracturing equipment. The Company recognizes revenue related to idle fee charges on a daily basis as the performance obligations are met. +Acidizing, which is part of our hydraulic fracturing operating segment, involves a well-stimulation technique where acid or similar chemicals are injected under pressure into formations to form or expand fissures. Our acidizing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service or sale of acid or chemical when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize acidizing revenue at a point-in-time, upon completion of the performance obligation. +Our cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Our cementing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize cementing revenue at a point-in-time, upon completion of the performance obligation. +The transaction price for each performance obligation for all our pressure pumping services is fixed per our contracts with our customers. +All Other — All other consists of coiled tubing operations, which are downhole well completion/remedial services. The performance obligation for these services has a fixed transaction price which is satisfied at a point-in-time upon completion of the service when control is transferred to the customer. Accordingly, we recognize revenue at a point-in-time, upon completion of the service and transfer of control to the customer. +Accounts Receivable — Accounts receivables are stated at the amount billed and billable to customers. At December 31, 2021 and 2020 accrued revenue (unbilled receivable) included as part of our accounts receivable was $ 19.4 million and $ 8.6 million, respectively. At December 31, 2021, the transaction price allocated to the remaining performance obligation for our partially completed hydraulic fracturing operations was $ 16.8 million, which is expected to be completed and recognized within one month following the current period balance sheet date, in our pressure pumping reportable segment. At December 31, 2020 the transaction price allocated to the remaining performance obligation for our then partially completed hydraulic fracturing operations was $ 14.7 million, which was recorded as part of our pressure pumping segment revenue for the year ended December 31, 2021. +As of December 31, 2021, the Company had $ 0.2 million allowance for credit losses. Our allowance for credit losses is based on the evaluation of both our historic collection experience and economic outlook for the oil and gas industry. We evaluated the historic loss experience on our accounts receivable and also considered separately customers with receivable balances that may be negatively impacted by current or future economic developments and market conditions. While the Company has not experienced significant credit losses in the past and has not yet seen material changes to the payment patterns of its customers, the Company cannot predict with any certainty the degree to which the impacts of the COVID-19 pandemic, including the potential impact of periodically adjusted borrowing base limits, level of hedged production, or unforeseen well shut-downs may affect the ability of its customers to timely pay receivables when due. Accordingly, in future periods, the Company may revise its estimates of expected credit losses. +57 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +The table below shows a summary of allowance for credit losses during the year ended December 31, 2021: +($ in thousands) +2021 2020 2019 +Balance - January 1, 2021 $ 1,497 $ 1,049 $ 100 +Provision for credit losses during the period—net 282 448 949 +Write-off during the period ( 1,562 ) — — +Balance - December 31, 2021 $ 217 $ 1,497 $ 1,049 +Inventories — Inventories, which consists only of raw materials, are stated at lower of average cost and net realizable value. +Property and Equipment — The Company’s property and equipment are recorded at cost, less accumulated depreciation. +Depreciation — Depreciation of property and equipment is provided on the straight‑line method over the following estimated useful lives: +Land +Indefinite +Buildings and property improvements +5 - 30 years +Vehicles +1 ‑ 5 years +Equipment +1 ‑ 20 years +Leasehold improvements +5 ‑ 20 years +Upon sale or retirement of property and equipment, including certain major components of our pressure pumping equipment that are replaced, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in the statement of operations. A significant portion of our loss on disposal of assets relates to replacement of major components like fluid and power ends. The Company recorded a loss on disposal of assets of $ 64.6 million , $ 58.1 million and $ 106.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. +Impairment of Long‑Lived Assets — In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 360, Accounting for the Impairment or Disposal of Long‑Lived Assets , the Company reviews its long‑lived assets to be held and used whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. +An impairment loss is indicated if the sum of the expected future undiscounted cash flows attributable to the asset group is less than the carrying amount of such asset group. In this circumstance, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. No impairment expense was recorded during the year ended December 31, 2021. Property and equipment impairment loss of $ 27.5 million and $ 1.1 million was recorded during the year ended December 31, 2020 relating to our pressure pumping and drilling assets, respectively. Property and equipment impairment loss of $ 1.2 million and $ 2.2 million was recorded during the year ended December 31, 2019 relating to our drilling and flowback asset groups, respectively. Our drilling and flowback asset groups are included in the “all other” category in our reportable segment disclosure. +The Company accounts for long‑lived assets to be disposed of at the lower of their carrying amount or fair value, less cost to sell once management has committed to a plan to dispose of the assets. +Goodwill — Goodwill is the excess of the consideration transferred over the fair value of the tangible and identifiable intangible assets and liabilities recognized. Goodwill is not amortized. We perform an annual impairment test of goodwill as of December 31, or more frequently if circumstances indicate that impairment may exist. The determination of impairment is made by comparing the carrying amount of a reporting unit with its fair value, which is generally calculated using a combination of market and income approaches. If the fair value of the reporting unit exceeds the carrying value, no further testing is performed. If the fair value of the reporting unit is less +58 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +than the carrying value, we consider goodwill to be impaired, and the amount of impairment loss is estimated and recorded in the statement of operations. +In 2011, we acquired Technology Stimulation Services, LLC ("TSS") for $ 24.4 million. The assets acquired from TSS were recorded as $ 15.0 million of equipment with the excess of the purchase price over fair value of the assets recorded as goodwill of $ 9.4 million. The acquisition complemented our existing pressure pumping business. The transaction was accounted for using the acquisition method of accounting and, accordingly, assets and liabilities assumed were recorded at their fair values as of the acquisition date. There were no additions to goodwill during the y ear ended December 31, 2021. In the first quarter of 2020, we performed an interim impairment test and concluded that goodwill was fully impaired. As a result of our interim impairment test during the first quarter of 2020, we recorded goodwill impairment expense of $ 9.4 million during the year ended December 31, 2020, which fully wrote off our goodwill carrying value. There were no good will impairments during the year ended December 31, 2019. +Intangible Assets — Intangible assets with finite useful lives are amortized on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized, which is generally on a straight‑line basis over the asset’s estimated useful life. +Income Taxes — Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. +We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and the results of recent operations. If we determine that we would not be able to fully realize our deferred tax assets in the future, we would record a valuation allowance. +Advertising Expense — All advertising costs are expensed as incurred. For the years ended December 31, 2021, 2020 and 2019, advertising expense was $ 0.8 million , $ 0.4 million and $ 1.2 million, respectively. +Deferred Loan Costs — The Company capitalized certain costs in connection with obtaining its borrowings, including lender, legal, and accounting fees. These costs are being amortized over the term of the related loan using the straight‑line method. Unamortized deferred loan costs associated with loans paid off or refinanced with different lenders are expensed in the period in which such an event occurs. Deferred loan costs are classified as a reduction of long‑term debt or in certain instances as an asset in the consolidated balance sheet. Amortization of deferred loan costs is recorded as interest expense in the statement of operations, and during the years ended December 31, 2021, 2020 and 2019, the amount of expense recorded was $ 0.5 million, $ 0.5 million and $ 0.5 million, respectively. +Stock-Based Compensation — The Company recognizes the cost of stock‑based awards on a straight‑line basis over the requisite service period of the award, which is usually the vesting period under the fair value method. Total compensation cost is measured on the grant date using fair value estimates. +Insurance Financing — The Company annually renews its commercial insurance policies, and may choose to either directly pay the insurance premium or finance a portion of the premium. If the Company finances a portion of the premium, a prepaid insurance asset is recorded and amortized monthly over the relevant period. +Concentration of Credit Risk — The Company’s assets that are potentially subject to concentrations of credit risk are cash and cash equivalents and trade accounts receivable. Cash balances are maintained in financial institutions, which at times exceed federally insured limits. The Company monitors the financial condition of the financial institutions in which accounts are maintained and has not experienced any losses in such accounts. The receivables of the Company are with credible operators in the oil and natural gas industries. The Company performs ongoing evaluations as to the financial condition of its customers with respect to trade receivables. +59 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +Recently Issued Accounting Standards Adopted in 2021 +In December 2019, the FASB Accounting Standards Update ("ASU") issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. Effective January 1, 2021, we adopted this guidance and the adoption did not materially affect the Company’s condensed consolidated financial statements. +Recently Issued Accounting Standards Not Yet Adopted in 2021 +In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform , which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate ("LIBOR"). The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified. This guidance is effective upon issuance and expires on December 31, 2022. The Company is currently assessing the impact of the LIBOR transition and this ASU on the Company’s consolidated financial statements. +3. SUPPLEMENTAL CASH FLOWS INFORMATION +($ in thousands) +Year Ended December 31, +2021 2020 2019 +Supplemental cash flows disclosures +Interest paid +$ 72 $ 2,207 $ 6,433 +Income taxes paid +$ 196 $ 1,786 $ 1,018 +Supplemental disclosure of non‑cash investing and financing activities +Capital expenditures included in accounts payable and accrued liabilities +$ 36,818 $ 14,803 $ 31,226 +Non-cash purchases of property and equipment $ — $ — $ — +4. FAIR VALUE MEASUREMENTS +Fair value ("FV") is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. +In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used, when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions other market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows: +Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment. +Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. +60 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. FAIR VALUE MEASUREMENTS (Continued) +Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. +A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. +Assets and Liabilities Measured at Fair Value on a Recurring Basis +Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued and other current liabilities, and long-term debt (if any). The estimated fair value of our financial instruments at December 31, 2021 and 2020 approximated or equaled their carrying value as reflected in our consolidated balance sheets. +Assets Measured at Fair Value on a Nonrecurring Basis +There was no impairment of assets during the year ended December 31, 2021. During the year ended December 31, 2020, we recorded property and equipment impairment loss of approximately $ 28.6 million in connection with the depressed utilization of our pressure pumping and drilling assets . During the year ended December 31, 2019, we recorded property and equipment impairment loss of approximately $ 3.4 million in connection with our drilling and flowback assets, in our “all other” segment. +We generally apply fair value techniques to our reporting units on a nonrecurring basis associated with valuing potential impairment loss related to goodwill, if any. Our estimate of the reporting unit fair value is based on a combination of income and market approaches, Level 1 and 3, respectively, in the fair value hierarchy. The income approach involves the use of a discounted cash flow method, with the cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies’ market multiples in estimating the fair value. Significant assumptions include projected revenue growth, capital expenditures, utilization, gross margins, discount rates, terminal growth rates, and weight allocation between income and market approaches. If the reporting unit’s carrying amount exceeds its fair value, we consider goodwill impaired, and the impairment loss is calculated and recorded in the period. There were no additions to, or disposal of, goodwill during the years ended December 31, 2021, 2020 and 2019. In the first quarter of 2020, the depressed crude oil prices and crude oil storage challenges faced in the U.S. oil and gas industry triggered the Company to perform an interim goodwill impairment test, and as a result, we compared the carrying value of the goodwill in our hydraulic fracturing reporting unit with the estimated fair value. Our interim impairment test also considered other relevant factors, including market capitalization and market participants’ view of the oil and gas industry in reaching our conclusion that the carrying value of our goodwill in our pressure pumping reportable segment of $ 9.4 million was fully impaired during the first quarter of 2020. Accordingly, we recorded a goodwill impairment expense of $ 9.4 million in March 2020, resulting in a full write off of our goodwill. There were no good will impairment during the year ended December 31, 2019. +61 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +5. PROPERTY AND EQUIPMENT +Property and equipment consisted of the following: +($ in thousands) +December 31, +2021 2020 +Land +$ 10,551 $ 10,551 +Buildings +30,045 29,312 +Equipment and vehicles +1,248,464 1,242,698 +Leasehold improvements +8,159 8,035 +Subtotal +1,297,219 1,290,596 +Less accumulated depreciation +( 488,725 ) ( 410,119 ) +Property and equipment — net +$ 808,494 $ 880,477 +During the years ended December 31, 2021 and 2020 and 2019, our depreciation expense was $ 133.4 million, $ 153.3 million and $ 145.3 million respectively. +6. LONG‑TERM DEBT +Asset-Based Loan ( " ABL ") Credit Facility +Our revolving credit facility ("ABL Credit Facility"), as amended, has a total borrowing capacity of $ 300 million (subject to the Borrowing Base limit), with a maturity date of December 19, 2023. The ABL Credit Facility has a borrowing base of 85 % of monthly eligible accounts receivable less customary reserves (the "borrowing base"), as redetermined monthly. The borrowing base as of December 31, 2021 was approximately $ 61.1 million. The ABL Credit Facility includes a Springing Fixed Charge Coverage Ratio to apply when excess availability is less than the greater of (i) 10 % of the lesser of the facility size or the borrowing base or (ii) $ 22.5 million. Under this facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. +Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either LIBOR or base rate, plus the applicable margin, which ranges from 1.75 % to 2.25 % for LIBOR loans and 0.75 % to 1.25 % for base rate loans, with a LIBOR floor of zero . +The loan origination costs relating to the ABL Credit Facility are classified as an asset in the balance sheet. There were no borrowings under the ABL Credit Facility as of December 31, 2021, and 2020. +7. ACCRUED AND OTHER CURRENT LIABILITIES +Accrued and other current liabilities consisted of the following: +($ in thousands) +December 31, +2021 2020 +Accrued insurance +— 6,553 +Accrued payroll and related expenses +6,816 4,640 +Capital expenditure, taxes and others accruals +13,951 13,483 +Total +$ 20,767 $ 24,676 +62 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +8. EMPLOYEE BENEFIT PLAN +The Company has a 401(k) plan, modified effective January 1, 2019, and the Company matches 100 % of the employee contributions up to 6 % of gross salary, up to the annual limit. The employees vest in the Company contributions to the 401(k) plan 25 % per year, beginning in the employee’s first year of service, with full vesting occurring after four years of service. The employees are fully vested in their contributions when made. Effective April 1, 2022, the Company modified its 401(k) plan to allow for immediate vesting of the Company’s contributions. During the years ended December 31, 2021, 2020 and 2019, the recorded expense under the plan was $ 2.8 million, $ 2.1 million and $ 3.0 million, respectively. +9. REPORTABLE SEGMENT INFORMATION +The Company has three operating segments for which discrete financial information is readily available: hydraulic fracturing (inclusive of acidizing), cementing and coiled tubing. These operating segments represent how the Chief Operating Decision Maker evaluates performance and allocates resources. +In December 2021, the Company disposed of two turbine generators included in our pressure pumping reportable segment for total cash proceeds of approximately $ 36.0 million. The net book value of the two turbines prior to the disposal was approximately $ 39.5 million, resulting in loss on disposal of approximately $ 3.5 million. In September 2020, the Company shut down its drilling operations and disposed of all of its drilling rigs and ancillary assets for approximately $ 0.5 million. In March 2020, the Company shut down its flowback operating segment and subsequently disposed of the assets for approximately $ 1.6 million. Our drilling and flowback operations were included in our “all other” category. The shutdown of the drilling and flowback operations resulted in a reduction in the number of our current operating segments to three . The change in the number of our operating segments did not impact our reportable segment information reported for the years presented. +In accordance with FASB ASC 280— Segment Reporting , the Company has one reportable segment (pressure pumping) comprised of the hydraulic fracturing and cementing operating segments. The coiled tubing operating segment and corporate administrative expense (inclusive of our total income tax expense (benefit), other (income) and expense and interest expense) are included in the "all other" category in the tables below. Total corporate administrative expense for the years ended December 31, 2021, 2020 and 2019 was $ 38.5 million , $ 31.6 million and $ 113.0 million, respectively. +Our hydraulic fracturing operating segment revenue approximated 93.3 %, 94.2 % and 95.6 % of our pressure pumping revenue for the years ended December 31, 2021, 2020 and 2019, respectively. +Inter-segment revenues are not material and are not shown separately in the table below. +The Company manages and assesses the performance of the reportable segment by its adjusted EBITDA (earnings before other income (expense), interest expense, income taxes, depreciation and amortization, stock-based compensation expense, severance and related expense, impairment expense, (gain)/loss on disposal of assets and other unusual or nonrecurring expenses or (income)). +63 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +9. REPORTABLE SEGMENT INFORMATION (Continued) +A reconciliation from segment level financial information to the consolidated statement of operations is provided in the table below (in thousands): +Pressure +Pumping +All Other +Total +Year ended and as of December 31, 2021 +Service revenue +$ 857,642 $ 16,872 $ 874,514 +Adjusted EBITDA +$ 181,688 $ ( 46,681 ) $ 135,007 +Depreciation and amortization +$ 129,478 $ 3,899 $ 133,377 +Capital expenditures +$ 162,044 $ 3,114 $ 165,158 +Total assets +$ 1,023,037 $ 38,199 $ 1,061,236 +Pressure +Pumping +All Other +Total +Year ended and as of December 31, 2020 +Service revenue +$ 773,474 $ 15,758 $ 789,232 +Adjusted EBITDA +$ 174,030 $ ( 32,567 ) $ 141,463 +Depreciation and amortization +$ 148,659 $ 4,631 $ 153,290 +Impairment expense +$ 36,907 $ 1,095 $ 38,002 +Capital expenditures +$ 78,154 $ 3,091 $ 81,245 +Total assets $ 1,009,631 $ 41,108 $ 1,050,739 +Pressure +Pumping +All Other +Total +Year ended and as of December 31, 2019 +Service revenue +$ 2,001,627 $ 50,687 $ 2,052,314 +Adjusted EBITDA +$ 533,760 $ ( 14,691 ) $ 519,069 +Depreciation and amortization +$ 139,348 $ 5,956 $ 145,304 +Impairment expense $ — $ 3,405 $ 3,405 +Capital expenditures +$ 387,119 $ 13,552 $ 400,671 +Goodwill +$ 9,425 $ — $ 9,425 +Total assets +$ 1,381,811 $ 54,300 $ 1,436,111 +64 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +9. REPORTABLE SEGMENT INFORMATION (Continued) +Reconciliation of net income (loss) to adjusted EBITDA (in thousands): +Pressure +Pumping +All Other +Total +Year ended December 31, 2021 +Net loss $ ( 12,723 ) $ ( 41,462 ) $ ( 54,185 ) +Depreciation and amortization +129,478 3,899 133,377 +Interest expense +— 614 614 +Income tax benefit — ( 14,252 ) ( 14,252 ) +Loss (gain) on disposal of assets 64,903 ( 257 ) 64,646 +Stock‑based compensation +— 11,519 11,519 +Other income — ( 873 ) ( 873 ) +Other general and administrative expense (1) +— ( 6,471 ) ( 6,471 ) +Severance expense 30 602 632 +Adjusted EBITDA +$ 181,688 $ ( 46,681 ) $ 135,007 +Pressure +Pumping All Other Total +Year ended December 31, 2020 +Net loss $ ( 68,271 ) $ ( 38,749 ) $ ( 107,020 ) +Depreciation and amortization +148,659 4,631 153,290 +Interest expense +1 2,382 2,383 +Income tax benefit — ( 27,480 ) ( 27,480 ) +Loss on disposal of assets +56,659 1,477 58,136 +Impairment expense 36,907 1,095 38,002 +Stock‑based compensation +— 9,100 9,100 +Other expense +— 874 874 +Other general and administrative expense (1) +— 13,038 13,038 +Retention bonus and severance expense 75 1,065 1,140 +Adjusted EBITDA +$ 174,030 $ ( 32,567 ) $ 141,463 +Pressure +Pumping All Other Total +Year ended December 31, 2019 +Net income (loss) +$ 281,090 $ ( 118,080 ) $ 163,010 +Depreciation and amortization +139,348 5,956 145,304 +Interest expense +51 7,090 7,141 +Income tax expense — 50,494 50,494 +Loss on disposal of assets +106,178 633 106,811 +Impairment expense — 3,405 3,405 +Stock‑based compensation +— 7,776 7,776 +Other expense +— 717 717 +Other general and administrative expense (1) +— 25,208 25,208 +Deferred IPO bonus, retention bonus and severance expense 7,093 2,110 9,203 +Adjusted EBITDA +$ 533,760 $ ( 14,691 ) $ 519,069 +(1) During the years ended December 31, 2021, 2020 and 2019, other general and administrative expense (net of reimbursement from insurance carriers) primarily relates to nonrecurring professional fees paid to external consultants in connection with our audit committee review, SEC investigation and shareholder litigation, net of insurance recoveries. During the years ended December 31, 2021, 2020 and 2019, we received reimbursement of approximately $ 9.8 million, $ 0.6 million and $ 0 , respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. +65 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +9. REPORTABLE SEGMENT INFORMATION (Continued) +Major Customers +The Company had revenue from the following significant customers that accounted for the following percentages of the Company’s total revenue: +Year Ended December 31, +2021 2020 2019 +Customer A +54.2 % 42.5 % 25.5 % +Customer B +14.6 % 20.3 % 20.9 % +Customer C +8.8 % 9.3 % 13.2 % +Customer D +4.4 % 8.6 % 9.2 % +Customer E +3.8 % 5.8 % 8.2 % +The above significant customers’ revenue that relates to pressure pumping is below: +Year Ended December 31, +2021 2020 2019 +Customer A 99.6 % 99.8 % 99.7 % +Customer B 100.0 % 97.6 % 95.4 % +Customer C 99.7 % 99.9 % 99.9 % +Customer D 87.6 % 99.7 % 100.0 % +Customer E 100.0 % 85.7 % 100.0 % +10. NET (LOSS) INCOME PER SHARE +Basic net (loss) income per common share is computed by dividing the net (loss) income relevant to the common stockholders by the weighted-average number of shares outstanding during the year. Diluted net (loss) income per common share uses the same net (loss) income divided by the sum of the weighted-average number of shares of common stock outstanding during the period, plus dilutive effects of options, performance stock units and restricted stock units outstanding during the period calculated using the treasury method and the potential dilutive effects of preferred stocks (if any) calculated using the if-converted method. +(In thousands, except for per share data) +Year Ended December 31, +2021 2020 2019 +Numerator (both basic and diluted) +Net (loss) income relevant to common stockholders $ ( 54,185 ) $ ( 107,020 ) $ 163,010 +Denominator +Denominator for basic net (loss) income per share 102,655 100,829 100,472 +Dilutive effect of stock options — — 2,929 +Dilutive effect of performance stock units — — 169 +Dilutive effect of restricted stock units — — 179 +Denominator for diluted net (loss) income per share 102,655 100,829 103,750 +Basic net (loss) income per common share $ ( 0.53 ) $ ( 1.06 ) $ 1.62 +Diluted net (loss) income per common share $ ( 0.53 ) $ ( 1.06 ) $ 1.57 +66 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +10. NET (LOSS) INCOME PER SHARE (Continued) +As shown in the table below, the following stock options, restricted stock units and performance stock units outstanding as of December 31, 2021, 2020 and 2019 have not been included in the calculation of diluted (loss) income per common share for the years ended December 31, 2021, 2020 and 2019 because they would be anti-dilutive to the calculation of diluted net (loss) income per common share: +(In thousands) +2021 2020 2019 +Stock options 798 4,200 — +Restricted stock units 1,413 1,165 — +Performance stock units 1,586 1,019 — +Total 3,797 6,384 — +11. STOCK‑BASED COMPENSATION +Stock Option Plan +In March 2013, we approved the Stock Option Plan of ProPetro Holding Corp. (the "Stock Option Plan") pursuant to which our Board of Directors may grant stock options to our consultants, directors, executives and employees. No awards have been granted under the Stock Option Plan following our Initial Public Offering ("IPO"), and no further awards will be granted under the Stock Option Plan. +2017 Incentive Award Plan +In March 2017, our shareholders approved the ProPetro Holding Corp. 2017 Incentive Award Plan (the "2017 Incentive Plan") pursuant to which our Board of Directors was authorized to grant stock options, restricted stock units ("RSUs"), performance stock units ("PSUs"), or other stock-based and cash awards to consultants, directors, executives and employees. The 2017 Incentive Plan originally authorized up to 5,800,000 shares of common stock to be issued with respect to awards granted pursuant to the plan. No awards have been granted under the 2017 Incentive Plan following approval of the 2020 Incentive Plan (as defined below), and no further awards will be granted under the 2017 Incentive Plan. +2020 Long Term Incentive Plan +In October 2020, our shareholders approved the ProPetro Holding Corp. 2020 Long Term Incentive Plan (the "2020 Incentive Plan") pursuant to which our Board of Directors may grant stock options, RSUs, PSUs, or other stock-based and cash awards to consultants, directors, executives and employees. The 2020 Incentive Plan authorizes up to 4,650,000 shares of common stock to be issued under awards granted pursuant to the plan. The 2020 Incentive Plan became effective October 22, 2020, and as of such date no further awards will be granted under the 2017 Incentive Plan. +The 2017 Incentive Plan and the 2020 Incentive Plan are herein collectively referred to as the "Incentive Plans". +Stock Options +On June 14, 2013, we granted 2,799,408 stock option awards to certain key employees, officers and directors pursuant to the Stock Option Plan that vested and became exercisable based upon the achievement of a service requirement. The options vested in 25 % increments for each year of continuous service and an option became fully vested upon the optionee’s completion of the fourth year of service. The contractual term for the options awarded is 10 years. The fair value of each option award granted was estimated on the date of grant using the Black-Scholes option-pricing model. +On July 19, 2016, we granted 1,274,549 stock option awards to certain key employees, officers and directors pursuant to the Stock Option Plan which vested in five substantially equal semi-annual installments commencing in December 2016, subject to a continuing services requirement. The contractual term for the options awarded is 10 years. We fully accelerated vesting of the options in connection with our IPO. The fair value of each option award granted was estimated on the date of grant using the Black-Scholes option-pricing model. +67 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. STOCK‑BASED COMPENSATION (Continued) +On March 16, 2017, we granted 793,738 stock option awards to certain key employees, officers and directors pursuant to the 2017 Incentive Plan which are scheduled to vest in four substantially equal annual installments, subject to a continuing service requirement. The contractual term for the options awarded is 10 years. The fair value of each stock option award granted was estimated on the date of grant using the Black-Scholes option-pricing model. There were no new stock option grants during the years ended December 31, 2021, 2020 and 2019. +As of December 31, 2021, the aggregate intrinsic value for our outstanding stock options was $ 1.6 million, and the aggregate intrinsic value for our exercisable stock options was $ 1.6 million. The aggregate intrinsic value for the exercised stock options during the year ended December 31, 2021 was $ 19.8 million. The remaining contractual term for the outstanding and exercisable stock options as of December 31, 2021, w as 4.1 years and 4.1 years , respectively. +A summary of the stock option activity during the year ended December 31, 2021 is presented below (in thousands, except for exercise price): +Number +of Shares +Weighted +Average +Exercise +Price +Outstanding at January 1, 2021 4,200 $ 4.82 +Granted +— $ — +Exercised +( 3,326 ) $ 3.42 +Forfeited +— $ 0.00 +Expired +( 76 ) $ 14.00 +Outstanding at December 31, 2021 798 $ 9.77 +Exercisable at December 31, 2021 798 $ 9.77 +Restricted Stock Units +In 2021, we granted 851,885 RSUs to employees, officers and directors pursuant to the 2020 Incentive Plan, which generally vest ratably over a three-year vesting period, in the case of awards to employees and officers, and generally vest in full after one year, in the case of awards to directors. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases to be an employee or director of the Company prior to vesting of the award. Each RSU represents the right to receive either one share of common stock or, as determined by the administrator in its sole discretion, a cash amount equal to the fair market value of one share of common stock on the day immediately preceding the settlement date. The grant date fair value of the RSUs is based on the closing share price of our common stock on the date of grant. For the years ended December 31, 2021, 2020 and 2019, the Company recognized stock compensation expense for RSUs of approximately $ 6.2 million, $ 5.1 million and $ 3.5 million, respectively. +As of December 31, 2021, the total unrecognized compensation expense for all RSUs was approximately $ 7.4 million, and is expected to be recognized over a weighted-average period of approximately 1.8 years. +68 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. STOCK‑BASED COMPENSATION (Continued) +The following table summarizes the RSUs activity during the year December 31, 2021 (in thousands, except for fair value): +Number of +Shares Weighted +Average +Grant Date +Fair Value ("FV") +Outstanding at January 1, 2021 1,165 $ 8.50 +Granted 852 $ 9.69 +Vested ( 589 ) $ 8.52 +Forfeited ( 15 ) $ 10.27 +Canceled — $ — +Outstanding at December 31, 2021 1,413 $ 9.19 +Performance Stock Units +In 2021, we granted 650,774 P SUs to certain key employees and officers as new awards under the 2020 Incentive Plan. Each PSU earned represents the right to receive either one share of common stock or, as determined by the administrator in its sole discretion, a cash amount equal to the fair market value of one share of common stock or amount of cash on the day immediately preceding the settlement date. The actual number of shares of common stock that may be issued under the PSUs ranges from 0 % up to a maximum of 200 % of the target number of PSUs granted to the participant, based on our total shareholder return ("TSR") relative to a designated peer group, generally at the end of a three-year period. In addition to the TSR conditions, vesting of the PSUs is generally subject to the recipient’s continued employment through the end of the applicable performance period. Compensation expense is recorded ratably over the corresponding requisite service period. The grant date fair value of PSUs is determined using a Monte Carlo probability model. Grant recipients do not have any shareholder rights until performance relative to the peer group has been determined following the completion of the performance period and shares have been issued. +For the years ended December 31, 2021, 2020 and 2019 the Company recognized stock compensation expense for the PSUs of approximatel y $ 5.5 million, $ 1.7 million and $ 3.8 million, respectively. +The following table summarizes information about PSUs activity during the year ended December 31, 2021 (in thousands, except for fair value): +Period +Granted Target Shares Outstanding at January 1, 2021 Target +Shares +Granted Target Shares Vested Target +Shares +Forfeited Target Shares Outstanding at December 31, 2021 Weighted +Average +Grant Date +FV Per +Share +2018 84 — ( 84 ) — — $ 27.51 +2019 126 — — — 126 $ 27.49 +2020 809 — — — 809 $ 8.30 +2021 — 651 — — 651 $ 14.76 +Total 1,019 651 ( 84 ) — 1,586 $ 12.48 +Weighted Average FV Per Share $ 12.27 $ 14.76 $ 27.51 $ — $ 12.48 +The total stock compensation expense for the years ended December 31, 2021, 2020 and 2019 for all stock awards was approximately $ 11.5 million , $ 9.1 million and $ 7.8 million, respectively. The total unrecognized stock-based compensation expense as of December 31, 2021 was approximately $ 16.4 million , and is expected to be recognized over a weighted-average period of approximatel y 1.8 years. +69 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +12. INCOME TAXES +The components of the provision for income taxes are as follows: +($ in thousands) +Year Ended December 31, +2021 2020 2019 +Federal: +Current +$ ( 52 ) $ — $ — +Deferred +( 15,143 ) ( 27,104 ) 47,090 +( 15,195 ) ( 27,104 ) 47,090 +State: +Current +88 221 1,736 +Deferred +855 ( 597 ) 1,668 +943 ( 376 ) 3,404 +Total income tax expense +$ ( 14,252 ) $ ( 27,480 ) $ 50,494 +Reconciliation between the amounts determined by applying the federal statutory rate of 21% for years ended December 31, 2021, 2020 and 2019 to income tax (benefit) expense is as follows: +($ in thousands) +Year Ended December 31, +2021 2020 2019 +Taxes at federal statutory rate +$ ( 14,372 ) $ ( 28,245 ) $ 44,836 +State taxes, net of federal benefit +61 154 2,504 +Non-deductible expenses +745 314 3,683 +Stock-based compensation +( 2,549 ) 751 ( 717 ) +Valuation allowance +825 868 — +Other +1,038 ( 1,322 ) 188 +Total income tax (benefit) expense +$ ( 14,252 ) $ ( 27,480 ) $ 50,494 +70 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +12. INCOME TAXES (Continued) +Deferred tax assets and liabilities are recognized for estimated future tax effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. The significant items giving rise to deferred tax assets (liabilities) are as follows: +($ in thousands) +December 31, +2021 2020 +Deferred Income Tax Assets +Accrued liabilities +$ 911 $ 472 +Allowance for credit losses 46 316 +Goodwill and other intangible assets +2,161 3,408 +Stock‑based compensation +3,382 4,015 +Net operating losses +87,822 85,827 +Other +56 56 +Total deferred tax assets +94,378 94,094 +Valuation allowance +( 1,693 ) ( 868 ) +Total deferred tax assets — net +$ 92,685 $ 93,226 +Deferred Income Tax Liabilities +Property and equipment +$ ( 152,624 ) $ ( 166,494 ) +Prepaid expenses +( 1,113 ) ( 2,073 ) +Total deferred tax liabilities +$ ( 153,737 ) $ ( 168,567 ) +Net deferred tax liabilities +$ ( 61,052 ) $ ( 75,341 ) +The Tax Cuts and Jobs Act (the "TCJA") included a reduction to the maxi mum deduction allo wed for net o perating losses generated in tax years after December 31, 2017 and the elimination of carrybacks of net operating losses. Under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which modified the TCJA, U.S. federal net operating loss carryforwards ( " NOLs " ) generated in taxable periods beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such NOLs in taxable years beginning after December 31, 2020, is limited to 80% of taxable income. As of December 31, 2021, the Company had approximately $ 408.0 million of federal NOLs some of which will begin to expire in 2035. Approximately $ 219.5 million of the Company’s federal NOLs relate to pre-2018 periods. As of December 31, 2021, the Company’s state net operating losses were approximately $ 50.1 million and will begin to expire in 2024. Utilization of net operating loss carryforwards may be limited due to past or future ownership changes. As of December 31, 2021, we determined that $ 1.7 million valuation allowance was necessary against our state deferred tax assets. +The Company’s U.S. federal income tax returns for the y ear ended December 31, 2018, and through the most recent filing remain open to examination by the Internal Revenue Service under the applicable U.S. federal statute of limitations provisions. The various states in which the Company is subject to income tax are generally open to examination for the tax years ended December 31, 2017, and through the most recent filing. +The Company records uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the related tax authority. As of December 31, 2021, 2020 and 2019, no uncertain tax positions were recorded. The Company will continue to evaluate its tax positions in accordance with ASC 740 and will recognize any future effect as either a benefit or charge to income in the applicable period. +Income tax penalties and interest assessments recognized under ASC 740 are accrued as a tax expense in the period that the Company’s taxes are in an uncertain tax position. Any accrued tax penalties or interest assessments will remain until the uncertain tax position is resolved with the taxing authorities or until the applicable statute of limitations has expired. +13. RELATED‑PARTY TRANSACTIONS +71 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +13. RELATED-PARTY TRANSACTIONS (Continued) +Corporate Office Building +Prior to April 2020, the Company rented its corporate office building and the associated real property from an entity, in which a former executive officer of the Company has an equity interest for approximately $ 0.1 million per year. In April 2020, the Company acquired the corporate office building and associated real property for approximately $ 1.5 million. +Operations and Maintenance Yards +The Company also rents five yards from an entity, in which certain former executive officers and a director of the Company have equity interests and total annual rent expense for each of the five yards was approximately $ 0.03 million, $ 0.03 million, $ 0.1 million, $ 0.1 million, and $ 0.2 million, respectively. The Company also leased its drilling yard from another entity, in which a certain former executive officer of the Company has an equity interest, for an annual lease expense of approximately $ 0.1 million during 2020 . In November 2020, we terminated the drilling yard lease. +Equipment Rental and Other Services +The Company obtained equipment maintenance services from an entity that has a family relationship with an executive officer of the Company. During the year ended December 31, 2021 and 2020, the Company incurred approximately $ 0 and $ 1.2 million, respectively, for equipment maintenance services associated with this related party. +At December 31, 2021 and 2020, the Company had no outstanding payables or receivables to or from the above related party. +Pioneer +On December 31, 2018, we consummated the Pioneer Pressure Pumping Acquisition. In connection with the Pioneer Pressure Pumping Acquisition, Pioneer received 16.6 million shares of our common stock and approximately $ 110.0 million in cash. +Revenue from services provided to Pioneer (including idle fees) accounted for approximately $ 473.8 million, $ 335.4 million and $ 524.2 million of our total revenue during the years ended December 31, 2021, 2020 and 2019, respectively. +In connection with the Pioneer Pressure Pumping Acquisition, the Company agreed to reimburse Pioneer for a certain portion of the retention bonuses paid to former Pioneer employees that were subsequently employed by the Company. During years ended December 31, 2021, 2020 and 2019, the Company fully reimbursed Pioneer approximately $ 0 , $ 2.7 million and $ 4.2 million respectively. +As of December 31, 2021, the total accounts receivable due from Pioneer, including estimated unbilled receivable for services (including idle fees) we provided, amounted to $ 62.1 million a nd the amount due to Pioneer was $ 0 . As of December 31, 2020, the balance due from Pioneer for services (including idle fees) we provided amo unted to approximately $ 41.7 million and the amount due to Pioneer was $ 0 . +14. LEASES +On January 1, 2019, we implemented ASC 842, using the modified retrospective transition method and elected not to restate prior years. Accordingly, the effects of adopting ASC 842 were adjusted in the beginning of 2019 while prior periods are accounted for under the legacy GAAP, ASC 840. There was no cumulative effect adjustment on beginning retained earnings. We also elected other practical expedients provided by the new lease standard, the short-term lease recognition practical expedient in which leases with a term of twelve months or less will not be recognized on the balance sheet and the practical expedient to not separate lease and non-lease components for real estate class of assets. Our discount rate was based on our estimated incremental borrowing rate on a collateralized basis with similar terms and economic considerations as our lease payments at the lease commencement. Below is a description of our operating and finance leases. +72 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +14. LEASES (Continued) +Operating Leases +Description of Lease +In March 2013, we entered into a ten-year real estate lease contract (the “Real Estate Lease”) with a commencement date of April 1, 2013, as part of the expansion of our equipment yard. The lease is with an entity in which a former director of the Company has a noncontrolling equity ownership interest. For the years ended December 31, 2021, 2020 and 2019, the Company made lease payments of approximately $ 0.4 million , $ 0.4 million and $ 0.4 million, respectively. The assets and liabilities under this contract are equally allocated between our cementing and coiled tubing segments. In addition to the contractual lease period, the contract includes an optional renewal of up to ten years , and in management’s judgment the exercise of the renewal option is not reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Real Estate Lease does not contain variability in payments resulting from either an index change or rate change. Effective January 1, 2019, the remaining lease term in our present value estimate of the minimum future lease payments was approximately four years . +We accounted for our Real Estate Lease to be an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the real estate lease because we concluded that the accounting effect was insignificant. As of December 31, 2021, the weighted average discount rate and remaining lease term was 6.7 % and 1.3 years, re spectively. +As of December 31, 2021, our total operating lease right-of-use asset cost wa s $ 1.2 million, and accumulated amortization was $ 0.8 million. As of December 31, 2020, our total operating lease right-of-use ass et cost was $ 1.2 million, and accumulated amortization was $ 0.5 million. For the years ended December 31, 2021, 2020 and 2019 we recorded operating lease cost of $ 0.3 million, $ 0.3 million and $ 0.4 million respectively, in our statement of operations. +Finance Leases +Description of Ground Lease +In 2018, we entered into a ten-year land lease contract (the “Ground Lease”) with an exclusive option to purchase the land exercisable beginning one year from the commencement date of October 1, 2018 through the end of the contractual lease term. In March 2020, the Company exercised its option and purchased the land associated with the Ground Lease for approximately $ 2.5 million. +The maturity analysis of liabilities and reconciliation to undiscounted and discounted remaining future lease payments for operating lease as of December 31, 2021 are as follows: +($ in thousands) Totals +2022 $ 389 +2023 98 +Total undiscounted future lease payments 487 +Amount representing interest ( 21 ) +Present value of future lease payments (lease obligation) $ 466 +The total cash paid for amounts included in the measurement of our operating lease liability during the year ended December 31, 2021 was approximately $ 0.4 million . During the year ended December 31, 2020, the total cash paid for amounts included in the measurement of our operating and finance lease liabilities was approximately $ 0.4 million and $ 0.03 million, respectively. The non-cash lease obligation we recorded effective January 1, 2019, upon adopting the new lease standard, ASC 842, was $ 2.0 million and $ 3.1 million for operating and finance leases, respectively. +73 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +14. LEASES (Continued) +Short-Term Leases +We elected the practical expedient, consistent with ASC 842, to exclude leases with an initial term of twelve months or less ("short-term lease") from our balance sheet and continue to record short-term leases as a period expense. For the years ended December 31, 2021 and 2020, our short-term asset lease expense was approximately $ 0.6 million and $ 1.0 million, respectively. +In April 2021, we entered into a short-term lease arrangement to lease our turbine (the “Equipment Lease”) with a commencement date of June 1, 2021 through September 30, 2021. We classified the Equipment Lease as an operating lease, and during the year ended December 31, 2021, we recognized approximately $ 3.0 million in lease income recorded as part of our pressure pumping segment revenue on our statements of operat ions. +15. COMMITMENTS AND CONTINGENCIES +Commitments +We entered into certain commitments for fixed assets, consumables and services incidental to the ordinary conduct of our business, generally for quantities required for our operations and at competitive market prices. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. As of December 31, 2021, t here were no outstanding contractual commitments. At December 31, 2021, the total remaining commitments and other obligations for all of our short-term lease and l odging arrangements was $ 3.7 million . +The Company enters into purchase agreements with its sand suppliers (the " Sand Suppliers " ) to secure supply of sand as part of its normal course of business. The agreements with the Sand Suppliers require that the Company purchase a minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the mi nimum volumes or a fixed price per ton of unpurchased volumes. Our agreements with Sand Suppliers expire at different times prior to December 31, 2025. During the years ended December 31, 2021, 2020 and 2019, no shortfall fee was recorded. However, one of our Sand Suppliers has filed a suit against us that includes claims related to alleged shortfall fees. The suit is in the early stages, and we are contesting the claims. While we cannot reasonably estimate the outcome of the matter at this time, in the opinion of management, the ultimate disposition of the action will not have a materially adverse effect on the Company. +One of the Sand Suppliers ( " SandCo " ) we entered into an agreement to purchase sand ( " Texas Sand " ) has an indirect relationship with a former executive officer of the Company, because beginning in 2018, the Texas Sand was sourced from a mine located on land owned by an entity in which the former executive officer of the Company has a 44 % noncontrolling equity interest. The total sand purchased from SandCo during the three months ended March 31, 2020 (the period the former executive was associated with the Company) was approximately $ 5.3 million. +As of December 31, 2021 and 2020, the Company had issued le tters of credit of $ 3.7 million and $ 3.7 million, respectively, under the ABL Credit Facility in connection with the Company's casualty insurance policy. +Contingent Liabilities +Legal Matters +In September 2019, a complaint, captioned Richard Logan, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. ProPetro Holding Corp., et al., (the "Logan Lawsuit"), was filed against the Company and certain of its then current and former officers and directors in the U.S. District Court for the Western District of Texas. +In July 2020, the Logan Lawsuit Lead Plaintiffs Nykredit Portefølje Administration A/S, Oklahoma Firefighters Pension and Retirement System, Oklahoma Law Enforcement Retirement System, Oklahoma Police Pension and Retirement System, and Oklahoma City Employee Retirement System, and additional named plaintiff Police and Fire Retirement System of the City of Detroit, individually and on behalf of a putative class of shareholders who purchased the Company’s common stock between March 17, 2017 and March 13, 2020, filed a +74 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +15. COMMITMENTS AND CONTINGENCIES (Continued) +third amended class action complaint in the U.S. District Court for the Western District of Texas, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule l0b-5 promulgated thereunder, and Sections 11 and 15 of the Securities Act of 1933, as amended, based on allegedly inaccurate or misleading statements, or omissions of material facts, about the Company’s business, operations and prospects against the Company, and certain of its current and former officers and directors. On September 13, 2021, the Court partially granted and partially denied motions to dismiss filed by the Company and the individual defendants. Discovery is still ongoing. +In May 2020, the U.S. District Court for the Western District of Texas consolidated two shareholder derivative lawsuits previously filed against the Company and certain of its current and former officers and directors into a single lawsuit captioned In re ProPetro Holding Corp. Derivative Litigation (the “Shareholder Derivative Lawsuit”). In August 2020, the plaintiffs in the Shareholder Derivative Lawsuit filed a consolidated complaint alleging (i) breaches of fiduciary duties, (ii) unjust enrichment and (iii) contribution. The plaintiffs did not quantify any alleged damages in its complaint but, in addition to attorneys’ fees and costs, they seek various forms of relief, including (i) damages sustained by the Company as a result of the alleged misconduct, (ii) punitive damages and (iii) equitable relief in the form of improvements to the Company’s governance and controls. On September 15, 2021, the Court granted the Company's motion to dismiss the complaint in its entirety, without prejudice. +On November 19, 2021, the Company received a demand letter from a law firm representing one of the purported shareholders of the Company that previously filed the dismissed Shareholder Derivative Lawsuit. The demand letter alleged facts and claims substantially similar to the Shareholder Derivative Lawsuit. The Board of Directors has constituted a committee to evaluate the demand letter and recommend a course of action to the Board of Directors, and the committee has retained counsel to assist with its review. The committee’s review is ongoing. +In October 2019, the Company received a letter from the SEC indicating that the SEC had opened an investigation into the Company, which followed the SEC’s issuance of a formal order of investigation, and requesting that the Company provide certain information and documents, including documents related to the Company's expanded audit committee review and related events. In November 2021, the Company entered a settlement with the SEC resolving the investigation. The Company was not required to pay any monetary penalty and has no ongoing undertakings in connection with the settlement. +We are presently unable to predict the duration, scope or result of the Logan Lawsuit, or any other related lawsuit or investigation. As of December 31, 2021, no provision was made by the Company in connection with this pending lawsuit as the final outcome cannot be reasonably estimated. +Environmental and Equipment Insurance +The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company's business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company's liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification. +Effective November 2021 and in connection with our equipment insurance program renewal, the Company will self-insure up to $ 10 million per occurrence for certain losses arising from or attributable to fire and/or explosion at the wellsites. +Regulatory Audits +In 2020, the Texas Comptroller of Public Accounts (the “Comptroller”) commenced a routine audit of the Company's motor vehicle and other related fuel taxes for the periods of July 2015 through December 2020. As of December 31, 2021, the audit is still ongoing and the final outcome cannot be reasonably estimated. +75 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +15. COMMITMENTS AND CONTINGENCIES (Continued) +In January 2022, we entered into a settlement agreement with the Comptroller for a $ 10.7 million tax refund, net of consulting fees, in connection with certain limited sales and use tax for the audit period July 1, 2015 through December 31, 2018. The net refund will be recorded in our first quarter of 2022, the period the refund is expected to be received by the Company. During the year December 31, 2021, the net refund received by the Company from the sales and excise and use tax audit was approximately $ 2.1 million, which was recorded as part of other income in the statement of operations . +16. QUARTERLY FINANCIAL DATA (UNAUDITED) +The following table sets forth our unaudited quarterly results for each of the last four quarters for the years ended December 31, 2021 and 2020. This unaudited quarterly information has been prepared on the same basis as our annual audited financial statements and includes all adjustments, consisting only of normal recurring adjustments that are necessary to present fairly the financial information for the fiscal quarters presented. +(In thousands, except for per share data) +2021 +First Quarter Second Quarter Third Quarter Fourth Quarter +Revenue - Service revenue $ 161,458 $ 216,887 $ 250,099 $ 246,070 +Gross profit $ 38,080 $ 54,050 $ 61,409 $ 58,709 +Net income +$ ( 20,375 ) $ ( 8,511 ) $ ( 5,067 ) $ ( 20,232 ) +Net income per common share: +Basic +$ ( 0.20 ) $ ( 0.08 ) $ ( 0.05 ) $ ( 0.20 ) +Diluted +$ ( 0.20 ) $ ( 0.08 ) $ ( 0.05 ) $ ( 0.20 ) +Weighted average common shares outstanding: +Basic +101,550 102,398 103,257 103,390 +Diluted +101,550 102,398 103,257 103,390 +2020 +First Quarter Second Quarter Third Quarter Fourth Quarter +Revenue - Service revenue $ 395,069 $ 106,109 $ 133,710 $ 154,344 +Gross profit $ 94,221 $ 37,916 $ 34,118 $ 38,698 +Net income +$ ( 7,804 ) $ ( 25,920 ) $ ( 29,184 ) $ ( 44,112 ) +Net income per common share: +Basic +$ ( 0.08 ) $ ( 0.26 ) $ ( 0.29 ) $ ( 0.44 ) +Diluted +$ ( 0.08 ) $ ( 0.26 ) $ ( 0.29 ) $ ( 0.44 ) +Weighted average common shares outstanding: +Basic +100,687 100,821 100,897 100,911 +Diluted +100,687 100,821 100,897 100,911 +76 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +77 +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2021. +Management’s Report on Internal Control over Financial Reporting +The management of ProPetro Holding Corp. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. ProPetro Holding Corp. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with U.S. GAAP. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any control system. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company will be detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our internal cont rol over financial reporting as of December 31, 2021 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management believes that ProPetro Holding Corp. maintained effective internal control over financial reporting as of December 31, 2021. The independent registered public accounting firm, Deloitte & Touche LLP , Houston, Texas, United States , Auditor Firm ID # 34 , has audited the consolidated financial statements as of and for the year ended December 31, 2021, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this Annual Report under Part II, Item 8 above. +Changes in Internal Control over Financial Reporting +There were no changes in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +78 +Item 9B. Other Information +None. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +79 +Part III +Item 10. Directors, Executive Officers and Corporate Governance +This information is incorporated by reference to the Company’s Proxy Statement for its 2022 Annual Meeting of Stockholders, which is expected to be filed before the end April 2022. +80 +Item 11. Executive Compensation +This information is incorporated by reference to the Company’s Proxy Statement for its 2022 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2022. +81 +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +This information is incorporated by reference to the Company’s Proxy Statement for its 2022 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2022. +82 +Item 13. Certain Relationships and Related Party Transactions, and Director Independence. +This information is incorporated by reference to the Company’s Proxy Statement for its 2022 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2022. +83 +Item 14. Principal Accounting Fees and Services +This information is incorporated by reference to the Company’s Proxy Statement for its 2022 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2022. +84 +Part IV +Item 15. Exhibits and Financial Statement Schedules. +(a)(1) Financial Statements +The Financial Statements in Item 8 are filed as part of this Annual Report. +(a)(2) Financial Statement Schedules +None. +(a)(3) Exhibits +The exhibits required to be filed by this Item 15(b) are set forth in the Exhibit Index included below. +(b) See Exhibit Index +(c) None +85 +EXHIBIT INDEX +Exhibit +Number Description +2.1 +Purchase and Sale Agreement, dated as of November 12, 2018, by and among Pioneer Natural Resources Pumping Services LLC, Pioneer Natural Resources USA, Inc. and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 2.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 31, 2018). +3.1 +Certificate of Incorporation of ProPetro Holding Corp., as amended March 16, 2017 (incorporated by reference herein to Exhibit 3.1 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017). +3.2 +Amended and Restated Bylaws of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 3.2 to ProPetro Holding Corp.’s Current Report on Form 8-K dated June 19, 2019). +3.3 +Certificate of Designations of Series B Junior Participating Preferred Stock of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 3.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated April 14, 2020). +4.1 +Specimen Stock Certificate (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940). +4.2 +Investor Rights Agreement, dated as of December 31, 2018, by and between Pioneer Natural Resources Pumping Services LLC and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 31, 2018). +4.3 +Registration Rights Agreement, dated as of December 31, 2018, by and between Pioneer Natural Resources Pumping Services LLC and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 4.2 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 31, 2018). +4.4 +Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference herein to Exhibit 4.4 to ProPetro Holding Corp.'s Annual Report on Form 10-K for the year ended December 31, 2019). +4.5 +Rights Agreement, dated as of April 14, 2020, by and between ProPetro Holding Corp. and American Stock Transfer & Trust Company, LLC (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated April 14, 2020) . +10.1 +Credit Agreement, dated as of March 22, 2017 by and among ProPetro Holding Corp., ProPetro Services, Inc., Barclays Bank PLC, as the Agent, the Collateral Agent, a Letter of Credit Issuer and the Swingline Lender, and each of the Lenders from time to time party thereto (incorporated by reference herein to Exhibit 10.2 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 28, 2017). +10.2# +Stock Option Plan of ProPetro Holding Corp., dated March 4, 2013 (incorporated by reference herein to Exhibit 10.6 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.3# +First Amendment to the Stock Option Plan of ProPetro Holding Corp., dated June 14, 2013 (incorporated by reference herein to Exhibit 10.7 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.4# +Second Amendment to the Stock Option Plan of ProPetro Holding Corp., dated December 2, 2016 (incorporated by reference herein to Exhibit 10.8 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.5# +Non‑Qualified Stock Option Agreement, dated June 14, 2013, by and between ProPetro Holding Corp. and Spencer D. Armour, III (incorporated by reference herein to Exhibit 10.12 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.6# +Non‑Qualified Stock Option Agreement, dated July 19, 2016, by and between ProPetro Holding Corp. and Spencer D. Armour, III (incorporated by reference herein to Exhibit 10.16 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 7, 2017 (Registration No. 333-215940)). +10.7# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan (incorporated by reference herein to Exhibit 10.18 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated March 7, 2017 (Registration No. 333-215940)). +10.8# +ProPetro Holding Corp. 2020 Long Term Incentive Plan (incorporated by reference herein to Exhibit 10.3 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 26, 2020) . +10.9# +Form of ProPetro Holding Corp. Senior Executive Incentive Bonus Plan (incorporated by reference herein to Exhibit 10.19 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated February 23, 2017 (Registration No. 333-215940)). +86 +10.10# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement (incorporated by reference herein to Exhibit 10.22 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated February 23, 2017 (Registration No. 333-215940)). +10.11# +Form of ProPetro Holding Corp. Amendment to Non‑Qualified Stock Option Agreement (incorporated by reference herein to Exhibit 10.23 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated February 23, 2017 (Registration No. 333-215940)). +10.12# +2017 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Performance Restricted Stock Unit Grant Notice and Performance Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017). +10.13# +2017 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.2 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017). +10.14# +2019 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.26 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019). +10.15# +2019 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Performance Restricted Stock Unit Grant Notice and Performance Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.27 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019). +10.16# +2019 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Directors) (incorporated by reference herein to Exhibit 10.28 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019). +10.17# +2020 Form of ProPetro Holding Corp. 2020 Long Term Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Directors). (incorporated by reference herein to Exhibit 10.29 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2020). +10.18# +Letter Agreement, dated October 4, 2019, by and between Phillip Gobe and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 9, 2019). +10.19# +ProPetro Services, Inc. Executive Severance Plan (incorporated by reference herein to Exhibit 10.3 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 16, 2020). +10.20# +Form of Participation Agreement pursuant to the ProPetro Services, Inc. Executive Severance Plan (incorporated by reference herein to Exhibit 10.4 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 16, 2020). +10.21# +Participation Agreement pursuant to the ProPetro Services, Inc. Executive Severance Plan, between Phillip A. Gobe and ProPetro Services, Inc., dated March 13, 2020 (incorporated by reference herein to Exhibit 10.5 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 16, 2020). +10.22# +Amended and Restated ProPetro Holding Corp. Executive Incentive Bonus Plan (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated February 18, 2020). +10.23# +Amendment No. 1 to Credit Agreement, dated as of February 22, 2018 by and among ProPetro Holding Corp., ProPetro Services, Inc., the Incremental Lenders therein, the Required Lenders and Barclays Bank PLC, as Administrative Agent for the Lenders (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated February 27, 2018) . +10.24# +Amendment No. 2 to Credit Agreement, dated as of December 19, 2018, by and among ProPetro Holding Corp., ProPetro Services, Inc., the Incremental Lenders therein, the Required Lenders and Barclays Bank PLC, as Administrative Agent for the Lenders (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated December 21, 2018). +10.25# +Pressure Pumping Services Agreement dated December 31, 2018, between Pioneer Natural Resources USA, Inc. and ProPetro Services, Inc. (incorporated by reference herein to Exhibit 10.31 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2018). +10.26# +Form of Indemnification Agreement for Pioneer Designated Directors (incorporated by reference herein to Exhibit 10.32 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2018). +10.27# +Form of Indemnification Agreement for Officers and Directors of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 10.33 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2018). +10.28# +ProPetro Services, Inc. Amended and Restated Executive Severance Plan (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated April 10, 2020). +10.29# +ProPetro Services, Inc. Second Amended and Restated Executive Severance Plan (incorporated by reference herein to Exhibit 10.4 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 26, 2020). +10.30# +Form of Participation Agreement pursuant to the ProPetro Services, Inc. Second Amended and Restated Executive Severance Plan (incorporated by reference herein to Exhibit 10.5 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 26, 2020). +87 +10.31 +Waiver to Credit Agreement, dated as of March 17, 2020 by and among ProPetro Holding Corp., ProPetro Services, Inc., Barclays Bank PLC, as the Agent, the Collateral Agent, a Letter of Credit Issuer and the Swingline Lender, and each of the Lenders from time to time party thereto (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 23, 2020). +10.32 +Waiver to Credit Agreement, dated as of June 22, 2020 by and among ProPetro Holding Corp., ProPetro Services, Inc., Barclays Bank PLC, as the Agent, the Collateral Agent, a Letter of Credit Issuer and the Swingline Lender, and each of the Lenders from time to time party thereto (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated June 23, 2020). +10.33# +Participation Agreement pursuant to the ProPetro Services, Inc. Executive Severance Plan, dated March 16, 2020, by and between Newton W. Wilson III and ProPetro Services, Inc. (incorporated by reference herein to Exhibit 10.51 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019). +10.34# +Amended and Restated ProPetro Holding Corp. Non-Employee Director Compensation Policy (incorporated by reference herein to Exhibit 10.53 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019). +10.35# +2020 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.54 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019) . +10.36# +2020 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Performance Restricted Stock Unit Grant Notice and Performance Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.55 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019). +10.37# +2021 Form of ProPetro Holding Corp. 2020 Long Term Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021). +10.38# +2021 Form of ProPetro Holding Corp. 2020 Long Term Incentive Plan Performance Share Unit Grant Notice and Performance Share Unit Agreement (incorporated by reference herein to Exhibit 10.2 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021). +10.39# +Participation Agreement pursuant to the ProPetro Services, Inc. Second Amended and Restated Executive Severance Plan, dated July 28, 2021, by and between Newton W. Wilson III and ProPetro Services, Inc (incorporated by reference herein to Exhibit 10.2 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated July 27, 2021). +21.1(a) +List of Subsidiaries of ProPetro Holding Corp. +23.1(a) +Consent of Independent Registered Public Accounting Firm. +31.1(a) +Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +31.2(a) +Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1(b) +Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2(b) +Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS(a) XBRL Instance Document +101.SCH(a) XBRL Taxonomy Extension Schema Document +101.CAL(a) XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB(a) XBRL Taxonomy Extension Label Linkbase Document +101.PRE(a) XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF(a) XBRL Taxonomy Extension Definition Linkbase Document +104(a) Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document +(a) Filed herewith. +(b) Furnished herewith. +# Compensatory plan, contract or arrangement. +Item 16. Form 10-K Summary +None. +88 +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on February 25, 2022. +ProPetro Holding Corp. +/s/ Samuel D. Sledge +Samuel D. Sledge +Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated on the date indicated. +89 +Signature +Title +Date +/s/ Samuel D. Sledge +Chief Executive Officer and Director (Principal Executive Officer) +February 25, 2022 +Samuel D. Sledge +/s/ David S. Schorlemer +Chief Financial Officer (Principal Financial Officer) +February 25, 2022 +David S. Schorlemer +/s/ Elo Omavuezi +Chief Accounting Officer (Principal Accounting Officer) +February 25, 2022 +Elo Omavuezi +/s/ Phillip A. Gobe +Executive Chairman of the Board February 25, 2022 +Phillip A. Gobe +/s/ Spencer D. Armour, III +Director +February 25, 2022 +Spencer D. Armour, III +/s/ Mark Berg +Director +February 25, 2022 +Mark Berg +/s/ Anthony Best +Director +February 25, 2022 +Anthony Best +/s/ G. Larry Lawrence +Director +February 25, 2022 +G. Larry Lawrence +/s/ Michele Vion +Director +February 25, 2022 +Michele Vion +/s/ Alan E. Douglas +Director +February 25, 2022 +Alan E. Douglas +/s/ Jack Moore +Director +February 25, 2022 +Jack Moore +90 \ No newline at end of file diff --git a/raw/filings/0001680247/2021/0001680247-22-000007/filing_metadata.csv b/raw/filings/0001680247/2021/0001680247-22-000007/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..7660c9cef1f17fe1f9224a03c80f8402e8ffa4c7 --- /dev/null +++ b/raw/filings/0001680247/2021/0001680247-22-000007/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001680247,PUMP,ProPetro Holding Corp.,10-K,2022-02-25,2021-12-31,2022-02-25T21:58:50.000Z,0001680247-22-000007,pump-20211231.htm,10-K,9701409,1,1,https://www.sec.gov/Archives/edgar/data/1680247/000168024722000007/pump-20211231.htm,https://www.sec.gov/Archives/edgar/data/1680247/000168024722000007/,2021,2021,1 diff --git a/raw/filings/0001680247/2021/0001680247-22-000007/item1.txt b/raw/filings/0001680247/2021/0001680247-22-000007/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..a87d9a36e46a61a997a78837ed36cb312f72160a --- /dev/null +++ b/raw/filings/0001680247/2021/0001680247-22-000007/item1.txt @@ -0,0 +1,95 @@ +Item 1. Business. +Our Company +We are a Midland, Texas‑based oilfield services company providing hydraulic fracturing and other complementary services to leading upstream oil and gas companies engaged in the exploration and production ("E&P") of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil‑producing areas in the United States, and we believe we are one of the leading providers of hydraulic fracturing services in the region by hydraulic horsepower ("HHP"). +Our total available HHP at December 31, 2021 wa s 1,423,000 HHP, which was comprised of 90 ,000 HHP of our Tier IV Dynamic Gas Blending ("DGB") equipment, 1,225,000 HHP of conventional Tier II equipment and 108,000 HHP of our DuraStim® electric hydraulic fracturing equipment. Our fleet could range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsites. With the industry transition to lower emissions equipment and simultaneous hydraulic fracturing ("Simul-Frac"), in addition to several other changes to our customers' job designs, we believe that our available fleet capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at the wellsites. In September 2021, we placed an order with our equipment manufacturers for 125,000 HHP of Tier IV DGB equipment for additional conversions, which we expect to be delivered at different times through the first half of 2022. +In 2019, we entered into a purchase commitment for 108,000 HHP of DuraStim® electric powered hydraulic fracturing equipment. In addition to DuraStim® fleets, we are also evaluating other electric and alternative pressure pumping solutions. In December 2021, we disposed of our two gas turbines initially purchased to provide electrical power to our DuraStim® fleets as we determined they were an inefficient power solution in the field. In the future, we may lease electrical power equipment from a third party or rely on our customers to provide power solutions for our electric equipment. +Our competitors include many large and small oilfield services companies, including Halliburton Company, Liberty Oilfield Services Inc., Nextier Oilfield Solutions Inc., Patterson-UTI Energy Inc., RPC, Inc., FTS International Inc. and a number of private and locally-oriented businesses. The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies' criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company's selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the service industry because of the capital requirements, and the depressed pricing experienced by the service industry. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +Our substantial market presence in the Permian Basin positions us well to capitalize on drilling and completion activity in the region. Primarily, our operational focus has been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have recently increased our operations in the Delaware sub-basin and are well-positioned to support further increases to our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending. +Through our pressure pumping segment (which also includes our cementing operations), we primarily provide hydraulic fracturing services to E&P companies in the Permian Basin. Our hydraulic fracturing fleet has been designed to handle the operating conditions commonly utilized in the Permian Basin and the region's increasingly high-intensity well completions (including Simul-Frac, which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. +1 +In addition to our core pressure pumping segment operations, which includes our cementing operations, we also offer coiled tubing services. Through our coiled tubing services segment, we seek to create operational efficiencies for our customers, which could allow us to capture a greater portion of their capital spending across the lifecycle of a well. +Commodity Price and Other Economic Conditions +The oil and gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, political instability in oil producing countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. +The global public health crisis associated with the COVID-19 pandemic could continue to have an adverse effect on global economic activity for the foreseeable future. Some of the challenges resulting from the COVID-19 pandemic that have impacted our business include restrictions on movement of personnel and associated gatherings, shortage of skilled labor, cost inflation and supply chain disruptions. Additionally, with most of the large, capitalized E&P companies in the United States, including our customers, closely managing their operating budget and exercising capital discipline, we do not currently expect significant increases in crude oil production over the short-to-medium term. Furthermore, OPEC+ has indicated that they will continue with their plans to manage production levels by gradually increasing crude oil output. With the tightness in crude oil production and growing demand for crude oil, there has been a significant increase in rig count and WTI crude oil prices have increased to ov er $90 per barrel in February 2022 from its lowest point of $20 per barrel in March 2020. The Permian Basin rig count has increased significantly from approximately 179 at the beginning of 2021 to approximately 294 at the end of 2021, according to Baker Hughes. Although crude oil prices are currently at a 7-year high, the oilfield services industry, including the pressure pumping segment, has not fully recovered as evidenced by continued depressed pricing for most of our services, and shortages of skilled labor force in the Permian Basin, coupled with rising inflationary costs. However, we still believe that the Permian Basin, our primary area of operation, will be the most attractive basin to E&P companies and should command higher prices and associated profitability, if the overall demand for crude oil and our services continues to increase. +Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including the upstream and oilfield services companies. As a result, we are working with our customers and equipment manufacturers to transition to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB, electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. If we are unable to quickly transition to lower emissions equipment and meet our and our customers’ emissions goals, the demand for our services could be adversely impacted. +The Permian Basin rig count increase, WTI crude oil price increase and costs inflation could be indicative of an energy market recovery. I f the rig count and market conditions continue to improve, including improved customers' pricing and labor availability, and we are able to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also continue to improve. However, if market conditions do not improve, and we are unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows. Refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for more discussions on our current and future business environment and financial performance. +Our Services +We have historically conducted our business through three operating segments: hydraulic fracturing, cementing, and coiled tubing. For reporting purposes, the hydraulic fracturing and cementing operating segments are aggregated into one reportable segment—"Pressure Pumping". Our coiled tubing operating segment and corporate administrative expense are aggregated into our "All Other" segment. For additional financial information on our reportable segments, please see reportable segment information in Part II - Item 8, "Financial Statements and Supplementary Data." +2 +Pressure Pumping +Hydraulic Fracturing +We primarily provide hydraulic fracturing services to E&P companies in the Permian Basin. These services are intended to optimize hydrocarbon flow paths during the completion phase of horizontal shale wellbores. We have significant expertise in multi‑stage fracturing of horizontal oil‑producing wells in unconventional geological formations. Our total available HHP at December 31, 2021 was 1,423,000 HHP, which was comprised o f 90,000 HHP of our Tier IV DGB equipment, 1,225,000 HHP of conventional Tier II equipment and 108,000 HHP of our DuraStim® hydraulic fracturing equipment. Our DuraStim® hydraulic fracturing equipment has been tested on a limited scale basis with certain of our customers and we are evaluating the appropriate strategy to continue such field testing, including whether field testing will be conducted in 2022. +The hydraulic fracturing process consists of pumping a fracturing fluid into a well at sufficient pressure to fracture the formation. Materials known as proppants, which in our business are comprised primarily of sand, are suspended in the fracturing fluid and are pumped into the fracture to prop it open. The fracturing fluid is designed to break, or loosen viscosity, and be forced out of the formation by its pressure, leaving the proppants suspended in the fractures created, thereby increasing the mobility of the hydrocarbons. As a result of the fracturing process, production rates are usually enhanced substantially, thus increasing the rate of return of hydrocarbons for the operator. +We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We also refer to all of our fracturing units, other equipment and vehicles necessary to perform a fracturing job as a " fleet " and the personnel assigned to each fleet as a " crew. " On average, one hydraulic fracturing fleet consists of approximately 50,000 to 80,000 HHP , depending on job design and customer demand. Our hydraulic fracturing units consist primarily of a high pressure hydraulic pump, diesel or dual gas engine, transmission and various hoses, valves, tanks and other supporting equipment like blenders, irons, hoses and datavans. Our DuraStim® hydraulic fracturing fleet is electrically driven and can be powered by turbines, generators or similar equipment that can generate electricity. In December 2021, we sold our two turbines for cash consideration of $36.0 million, and the net book value of the turbines prior to the sale was approximately $39.5 million. Our two turbines were initially purchase d to provide power to our DuraStim® equipment. In the future, we may lease or purchase alternative power solutions for our electric equipment. +We provide dedicated equipment, personnel and services that are tailored to meet each of our customer’s needs. Each fleet has a designated team of personnel, which allows us to provide responsive and customized services, such as project design, proppant and other consumables procurement, real‑time data provision and post‑completion analysis for each of our jobs. Many of our hydraulic fracturing fleets and associated personnel have worked continuously with the same customer for the past several years promoting deep relationships and a high degree of coordination and visibility into future customer activity levels. Furthermore, in light of our substantial market presence and historically high fleet utilization levels, we have established a variety of trusted relationships with key equipment, sand and other downhole consumable suppliers. We believe these strategic relationships position us to acquire equipment, parts and materials on a timely and economic basis and allow our dedicated procurement and logistics team to support consistently safe and reliable operations. +Cementing +We provide cementing services for completion of new wells and remedial work on existing wells. Cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Cementing provides isolation between fluid zones behind the casing to minimize potential damage to hydrocarbon bearing formations or the integrity of freshwater aquifers, and provides structural integrity for the casing by securing it to the earth. Cementing is also done when re-completing wells, where one zone is plugged and another is opened. +We believe that our cementing segment provides an organic growth opportunity for us to expand our service offerings within our existing customer base. +3 +Other Services +Coiled Tubing +Coiled tubing services involve injecting coiled tubing into wells to perform various completion well intervention operations. Coiled tubing is a flexible steel pipe with a diameter of typically less than three inches and manufactured in continuous lengths of thousands of feet. It is wound or coiled on a truck‑mounted reel for onshore applications. Due to its small diameter, coiled tubing can be inserted into existing production tubing and used to perform a variety of services (including drillout of plugs) to enhance the flow of oil or natural gas. +The principal advantages of using coiled tubing include the ability to (i) continue production from the well without interruption, thus reducing the risk of formation damage, (ii) move continuous coiled tubing in and out of a well significantly faster than conventional pipe used with a workover rig, which must be jointed and unjointed, (iii) direct fluids into a wellbore with more precision, allowing for improved stimulation fluid placement, (iv) provide a source of energy to power a downhole motor or manipulate downhole tools, and (v) enhance access to remote fields due to the smaller size and mobility. +Our Customers +Our customers consist primarily of oil and natural gas producers in North America. Our top five customers accounted for approximately 85.7%, 86.5% and 77.1% of our revenue, for the years ended December 31, 2021, 2020 and 2019, respectively. For the year ended December 31, 2021, Pioneer Natural Resources USA Inc. ("Pioneer") and Endeavor Energy Resources accounted for 54.2% and 14.6%, respectively, of total revenue. No other customer accounted for more than 10% of our total revenue for the year ended December 31, 2021. +Competition +The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies’ criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company’s selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the oilfield service industry because of the capital requirements and the continuing depressed pricing experienced by the service industry. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +We provide our services primarily in the Permian Basin, and we compete against different companies in each service and product line we offer. Our competition includes many large and small oilfield services companies, including the largest integrated oilfield services companies. Our major competitors for hydraulic fracturing services include Halliburton Company, Liberty Oilfield Services Inc., Nextier Oilfield Solutions Inc., Patterson‑UTI Energy Inc., RPC, Inc., FTS International, Inc. and a number of private and locally-oriented businesses. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the fourth quarter, relating to the conclusion of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather during which we may experience declines in our operating results. +Operating Risks and Insurance +Our operations are subject to hazards inherent in the oilfield services industry, such as accidents, blowouts, explosions, fires and spills and releases that can cause personal injury or loss of life, damage or destruction of property, equipment, natural resources and the environment and suspension of operations. +4 +In addition, claims for loss of oil and natural gas production and damage to formations can occur in the oilfield services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in us being named as a defendant in lawsuits asserting large claims. +Our business involves the transportation of heavy equipment and materials, and as a result, we may also experience traffic accidents which may result in spills, property damage and personal injury. +Despite our efforts to maintain safety standards, we have suffered accidents from time to time in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations. +We maintain commercial general liability, workers’ compensation, business automobile, commercial property, umbrella liability, excess liability, and directors and officers insurance policies providing coverages of risks and amounts that we believe to be customary in our industry. Further, we have pollution legal liability coverage for our business entities, which would cover, among other things, third party liability and costs of clean up relating to environmental contamination on our premises while our equipment is in transit and on our customers’ job site. With respect to our hydraulic fracturing operations, coverage would be available under our pollution legal liability policy for any surface or subsurface environmental clean‑up and liability to third parties arising from any surface or subsurface contamination. We also have certain specific coverages for some of our businesses, including our hydraulic fracturing services. +We maintain directors and officers insurance; however, our insurance coverage is subject to certain exclusions (including, for example, any required SEC disgorgement or penalties) and we are responsible for meeting certain deductibles under the policies. Moreover, we cannot assure you that our insurance coverage will adequately protect us from claims made in the Logan Lawsuit or any future claims. +Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of the high premium costs relative to perceived risk. Further, insurance rates have in the past been subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us. See “Risk Factors” for a description of certain risks associated with our insurance policies. +Environmental and Occupational Health and Safety Regulations +Our operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection, and occupational health and safety. Numerous federal, state and local governmental agencies issue regulations that often require difficult and costly compliance measures that could carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may, for example, restrict the types, quantities and concentrations of various substances that can be released into the environment, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas and other protected areas, or require action to prevent or remediate pollution from current or former operations. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental, health and safety laws and regulations occur frequently, and any changes that result in more stringent and costly requirements could materially adversely affect our operations and financial position. For example, following the election of President Biden and Democratic control in both houses of Congress, it is possible that our operations may be subject to greater environmental, health and safety restrictions, particularly with regards to hydraulic fracturing, permitting and greenhouse gases ( " GHG " ) emissions. We have not experienced any material adverse effect from compliance with current requirements; however, this trend may not continue in the future. +Below is an overview of some of the more significant environmental, health and safety requirements with which we must comply. Our customers’ operations are subject to similar laws and regulations. Any material adverse effect of these laws and regulations on our customers’ operations and financial position may also have an indirect material adverse effect on our operations and financial position. +5 +Waste Handling. We handle, transport, store and dispose of wastes that are subject to the Resource Conservation and Recovery Act ( " RCRA " ) and comparable state laws and regulations, which affect our activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although certain petroleum production wastes are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. Moreover, the U.S. Environmental Protection Agency ( " EPA " ) or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or recategorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to recategorize certain oil and natural gas exploration, development and production wastes as hazardous wastes. Several environmental organizations have also petitioned the EPA to modify existing regulations to recategorize certain oil and natural gas exploration, development and production wastes as hazardous. Any such changes in these laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act ( " CERCLA " or " Superfund " ) and analogous state laws generally impose liability without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Liability for the costs of removing or remediating previously disposed wastes or contamination, damages to natural resources, the costs of conducting certain health studies, amongst other things, is strict and joint and several. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state laws. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such hazardous substances have been released. +NORM. In the course of our operations, some of our equipment may be exposed to naturally occurring radioactive materials ( " NORM " ) associated with oil and gas deposits and, accordingly, may result in the generation of wastes and other materials containing NORM. NORM exhibiting levels of radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. +Water Discharges. The Clean Water Act, Safe Drinking Water Act, Oil Pollution Act and analogous state laws and regulations impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into regulated waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Also, spill prevention, control and countermeasure plan requirements require appropriate containment berms and similar structures to help prevent the contamination of regulated waters. +Air Emissions. The Clean Air Act ( " CAA " ) and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other emissions control requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants from specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. These and other laws and regulations may increase the costs of compliance for some facilities where we operate. Obtaining or renewing permits also has the potential to delay the development of oil and natural gas projects. +Climate Change. In the United States, no comprehensive climate change legislation has been implemented at the federal level. However, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, implement New Source Performance Standards directing the reduction of certain pollutants from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the Department of Transportation ("DOT"), implementing GHG emissions limits on +6 +vehicles manufactured for operation in the United States. In September 2020, the Trump Administration revised prior regulations to rescind certain methane standards and remove the transmission and storage segments from the source category for certain regulations. However, subsequently, the U.S. Congress approved, and President Biden signed into law, a resolution under the Congressional Review Act to repeal the September 2020 revisions to the methane standards, effectively reinstating the prior standards. Additionally in November 2021, the EPA issued a proposed rule that, if finalized, would establish OOOO(b) new source and OOOO(c) first-time existing source of standards of performance for methane and volatile organic compound emissions for oil and gas facilities. Operators of affected facilities will have to comply with specific standards of performance to include leak detection using optical gas imaging and subsequent repair equipment, and reduction of emissions by 95% through capture and control systems. The EPA plans to issue a supplemental proposal in 2022 containing additional requirements not included in the November 2021 proposed rule and anticipates the issuance of a final rule by the end of the year. +Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas such as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored " Paris Agreement, " requires member states to submit non-binding, individually-determined reduction goals known as Nationally Determined Contributions (“NDCs”) every five years after 2020. Following President Biden’s executive order in January 2021, the United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. Additionally, at the 26th Conference of the Parties (“COP26”) in Glasgow in November 2021, the United States and the European Union jointly announced the launch of the Global Methane Pledge; an initiative committing to a collective goal of reducing global methane emissions by at least 30 percent from 2020 levels by 2030, including “all feasible reductions” in the energy sector. However, the impacts of these actions are unclear at this time. +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, including climate-change-related pledges made by certain candidates for public office. On January 27, 2021, President Biden issued an executive order that commits to substantial action on climate change, calling for, among other things, the increased use of zero-emissions vehicles by the federal government, the elimination of subsidies provided to the fossil fuel industry and an increased emphasis on climate-related risk across government agencies and economic sectors. The executive order also suspends the issuance of new leases for oil and gas development on federal land; for more information, see our regulatory disclosure titled " Regulation of Hydraulic Fracturing and Related Activities. " Other actions that the Biden Administration may take include the imposition of more restrictive requirements for the development of pipeline infrastructure or liquefied natural gas export facilities or more restrictive GHG emissions limitations for oil and gas facilities. Litigation risks are also increasing as a number of parties have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. +The adoption and implementation of new or more stringent international, federal or state legislation, regulations or other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate GHG emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for, oil and natural gas, which could reduce demand for our services and products. +Moreover, climate change may result in various physical risks, such as the increased frequency or intensity of extreme weather events or changes in the meteorological and hydrological patterns, that could adversely impact us, our customers’ and our suppliers’ operations. Such physical risks may result in damage to our customers’ facilities or otherwise adversely impact our operations, such as if facilities are subject to water use curtailments in response to drought, or demand for our customers’ products, such as to the extent warmer winters reduce the demand for energy for heating purposes, which may ultimately reduce demand for the products and services we provide. Such physical risks may also impact our suppliers, which may adversely affect out ability to provide our products and services. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Endangered and Threatened Species. Environmental laws such as the Endangered Species Act ( " ESA " ) and analogous state laws may impact exploration, development and production activities in areas where we operate. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and various state analogs. The U.S. Fish and Wildlife Service ( " FWS " ) may identify previously unidentified endangered or threatened species or may designate +7 +critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species. For example, the dunes sagebrush lizard, which is found only in the active and semi-stable shinnery oak dunes of southeastern New Mexico and adjacent portions of Texas (including areas where our customers operate), was a candidate species for listing under the ESA by the FWS for many years. As a result of a recent settlement with certain environmental groups, the FWS, in July 2020, acted on a petition to list the dunes sagebrush lizard finding sufficient information to warrant a formal one-year review to consider listing the species. While that deadline has been missed, the listing review is reportedly ongoing; additionally, FWS has also solicited comments on a proposed conservation agreement that would implement certain protective practices for the species and authorize incidental take of the species resulting from certain covered activities, including exploration and development of oil and gas fields. However, to the extent any protections are implemented for this or any other species, it could cause us or our customers to incur additional costs or become subject to operating restrictions or operating bans in the affected areas. +Regulation of Hydraulic Fracturing and Related Activities. Our hydraulic fracturing operations are a significant component of our business. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has previously issued a series of rules under the CAA that establish new emission control requirements for certain oil and natural gas production and natural gas processing operations and associated equipment. Separately, the Bureau of Land Management ( " BLM " ) previously finalized a rule governing hydraulic fracturing on federal lands, but that rule was subsequently rescinded. Although several of these rulemakings have been rescinded, modified or subjected to legal challenges, new or more stringent regulations may be promulgated by the Biden administration. For example, in January 2021, President Biden issued an executive order suspending new leasing activities, but not operations under existing leases, for oil and gas exploration and production on non-Indian federal lands pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices that take into consideration potential climate and other impacts associated with oil and gas activities on such lands and waters. Although the federal court for the Western District of Louisiana issued a preliminary injunction against the leasing pause, in response to the executive order, the Department of the Interior ( " DOI " ) issued a report recommending various changes to the federal leasing program, though many such changes would require Congressional action. As a result, we cannot predict the final scope of regulations or restrictions that may apply to oil and gas operations on federal lands. However, any regulations that ban or effectively ban such operations may adversely impact demand for our products and services. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have previously been proposed in Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +Federal and state governments have also investigated whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for wastewater disposal wells that impose permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission’s well completion seismicity guidelines for operators in the SCOOP and STACK require hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division has previously issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission ( "TRRC") has adopted similar rules and, in September 2021, issued a notice to disposal well operators in the Gardendale Seismic Response Area near Midland, Texas to reduce daily injection volumes following multiple earthquakes above a 3.5 magnitude over an 18 month period. The notice also required disposal well operators to provide injection data to TRRC staff to further analyze seismicity in the area. Subsequently, the TRRC ordered the indefinite suspension of all deep oil and gas produced water injection wells in the area, effective December 31, 2021. While we cannot predict the ultimate outcome of these actions, any action that temporarily or permanently restricts the availability of disposal capacity for produced water or other oilfield fluids may increase our customers’ costs or require them to suspend operations, which may adversely impact demand for our products and services. +8 +Increased regulation of hydraulic fracturing and related activities could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and record keeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. +OSHA Matters. The Occupational Safety and Health Act ( " OSHA " ) and comparable state statutes regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. +Human Capital +Our employees are our key asset. Our primary human capital management objectives are to effectively engage, develop, retain and reward our employees. As of December 31, 2021, we employed approximatel y 1,500 people , none of which are unionized. Of the total population over 80% of our headcount worked for or supports our pressure pumping segment. Our employees are a key component of our ability to attract and retain customers as a result of their operational excellence in the field. +Some examples of significant programs and initiatives that are focused to attract, develop and retain our diverse workforce include: +• Diversity and inclusion. We believe that in order to attract and retain talent with the skill sets and expertise required to maximize our operational efficiencies across all levels in the Company, it is in our best interest to attempt to recruit and develop a diverse team and create a culture that is inclusive and provides equal opportunities for hiring and advancement for all employees and prospective employees. Some examples of this effort include; +◦ a commitment to conducting business in a manner that respects all human rights in compliance within the requirements of applicable laws; +◦ efforts to promote and encourage respect for human rights and fundamental freedoms for all without distinctions of any kind such as race, color, sex, language, religion, political or other opinions; +◦ working in partnership with personnel, business parties and other parties directly linked to our operations that share our commitment to these same principles; +◦ efforts in our employment practices, including through our code of conduct, our equal employment opportunity employer policy, and our anti-harassment policy; and +◦ to make it possible for grievances regarding health and safety to be addressed early and remediated directly, in confidence and without fear of retaliation; the Company provides an anonymous Ethics and Compliance hotline that is promoted internally and accessible from our intranet and internet. +• Training and Safety. We offer in-depth, role-appropriate safety training upon hiring and as part of the continuous development of our employees. The safety of our employees, our customers, and the communities in which we operate is paramount. We track and evaluate safety incidents at wellsites and offices, and if an accident does occur, we take actions to mitigate similar incidents from reoccurring in the future. The Company incentivizes employees to focus on conducting operations in accordance with our strict safety standards and encourages employees to immediately report any breach of safety protocol. Ten percent of our executive officers’ annual target bonuses under the 2021 annual incentive program were based upon the Company’s achievement of certain safety goals, including a target total recordable incident rate of less than 0.75. +• Professional Development. In 2021 ProPetro introduced a Tuition Reimbursement Program to encourage employees to pursue professional development interests that will help strengthen skills and competencies required for their current position or future roles in the business. This program is designed to provide assistance and offset related training expense. +9 +• Health, Wellness and Benefits. Our employee benefit offerings are designed to meet the varied and evolving needs of a diverse workforce across the Company and we believe are consistent with those provided by our peer companies with which we compete for talent. The Company provides employees with the ability to participate in health and welfare plans, including medical, dental, life, accidental death and dismemberment and short-term and long-term disability insurance plans. Since the beginning of COVID-19, we have implemented processes and procedures to help address COVID-19 matters. Below are some of the adjustments we made to address the COVID-19 pandemic; +◦ instituted periodic update, guidelines and questionnaires to all employees to address and identify COVID-19 related matters; +◦ initially instituted a temporary remote work environment in response to COVID-19 and have retained the flexibility for employees to work remotely when necessary or advisable; +◦ encouraged all employees to adhere to guidelines provided by the Centers for Disease Control and Prevention; and +◦ provided coverage for COVID-19 testing and vaccination under the Company’s medical plan at no cost to our employees. +In 2021, we performed an extensive review of our health-related benefits program to ensure that our offerings are market competitive and effectively utilized by employees. Based on that review, we made comprehensive adjustments to our health-related benefits programs, which improved the cost and quality of coverage. We significantly increased the number of employee meetings to provide education and encourage individuals to maximize the value of benefits offered, resulting in an overall increase in participation and positive feedback from employees. +We have also recently initiated a plan to review our 401(k) plan and implement improvements in 2022 with a focus on improving plan structure, reducing program administration, providing employee education and increasing plan participation. +Availability of Filings +Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the " Exchange Act " ), are made available free of charge on our internet web site at www.propetroservices.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the SEC. The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is www.sec.gov. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Annual Report or the documents incorporated by reference in this Annual Report. +10 \ No newline at end of file diff --git a/raw/filings/0001680247/2021/0001680247-22-000007/item13.txt b/raw/filings/0001680247/2021/0001680247-22-000007/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..7f08daea1c022fa0c56ebf61034390f0c58c7263 --- /dev/null +++ b/raw/filings/0001680247/2021/0001680247-22-000007/item13.txt @@ -0,0 +1,3 @@ +Item 13. Certain Relationships and Related Party Transactions, and Director Independence. +This information is incorporated by reference to the Company’s Proxy Statement for its 2022 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2022. +83 \ No newline at end of file diff --git a/raw/filings/0001680247/2021/0001680247-22-000007/item9a.txt b/raw/filings/0001680247/2021/0001680247-22-000007/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..b386fbd9c1f50fb1eef726932272c3d2f46ab618 --- /dev/null +++ b/raw/filings/0001680247/2021/0001680247-22-000007/item9a.txt @@ -0,0 +1,11 @@ +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2021. +Management’s Report on Internal Control over Financial Reporting +The management of ProPetro Holding Corp. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. ProPetro Holding Corp. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with U.S. GAAP. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any control system. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company will be detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our internal cont rol over financial reporting as of December 31, 2021 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management believes that ProPetro Holding Corp. maintained effective internal control over financial reporting as of December 31, 2021. The independent registered public accounting firm, Deloitte & Touche LLP , Houston, Texas, United States , Auditor Firm ID # 34 , has audited the consolidated financial statements as of and for the year ended December 31, 2021, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this Annual Report under Part II, Item 8 above. +Changes in Internal Control over Financial Reporting +There were no changes in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +78 \ No newline at end of file diff --git a/raw/filings/0001680247/2021/0001680247-22-000007/rp_note.txt b/raw/filings/0001680247/2021/0001680247-22-000007/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..4991759fde4b7aac6f1df64ea3442f4522cd1a20 --- /dev/null +++ b/raw/filings/0001680247/2021/0001680247-22-000007/rp_note.txt @@ -0,0 +1,13 @@ +13. RELATED-PARTY TRANSACTIONS (Continued) +Corporate Office Building +Prior to April 2020, the Company rented its corporate office building and the associated real property from an entity, in which a former executive officer of the Company has an equity interest for approximately $ 0.1 million per year. In April 2020, the Company acquired the corporate office building and associated real property for approximately $ 1.5 million. +Operations and Maintenance Yards +The Company also rents five yards from an entity, in which certain former executive officers and a director of the Company have equity interests and total annual rent expense for each of the five yards was approximately $ 0.03 million, $ 0.03 million, $ 0.1 million, $ 0.1 million, and $ 0.2 million, respectively. The Company also leased its drilling yard from another entity, in which a certain former executive officer of the Company has an equity interest, for an annual lease expense of approximately $ 0.1 million during 2020 . In November 2020, we terminated the drilling yard lease. +Equipment Rental and Other Services +The Company obtained equipment maintenance services from an entity that has a family relationship with an executive officer of the Company. During the year ended December 31, 2021 and 2020, the Company incurred approximately $ 0 and $ 1.2 million, respectively, for equipment maintenance services associated with this related party. +At December 31, 2021 and 2020, the Company had no outstanding payables or receivables to or from the above related party. +Pioneer +On December 31, 2018, we consummated the Pioneer Pressure Pumping Acquisition. In connection with the Pioneer Pressure Pumping Acquisition, Pioneer received 16.6 million shares of our common stock and approximately $ 110.0 million in cash. +Revenue from services provided to Pioneer (including idle fees) accounted for approximately $ 473.8 million, $ 335.4 million and $ 524.2 million of our total revenue during the years ended December 31, 2021, 2020 and 2019, respectively. +In connection with the Pioneer Pressure Pumping Acquisition, the Company agreed to reimburse Pioneer for a certain portion of the retention bonuses paid to former Pioneer employees that were subsequently employed by the Company. During years ended December 31, 2021, 2020 and 2019, the Company fully reimbursed Pioneer approximately $ 0 , $ 2.7 million and $ 4.2 million respectively. +As of December 31, 2021, the total accounts receivable due from Pioneer, including estimated unbilled receivable for services (including idle fees) we provided, amounted to $ 62.1 million a nd the amount due to Pioneer was $ 0 . As of December 31, 2020, the balance due from Pioneer for services (including idle fees) we provided amo unted to approximately $ 41.7 million and the amount due to Pioneer was $ 0 . \ No newline at end of file diff --git a/raw/filings/0001680247/2021/0001680247-22-000007/rpt_disclosure.txt b/raw/filings/0001680247/2021/0001680247-22-000007/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a6417cedea26fd55291e75bc6b56200d638dc60 --- /dev/null +++ b/raw/filings/0001680247/2021/0001680247-22-000007/rpt_disclosure.txt @@ -0,0 +1,13 @@ +Certain Relationships and Related Party Transactions +RELATED PARTY TRANSACTIONS +Operations and Maintenance Yards +The Company also rents five yards from South Midkiff Partners, LLC, an entity partially owned by Spencer D. Armour III (a director) and David Sledge, the father of Sam Sledge, our Chief Executive Officer. Total annual rent expense in 2022 for each of the five yards was approximately $0.03 million, $0.03 million, $0.1 million, $0.1 million, and $0.2 million, respectively. +Transportation and Equipment Rental +Adam Muñoz, our President and Chief Operating Officer, has a family relationship with an employee of J&M Burns Transportation, an entity that provides transportation services to the Company. The employee receives a portion of his compensation from J&M Burns Transportation based on the amount of services sold by him to customers, including the Company. The Company incurred approximately $36.8 million in expense for the year ended December 31, 2022 for services provided to the Company by J&M Burns Transportation. +Executive Officer Family Members +J. Oscar Dominguez is our former Vice President of Frac Technical Services and the father-in-law of Adam Muñoz. Mr. Dominguez received total compensation of approximately $2.1 million for his services for the year ended December 31, 2022 (including $459,000 cash compensation, $286,000 non-cash equity compensation, $1.3 million cash as a severance payment and $15,000 cash payout for accrued paid time off). +Oscar M. Dominguez is our Vice President of Frac Operations and the brother-in-law of Adam Muñoz. Mr. Dominguez received total compensation of approximately $1.1 million for his services for the year ended December 31, 2022 (including $781,000 cash compensation and $276,000 non-cash equity compensation). +Roger Dominguez is our Supply Chain Logistics Manager and the brother-in-law of Adam Muñoz. Mr. Dominguez received total compensation of approximately $312,000 for his services for the year ended December 31, 2022 (including $260,000 cash compensation and $52,000 non-cash equity compensation). +Pioneer +On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property in connection with the Pioneer Pressure Pumping Acquisition. In connection with the consummation of the Pioneer Pressure Pumping Acquisition and effective January 1, 2019, we became a long-term service provider to Pioneer, providing pressure pumping and related services. In March, 2022, we amended and restated our agreement to provide pressure pumping and related services to Pioneer, which reduced the number of contracted fleets to six fleets from eight fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, replaced the idle fees arrangement with equipment reservation fees and provided for an initial term from January 1, 2022 through December 31, 2022, subject to extension and termination as described therein. On October 31, 2022, we entered into (i) a certain Pressure Pumping Services Agreement—Fleet One Simulfrac (the “Fleet One Pressure Pumping Agreement”) and (ii) a certain Pressure Pumping Services Agreement—Fleet Two (the “Fleet Two Pressure Pumping Agreement”), which replaced all previous agreements with Pioneer and reduced the number of contracted fleets to two fleets. The Fleet One Pressure Pumping Agreement is effective as of January 1, 2023 and will terminate on August 31, 2023 and is subject to certain extension, termination and release rights as described therein. The Fleet Two Pressure Pumping Agreement is effective as of January 1, 2023. In February 2023, we mutually agreed with Pioneer to terminate the Fleet Two Pressure Pumping Agreement, effective on or about May 12, 2023. Revenue from services provided to Pioneer (including reservation fees) accounted for approximately $422.8 million during the year ended December 31, 2022. +18  |   ir.propetroservices.com \ No newline at end of file diff --git a/raw/filings/0001680247/2022/0001680247-23-000026/filing.txt b/raw/filings/0001680247/2022/0001680247-23-000026/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..da4de6ee5e7421af5fee97907ef160468724de6c --- /dev/null +++ b/raw/filings/0001680247/2022/0001680247-23-000026/filing.txt @@ -0,0 +1,1983 @@ +pump-20221231 +0001680247 false FY 2022 true http://fasb.org/us-gaap/2022#ServiceMember http://fasb.org/us-gaap/2022#ServiceMember http://fasb.org/us-gaap/2022#ServiceMember http://fasb.org/us-gaap/2022#ServiceMember http://fasb.org/us-gaap/2022#ServiceMember http://fasb.org/us-gaap/2022#ServiceMember P1Y0M0D P2Y P3Y P1Y 0001680247 2022-01-01 2022-12-31 0001680247 us-gaap:CommonClassAMember 2022-01-01 2022-12-31 0001680247 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EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number: 001-38035 +______________________________ +ProPetro Holding Corp. +(Exact name of registrant as specified in its charter) +______________________________ +Delaware 26-3685382 +(State or other jurisdiction of +incorporation or organization) (I.R.S. Employer +Identification No.) +1706 South Midkiff , +Midland , Texas 79701 +(Address of principal executive offices) +Registrant’s telephone number, including area code: ( 432 ) 688-0012 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock ($0.001 par value) PUMP New York Stock Exchange +Preferred Stock Purchase Rights N/A New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: +None +______________________________________________________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities A ct. Yes ý No ¨ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. +Large accelerated filer +ý +Accelerated filer ☐ +Non-accelerated filer +☐ (Do not check if a smaller reporting company) +Smaller reporting company ☐ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý +The aggregate market value of the Company’s Common Stock held by nonaffiliates on June 30, 2022, determined using the per share closing price on the New York Stock Exchange Composite tape of $10.00 on that date, was app roximately $ 726.8 million. +The number of the registrant’s common shares, par value $0.001 per share, outstanding at February 20, 2023, was 115,055,432 . +TABLE OF CONTENTS +FORWARD-LOOKING STATEMENTS +i +SUMMARY OF RISK FACTORS +iii +PART I +BUSINESS +1 +RISK FACTORS +11 +UNRESOLVED STAFF COMMENTS +29 +PROPERTIES +29 +LEGAL PROCEEDINGS +29 +MINE SAFETY DISCLOSURES +29 +PART II +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +30 +SELECTED FINANCIAL DATA +31 +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +33 +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +47 +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +48 +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +82 +CONTROLS AND PROCEDURES +82 +OTHER INFORMATION +83 +DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +83 +PART III +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +84 +EXECUTIVE COMPENSATION +84 +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +84 +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +84 +PRINCIPAL ACCOUNTING FEES AND SERVICES +84 +PART IV +EXHIBITS AND FINANCIAL SCHEDULES +85 +FORM 10-K SUMMARY +88 +SIGNATURES +89 +i +FORWARD‑LOOKING STATEMENTS +This Annual Report on Form 10-K (the "Annual Report") contains forward‑looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words "may," "could," "plan," "project," "budget," "predict," "pursue," "target," "seek," "objective," "believe," "expect," "anticipate," "intend," "estimate," and other expressions that are predictions of, or indicate, future events and trends and that do not relate to historical matters identify forward‑looking statements. Our forward‑looking statements include, among other matters, statements about our business strategy, industry, future profitabilit y, including statements about our expected growth from the Silvertip Acquisition, expected capital expenditu res and the impact of such expenditures on our performance and capital programs. +A forward‑looking statement may include a statement of the assumptions or bases underlying the forward‑looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward‑looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward‑looking statements include: +• operational challenges from the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; +• the severity and duration of any world events and armed conflict, like the Russian-Ukraine war and associated repercussions to supply and demand for oil and gas and the economy generally; +• the actions taken by the members of the Organization of the Petroleum Exporting Countries ("OPEC") and Russia (together with OPEC and other allied producing countries, "OPEC+") with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations; +• actions taken by the Biden Administration, such as executive orders or new regulations, that may negatively impact the future production of oil and natural gas in the United States and may adversely affect our future operations; +• the level of production and resulting market prices for crude oil, natural gas and other hydrocarbons; +• changes in general economic and geopolitical conditions, including increasing interest rates, the rate of inflation and potential economic recession; +• the effects of existing and future laws and governmental regulations (or the interpretation thereof) on us, our suppliers and our customers; +• cost increases and supply chain constraints related to our services; +• competitive conditions in our industry; +• our ability to attract and retain employees; +• changes in the long-term supply of, and demand for, oil and natural gas; +• actions taken by our customers, suppliers, competitors and third-party operators and the possible loss of customers or work to our competitors; +• technological changes, including lower emissions oilfield services equipment and similar advancements; +• changes in the availability and cost of capital; +• our ability to successfully implement our business plan, including integrating the recently acquired wireline business from the Silvertip Acquisition and execution of other potential mergers and acquisitions; +• large or multiple customer defaults, including defaults resulting from actual or potential insolvencies; +• the effects of consolidation on our customers or competitors; +• the price and availability of debt and equity financing (including increasing interest rates) for the Company and our customers; +• our ability to complete growth projects on time and on budget; +i +• increases in tax rates or types of taxes enacted that specifically impact E&P operations resulting in changes in the amount of taxes owed by us; +• regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our services; +• new or expanded regulations that materially limit our customers’ access to federal and state lands for oil and gas development, thereby reducing demand for our services in the affected areas; +• growing demand for electric vehicles that result in reduced demand for gasoline and therefore the demand for our services; +• our ability to successfully implement technological developments and enhancements, including our new Tier IV DGB and electric hydraulic fracturing equipment, and other lower-emissions equipment we may acquire or that may be sought by our customers; +• operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control, which risks may be self-insured, or may not be fully covered under our insurance programs; +• exposure to cyber-security events which could cause operational disruptions or reputational harm; +• acts of terrorism, war or political or civil unrest in the United States or elsewhere; and +• the effects of current and future litigation. +You should not place undue reliance on our forward‑looking statements. Although forward‑looking statements reflect our good faith beliefs at the time they are made, forward‑looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under "Item 1A. Risk Factors" of this Annual Report, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward‑looking statements. We undertake no obligation to publicly update or revise any forward‑looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law. +Unless the context indicates otherwise, all references to "ProPetro Holding Corp.," "the Company," "we," "our" or "us" or like terms refer to ProPetro Holding Corp. and its co nsolidated subsidiaries, ProPetro Services, Inc. and Silvertip Completion Services Operating, LLC. +ii +SUMMARY RISK FACTORS +Our business is subject to varying degrees of risk and uncertainty. Investors should consider the risks and uncertainties summarized below, as well as the risks and uncertainties discussed in Part I, "Item 1A. Risk Factors" of this Annual Report on Form 10-K. Additional risks not presently known to us or that we currently deem immaterial may also affect us. If any of these risks occur, our business, financial condition or results of operations could be materially and adversely affected. +Our business is subject to the following principal risks and uncertainties: +Risks Inherent in Our Business and Industry +• Our business and financial performance depends on the historically cyclical oil and natural gas industry and particularly on the level of capital spending and exploration and production activity within the United States and in the Permian Basin, and a decline in prices for oil and natural gas may cause fluctuation in operating results or otherwise have an adverse effect on our revenue, cash flows, profitability and growth. +• The cyclical nature of the oil and natural gas industry may cause our operating results to fluctuate. +• The majority of our operations are located in the Permian Basin, making us vulnerable to risks associated with operating in one major geographic area. +• The Inflation Reduction Act of 2022 ("IRA 2022") could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations. +• The COVID-19 outbreak has negatively impacted, and may continue to negatively impact crude oil prices and demand for our products and services. +• Our business may be adversely affected by a deterioration in general economic conditions or a weakening of the broader energy industry. +• Our operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms, or at all, which could limit our ability to grow. +• Our indebtedness and liquidity needs could restrict our operations and make us more vulnerable to adverse economic conditions. +• Restrictions in our Asset Backed Loan (ABL) Credit Facility (as defined herein) and any future financing agreements may limit our ability to finance future operations or capital needs or capitalize on potential acquisitions and other business opportunities. +• Our operations are subject to unforeseen interruptions and hazards inherent in the oil and natural gas industry, for which we may not be adequately insured and which could cause us to lose customers and substantial revenue. +• We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +• We may grow through acquisitions and our failure to properly plan and manage those acquisitions may adversely affect our performance. +Risks Related to Customers, Suppliers and Competition +• Reliance upon a few large customers may adversely affect our revenue and operating results. +• We face significant competition that may cause us to lose market share, and competition in our industry has intensified during the recent industry downturn. +• We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our business, results of operations and financial conditions. +• Our business depends upon the ability to obtain specialized equipment, parts and key raw materials, including sand and chemicals, from third‑party suppliers, and we may be vulnerable to delayed deliveries and future price increases. +iii +• We may be required to pay fees to certain of our sand suppliers based on minimum volumes under long-term contracts regardless of actual volumes received. +Risks Related to Employees +• We rely on a few key employees whose absence or loss could adversely affect our business. +• If we are unable to employ a sufficient number of skilled and qualified workers, our capacity and profitability could be diminished and our growth potential could be impaired. +Risks Related to Regulatory Matters +• We are subject to environmental laws and regulations, and future compliance, claims, and liabilities relating to such matters may have a material adverse effect on our results of operations, financial position or cash flows. +• Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide. +• Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +• Increased attention to environmental, social and governance matters, conservation measures, commercial development and technological advances could reduce demand for oil and natural gas and our services. +• Certain of our completion services, particularly our hydraulic fracturing services, are substantially dependent on the availability of water. Restrictions on our or our customers’ ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows. +Risks Related to our Tax Matters +• Our ability to use our net operating loss carryforwards may be limited. +Risks Inherent to an Investment in our Common Stock +• We are subject to certain requirements of Section 404 of the Sarbanes-Oxley Act ("Section 404"). If we or our auditors identify and report material weaknesses in internal control over financial reporting, our investors may lose confidence in our reported information and our stock price may be negatively affected. +• Certain provisions of our certificate of incorporation, and bylaws, as well as Delaware law, may discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock. +• Our business could be negatively affected as a result of the actions of activist shareholders. +• Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to pursue actions in another judicial forum for disputes with us or our directors, officers, employees or agents. +• There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock. +iv +PART I +Item 1. Business. +Our Company +We are a leading integrated oilfield services company, located in Midland, Texas, focused on providing innovative hydraulic fracturing, wireline, and other complementary oilfield completion services to leading upstream oil and gas companies engaged in the exploration and production ("E&P") of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil‑producing areas in the United States, and we believe we are one of the leading providers of completion services in the region. +On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip Completion Services Operating, LLC (the "Silvertip Acquisition"), which provides wireline perforation and ancillary services solely in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed debt, and the payment of certain other closing and transaction costs. The Silvertip Acquisition positions the Company as a leading completions-focused oilfield services provider headquartered in the Permian Basin. +Our competitors include many large and small oilfield services companies, including Halliburton Company, Liberty Energy Inc., ProFrac Holding Corp., Nextier Oilfield Solutions Inc., Patterson-UTI Energy Inc., RPC, Inc., and a number of private and locally-oriented businesses. The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies' criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company's selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the service industry because of the capital requirements, lack of large scale deployment of certain new technology such as electric powered equipment, and the pricing for our services and expected return on invested capital. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +Our substantial market presence in the Permian Basin positions us well to capitalize on drilling and completion activity in the region. Our operational focus has primarily been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have increased our operations in the Delaware sub-basin and are well-positioned to support further increases to our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending. +We primarily provide hydraulic fracturing, wireline, and cementing completion services to E&P companies in the Permian Basin. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region's increasingly high-intensity well completions (including Simul-Frac, which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. +Effective September 1, 2022, we disposed of our coiled tubing assets to STEP Energy Services (USA) L td. ("STEP") and shut down our coiled tubing operations. We received approximately $2.8 million in cash and 2.6 million common shares of STEP, which have an estimated fair value of $11.8 million, as consideration. Upon the sale of our coiled tubing assets, we recorded a loss on sale of $13.8 million . +Commodity Price and Other Economic Conditions +The oil and gas industry has traditionally been volatile and is characterized by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, war and political instability in oil producing +1 +countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. +The global public health crisis associated with the COVID-19 pandemic has had an adverse effect on global economic activity and the oil and gas industry in 2020 and 2021. Some of the challenges resulting from the COVID-19 pandemic that have impacted our business include restrictions on movement of personnel and associated gatherings, shortage of skilled labor, cost inflation and supply chain disruptions. In light of the COVID-19 pandemic, most companies, including our customers in the Permian Basin, reacted by closely managing their operating budget and exercising capital discipline in 2020 and 2021. +In February 2022, Russia launched a large-scale invasion of Ukraine that has led to significant armed hostilities. As a result, the United States, the United Kingdom, the member states of the European Union and other public and private sectors have levied severe sanctions on Russian financial institutions, businesses and individuals. This conflict, and the resulting sanctions, have contributed to significant increases and volatility in the prices for oil and natural gas. The geopolitical and macroeconomic consequences of this invasion and associated sanctions remain uncertain, and such events, or any further hostilities in Ukraine or elsewhere, could severely impact the world economy and the oil and gas industry and may adversely affect our financial condition. +The Russia-Ukraine war, and the adverse impacts of the COVID-19 pandemic in recent years, including inflation, have resulted in volatility in supply and demand dynamics for crude oil and associated volatility in crude oil pricing. In 2022, West Texas Intermediate ( "WTI") average crude oil price was approximately $94 per barrel, which is the highest average price in the last nine years. We believe that the recent surge in global crude oil prices is partly due to the lack of reinvestment in the oil and gas industry in the last two years, and increased demand for oil and gas products, coupled with the adverse impact of the Russia-Ukraine war, which has led to various sanctions on Russian crude oil supply and businesses. With the significant increase in global crude oil prices, including WTI crude oil prices, there has been an increase in the Permian Basin rig count from approximately 179 at the beginning of 2021 to approximately 353 at the end of December 2022, according to Baker Hughes. Following the increase in rig count and WTI crude oil price, the oilfield service industry has experienced increased demand for its oil well completion services, and improved pricing. As a result of the growing demand for oil well completion services and significant cost inflation across the industry, we negotiated pricing increases with certain of our customers for our oil well completion services, depending on job design. Although we are currently operating in an improved pricing environment compared to 2020 and 2021, the rapid increase in cost inflation and supply chain tightness could adversely impact our future profitability. The U.S. inflation rate has been steadily increasing since 2021. These inflationary pressures have resulted in and may result in additional increases to the costs of our oilfield goods, services and personnel, which in turn cause our capital expenditures and operating costs to rise. Sustained levels of high inflation have likewise caused the U.S. Federal Reserve and other central banks to increase interest rates, and to the extent elevated inflation remains, we may experience further cost increases for our operations, including labor costs and equipment. We cannot predict any future trends in the rate of inflation and a significant increase in inflation, to the extent we are unable to timely pass-through the cost increases to our customers, would negatively impact our business, financial condition and results of operations. See Part II, Item 1A. " Risk Factors—Continuing or worsening inflationary issues and associated changes in monetary policy have resulted in and may result in additional increases to the cost of our goods, services and personnel, which in turn cause our capital expenditures and operating costs to rise. " +Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including the upstream and oilfield services companies. As a result, we are working with our customers and equipment manufacturers to transition our equipment to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV Dynamic Gas Blending (" DGB ") , electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. We have transitioned our active hydraulic fracturing equipment portfolio from approximately 10% lower emissions equipment in 2021 to approximately 35% in 2022, and expect to increase to approximately 65% in 2023. +The Permian Basin rig count increase, demand for oil and gas products, WTI crude oil price increase and costs inflation could be indicative of an energy market recovery. I f the rig count and market conditions continue to improve, including improved customers' pricing and labor availability, and we are able to continue to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also continue to improve. However, if market conditions do not improve or decline in the future, and we are unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows. +2 +Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment. +Our Services +We have historically conducted our business through five operating segments: hydraulic fracturing, cementing, coiled tubing, drilling and flowback. For reporting purposes, the hydraulic fracturing and cementing operating segments were aggregated into one reportable segment—"Pressure Pumping" while coiled tubing, drilling and flowback operating segments, and corporate administrative expenses were aggregated into the "All Other" category. In connection with the Silvertip Acquisition, we now have a wireline operating segment which has been aggregated with Pressure Pumping. Additionally, the divestitures of our coiled tubing operations in September 2022 and our drilling and flowback operations in 2020 resulted in the "All Other" category having no operating segments and therefore in 2022, our corporate administrative expenses were aggregated into "Pressure Pumping", and prior periods have been restated accordingly. During the fourth quarter of 2022, we renamed our "Pressure Pumping" reportable segment to "Completion Services" since the Company is now positioned to provide highly complementary completion services to its customers and has significant cross-selling opportunities across its combined customer base. For additional financial information on our reportable segments presentation, please see reportable segment information in Part II - Item 8, "Financial Statements and Supplementary Data." +Completion Services +Hydraulic Fracturing +We provide hydraulic fracturing services to E&P companies in the Permian Basin. These services are intended to optimize hydrocarbon flow paths during the completion phase of horizontal shale wellbores. We have significant expertise in multi‑stage fracturing of horizontal oil‑producing wells in unconventional geological formations. Our total available hydraulic horsepower ("HHP") at December 31, 2022 wa s 1,315,000 HHP, which was comprised of 252,500 HHP of our Tier IV DGB equipment and 1,062,500 HHP of convention al Tier II equipment. An individual fleet could range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsite. During the year ended December 31, 2022, we recorded an impairment with respect to our DuraStim® hydraulic fracturing pumps (108,000 HHP) that did not meet the manufacturer’s specifications or our expectations and have remained idled. With the industry transition to lower emissions equipment and simultaneous hydraulic fracturing ("Simul-Frac"), in addition to several other changes to our customers' job designs, we believe that our available fleet capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at wellsites. In addition, in September 2021, August 2022 and December 2022, we committed to additional conversions of our Tier II equipment to Tier IV DGB, and purchase of new Tier IV DGB equipment. As such, we entered into conversion and purchase agreements with our equipment manufacturers for a total of 362,500 HH P of Tier IV DGB equipment and as of December 31, 2022, we have received 192,500 HH P of the converted and new Tier IV DGB equipment and expect to receive the remaining 170,000 HHP by the second quarter of 2023. In August 2022 and December 2022, we entered into leases for four electric fleets of 60,000 HHP per fleet. We expect to take delivery of the electric fleets at different times during the second half of 2023. We have entered into a contract with a customer for the use of one of our electric hydraulic fracturing fleets to provide committed services for a period of three years after we take delivery of the fleet. +The hydraulic fracturing process consists of pumping fracturing fluid into a well at sufficient pressure to fracture the formation. Materials known as proppants, which in our business are comprised primarily of sand, are suspended in the fracturing fluid and are pumped into the fracture to prop it open. The fracturing fluid is designed to break, or loosen viscosity, and be forced out of the formation by its pressure, leaving the proppants suspended in the fractures created, thereby increasing the mobility of the hydrocarbons. As a result of the fracturing process, production rates are usually enhanced substantially, thus increasing the rate of return of hydrocarbons for the operator. +We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We also refer to all of our fracturing units, other equipment and vehicles necessary to perform a fracturing job as a "fleet" and the personnel assigned to each fleet as a "crew." Our hydraulic fracturing units consist primarily of a high pressure hydraulic pumps, diesel or dual gas engines, transmissions and various hoses, valves, tanks and other supporting equipment like blenders, irons, hoses and datavans. +We provide dedicated equipment, personnel and services that are tailored to meet each of our customer’s needs. Each fleet has a designated team of personnel, which allows us to provide responsive and customized services, such as project design, proppant and other consumables procurement, real‑time data provision and post‑completion analysis for each of our jobs. Many of our +3 +hydraulic fracturing fleets and associated personnel have worked continuously with the same customer for the past several years promoting deep relationships and a high degree of coordination and visibility into future customer activity levels. Furthermore, in light of our substantial market presence and historically high fleet utilization levels, we have established a variety of trusted relationships with key equipment, sand and other downhole consumable suppliers. We believe these strategic relationships position us to acquire equipment, parts and materials on a timely and economic basis and allow our dedicated procurement and logistics team to support consistently safe and reliable operations. +Cementing +We provide cementing services for completion of new wells and remedial work on existing wells. Cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Cementing provides isolation between fluid zones behind the casing to minimize potential damage to hydrocarbon bearing formations or the integrity of freshwater aquifers, and provides structural integrity for the casing by securing it to the earth. Cementing is also done when re-completing wells, where one zone is plugged and another is opened. +We believe that our cementing segment provides an organic growth opportunity for us to expand our service offerings within our existing customer base. +Wireline +We provide wireline and ancillary services such as pumpdown on new oil well completions in the Permian Basin. Wireline utilizes equipment with a drum of wireline to deploy perforating guns in the well to perforate the casing, cement, and formation. Once the well is perforated, it is ready to be fractured. Pumpdown utilizes pressure pumping equipment to pump water into the well to deploy or push the perforating guns attached to wireline through the lateral section of a well. +We own and operate a fleet of mobile wireline units and other auxiliary equipment to perform well completion services. We also refer to our wireline units, pressure control equipment, other equipment and vehicles necessary to perform a job as a " spread " and the personnel assigned to the spread as a " crew. " On average, one wireline spread consists of a wireline tractor truck with a large cab functioning as mobile office where the engineer controls the wireline spooled drum along with associated pressure control iron and equipment, trailers and vehicles. We currently have 23 wireline units. +Other Services +Coiled Tubing +Coiled tubing services involve injecting coiled tubing into wells to perform various completion well intervention operations. Coiled tubing is a flexible steel pipe with a diameter of typically less than three inches and manufactured in continuous lengths of thousands of feet. It is wound or coiled on a truck‑mounted reel for onshore applications. Due to its small diameter, coiled tubing can be inserted into existing production tubing and used to perform a variety of services (including drillout of plugs) to enhance the flow of oil or natural gas. Effective September 1, 2022, we shut down our coiled tubing operations and disposed of all of the assets. +Our Customers +Our customers consist primarily of oil and natural gas producers in North America. Our top five customers accounted for a pproximately 84.0%, 85.7% and 86.5% of our revenue, for the years ended December 31, 2022, 2021 and 2020, respectively. For the year ended December 31, 2022, Pioneer Natural Resources USA Inc. ("Pioneer"), Endeavor Energy Resources and XTO Energy accounted for 33.1%, 28.3% and 15.0%, respectively, of total revenue. No other customer accounted for more than 10% of our total revenue for the year ended December 31, 2022. +On March 31, 2022, we entered into an amended and restated pressure pumping services agreement (the "A&R Pressure Pumping Services Agreement") with Pioneer , which was initially entered into in connection with our purchase of certain pressure pumping assets and real property from Pioneer and Pioneer Pumping Services (the "Pioneer Pressure Pumping Acquisition") . The A&R Pressure Pumping Services Agreement, which was effective from January 1, 2022 to December 31, 2022, reduced the number of contracted fleets to six fleets from eight fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, and replaced the idle fees arrangement with equipment reservation fees (the "Reservation fees"). As part of the Reservation fees arrangement, the Company was entitled to receive compensation for all eligible contracted fleets that were made available to Pioneer at the beginning of every quarter in 2022 through the term of the A&R Pressure Pumping Services Agreement. The A&R Pressure Pumping Services Agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and the Fleet Two Agreement described below. +4 +On October 31, 2022, we entered into two pressure pumping services agreements with Pioneer, pursuant to which we will provide hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and will terminate on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was originally planned to terminate on the one year anniversary of the date on which the fleet dedicated thereunder converted from a Tier II diesel Simul-Frac fleet to a Tier IV dual fuel zipper fleet, which was expected to occur in May 2023. In February 2023, Pioneer provided the Company notice (i) stating that Pioneer intended to release Fleet Two effective upon the completion of operations on the pad where the performance of Services (as defined in the Fleet Two Agreement) is in progress on May 12, 2023 (the “Release Date”) and (ii) requesting that the Company agree to the termination of the Fleet Two Agreement as of the Release Date. The Company agreed with such request, and, as a result, the Fleet Two Agreement will be terminated as of the Release Date. +Competition +The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services and equipment that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies’ criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company’s selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the oilfield service industry because of the capital requirements. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment portfolio and quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +We provide our services primarily in the Permian Basin, and we compete against different companies in each service and product line we offer. Our competition includes many large and small oilfield services companies, including the largest integrated oilfield services companies. Our major competitors include Halliburton Company, Liberty Energy Inc., ProFrac Holding Corp., Nextier Oilfield Solutions Inc., Patterson‑UTI Energy Inc., RPC, Inc., and a number of private and locally-oriented businesses. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the fourth quarter, relating to the conclusion of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather during which we may experience declines in our operating and financial results. +Operating Risks and Insurance +Our operations are subject to hazards inherent in the oilfield services industry, such as accidents, blowouts, explosions, fires and spills and releases that can cause personal injury or loss of life, damage or destruction of property, equipment, natural resources and the environment and suspension of operations. +In addition, claims for loss of oil and natural gas production and damage to formations can occur in the oilfield services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in us being named as a defendant in lawsuits asserting large claims. +Our business involves the transportation of heavy equipment and materials, and as a result, we may also experience traffic accidents which may result in spills, property damage and personal injury. +Despite our efforts to maintain safety standards, we have suffered accidents from time to time in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations. +5 +We maintain commercial general liability, workers’ compensation, business automobile, commercial property, umbrella liability, excess liability, and directors and officers insurance policies providing coverages of risks and amounts that we believe to be customary in our industry. Further, we have pollution legal liability coverage for our business entities, which would cover, among other things, third party liability and costs of clean up relating to environmental contamination on our premises while our equipment is in transit and on our customers’ job site. With respect to our operations, coverage would be available under our pollution legal liability policy for any surface or subsurface environmental clean‑up and liability to third parties arising from any surface or subsurface contamination. We also have certain specific coverages for some of our businesses, including our hydraulic fracturing and wireline services. +We maintain directors and officers insurance; however, our insurance coverage is subject to certain exclusions (including, for example, any required SEC disgorgement or penalties) and we are responsible for meeting certain deductibles under the policies. Moreover, we cannot assure you that our insurance coverage will adequately protect us from all future claims. +Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of the high premium costs relative to perceived risk. Further, insurance rates have in the past been subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us. See " Risk Factors " for a description of certain risks associated with our insurance policies. +Environmental and Occupational Health and Safety Regulations +Our operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection, and occupational health and safety. Numerous federal, state and local governmental agencies issue regulations that often require difficult and costly compliance measures that could carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may, for example, restrict the types, quantities and concentrations of various substances that can be released into the environment, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas and other protected areas, or require action to prevent or remediate pollution from current or former operations. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental, health and safety laws and regulations occur frequently, and any changes that result in more stringent and costly requirements could materially adversely affect our operations and financial position. For example, following the election of President Biden and passage of laws such as the IRA 2022, it is possible that our operations may be subject to greater environmental, health and safety restrictions, particularly with regards to hydraulic fracturing and wireline, permitting and greenhouse gases ( " GHG " ) emissions. We have not experienced any material adverse effect from compliance with current requirements; however, this trend may not continue in the future. +Below is an overview of some of the more significant environmental, health and safety requirements with which we must comply. Our customers’ operations are subject to similar laws and regulations. Any material adverse effect of these laws and regulations on our customers’ operations and financial position may also have an indirect material adverse effect on our operations and financial position. +Waste Handling. We handle, transport, store and dispose of wastes that are subject to the Resource Conservation and Recovery Act ( " RCRA " ) and comparable state laws and regulations, which affect our activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although certain petroleum production wastes are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. Moreover, the U.S. Environmental Protection Agency ( " EPA " ) or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or recategorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to recategorize certain oil and natural gas exploration, development and production wastes as hazardous wastes. Several environmental organizations have also petitioned the EPA to modify existing regulations to recategorize certain oil and natural gas exploration, development and production wastes as hazardous. Any such changes in these laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any +6 +legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act ( " CERCLA " or " Superfund " ) and analogous state laws generally impose liability without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Liability for the costs of removing or remediating previously disposed wastes or contamination, damages to natural resources, the costs of conducting certain health studies, amongst other things, is strict and joint and several. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state laws. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such hazardous substances have been released. +NORM. In the course of our operations, some of our equipment may be exposed to naturally occurring radioactive materials ( " NORM " ) associated with oil and gas deposits and, accordingly, may result in the generation of wastes and other materials containing NORM. NORM exhibiting levels of radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. +Water Discharges. The Clean Water Act, Safe Drinking Water Act, Oil Pollution Act and analogous state laws and regulations impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into regulated waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Also, spill prevention, control and countermeasure plan requirements require appropriate containment berms and similar structures to help prevent the contamination of regulated waters. +Air Emissions. The Clean Air Act ( " CAA " ) and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other emissions control requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants from specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. These and other laws and regulations may increase the costs of compliance for some facilities where we operate. Obtaining or renewing permits also has the potential to delay the development of oil and natural gas projects. +Climate Change. In the United States, no comprehensive climate change legislation has been implemented at the federal level, though recently passed laws such as the IRA 2022 advance numerous climate-related objectives. Additionally, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, implement New Source Performance Standards directing the reduction of certain pollutants from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the Department of Transportation ("DOT"), implementing GHG emissions limits on vehicles manufactured for operation in the United States. In September 2020, the Trump Administration revised prior regulations to rescind certain methane standards and remove the transmission and storage segments from the source category for certain regulations. However, subsequently, the U.S. Congress approved, and President Biden signed into law, a resolution under the Congressional Review Act to repeal the September 2020 revisions to the methane standards, effectively reinstating the prior standards. Additionally, the EPA has proposed more recent rules covering the standards of performance for methane and volatile organic compounds emissions for oil and gas facilities, including leak detection, monitoring and repair, and a "super-emitter" response program to timely mitigate emissions events as detected by governmental agencies or qualified third parties. Certain of these requirements are currently subject to public comment, and the rule is expected to be finalized in 2023; however, it is likely that these requirements will be subject to legal challenge. +Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas such as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored " Paris Agreement, " requires member states to submit non-binding, individually-determined reduction goals known as Nationally Determined Contributions ( " NDCs " ) every five years after 2020. Following President Biden’s executive order in January 2021, the United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. Some countries, including the United States, have additionally made commitments to reduce global methane +7 +emissions through initiatives such as the Global Methane Pledge, and have been called upon to phase out inefficient fossil fuel subsidies. However, the impacts of these actions are unclear at this time. For more information, see our risk factors titled "Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide" and "The IRA 2022 could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations." +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, including climate-change-related pledges made by certain candidates for public office. On January 27, 2021, President Biden issued an executive order that commits to substantial action on climate change, calling for, among other things, the increased use of zero-emissions vehicles by the federal government, the elimination of subsidies provided to the fossil fuel industry and an increased emphasis on climate-related risk across government agencies and economic sectors. The executive order also suspends the issuance of new leases for oil and gas development on federal land; for more information, see our regulatory disclosure titled " Regulation of Hydraulic Fracturing and Related Activities. " Other actions that the Biden Administration may take include the imposition of more restrictive requirements for the development of pipeline infrastructure or liquefied natural gas export facilities or more restrictive GHG emissions limitations for oil and gas facilities. Litigation risks are also increasing as a number of parties have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. +The adoption and implementation of new or more stringent international, federal or state legislation, regulations or other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate GHG emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for, oil and natural gas, which could reduce demand for our services and products. +Moreover, climate change may result in various physical risks, such as the increased frequency or intensity of extreme weather events or changes in the meteorological and hydrological patterns, that could adversely impact us, our customers’ and our suppliers’ operations. Such physical risks may result in damage to our customers’ facilities or otherwise adversely impact our operations, such as if facilities are subject to water use curtailments in response to drought, or demand for our customers’ products, such as to the extent warmer winters reduce the demand for energy for heating purposes, which may ultimately reduce demand for the products and services we provide. Such physical risks may also impact our suppliers, which may adversely affect our ability to provide our products and services. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Endangered and Threatened Species. Environmental laws such as the Endangered Species Act ( " ESA " ) and analogous state laws may impact exploration, development and production activities in areas where we operate. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and various state analogs. The U.S. Fish and Wildlife Service ( " FWS " ) may identify previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species. For example, the dunes sagebrush lizard, which is found only in the active and semi-stable shinnery oak dunes of southeastern New Mexico and adjacent portions of Texas (including areas where our customers operate), was a candidate species for listing under the ESA by the FWS for many years. As a result of a recent settlement with certain environmental groups, the FWS, in July 2020, acted on a petition to list the dunes sagebrush lizard finding sufficient information to warrant a formal one-year review to consider listing the species. While that deadline has been missed, the listing review is reportedly ongoing and a decision is expected in June 2023; additionally, FWS has also solicited comments on a proposed conservation agreement that would implement certain protective practices for the species and authorize incidental take of the species resulting from certain covered activities, including exploration and development of oil and gas fields. However, to the extent any protections are implemented for this or any other species, it could cause us or our customers to incur additional costs or become subject to operating restrictions or operating bans in the affected areas. +Regulation of Hydraulic Fracturing and Related Activities. Our hydraulic fracturing operations are a significant component of our business. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. Although several of these rulemakings have been rescinded, modified or subjected to legal challenges, new or more +8 +stringent regulations may be promulgated by the Biden administration. For example, the Bureau of Land Management (“BLM”) recently proposed a rule that would limit flaring from well sites on federal lands, as well as allow the delay or denial of permits if BLM finds that an operator’s methane waste minimization plan is insufficient. The Biden Administration has also called for revisions and restrictions to the leasing and permitting programs for oil and gas development on federal lands and, for a time, suspended federal oil and gas leasing activities. The Department of the Interior ( " DOI " ) has also issued a report recommending various changes to the federal leasing program, though many such changes would require Congressional action. As a result, we cannot predict the final scope of regulations or restrictions that may apply to oil and gas operations on federal lands. However, any regulations that ban or effectively ban such operations may adversely impact demand for our products and services. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have previously been proposed in Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +Federal and state governments have also investigated whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for wastewater disposal wells that impose permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission’s well completion seismicity guidelines for operators in the SCOOP and STACK require hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division has previously issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission ( "TRRC") has adopted similar rules including the indefinite suspension of all deep oil and gas produced water injection wells in certain areas covered by the TRRC’s seismic response program. +Increased regulation of hydraulic fracturing and related activities could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and record keeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. For more information on each of these items, see our risk factor titled "Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays." +OSHA Matters. The Occupational Safety and Health Act ( " OSHA " ) and comparable state statutes regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. +Human Capital +Our employees are our key asset. Our primary human capital management objectives are to effectively engage, develop, retain and reward our employees. As of December 31, 2022, we employed approximatel y 2,000 people , none of which are unionized. All of our employees work for or support our Completion Services reportable segment. Our employees are a key component of our ability to attract and retain customers as a result of their operational excellence in the field. +Some examples of significant programs and initiatives that are focused to attract, develop and retain our diverse workforce include: +• Diversity and inclusion. We believe that in order to attract and retain talent with the skill sets and expertise required to maximize our operational efficiencies across all levels in the Company, it is in our best interest to attempt to recruit and develop a diverse team and create a culture that is inclusive and provides equal opportunities for hiring and advancement for all employees and prospective employees. Some examples of this effort include; +◦ a commitment to conducting business in a manner that respects all human rights in compliance within the requirements of applicable laws; +9 +◦ efforts to promote and encourage respect for human rights and fundamental freedoms for all without distinctions of any kind such as race, color, sex, language, religion, political or other opinions; +◦ working in partnership with personnel, business parties and other parties directly linked to our operations that share our commitment to these same principles; +◦ efforts in our employment practices, including through our code of conduct, our equal employment opportunity employer policy, and our anti-harassment policy; and +◦ to make it possible for grievances regarding health and safety to be addressed early and remediated directly, in confidence and without fear of retaliation; the Company provides an anonymous Ethics and Compliance hotline that is promoted internally and accessible from our intranet and internet. +• Training and Safety. We offer in-depth, role-appropriate safety training upon hiring and as part of the continuous development of our employees. The safety of our employees, our customers, and the communities in which we operate is paramount. We track and evaluate safety incidents at wellsites and offices, and if an accident does occur, we take actions to mitigate similar incidents from reoccurring in the future. The Company incentivizes employees to focus on conducting operations in accordance with our strict safety standards and encourages employees to immediately report any breach of safety protocol. Ten percent of our executive officers’ annual target bonuses under the 2022 annual incentive program were based upon the Company’s achievement of certain safety goals, including a target total recordable incident rate of less than 0.65. +• Professional Development. In 2022, ProPetro launched a leadership training initiative for all positions that are responsible for supervision and oversight of other employees. This effort includes development of 255 frontline and above leadership positions over a seven month period. In 2021, ProPetro introduced a Tuition Reimbursement Program to encourage employees to pursue professional development interests that will help strengthen skills and competencies required for their current position or future roles in the business. +• Health, Wellness and Benefits. Our employee benefit offerings are designed to meet the varied and evolving needs of a diverse workforce across the Company and we believe are consistent with those provided by our peer companies with which we compete for talent. The Company provides employees with the ability to participate in health and welfare plans, including medical, dental, life, accidental death and dismemberment and short-term and long-term disability insurance plans. +We periodically review of our health-related benefits program to ensure that our offerings are market competitive and effectively utilized by employees. Based on our recent review, we made comprehensive adjustments to our health-related benefits programs, which improved the cost and quality of coverage. We significantly increased the number of employee meetings to provide education and encourage individuals to maximize the value of benefits offered, resulting in an overall increase in participation and positive feedback from employees. +In 2022, we implemented improvements to our 401(k) plan with a focus on improving plan structure, allowing for immediate vesting of employer’s contributions, reducing program administration, providing employee education and increasing plan participation. We also implemented an hourly bonus structure in 2022 to provide greater reward and recognition and improve employee retention. For hydraulic fracturing field employees and related field support positions, a performance element was included to drive key operating metrics. +Availability of Filings +Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the " Exchange Act " ), are made available free of charge on our internet website at www.propetroservices.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the SEC. The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that website is www.sec.gov. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Annual Report or the documents incorporated by reference in this Annual Report. +10 +Item 1A. Risk Factors. +The following is a description of significant factors that could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report and presented elsewhere by management from time to time. Such factors may have a material adverse effect on our business, financial condition and results of operations. It is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete statement of all our potential risks or uncertainties. Due to these, and other factors, past performance should not be considered an indication of future performance. +Risks Inherent in Our Business and Industry +Our business and financial performance depends on the historically cyclical oil and natural gas industry and particularly on the level of capital spending and exploration and production activity within the United States and in the Permian Basin, and a decline in prices for oil and natural gas may cause fluctuation in operating results or otherwise have an adverse effect on our revenue, cash flows, profitability and growth. +Demand for most of our services depends substantially on the level of capital expenditures in the Permian Basin by companies in the oil and natural gas industry. As a result, our operations are dependent on the levels of capital spending and activity in oil and gas exploration, development and production. Demand for our services is largely dependent on oil and natural gas prices, and our customers’ completion budgets and rig count. Prolonged low oil and gas prices would generally depress the level of oil and natural gas exploration, development, production, and well completion activity and would result in a corresponding decline in the demand for the completion services that we provide. Historically, oil prices and markets have been extremely volatile. Prices are affected by many factors beyond our control. WTI oi l price declined significantly in 2015 and 2016 to approximately $30 per barrel, but subsequently recovered in 2017. Furthermore, in March 2020, WTI oil price declined to a low of approximately $20 per barrel and then subsequently recovered. The average WTI oil prices per barrel were approximately $94 , $68 and $39 for the years ended December 31, 2022, 2021 and 2020, respectively. In the last three years, the highly volatile and unpredictable nature of oil and natural gas prices caused a reduction in our customers’ spending and associated drilling and completion activities, which has had and may continue to have an adverse effect on our revenue and cash flows, if WTI oil prices remain highly volatile or decline in the future. +Many factors over which we have no control affect the supply of, and demand for our services, and our customers’ willingness to explore, develop and produce oil and natural gas, and therefore, influence prices for our services, including: +• the severity and duration of world health events, including the COVID-19 pandemic, related economic repercussions; +• the actions by the members of OPEC+ with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations; +• the domestic and foreign supply of, and demand for, oil and natural gas; +• the level of prices, and expectations about future prices, of oil and natural gas; +• the level of global oil and natural gas exploration and production; +• the cost of exploring for, developing, producing and delivering oil and natural gas; +• the supply of and demand for drilling and hydraulic fracturing and wireline equipment, including the supply and demand for lower emissions hydraulic fracturing and wireline equipment; +• cost increases and supply chain constraints related to our services; +• the expected decline rates of current production; +• the price and quantity of foreign imports; +• political and economic conditions in oil and natural gas producing countries and regions, including the United States, the Middle East, Africa, South America and Russia; +11 +• operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; +• speculative trading in crude oil and natural gas derivative contracts; +• the level of consumer product demand; +• the discovery rates of new oil and natural gas reserves; +• contractions in the credit market; +• the strength or weakness of the U.S. dollar; +• available pipeline and other transportation capacity; +• the levels of oil and natural gas storage; +• weather conditions and other natural disasters; +• domestic and foreign tax policy; +• domestic and foreign governmental approvals and regulatory requirements and conditions, including tighter emissions standards in the energy industry; +• the continued threat of terrorism and the impact of military and other action, including military action in the Middle East; +• political or civil unrest in the United States or elsewhere; +• technical advances affecting energy consumption; +• the proximity and capacity of oil and natural gas pipelines and other transportation facilities; +• the price and availability of alternative fuels; +• the ability of oil and natural gas producers to raise equity capital and debt financing; +• merger and divestiture activity among oil and natural gas producers; and +• overall domestic and global economic conditions. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. For example, in 2020, Saudi Arabia and Russia failed to agree on a plan to cut production of oil and gas within OPEC and Russia. Subsequently, Saudi Arabia announced plans to increase production and reduce the prices at which they sell oil. In 2022, Russia launched a large-scale invasion of Ukraine, leading to armed hostilities and imposition of sanctions on Russian economic trades. These events, combined with the COVID-19 pandemic which have impacted the economic activity and disrupted the global supply chain dynamics, have contributed to the unpredictable nature of crude oil prices. +12 +The cyclical nature of the oil and natural gas industry may cause our operating results to fluctuate. +We derive our revenues from companies in the oil and natural gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices. We have experienced, and may in the future experience, significant fluctuations in operating results as a result of the reactions of our customers to changes in oil and natural gas prices. For example, the decline in and unpredictable nature of oil and gas prices in 2019 and 2020, combined with adverse changes in the capital and credit markets and the COVID-19 pandemic in 2020, caused many exploration and production companies to significantly reduce their 2020 and 2021 capital budgets and drilling activity. This resulted in a significant decline in demand for oilfield services and adversely impacted the prices oilfield services companies can charge for their services. These factors have materially and adversely affected our business, results of operations and financial condition. In addition, a majority of the service revenue we earn is based upon a charge for a relatively short period of time (for example, a day, a week or a month) for the actual period of time the service is provided to our customers. By contracting services on a short‑term basis, we are exposed to the risks of a rapid reduction in market prices and utilization and resulting volatility in our revenues. +The majority of our operations are located in the Permian Basin, making us vulnerable to risks associated with operating in one major geographic area. +Our operations are geographically concentrated in the Permian Basin. For the years ended December 31, 2022, 2021 and 2020, approximately 98.3%, 98.7% and 99.5%, respectively, of our revenues were attributable to our operations in the Permian Basin. As a result of this concentration, we may be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in the Permian Basin caused by significant governmental regulation, processing or transportation capacity constraints, market limitations, curtailment of production or interruption of the processing or transportation of oil and natural gas produced from the wells in these areas. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil and natural gas producing areas such as the Permian Basin, which may cause these conditions to occur with greater frequency or magnify the effects of these conditions. Due to the concentrated nature of our operations, we could experience any of the same conditions at the same time, resulting in a relatively greater impact on our revenue than they might have on other companies that have more geographically diverse operations. +The IRA 2022 could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations. +In August 2022, President Biden signed the IRA 2022 into law. The IRA 2022 provides for hundreds of billions of dollars in incentives for the development of renewable energy, clean hydrogen, clean fuels, electric vehicles and supporting infrastructure and carbon capture and sequestration, amongst other provisions. These incentives could further accelerate the transition of the economy away from the use of fossil fuels towards lower- or zero-carbon emissions alternatives, which could decrease demand for oil and gas and consequently adversely affect the business of our customers, thereby reducing demand for our services. In addition, the IRA 2022 imposes the first ever federal fee on the emission of greenhouse gases through a methane emissions charge. The IRA 2022 amends the federal Clean Air Act to impose a fee on the emission of methane from sources required to report their GHG emissions to the EPA, including those sources in the offshore and onshore petroleum and natural gas production and gathering and boosting source categories. The methane emissions charge will start in calendar year 2024 at $900 per ton of methane, increase to $1,200 in 2025, and be set at $1,500 for 2026 and each year after. Calculation of the fee is based on certain thresholds established in the IRA 2022. The methane emissions charge could increase our customers’ operating costs and adversely affect their businesses, thereby reducing demand for our services. +The COVID-19 outbreak has negatively impacted, and may continue to negatively impact crude oil prices and demand for our products and services. +The outbreak of COVID-19 has adversely impacted and may continue to adversely impact our operations, the operations of our customers and the global economy, including the worldwide demand for oil and natural gas and the level of demand for our products and services. The COVID-19 pandemic also altered the level of capital spending by oil and gas companies for exploration and production activities and adversely affected the economies and financial markets of many countries resulting in an economic downturn that affected demand for our products and services. In response to the initial outbreak of COVID-19, many state and local jurisdictions imposed quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events, among other effects. In an effort to minimize the spread of illness, we and our customers implemented various worksite restrictions as well as quarantining in order to minimize the chances of a potential COVID-19 outbreak. +13 +During 2021 and 2022, the distribution of COVID-19 vaccines progressed and many government-imposed restrictions were relaxed or rescinded. While the prices of and demand for crude oil have recovered, further outbreaks or the emergence of new strains of the COVID-19 virus, could result in the reimposition of domestic and international regulations directing individuals to stay at home, limiting travel, requiring facility closures and imposing quarantines. Widespread implementation of these or similar restrictions could result in commodity price volatility, reduced demand for our products and services, as well as delays in or inability to fulfill our contractual obligations to customers, logistic constraints, increases in our costs, and workforce and raw material shortages. The effects of the COVID-19 pandemic and related economic, business and market disruptions thus could continue and adversely affect us . +Our business may be adversely affected by a deterioration in general economic conditions or a weakening of the broader energy industry. +A prolonged economic slowdown or recession in the United States, adverse events relating to the energy industry or regional, national and global economic conditions and factors, particularly a further slowdown in the exploration and production industry, could negatively impact our operations and therefore adversely affect our results. The risks associated with our business are more acute during periods of economic slowdown or recession because such periods may be accompanied by decreased exploration and development spending by our customers, decreased demand for oil and natural gas and decreased prices for oil and natural gas. In 2020, the COVID-19 pandemic and the turmoil between the members of OPEC+ caused oil prices to fall substantially and adversely impacted the global economy; a recurrence of similar events would heighten the risk of a prolonged economic slowdown or recession in the United States. +New technology may cause us to become less competitive. +The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. As competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. The transition to lower emissions equipment is capital intensive and could require us to convert all our conventional Tier II equipment to lower emissions equipment. If we are unable to quickly transition to lower emissions equipment, the demand for our services could be adversely impacted. For example, many E&P companies, including our customers, are transitioning to a lower emissions operating environment and may require us to invest in equipment with lower emissions profile. Further, we may face competitive pressure to develop, implement or acquire and deploy certain technology improvements at a substantial cost, such as our DuraStim® fleets or the cost of implementing or purchasing a technology like DuraStim® may be substantially higher than anticipated, and we may not be able to successfully implement the DuraStim® fleets or other technologies we may purchase. As of December 31, 2022 we recorded an impairment of $57.5 million on our DuraStim® equipment because they did not meet our expectations and remained idled with no near term plans to deploy the equipment to customers’ wellsites. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, effectively use and implement new and emerging technologies could have a material adverse effect on our business, financial condition, prospects or results of operations. +Our operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms, or at all, which could limit our ability to grow. +The oilfield services industry is capital intensive. In conducting our business and operations, we have made, and expect to continue to make, substantial capital expenditures. Our total capital expenditures incurred were approximately $365.3 million, $165.2 million and $81.2 million during the years ended December 31, 2022, 2021 and 2020. We have historically financed capital expenditures primarily with funding from cash on hand, cash flow from operations, equipment and vendor financing and borrowings under our credit facility. We may be unable to generate sufficient cash from operations and other capital resources to maintain planned or future levels of capital expenditures which, among other things, may prevent us from acquiring new equipment (including equipment with a lower emissions profile) or properly maintaining our existing equipment. Any disruptions or volatility in the global financial markets may lead to an increase in interest rates or a contraction in credit availabil ity impacting our ability to finance our operations. Our borrowing base changed from $102.3 million as of December 31, 2022 to approximately $143.3 million as of February 20, 2023 due to a change in our eligible accounts receivable. If our customer activity levels decline in the future resulting in a decrease in our eligible accounts receivable, our borrowing base could decline. This could put us at a competitive disadvantage or interfere with our growth plans. Further, our actual capital expenditures could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of liquidity we have available, we could be required to seek additional sources of capital, which may include debt financing, joint venture partnerships, sales of assets, offerings of debt or equity securities or other +14 +means. We may not be able to obtain any such alternative source of capital. We may be required to curtail or eliminate contemplated activities. If we can obtain alternative sources of capital, the terms of such alternative may not be favorable to us. In particular, the terms of any debt financing may include covenants that significantly restrict our operations. Our inability to grow as planned may reduce our chances of maintaining and improving profitability. +Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, geopolitical issues (including the Russia-Ukraine war), public health crises (including the COVID-19 pandemic), interest rates, inflation, the availability and cost of credit in the United States and foreign financial markets have contributed to increased economic uncertainty and diminished expectations for the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, could precipitate an economic slowdown. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. T he historically unpredictable nature of oil and natural gas prices, and particularly the volatility over the past two years have caused a reduction in our customers’ spending and associated drilling and completion activities, which had and may continue to have an adverse effect on our revenue and cash flows. If the economic climate in the United States or abroad deteriorates or remains uncertain, worldwide demand for petroleum products could diminish, which could impact the price at which oil, natural gas and natural gas liquids can be sold, which could affect the ability of our customers to continue operations and adversely impact our results of operations, liquidity and financial condition. +Our indebtedness and liquidity needs could restrict our operations and make us more vulnerable to adverse economic conditions. +Our existing and future indebtedness, whether incurred in connection with acquisitions, operations or otherwise, may adversely affect our operations and limit our growth, and we may have difficulty making debt service payments on such indebtedness as payments become due. Our level of indebtedness may affect our operations in several ways, including the following: +• increasing our vulnerability to general adverse economic and industry conditions; +• the covenants that are contained in the agreements governing our indebtedness could limit our ability to borrow funds, dispose of assets, pay dividends and make certain investments; +• our debt covenants could also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry; +• any failure to comply with the financial or other debt covenants, including covenants that impose requirements to maintain certain financial ratios, could result in an event of default, which could result in some or all of our indebtedness becoming immediately due and payable; +• our level of debt could impair our ability to obtain additional financing, or obtain additional financing on favorable terms in the future for working capital, capital expenditures, acquisitions or other general corporate purposes; and +• our business may not generate sufficient cash flow from operations to enable us to meet our obligations under our indebtedness. +Restrictions in our ABL Credit Facility and any future financing agreements may limit our ability to finance future operations or capital needs or capitalize on potential acquisitions and other business opportunities. +The operating and financial restrictions and covenants in our credit facility and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities. For example, our ABL Credit Facility restricts or limits our ability to: +• grant liens; +• incur additional indebtedness; +• engage in a merger, consolidation or dissolution; +• enter into transactions with affiliates; +15 +• sell or otherwise dispose of assets, businesses and operations; +• materially alter the character of our business as currently conducted; and +• make acquisitions, investments and capital expenditures. +Furthermore, our ABL Credit Facility contains certain other operating and financial covenants. Our ability to comply with the covenants and restrictions contained in the ABL Credit Facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in our ABL Credit Facility, a significant portion of our indebtedness may become immediately due and payable and our lenders’ commitment to make further loans to us may terminate. Further, our borrowing base, as redetermined monthly, is tied to 85.0% to 90.0% of eligible accounts receivable. Changes to our operational activity levels or customer concentration levels have an impact on our total eligible accounts receivable, which could result in significant changes to our borrowing base and therefore our availability under our ABL Credit Facility. For example, our borrowing base changed from $102.3 million as of December 31, 2022 to approximately $143.3 million as of February 20, 2023 due to a change in our eligible accounts receivable. If our customer activity declines in the future, our borrowing base could decline. If our borrowing base is reduced below the amount of our outstanding borrowings, we will be required to re pay the excess borrowings immediately on demand by the lenders. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Any subsequent replacement of our ABL Credit Facility or any new indebtedness could have similar or greater restrictions. Please read " Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facility and Other Financing Arrangements. " +We may incur debt and our indebtedness could adversely affect our operations and financial condition. +Our business is capital intensive and we may seek to raise debt capital to fund our business and growth strategy. Indebtedness could have negative consequences that could materially and adversely affect our business, financial condition, results of operations, cash flows and prospects, such as: +• requiring us to dedicate a substantial portion of our cash flow from operating activities to payments on our indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, research and development efforts, potential strategic acquisitions and other general corporate purposes; +• limiting our ability to obtain additional financing to fund growth, working capital or capital expenditures, or to fulfill debt service requirements or other cash requirements; +• increasing our vulnerability to economic downturns and changing market conditions; and +• placing us at a competitive disadvantage relative to competitors that have less debt. +Furthermore, interest rates on future indebtedness could be higher than current levels, causing our financing costs to increase accordingly. In addition, LIBOR and other “benchmark” rates are subject to ongoing national and international regulatory scrutiny and reform. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of June 2023 for US dollars setting. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and we are unable to predict the effect of any such alternatives on our business and results of operations. However, if LIBOR is phased out without a replacement benchmark, our only option under the ABL Credit Facility will be to borrow at the Base Rate (as defined in the ABL Credit Facility) until an alternative benchmark rate is selected. Changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our shares, and a rising interest rate environment could have an adverse impact on the price of our shares, our ability to issue equity or incur debt. +We may record losses or impairment charges related to goodwill and long-lived assets including intangible assets. +Changes in future market conditions and prolonged periods of low utilization, changes in technology or the sale of assets below their carrying value may cause us to experience losses in our results of operations. These events could result in the recognition of impairment charges or losses from asset sales that negatively impact our financial results. Significant impairment charges or losses from asset sales as a result of a decline in market conditions or otherwise could have a material adverse effect on our results of operations in future periods. For example, in 2021, we recorded loss on disposal of asset $3.5 million in connection with the sale of our two turbines . In 2022, we recorded impairment charges of $57.5 million in connection with our DuraStim® +16 +equipment, which remained idled with no near term plans to deploy the equipment to customers’ wellsites. If oil and natural gas prices trade at depressed price levels as experienced in the first half of 2020, and our equipment remains idle or under-utilized, the estimated fair value of such equipment may decline, which will result in additional impairment expense in the future. +Our operations are subject to unforeseen interruptions and hazards inherent in the oil and natural gas industry, for which we may not be adequately insured and which could cause us to lose customers and substantial revenue. +Our operations are exposed to the risks inherent to our industry, such as equipment defects, vehicle accidents, worksite injuries to our or third-party personnel, fires, explosions, blowouts, surface cratering, uncontrollable flows of gas or well fluids, pipe or pipeline failures, abnormally pressured formations and various environmental hazards, such as oil spills and releases of, and exposure to, hazardous substances. For example, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including hydrochloric acid and other chemical additives. In addition, our operations are exposed to potential natural disasters, including blizzards, tornadoes, storms, floods, other adverse weather conditions and earthquakes. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean‑up responsibilities, regulatory investigations and penalties or other damage resulting in curtailment or suspension of our operations or the loss of customers. The cost of managing such risks may be significant. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our environmental or safety record as unacceptable, which could cause us to lose customers and substantial revenues. +Our insurance may not be adequate to cover all losses or liabilities we may suffer. We are also self-insured up to $10 million per occurrence for certain losses arising from or attributable to fire and/or explosion at wellsites. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased and could escalate further. In addition, sub‑limits have been imposed for certain risks. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our business, results of operations and financial condition. In addition, we may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. +Since hydraulic fracturing activities are part of our operations, they are covered by our insurance against claims made for bodily injury, property damage and clean‑up costs stemming from a sudden and accidental pollution event. However, we may not have coverage if we are unaware of the pollution event and unable to report the " occurrence " to our insurance company within the time frame required under our insurance policy. In addition, these policies do not provide coverage for all liabilities, and the insurance coverage may not be adequate to cover claims that may arise, or we may not be able to maintain adequate insurance at rates we consider reasonable. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +A terrorist attack, armed conflict or political or civil unrest could harm our business. +Terrorist activities, anti‑terrorist efforts, other armed conflicts and political or civil unrest could adversely affect the U.S. and global economies and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants, refineries or transportation facilities are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas, which, in turn, could also reduce the demand for our services. Terrorist activities, the threat of potential terrorist activities, political or civil unrest and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies. +We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition and results of operations. +We operate with most of our customers under master service agreements ( " MSAs " ). We endeavor to allocate potential liabilities and risks between the parties in the MSAs. Generally, under our MSAs, including those relating to our hydraulic fracturing services, we assume responsibility for, including control and removal of, pollution or contamination which originates above surface and originates from our equipment or services. Our customer assumes responsibility for, including control and removal of, all other pollution or contamination which may occur during operations, including that which may result from seepage or any other uncontrolled flow of drilling fluids. We may have liability in such cases if we are negligent or commit willful acts. +17 +Generally, our customers also agree to indemnify us against claims arising from their employees’ personal injury or death to the extent that, in the case of our hydraulic fracturing operations, their employees are injured or their properties are damaged by such operations, unless resulting from our gross negligence or willful misconduct. Similarly, we generally agree to indemnify our customers for liabilities arising from personal injury to or death of any of our employees, unless resulting from gross negligence or willful misconduct of the customer. In addition, our customers generally agree to indemnify us for loss or destruction of customer‑owned property or equipment and in turn, we agree to indemnify our customers for loss or destruction of property or equipment we own. Losses due to catastrophic events, such as blowouts, are generally the responsibility of the customer. However, despite this general allocation of risk, we might not succeed in enforcing such contractual allocation, might incur an unforeseen liability falling outside the scope of such allocation or may be required to enter into an MSA with terms that vary from the above allocations of risk. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in us being named as a defendant in lawsuits asserting large claims. As a result, we may incur substantial losses which could materially and adversely affect our financial condition and results of operation. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. For example, we depend on digital technologies to perform many of our services and process and record operational and accounting data. At the same time, cyber incidents, including deliberate attacks or unintentional events, have increased. The U.S. government has issued public warnings indicating that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary information, personal information and other data, or other disruption of our business operations. In addition, certain cyber incidents, such as unauthorized surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks, including cyberattacks, may not be sufficient and may not protect against or cover all of the losses (including potential reputational loss) we may experience as a result of the realization of such risks. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate the effects of cyber incidents. +We may grow through acquisitions and our failure to properly plan and manage those acquisitions may adversely affect our performance. +We have completed and may in the future pursue, asset acquisitions or acquisitions of businesses. Any acquisition of assets or businesses involves potential risks, including the failure to realize expected profitability, growth or accretion; environmental or regulatory compliance matters or liability; title or permit issues; the incurrence of significant charges, such as impairment of goodwill, property and equipment or intangible assets or restructuring charges; and the incurrence of unanticipated liabilities and costs for which indemnification is unavailable or inadequate. The process of upgrading acquired assets to our specifications and integrating acquired assets or businesses may also involve unforeseen costs and delays or other operational, technical and financial difficulties and may require a significant amount of time and resources and may divert management’s attention from existing operations or other priorities. For example, in 2022, we consummated the Silvertip Acquisition, and we are in the process of fully integrating all parts of the acquired business into our operations. +We must plan and manage any acquisitions effectively to achieve revenue growth and maintain profitability in our evolving market. Any failure to manage acquisitions effectively or integrate acquired assets or businesses into our existing operations successfully, or to realize the expected benefits from an acquisition or minimize any unforeseen operational difficulties, could have a material adverse effect on our business, financial condition, prospects or results of operations. +We may be adversely affected by the effects of inflation. +The U.S. inflation rate has been steadily increasing since 2021 and through 2022. Inflation in wages, materials, parts, equipment and other costs has the potential to adversely affect our results of operations, cash flows and financial position by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers for our products and services. In addition, the existence of inflation in the economy has the potential to result in higher interest rates, which could result in higher borrowing costs, supply shortages, increased costs of labor, weakening exchange rates and other similar effects. Sustained levels of high inflation have likewise caused the U.S. Federal Reserve and other central banks to increase interest rates multiple times in 2022 and the U.S. Federal Reserve has indicated its intention to continue to raise benchmark interest rates into 2023 in an effort to curb inflationary pressure on the costs of goods and services across the U.S., which could have the effects of raising the cost of capital and depressing economic growth, either of which—or the combination thereof—could hurt the financial and operating results of our business. To the extent elevated inflation remains, +18 +we may experience further cost increases for our operations, including labor costs and equipment. We cannot predict any future trends in the rate of inflation and a significant increase in inflation, to the extent we are unable to timely pass-through the cost increases to our customers, would negatively impact our business, financial condition and results of operations. +Risks Related to Customers, Suppliers and Competition +Reliance upon a few large customers may adversely affect our revenue and operating results. +The majority of our revenue is generated from our hydraulic fracturing services. Due to the large percentage of our revenue historically derived from our hydraulic fracturing services with recurring customers and the limited availability of our fracturing units, we have had some degree of customer concentration. Our top ten customers represented approximately 91.2% , 91.4% and 97.3% of our consolidated revenue for the years ended December 31, 2022, 2021 and 2020, respectively. It is likely that we will depend on a relatively small number of customers for a significant portion of our revenue in the future. If a major customer fails to pay us, revenue would be impacted and our operating results and financial condition could be harmed. +Additionally, if we were to lose any material customer, we may not be able to redeploy our equipment at similar utilization or pricing levels and such loss could have an adverse effect on our business until the equipment is redeployed at similar utilization or pricing levels. One customer, Pioneer, accounted for 33.1% of our revenue for the year ended December 31, 2022 . The revenue generated from our relationship with Pioneer is largely derived from the A&R Pressure Pumping Services Agreement, which reduced our committed fleet to six through December 31, 2022. On October 31, 2022, we entered into the Fleet One Agreement and the Fleet Two Agreement with Pioneer to provide two committed fleets with terms ranging from eight to twelve month periods. Each agreement was effective January 1, 2023 and is subject to certain termination and release rights . In February 2023, Pioneer provided the Company notice (i) stating that Pioneer intended to release Fleet Two effective upon the completion of operations on the pad where the performance of Services (as defined in the Fleet Two Agreement) is in progress on May 12, 2023 and (ii) requesting that the Company agree to the termination of the Fleet Two Agreement as of the Release Date. The Company agreed with such request, and, as a result, the Fleet Two Agreement will be terminated as of the Release Date. If Pioneer elects to terminate the remaining committed fleet and we are unable to redeploy such fleet to another customer, it could have a material adverse effect on our financial condition, results of operations and cash flows. See "Part I, Item 1. Business — Customers" for further information regarding the agreements with Pioneer. +We face significant competition that may cause us to lose market share, and competition in our industry has intensified during the industry downturn. +The oilfield services industry is highly competitive and has relatively few barriers to entry. The principal competitive factors impacting sales of our services are price, reputation and technical expertise, equipment and service quality and health and safety standards. The market is also fragmented and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial and other resources than we do. Our larger competitors’ greater resources could allow those competitors to compete more effectively than we can. For instance, our larger competitors may offer services at below‑market prices or bundle ancillary services at no additional cost to our customers. We compete with large national and multi‑national companies that have longer operating histories, greater financial, technical and other resources and greater name recognition than we do. Several of our competitors provide a broader array of services and have a stronger presence in more geographic markets. In addition, we compete with several smaller companies capable of competing effectively on a regional or local basis. +Some jobs are awarded on a bid basis, which further increases competition based on price. Pricing is often the primary factor in determining which qualified contractor is awarded a job. The competitive environment may be further intensified by tighter emissions standards in the energy industry and mergers and acquisitions among oil and natural gas companies or other events that have the effect of reducing the number of available customers. As a result of competition, we may lose customers or customer work and lose market share or be unable to maintain or increase prices for our present services or to acquire additional business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. +Our competitors may be able to respond more quickly to new or emerging technologies and services and changes in customer requirements. The amount of equipment available may exceed demand, which could result in active price competition. In addition, some E&P companies have commenced completing their wells using their own hydraulic fracturing equipment and personnel. Any increase in the development and utilization of in‑house fracturing capabilities by our customers could decrease the demand for our services and have a material adverse impact on our business. +Pressure on pricing for our services resulting from the industry downturn has impacted, and may continue to impact, our ability to maintain utilization and pricing for our services or implement price increases. During periods of declining pricing for our +19 +services, we may not be able to reduce our costs accordingly, which could further adversely affect our results of operations. Also, we may not be able to successfully increase prices without adversely affecting our utilization levels. The inability to maintain our utilization and pricing levels, or to increase our prices as costs increase, could have a material adverse effect on our business, financial condition and results of operations. +Furthermore, competition among oilfield services and equipment providers is affected by each provider’s reputation for safety and quality. We cannot assure that we will be able to maintain our competitive position. +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our business, results of operations and financial condition. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we fail to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re‑market or otherwise use the production could have a material adverse effect on our business, results of operations and financial condition. In weak economic environments, we may experience increased delays and failures to pay due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets or other sources of capital. The unpredictable nature of oil and gas prices in recent years and the economic disruption from the COVID-19 pandemic may have negatively impacted the financial condition and liquidity of some of our customers, and future declines or continued volatility could impact their ability to meet their financial obligations to us. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, results of operations, and financial condition. +Our business depends upon the ability to obtain specialized equipment, parts and key raw materials, including sand and chemicals, from third‑party suppliers, and we may be vulnerable to delayed deliveries and future price increases. +We purchase specialized equipment, parts and raw materials (including, for example, frac sand, chemicals and fluid ends) from third party suppliers and affiliates. In some cases, our customers are responsible for supplying necessary raw materials (including frac sand), parts and/or equipment. At times during the business cycle, there is a high demand for hydraulic fracturing and other oilfield services and extended lead times to obtain equipment and raw materials needed to provide these services. For example, in 2021 and 2022, we have seen significant disruption in supply chains around the world caused by the COVID-19 pandemic that have impacted our operations. Should our current suppliers (or our customers’ suppliers where applicable) be unable or unwilling to provide the necessary equipment, parts or raw materials or otherwise fail to deliver the products timely and/or in the quantities required, any resulting delays in the provision of our services could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, future price increases for this type of equipment, parts and raw materials could negatively impact our ability to purchase new equipment, to update or expand our existing fleets, to timely repair equipment in our existing fleets or meet the current demands of our customers. +We may be required to pay fees to certain of our sand suppliers based on minimum volumes under long-term contracts regardless of actual volumes received. +We enter into purchase agreements with sand suppliers (the " Sand Suppliers " ) to secure supply of sand in the normal course of our business. The agreements with the Sand Suppliers require that we purchase minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the mi nimum volumes or a fixed price per ton of unpurchased volumes. Our current agreements with Sand Suppliers expire at different times prior to December 31, 2025. +Disruption of our supply chain could adversely impact our ability to provide our services. +Our suppliers use multiple forms of transportation to bring their products to market, including truck, ocean and air-cargo shipments. Disruption to the timely supply of raw materials, parts and finished goods or increases in the cost of transportation services, including due to general inflationary pressures, cost of fuel and labor, labor disputes, governmental regulation or governmental restrictions limiting specific forms of transportation, could have an adverse effect on our ability to provide our services, which would adversely affect our results of operations, cash flows and financial position +20 +Risks Related to Employees +We rely on a few key employees whose absence or loss could adversely affect our business. +Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services could adversely affect our business. In particular, the loss of the services of one or more members of our executive team, such as our Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer, Chief Accounting Officer and General Counsel could disrupt our operations. We do not maintain " key person " life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees. +If we are unable to employ a sufficient number of skilled and qualified workers, our capacity and profitability could be diminished and our growth potential could be impaired. +The delivery of our services requires skilled and qualified workers with specialized skills and experience who can perform physically demanding work. As a result of the volatility of the oilfield services industry and the demanding nature of the work, workers may choose to pursue employment in fields that offer a less challenging work environment at wage rates that are competitive. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled workers. As a result of the COVID-19 pandemic and the physical nature of our operations, we have experienced difficulties in attracting and retaining skilled workers. If demand for our services increases, we may experience difficulty in hiring or re-hiring skilled and unskilled workers in the future to meet that demand. At times, the demand for skilled workers in our geographic areas of operations is high, and the supply is limited. As a result, competition for experienced oilfield services personnel is intense, and we face significant challenges in competing for crews and management with large and well‑established competitors. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Furthermore, if we are unable to adjust wages to account for rapidly rising inflationary cost, there could be a reduction in the available skilled labor force we could attract or retain. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired. +Risks Related to Regulatory Matters +We are subject to environmental laws and regulations, and future compliance, claims, and liabilities relating to such matters may have a material adverse effect on our results of operations, financial position or cash flows. +The nature of our operations, including the handling, storing, transporting and disposing of a variety of fluids and substances, including hydraulic fracturing fluids, which can contain substances such as hydrochloric acid, and other regulated substances, air emissions and wastewater discharges exposes us to some risks of environmental liability, including the release of pollutants from oil and natural gas wells and associated equipment to the environment. The cost of compliance with these laws can be significant. Failure to properly handle, transport or dispose of these materials or otherwise conduct our operations in accordance with these and other environmental laws could expose us to substantial liability for administrative, civil and criminal penalties, cleanup and site restoration costs and liability associated with releases of such materials, damages to natural resources and other damages, as well as potentially impair our ability to conduct our operations. Such liability is commonly on a strict, joint and several liability basis, without regard to fault. Liability may be imposed as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Neighboring landowners and other third parties may file claims against us for personal injury or property damage allegedly caused by the release of pollutants into the environment. Environmental laws and regulations have changed in the past, and they may change in the future and become more stringent. For example, following the election of President Biden, President Biden has made climate change a focus of his administration. For more information, see our risk factor titled, “Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide.” Separately, current and future claims and liabilities may have a material adverse effect on us because of potential adverse outcomes, defense costs, diversion of management resources, unavailability of insurance coverage and other factors. The ultimate costs of these liabilities are difficult to determine and may exceed any reserves we may have established. If existing environmental requirements or enforcement policies change, we may be required to make significant unanticipated capital and operating expenditures. +Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide. +21 +The threat of climate change continues to attract considerable attention in the United States and in foreign countries. Numerous proposals have been made and could continue to be made at the international, national, regional and state levels of government to monitor and limit existing emissions of GHGs as well as to restrict or eliminate future GHG emissions. As a result, our operations as well as the operations of our oil and natural gas exploration and production customers are subject to a series of regulatory, political, litigation, and financial risks associated with the production and processing of fossil fuels and emission of GHGs. +In the United States, no comprehensive climate change legislation has been implemented at the federal level, though recently passed laws such as the IRA 2022 advance numerous climate-related objectives. Additionally, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, implement New Source Performance Standards directing the reduction of certain pollutants from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the Department of Transportation ( " DOT ") , implementing GHG emissions limits on vehicles manufactured for operation in the United States. In September 2020, the Trump Administration revised prior regulations to rescind certain methane standards and remove the transmission and storage segments from the source category for certain regulations. However, subsequently, the U.S. Congress approved, and President Biden signed into law, a resolution under the Congressional Review Act to repeal the September 2020 revisions to the methane standards, effectively reinstating the prior standards. Additionally, in November 2021, the EPA issued a proposed rule that, if finalized, would establish OOOOb new source and OOOOc first-time existing source of standards of performance for methane and volatile organic compound emissions for oil and gas facilities. Operators of affected facilities will have to comply with specific standards of performance to include leak detection using optical gas imaging and subsequent repair equipment, and reduction of emissions by 95% through capture and control systems. In November 2022, the EPA published a supplemental methane proposal, which, among other items, sets forth specific revisions strengthening the first nationwide emission guidelines for states to limit methane emissions from existing crude oil and natural gas facilities. The proposal also revises requirements for fugitive emissions monitoring and repair as well as equipment leaks and the frequency of monitoring surveys, establishes a " super-emitter " response program to timely mitigate emissions events as detected by governmental agencies or qualified third parties, and provides additional options for the use of advanced monitoring to encourage the deployment of innovative technologies to detect and reduce methane emissions. The proposal is currently subject to public comment and is expected to be finalized in 2023; however, it is likely that these requirements will be subject to legal challenge. Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas such as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored "Paris Agreement," requires member states to submit non-binding, individually-determined reduction goals known as Nationally Determined Contributions ("NDCs") every five years after 2020. Following President Biden’s executive order in January 2021, the United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. Additionally, at the 26th Conference of the Parties ("COP26") in Glasgow in November 2021, the United States and the European Union jointly announced the launch of the Global Methane Pledge; an initiative committing to a collective goal of reducing global methane emissions by at least 30 percent from 2020 levels by 2030, including "all feasible reductions" in the energy sector. At COP27 in November 2022, countries reiterated the agreements from COP26 and were called upon to accelerate efforts toward the phase out of inefficient fossil fuel subsidies. The US also announced, in conjunction with the European Union and other partner countries, that it would develop standards for monitoring and reporting methane emissions to help create a market for low methane-intensity natural gas. Although no firm commitment or timeline to phase out or phase down all fossil fuels was made at COP27, there can be no guarantees that countries will not seek to implement such a phase out in the future. However, the impacts of these actions are unclear at this time. +Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored " Paris Agreement, " requires member states to submit non-binding, individually-determined reduction goals known as NDC’s every five years after 2020. Following President Biden’s executive order in January 2021, the United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. Additionally, at the COP26 in Glasgow in November 2021, the United States and the European Union jointly announced the launch of a Global Methane Pledge; an initiative committing to a collective goal of reducing global methane emissions by at least 30 percent from 2020 levels by 2030, including “all feasible reductions” in the energy sector. However, the impacts of these actions are unclear at this time. +22 +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, including climate-change-related pledges made by certain candidates for public office. On January 27, 2021, President Biden issued an executive order that commits to substantial action on climate change, calling for, among other things, the increased use of zero-emissions vehicles by the federal government, the elimination of subsidies provided to the fossil fuel industry, and an increased emphasis on climate-related risk across government agencies and economic sectors. The executive order also suspends the issuance of new leases for oil and gas development on federal land; for more information, see our risk factor titled " Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. " +Other actions that the Biden Administration may take include the imposition of more restrictive requirements for the development of pipeline infrastructure or liquefied natural gas export facilities, or more restrictive GHG emissions limitations for oil and gas facilities. Litigation risks are also increasing as a number of parties have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. +There are also increasing financial risks for companies in the fossil fuel sector as shareholders currently invested in fossil-fuel energy companies concerned about the potential effects of climate change may elect in the future to shift some or all of their investments into non-fossil fuel related sectors. Institutional lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable lending practices and some of them may elect not to provide funding for fossil fuel energy companies. For example, at COP26, the Glasgow Financial Alliance for Net Zero ( " GFANZ " ) announced that commitments from over 450 firms across 45 countries had resulted in over $130 trillion in capital committed to net zero goals. The various sub-alliances of GFANZ generally require participants to set short-term, sector-specific targets to transition their financing, investing, and/or underwriting activities to net zero emissions by 2050. There is also a risk that financial institutions will be required to adopt policies that have the effect of reducing the funding provided to the fossil fuel sector. In late 2020, the Federal Reserve announced that it has joined the Network for Greening the Financial System ( " NGFS " ), a consortium of financial regulators focused on addressing climate-related risks in the financial sector. Subsequently, the Federal Reserve has issued a statement in support of the efforts of the NGFS to identify key issues and potential solutions for the climate-related challenges most relevant to central banks and supervisory authorities. Limitation of investments in and financings for fossil fuel energy companies could result in the restriction, delay or cancellation of drilling programs or development or production activities. In January 2023, the Federal Reserve launched a pilot climate scenario analysis exercise, with six of the United States’ largest banks participating to enhance the ability of firms and supervisors to measure and manage climate-related financial risk. Additionally, the United States Securities and Exchange Commission has announced a proposed rule that would require climate disclosures, including registrants’ Scope 1 and 2 emissions and, in some cases, Scope 3 emissions. Although the final form and substance of these requirements is not yet known, this may result in additional costs to comply with any such disclosure requirements. We also cannot predict how financial institutions and investors might consider any information disclosed under the final rule when making investment decisions, and as a result it is possible that we could face increases with respect to the costs of, or restrictions imposed on, our access to capital. +The adoption and implementation of new or more stringent international, federal or state legislation, regulations or other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate GHG emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for, oil and natural gas, which could reduce demand for our services and products. Additionally, political, litigation and financial risks may result in our oil and natural gas customers restricting or cancelling production activities, incurring liability for infrastructure damages as a result of climatic changes, or impairing their ability to continue to operate in an economic manner, which also could reduce demand for our services and products. One or more of these developments could have a material adverse effect on our business, financial condition and results of operations. +Moreover, climate change may result in various physical risks, such as the increased frequency or intensity of extreme weather events or changes in the meteorological and hydrological patterns, that could adversely impact us, our customers’ and our suppliers’ operations. Such physical risks may result in damage to our customers’ facilities or otherwise adversely impact our operations, such as if facilities are subject to water use curtailments in response to drought, or demand for our customers’ products, such as to the extent warmer winters reduce the demand for energy for heating purposes, which may ultimately reduce demand for the products and services we provide. Such physical risks may also impact our suppliers, which may adversely affect our ability to provide our products and services. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +23 +Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +Our hydraulic fracturing operations are a significant component of our business, and it is an important and common practice that is used to stimulate production of hydrocarbons, particularly oil and natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has previously issued a series of rules under the CAA that establish new emission control requirements for emissions of volatile organic compounds and methane from certain oil and natural gas production and natural gas processing operations and equipment. Separately, the BLM finalized a rule governing hydraulic fracturing on federal lands but this rule was subsequently rescinded. Although several of these rulemakings have been rescinded, modified or subjected to legal challenges, new or more stringent regulations may be promulgated by the Biden Administration. For example, the BLM recently proposed a rule that would limit flaring from well sites on federal lands, as well as allow the delay or denial of permits if BLM finds that an operator’s methane waste minimization plan is insufficient. In January 2021, President Biden issued an executive order suspending new leasing activities, but not operations under existing leases, for oil and gas exploration and production on non-Indian federal lands pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices that take into consideration potential climate and other impacts associated with oil and gas activities on such lands and waters. Although the leasing pause was effectively halted by a permanent injunction in August 2022, in response to the executive order, the DOI issued a report recommending various changes to the federal leasing program, though many such changes would require Congressional action. As a result, we cannot predict the final scope of regulations or restrictions that may apply to oil and gas operations on federal lands. However, any regulations that ban or effectively ban such operations may adversely impact demand for our products and services. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in recent sessions of Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +Federal and state governments have also investigated whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for wastewater disposal wells in 2014 that imposed certain permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission released well completion seismicity guidelines for operators in the SCOOP and STACK require hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division has previously issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The TRRC has adopted similar rules and, in September 2021, issued a notice to disposal well operators in the Gardendale Seismic Response Area near Midland, Texas to reduce daily injection volumes following multiple earthquakes above a 3.5 magnitude over an 18 month period. The notice also required disposal well operators to provide injection data to TRRC staff to further analyze seismicity in the area. Subsequently, the TRRC ordered the indefinite suspension of all deep oil and gas produced water injection wells in the area, effective December 31, 2021. The Gardendale Seismic Response area has since been expanded in response to an additional earthquake in December 2022, covering 17 additional wells. While we cannot predict the ultimate outcome of these actions, any action that temporarily or permanently restricts the availability of disposal capacity for produced water or other oilfield fluids may increase our customers’ costs or require them to suspend operations, which may adversely impact demand for our products and services +Increased regulation of hydraulic fracturing and related activities could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. +24 +Increasing trucking regulations may increase our costs and negatively impact our results of operations. +In connection with our business operations, including the transportation and relocation of our hydraulic fracturing equipment and shipment of frac sand, we operate trucks and other heavy equipment. As such, we operate as a motor carrier in providing certain of our services and therefore are subject to regulation by the DOT and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations, driver licensing, insurance requirements, financial reporting and review of certain mergers, consolidations and acquisitions, and transportation of hazardous materials. Our trucking operations are subject to possible regulatory and legislative changes that may increase our costs. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive or work in any specific period, onboard black box recorder device requirements or limits on vehicle weight and size. +Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Matters such as the weight and dimensions of equipment are also subject to federal and state regulations. From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +Certain motor vehicle operators require registration with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria that could result in a suspension of operations. +Increased attention to environmental, social and governance ( " ESG " ) matters, conservation measures, commercial development and technological advances could reduce demand for oil and natural gas and our services. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, increased attention to climate change and other ESG matters, and technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas, resulting in reduced demand for oilfield services. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +The commercial development of economically‑viable alternative energy sources and related products (such as electric vehicles, wind, solar, geothermal, tidal, fuel cells and biofuels) could have a similar effect. The IRA 2022 appropriates significant federal funding for renewable energy initiatives, which could accelerate the use and commercial viability of alternative energy sources and decrease demand for oil and natural gas. The IRA 2022 has incentivized the further development of and investment in clean energy through the use of tax credits, and future legislation could expand these benefits for alternative energy sources. In addition, certain U.S. federal income tax deductions currently available with respect to oil and natural gas exploration and development, including the allowance of percentage depletion for oil and natural gas properties, may be eliminated as a result of proposed legislation. Any future decreases in the rate at which oil and natural gas reserves are discovered or developed, whether due to the passage of legislation, increased governmental regulation leading to limitations, or prohibitions on exploration and drilling activity, including hydraulic fracturing, or other factors, could have a material adverse effect on our business and financial condition, even in a stronger oil and natural gas price environment. +Moreover, while we may create and publish voluntary disclosures regarding ESG matters from time to time, certain statements in those voluntary disclosures may be based on hypothetical expectations and assumptions that may or may not be representative of current or actual risks or events or forecasts of expected risks or events, including the costs associated therewith. Such expectations and assumptions are necessarily uncertain and may be prone to error or subject to misinterpretation given the long timelines involved and the lack of an established single approach to identifying, measuring and reporting on many ESG matters. Additionally, we may announce various targets or product and service offerings in an attempt to improve our ESG profile. However, we cannot guarantee that we will be able to meet any such targets or that such targets or offerings will have the intended results on our ESG profile, including but not limited to as a result of unforeseen costs, consequences or technical difficulties associated with such targets or offerings. Also, despite any voluntary actions, we may receive pressure from certain investors, lenders or other groups to adopt more aggressive climate or other ESG-related goals or policies, but we cannot guarantee that we will be able to implement such goals because of potential costs or technical or operational obstacles. +In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform +25 +their investment and voting decisions. Unfavorable ESG ratings and recent activism directed at shifting funding away from companies with energy-related assets could lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital. Additionally, to the extent ESG matters negatively impact our reputation, we may not be able to compete as effectively to recruit or retain employees, which may adversely affect our operations. +Certain of our completion services, particularly our hydraulic fracturing services, are substantially dependent on the availability of water. Restrictions on our or our customers’ ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows. +Water is an essential component of unconventional shale oil and natural gas production during both the drilling and hydraulic fracturing processes. Over the past several years, certain of the areas in which we and our customers operate have experienced extreme drought conditions and competition for water in such areas is growing. In addition, some state and local governmental authorities have begun to monitor or restrict the use of water subject to their jurisdiction for hydraulic fracturing to ensure adequate local water supply. For instance, some states require E&P companies to report certain information regarding the water they use for hydraulic fracturing and to monitor the quality of groundwater surrounding some wells stimulated by hydraulic fracturing. Generally, our water requirements are met by our customers from sources on or near their sites, but there is no assurance that our customers will be able to obtain a sufficient supply of water from sources in these areas. Our or our customers’ inability to obtain water from local sources or to effectively utilize flowback water could have an adverse effect on our financial condition, results of operations and cash flows. +Risks Related to our Tax Matters +Our ability to use our net operating loss carryforwards may be limited. +The Tax Cuts and Jobs Act (the " TCJA " ) included a reduction to the maximum deduction allowed for net operating losses generated in tax years after December 31, 2017, and the elimination of carrybacks of net operating losses. Under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which modified the TCJA, U.S. federal net operating loss carryforwards ("NOLs") generated in taxable periods beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such NOLs in taxable years beginning after December 31, 2020, is limited to 80% of taxable income. As of December 31, 2022, we had approximately $421.7 million of U.S. federal NOLs, some of which will begin to expire in 2035. Approximately $219.5 million of our U.S. federal NOLs relate to pre-2018 periods. As of December 31, 2022, our state net operating losses were approximately $50.4 million and will begin to expire in 2024. +Utilization of these NOLs depends on many factors, including our future income, which cannot be assured. In addition, Section 382 ( " Section 382 " ) of the Internal Revenue Code of 1986, as amended (the " Code " ), generally imposes an annual limitation on the amount of taxable income that may be offset by NOLs when a corporation has undergone an " ownership change " (as determined under Section 382). Generally, a change of more than 50% in the ownership of a corporation’s stock, by value, over a three‑year period constitutes an ownership change for U.S. federal income tax purposes. Any unused annual limitation may, subject to certain limitations, be carried over to later years. We may experience ownership changes, which may result in annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long‑term tax‑exempt rate as defined in Section 382, increased under certain circumstances as a result of recognizing built‑in gains in our assets existing at the time of the ownership change. The limitations arising from ownership changes may prevent utilization of our NOLs prior to their expiration. Future ownership changes or regulatory changes could further limit our ability to utilize our NOLs. To the extent we are not able to offset our future income with our NOLs, this could adversely affect our operating results and cash flows if we attain profitability. +Risks Inherent to an Investment in our Common Stock +We are subject to certain requirements of Section 404 of the Sarbanes-Oxley Act ( " Section 404 " ). If we or our auditors identify and report material weaknesses in internal control over financial reporting, our investors may lose confidence in our reported information and our stock price may be negatively affected. +We are required to comply with certain provisions of Section 404, which requires that we document and test our internal control over financial reporting and issue our management’s assessment of our internal control over financial reporting. This section also requires that our independent registered public accounting firm issue an attestation report on such internal control. +If we or our auditors identify and report material weaknesses in our internal control over financial reporting, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to +26 +lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. +Certain provisions of our certificate of incorporation, and bylaws, as well as Delaware law, may discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock. +Our certificate of incorporation authorizes our board of directors (the " Board " ) to issue preferred stock without shareholder approval. If our Board elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our shareholders, including: +• limitations on the removal of directors; +• limitations on the ability of our shareholders to call special meetings; +• advance notice provisions for shareholder proposals and nominations for elections to the Board to be acted upon at meetings of shareholders; +• providing that the Board is expressly authorized to adopt, or to alter or repeal our bylaws; and +• establishing advance notice and certain information requirements for nominations for election to our Board or for proposing matters that can be acted upon by shareholders at shareholder meetings. +Our business could be negatively affected as a result of the actions of activist shareholders. +Publicly traded companies have increasingly become subject to campaigns by investors seeking to increase shareholder value by advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases, sales of assets or even sale of the entire company. Given our shareholder composition and other factors, it is possible such shareholders or future activist shareholders may attempt to effect such changes or acquire control over us. Responding to proxy contests and other actions by such activist shareholders or others in the future would be costly and time-consuming, disrupt our operations and divert the attention of our Board and senior management from the pursuit of business strategies, which could adversely affect our results of operations and financial condition. Additionally, perceived uncertainties as to our future direction as a result of shareholder activism or changes to the composition of the Board may lead to the perception of a change in the direction of our business, instability or lack of continuity which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. If customers choose to delay, defer or reduce transactions with us or transact with our competitors instead of us because of any such issues, then our business, financial condition, revenues, results of operations and cash flows could be adversely affected. +Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to pursue actions in another judicial forum for disputes with us or our directors, officers, employees or agents. +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our shareholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the " DGCL " ), our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. +The exclusive forum provision would not apply to suits brought to enforce any liability or duty created by the Securities Act or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. +27 +The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation or similar governing documents has been challenged in legal proceedings, and it is possible that a court could find the choice of forum provisions contained in our certificate of incorporation to be inapplicable or unenforceable, including with respect to claims arising under the U.S. federal securities laws. +Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our certificate of incorporation regarding exclusive forum. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations. +The market price of our common stock is subject to volatility. +The market price of our common stock could be subject to wide fluctuations in response to, and the level of trading of our common stock may be affected by, numerous factors, many of which are beyond our control. These factors include, among other things, our limited trading volume, the concentration of holdings or our common stock, actual or anticipated variations in our operating results and cash flow, the nature and content of our earnings releases, announcements or events that impact our products, customers, competitors or markets, business conditions in our markets and the general state of the securities markets, volatility in oil and gas prices and the market for energy-related stocks, as well as general economic and market conditions and other factors that may affect our future results, including those described in this report. Significant sales of our common stock, or the expectation of these sales, by significant shareholders, officers or directors could materially and adversely affect the market price of our common stock. +There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock. +We are not restricted from issuing additional common stock, including securities that are convertible into or exchangeable for, or that represent a right to receive, common stock. In addition, we may issue common stock as consideration in future mergers and acquisitions, as we did in the Silvertip Acquisition. Any issuance of additional shares of our common stock or convertible securities will dilute the ownership interest of our common stockholders. Sales of a substantial number of shares of our common stock or other equity-related securities in the public market, or the perception that these sales could occur, could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our common stock or other equity-related securities would have on the market price of our common stock. +28 +Item 1B. Unresolved Staff Comments. +None. +Item 2. Properties +Our corporate headquarters is located at 1706 S. Midkiff, Midland, Texas 79701. In addition to our headquarters, we also own and lease other properties that are used for field offices, yards or storage in the Permian Basin. We believe that our facilities are adequate for our current operations. +Item 3. Legal Proceedings. +Disclosure concerning legal proceedings is incorporated by reference to "Note 17. Commitments and Contingencies— Contingent Liabilities " o f our Consolidated Financial Statements contained in this Annual Report. +From time to time, we may be subject to various other legal proceedings and claims incidental to or arising in the ordinary course of our business. +Item 4. Mine and Safety Disclosures +None. +29 +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +On March 22, 2017, we consummated our initial public offering ( " IPO " ) of our common stock at a price of $14.00 per share. Our common stock is traded on the New York Stock Exchange under the symbol " PUMP. " +Holders +As of December 31, 2022, there w ere 114,515,008 shares of common stock outstanding, held of record by six holders. The number of record holders of our common stock does not include Depository Trust Company participants or beneficial owners holding shares through nominee names. +Dividend +We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the growth of our business and repay borrowings under our ABL Credit Facility, if any. Our future dividend policy is within the discretion of our Board and will depend upon then‑existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory restrictions on our ability to pay dividends and other factors our Board may deem relevant. In addition, our ABL Credit Facility places certain restrictions on our ability to pay cash dividends. +Performance Graph +The annual changes for the periods shown in the following graph are based on the assumption that $100 had been invested in our common stock, the Russell 2000 Index ("Russell 2000") and a self-constructed peer group index of comparable companies ("Peer Group") on March 17, 2017 (the first trading date of our common stock), and that all dividends were reinvested at the closing prices of the dividend payment dates. The relevant companies included in our Peer Group consists of Liberty Energy Inc., Nextier Oilfield Solutions Inc., RPC, Inc., Calfrac Well Services Ltd., Patterson-UTI Energy, Inc. and Mammoth Energy Services, Inc. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on the last trading date of 2022. The calculations exclude trading commissions and taxes. The stock price performance on the following graph and table is not necessarily indicative of future stock price performance. +30 +Date Peer Group Russell 2000 ProPetro Holding Corp. +12/31/2017 $ 100.0 $ 100.0 $ 100.0 +12/31/2018 $ 45.5 $ 89.0 $ 61.1 +12/31/2019 $ 32.8 $ 111.7 $ 55.8 +12/31/2020 $ 20.0 $ 134.0 $ 36.7 +12/31/2021 $ 24.2 $ 153.9 $ 40.2 +12/31/2022 $ 48.6 $ 122.4 $ 51.4 +31 +Item 6. [Reserved] +32 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward‑looking statements that involve risks and uncertainties. You should read the " Risk Factors " section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis. +Basis of Presentation +This discussion of our results omits our results of operations and cash flows for the year ended December 31, 2020 and the comparison of our results of operations for the years ended December 31, 2021 and 2020, which may be found in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022. +Unless otherwise indicated, references in this " Management’s Discussion and Analysis of Financial Condition and Results of Operations " to " ProPetro Holding Corp., " " the Company, " " we, " " our, " " us " or like terms refer to ProPetro Holding Corp. and its subsidiaries. +Overview +Our Business +We are a leading integrated oilfield services company, located in Midland, Texas, focused on providing innovative hydraulic fracturing, wireline and other complementary oilfield completion services to leading upstream oil and gas companies engaged in the E&P of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil‑producing areas in the United States, and we believe we are one of the leading providers of completion services in the region. +Our hydraulic fracturing operations account for approximately 89.3% of our total revenues and operations. Our total available hydraulic horsepower ("HHP") in our hydraulic fracturing operations at December 31, 2022 w as 1,315,000 HHP, which was comprised of 252,500 HHP of our Tier IV DGB equipment and 1,062,500 HHP of conventional Tier II equipment. Our hydraulic fracturing fleets range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsites. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region’s increasingly high-intensity well completions (including Simul-Frac, which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. With the industry transition to lower emissions equipment and Simul-Frac, in addition to several other changes to our customers' job designs, we believe that our available capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at wellsites. In addition, in September 2021, August 2022 and December 2022, we committed to additional conversions of our Tier II equipment to Tier IV DGB, and purchase of new Tier IV DGB equipment. As such, we entered into conversion and purchase arrangements with our equipment manufacturers for a total of 362,500 HHP of Tier IV DGB equipment and as of December 31, 2022, we have received 192,500 HHP of the converted and new Tier IV DGB equipment and expect to receive the remaining 170,000 HHP by the second quarter of 2023. In August 2022 and December 2022, we entered into three-year electric fleet leases for a total of four fleets with 60,000 HHP per fleet. We expect to take delivery of the electric fleets at different times during the second half of 2023. +On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip Completion Services Operating, LLC, which provides wireline perforation and ancillary services solely in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed debt, and the payment of certain other closing and transaction costs. At December 31, 2022, we had 23 wireline units available to provide wireline perforation and ancillary services. The Silvertip Acquisition positions the Company as a more resilient and diversified completions-focused oilfield services provider headquartered in the Permian Basin. +Our substantial market presence in the Permian Basin positions us well to capitalize on drilling and completion activity in the region. Primarily, our operational focus has been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have increased our operations in the Delaware sub-basin and are well-positioned to support further +33 +increases to our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending. +Our hydraulic fracturing, wireline and cementing operations have been aggregated into one reportable segment: "Completion Services." In connection with our divestiture of our coiled tubing operations and the Silvertip Acquisition, we have revised our reportable segment presentation from Pressure Pumping to Completion Services and have restated prior periods accordingly. Our now discontinued coiled tubing, drilling and flowback operations were aggregated into the "All Other" category. For additional financial information on our reportable segments presentation, please see reportable segment information in Part II - Item 8, "Financial Statements and Supplementary Data." +Pioneer Pressure Pumping Acquisition +On December 31, 2018, we consummated the purchase of pressure pumping and related assets of Pioneer and Pioneer Pumping Services, LLC in the Pioneer Pressure Pumping Acquisition. In connection with the acquisition, we became a long-term service provider to Pioneer under the Pioneer Services Agreement , with a term of up to 10 years for providing pressure pumping and related services, with Pioneer having the right to terminate the agreement, in whole or part, effective as of December 31 of each of the calendar years of 2022, 2024 and 2026 and the right to increase the number of committed fleets prior to December 31, 2022. Under the agreement, the Company was entitled to receive compensation if Pioneer were to idle committed fleets ("idle fees"); however, we were first required to use all economically reasonable efforts to deploy the idled fleets to another customer. This agreement was superseded by the agreement below. +On March 31, 2022, we entered into an amended and restated A&R Pressure Pumping Services Agreement in place of the Pioneer Services Agreement. The A&R Pressure Pumping Services Agreement, which was effective from January 1, 2022 to December 31, 2022, reduced the number of contracted fleets from eight fleets to six fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, and replaced the idle fees arrangement with equipment reservation fees (the "Reservation fees"). As part of the Reservation fees arrangement, the Company was entitled to receive compensation for all eligible contracted fleets that were made available to Pioneer at the beginning of every quarter in 2022 through the term of the A&R Pressure Pumping Services Agreement. This agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and Fleet Two Agreement described below. +On October 31, 2022, we entered into the Fleet One Agreement and the Fleet Two Agreement with Pioneer, pursuant to which we will provide hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and will terminate on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was originally planned to terminate on the one year anniversary of the date on which the fleet dedicated thereunder converted from a Tier II diesel Simul-Frac fleet to a Tier IV dual fuel zipper fleet, which was expected to occur in May 2023. In February 2023, Pioneer provided the Company notice (i) stating that Pioneer intended to release Fleet Two effective upon the completion of operations on the pad where the performance of Services (as defined in the Fleet Two Agreement) is in progress on May 12, 2023 and (ii) requesting that the Company agree to the termination of the Fleet Two Agreement as of the Release Date. The Company agreed with such request, and, as a result, the Fleet Two Agreement will be terminated as of the Release Date. +Commodity Price and Other Economic Conditions +The oil and gas industry has traditionally been volatile and is characterized by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, political instability in oil producing countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. +The global public health crisis associated with the COVID-19 pandemic has had an adverse effect on global economic activity and the oil and gas industry in 2020 and 2021. Some of the challenges resulting from the COVID-19 pandemic that have impacted our business include restrictions on movement of personnel and associated gatherings, shortage of skilled labor, cost inflation and supply chain disruptions. In light of the COVID-19 pandemic, most companies, including our customers in the Permian Basin, reacted by closely managing their operating budget and exercising capital discipline in 2020 and 2021. +34 +In February 2022, Russia launched a large-scale invasion of Ukraine that has led to significant armed hostilities. As a result, the United States, the United Kingdom, the member states of the European Union and other public and private actors have levied severe sanctions on Russian financial institutions, businesses and individuals. This conflict, and the resulting sanctions, has contributed to significant increases and volatility in the prices for oil and natural gas. The geopolitical and macroeconomic consequences of this invasion and associated sanctions remain uncertain, and such events, or any further hostilities in Ukraine or elsewhere, could severely impact the world economy and the oil and gas industry and may adversely affect our financial condition. +The Russia-Ukraine war, and the adverse impacts of the COVID-19 pandemic in recent years, including inflation, have resulted in volatility in supply and demand dynamics for crude oil and associated volatility in crude oil pricing. In 2022, WTI average crude oil price was approximately $94 per barrel, which is the highest average price in the last nine years. We believe that the recent surge in global crude oil prices is partly due to the lack of reinvestment in the oil and gas industry in the last two years, and increased demand for oil and gas products, coupled with the adverse impact of the Russia-Ukraine war, which has led to various sanctions on Russian crude oil supply and businesses. With the significant increase in global crude oil prices, including WTI crude oil prices, there has been an increase in the Permian Basin rig count from approximately 179 at the beginning of 2021 to approximately 353 at the end of December 2022, according to Baker Hughes. Following the increase in rig count and WTI crude oil price, the oilfield service industry has experienced increased demand for its completion services, and improved pricing. As a result of the growing demand for completion services and significant cost inflation across the industry, we negotiated pricing increases with certain of our customers for our completion services, depending on job design. Although we are currently operating in an improved pricing environment compared to 2020 and 2021, the rapid increase in cost inflation and supply chain tightness could adversely impact our future profitability. The U.S. inflation rate has been steadily increasing since 2021. These inflationary pressures have resulted in and may result in additional increases to the costs of our oilfield goods, services and personnel, which in turn cause our capital expenditures and operating costs to rise. Sustained levels of high inflation have likewise caused the U.S. Federal Reserve and other central banks to increase interest rates, and to the extent elevated inflation remains, we may experience further cost increases for our operations, including labor costs and equipment. We cannot predict any future trends in the rate of inflation and a significant increase in inflation, to the extent we are unable to timely pass-through the cost increases to our customers, would negatively impact our business, financial condition and results of operations. See Part II, Item 1A. Risk Factors— " Continuing or worsening inflationary issues and associated changes in monetary policy have resulted in and may result in additional increases to the cost of our goods, services and personnel, which in turn cause our capital expenditures and operating costs to rise. " +Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including the upstream and oilfield services companies. As a result, we are working with our customers and equipment manufacturers to transition our equipment to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB, electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. We have transitioned our hydraulic fracturing equipment portfolio from approximately 10% lower emissions equipment in 2021 to approximately 35% in 2022, and expect to increase to approximately 65% in 2023. +The Permian Basin rig count increase, demand for oil and gas products, WTI crude oil price increase and cost inflation could be indicative of an energy market recovery. I f the rig count and market conditions continue to improve, including improved customers' pricing and labor availability, and we are able to continue to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also continue to improve. However, if market conditions do not improve or decline in the future, and we are unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows. +Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment. +35 +2022 Operational Highlights +Over the course of the year ended December 31, 2022: +• improved pricing and increased operational efficiency at wellsites ; +• our average effectively utilized fleet count was approximately 15 active fleets, a 25% increase from approximately 12 active fleets in 2021; +• we entered into a lease agreement for four electric fleets with 60,000 HHP per fleet, and we transitioned 162,500 HHP of our equipment portfolio to lower emissions, Tier IV DGB equipment. In 2023, our equipment portfolio is expected to be comprised of approximately 65% lower emissions (electric and Tier IV DGB), and 35% conventional diesel equipment; +• we entered into a contract with a customer for the use of one of our electric hydraulic fracturing fleets to provide committed services for a period of three years after we take delivery of the fleet; and +• on November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip Completion Services Operating, LLC, which provides wireline perforation and ancillary services solely in the Permian Basin. +2022 Financial Highlights +Financial highlights for the year ended December 31, 2022: +• revenue increased $405.2 million, or 46.3%, to $1,279.7 million, as compared to $874.5 million for the year ended December 31, 2021; +• cost of services (exclusive of depreciation and amortization) increased $220.6 million or 33.3% to $882.8 million, as compared to $662.3 million for the year ended December 31, 2021; cost of services as a percentage of revenue decreased to 69.0% in 2022 compared to 75.7% for the year ended December 31, 2021; +• general and administrative expenses, inclusive of stock-based compensation, increased $28.8 million, or 34.8% to $111.8 million, as compared to $82.9 million for the year ended December 31, 2021; +• the total impairment expense recorded during the year December 31, 2022 was approximately $57.5 million related to our DuraStim® equipment, compared to no impairment expense recorded during the year ended December 31, 2021; +• net income was $2.0 million, compared to a net loss of $54.2 million for the year ended December 31, 2021. Diluted net income per common share was $0.02, compared to diluted net loss per common share of $0.53 for the year ended December 31, 2021. Adjusted EBITDA of approximately $316.6 million increased 134.5%, compared to $135.0 million for the year ended December 31, 2021 (see reconciliation of Adjusted EBITDA to net income (loss) in the subsequent section "How We Evaluate Our Operations") and margins increased 930 basis points; +• our total liquidity was $155.2 million, consisting of cash, cash equivalents and restricted cash of $88.9 million and remaining availability of $66.3 million under our ABL Credit Facility; and +• $30.0 million of borrowings as of December 31, 2022 under our ABL Credit Facility. +Our Assets and Operations +Through our Completion Services segment, which includes our hydraulic fracturing, cementing and wireline operations, we primarily provide hydraulic fracturing services to E&P companies in the Permian Basin. During the year ended December 31, 2022, our hydraulic fracturing, cementing and wireline operations accounted for 89.3%, 7.2% and 2.4% of our total revenue, respectively. Our equipment has been designed to handle Permian Basin specific operating conditions and the region’s increasingly high‑intensity well completions, which are characterized by longer horizontal wellbores, more frac stages per lateral and increasing amounts of proppant per well. We plan to continually reinvest in our equipment to ensure optimal performance and reliability. +36 +In addition to our core Completion Services segment operations, we also offer a suite of complementary services, which we believe create operational efficiencies for our customers and could allow us to capture a greater portion of their capital spending across the lifecycle of a well in the future. In September 2022, we discontinued our coiled tubing operations and disposed of the coiled tubing assets. +How We Generate Revenue +We generate revenue primarily through our Completion Services segment, and more specifically, by providing hydraulic fracturing services to our customers. We own and operate a fleet of mobile hydraulic fracturing, wireline and cementing units and other auxiliary equipment to perform completion services to E&P companies. We also provide personnel and services that are tailored to meet each of our customers’ needs. +Hydraulic fracturing operations account for a significant portion of our total revenue. We charge our customers on a per‑job basis, in which we set pricing terms after receiving full specifications for the requested job, including the lateral length of the customer’s wellbore, the number of frac stages per well, the amount of proppant and chemicals to be used and other parameters of the job. +In addition to hydraulic fracturing services, we generate revenue through other completion services that we provide to our customers, including cementing, wireline and other related services. These completion services are provided through various contractual arrangements, including on a turnkey contract basis, in which we set a price to perform a particular job, or a daywork contract basis, in which we are paid a set price per day for our services. We are also sometimes paid by the hour for these complementary services. +Demand for our services is largely dependent on oil and natural gas prices, and our customers’ well completion budgets and rig count. Our revenue, profitability and cash flows are highly dependent upon prevailing crude oil prices and expectations about future prices. For many years, oil prices and markets have been extremely volatile. Prices are affected by many factors beyond our control. The average WTI oil prices per barrel were approximately $94 , $68 and $39 for the years ended December 31, 2022, 2021 and 2020, respectively. In February 2023, the W TI oil price was approximately $78 per barrel. If the WTI oil price declines in the future or remains highly volatile, demand for our services may be negat ively impacted, which could result in a significant decrease in our future profitability and cash flows. We monitor the oil and natural gas prices and the Permian Basin rig count to enable us to more effectively plan our business and forecast the demand for our services. +The historical weekly average Permian Basin rig count based on the Baker Hughes Company rig count information was as follows: +Year Ended December 31, +Drilling Rig Type (Permian Basin) 2022 2021 2020 +Directional 3 2 1 +Horizontal 318 227 212 +Vertical 14 11 8 +Total 335 240 221 +Average Permian Basin rig count to U.S rig count 46.3 % 50.5 % 51.0 % +Costs of Conducting our Business +The principal direct costs involved in operating our business are direct labor, expendables and other direct costs. +Direct Labor Costs. Payroll and benefit expenses related to our crews and other employees that are directly or indirectly attributable to the effective delivery of services are included in our operating costs. Direct lab or costs amounted to 27.7% and 22.4% of total costs of service for the years ended December 31, 2022 and 2021, respectively. The increase in our direct labor costs percentage is driven by wage adjustments and higher headcount to support current activity levels. +Expendables. Expendables include the product and freight costs associated with proppant, chemicals and other consumables used in our completion services and other operations. These costs comprise a substantial variable component of our service costs, particularly with respect to the quantity and quality of sand and chemicals demanded when providing hydraulic fracturing services. Expendable product costs comprised approximately 33.6%, and 41.8% of total costs of service for the years ended December 31, 2022 and 2021, respectively. The percentage decrease in our expendables in 2022 was primarily attributable to certain customers electing to directly source sand and the associated logistics. +37 +Other Direct Costs. We incur other direct expenses related to our service offerings, including the costs of fuel, repairs and maintenance, general supplies, equipment rental and other miscellaneous operating expenses. Fuel is consumed both in the operation and movement of our equipment. Repairs and maintenance costs are expenses directly related to upkeep of equipment, which have been amplified by the demand for higher horsepower jobs. Capital expenditures to upgrade or extend the useful life of equipment are capitalized and are not included in other direct costs. Other direct costs were 38.7% and 35.8% of total costs of service for the years ended December 31, 2022 and 2021, respectively. The percentage increase in 2022 was primarily driven by higher recurring repairs and maintenance costs in 2022 compared to 2021. +How We Evaluate Our Operations +Our management uses Adjusted EBITDA or Adjusted EBITDA margin to evaluate and analyze the performance of our various operating segments. +Adjusted EBITDA and Adjusted EBITDA Margin +We view Adjusted EBITDA and Adjusted EBITDA margin as important indicators of performance. We define EBITDA as our earnings, before (i) interest expense, (ii) income taxes and (iii) depreciation and amortization. We define Adjusted EBITDA as EBITDA, plus (i) loss/(gain) on disposal of assets, (ii) stock-based compensation, and (iii) other unusual or nonrecurring (income)/expenses, such as impairment charges, severance, costs related to asset acquisitions, insurance recoveries, costs related to nonrecurring legal settlement and one-time professional and advisory fees. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues. +Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures utilized by our management and other users of our financial statements such as investors, commercial banks, and research analysts, to assess our financial performance because it allows us and other users to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), nonrecurring (income) expenses and items outside the control of our management team (such as income taxes). Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income (loss), operating income (loss), cash flow from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles in the United States of America ( " GAAP " ). +Note Regarding Non‑GAAP Financial Measures +Adjusted EBITDA and Adjusted EBITDA margin are not financial measures presented in accordance with GAAP ( " non-GAAP " ), except when specifically required to be disclosed by GAAP in the financial statements. We believe that the presentation of Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors in assessing our financial condition and results of operations because it allows them to compare our operating performance on a consistent basis across periods and our peer group by removing the effects of our capital structure, asset base, nonrecurring (income) expenses and items outside the control of the Company. Net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA. Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some, but not all, items that affect the most directly comparable GAAP financial measures. You should not consider Adjusted EBITDA and Adjusted EBITDA margin in isolation or as a substitute for an analysis of our results as reported under GAAP. Because Adjusted EBITDA and Adjusted EBITDA margin may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. +38 +Reconciliation of net income (loss) to Adjusted EBITDA ($ in thousands): +Completion +Services +All Other +Total +Year ended December 31, 2022 +Net income (loss) $ 19,754 $ (17,724) $ 2,030 +Depreciation and amortization +125,867 2,241 128,108 +Interest expense +1,605 — 1,605 +Income tax expense 5,356 — 5,356 +Loss on disposal of assets 88,145 14,005 102,150 +Impairment expense 57,454 — 57,454 +Stock‑based compensation +21,881 — 21,881 +Other income (2) (3) +(11,582) — (11,582) +Other general and administrative expense (1) +8,460 — 8,460 +Severance expense 1,111 17 1,128 +Adjusted EBITDA +$ 318,051 $ (1,461) $ 316,590 +Completion +Services All Other Total +Year ended December 31, 2021 +Net loss $ (51,189) $ (2,996) $ (54,185) +Depreciation and amortization +129,780 3,597 133,377 +Interest expense +614 — 614 +Income tax benefit (14,252) — (14,252) +Loss on disposal of assets 64,549 97 64,646 +Stock‑based compensation +11,519 — 11,519 +Other income (873) — (873) +Other general and administrative expense (1) +(6,471) — (6,471) +Severance expense 632 — 632 +Adjusted EBITDA +$ 134,309 $ 698 $ 135,007 +Completion +Services All Other Total +Year ended December 31, 2020 +Net loss $ (99,830) $ (7,190) $ (107,020) +Depreciation and amortization +148,936 4,354 153,290 +Interest expense +2,383 — 2,383 +Income tax benefit (27,480) — (27,480) +Loss on disposal of assets +56,584 1,552 58,136 +Impairment expense 36,907 1,095 38,002 +Stock‑based compensation +9,100 — 9,100 +Other expense +874 — 874 +Other general and administrative expense (1) +13,038 — 13,038 +Retention bonus and severance expense 1,140 — 1,140 +Adjusted EBITDA +$ 141,652 $ (189) $ 141,463 +____________________ +(1) During the years ended December 31, 2022, 2021 and 2020, other general and administrative expense (net of reimbursement from insurance carriers) primarily relates to nonrecurring professional fees paid to external consultants in connection with our audit committee review, SEC investigation, shareholder litigation, legal settlement to a vendor and other legal matters, net of insurance recoveries. During the years ended December 31, 2022, 2021 +39 +and 2020, we received reimbursement of approxim ately $10.4 million, $9.8 million and $0.6 million, respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. +(2) Includes a $10.7 million net tax refund (net of advisory fees) received in March 2022 from the Texas Comptroller of Public Accounts in connection with limited sales, excise and use tax audit of the period from July 1, 2015 through December 31, 2018. +(3) Includes $2.7 million non-cash income from fixed asset inventory received as part of a settlement of warranty claims with an equipment manufacturer and a $1.6 million unrealized loss on short-term investment. +40 +Results of Operations +In 2022, we conducted our business through four operating segments: hydraulic fracturing, cementing, wireline and coiled tubing . For reporting purposes, the hydraulic fracturing, cementing and wireline operating segments are aggregated into our one reportable segment—Completion Services. We disposed of our coiled tubing assets and shut down our coiled tubing operations effective September 1, 2022. The results of our coiled tubing operations prior to September 1, 2022 are reflected in the "All Other" category. +Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 +($ in thousands, except percentages) +Year Ended December 31, Change +2022 2021 Variance % +Revenue $ 1,279,701 $ 874,514 $ 405,187 46.3 % +Less (Add): +Cost of services (1) +882,820 662,266 220,554 33.3 % +General and administrative expense (2) +111,760 82,921 28,839 34.8 % +Depreciation and amortization 128,108 133,377 (5,269) (4.0) % +Impairment expense 57,454 — 57,454 100.0 % +Loss on disposal of assets 102,150 64,646 37,504 58.0 % +Interest expense 1,605 614 991 161.4 % +Other expense (income) (11,582) (873) 10,709 1,226.7 % +Income tax expense (benefit) 5,356 (14,252) 19,608 137.6 % +Net income (loss) $ 2,030 $ (54,185) $ 56,215 103.7 % +Adjusted EBITDA (3) +$ 316,590 $ 135,007 $ 181,583 134.5 % +Adjusted EBITDA Margin (3) +24.7 % 15.4 % 9.3 % 60.4 % +Completion Services segment results of operations: +Revenue $ 1,266,261 $ 857,642 $ 408,619 47.6 % +Cost of services $ 869,053 $ 647,570 $ 221,483 34.2 % +Adjusted EBITDA $ 318,051 $ 134,309 $ 183,742 136.8 % +Adjusted EBITDA Margin (4) +25.1 % 15.7 % 9.4 % 59.9 % +____________________ +(1) Exclusive of depreciation and amortization. +(2) Inclusive of stock‑based compensation. +(3) For definitions of the non‑GAAP financial measures of Adjusted EBITDA and Adjusted EBITDA margin and reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to our most directly comparable financial measures calculated in accordance with GAAP, please read " How We Evaluate Our Operations. " Included in our Adjusted EBITDA is reservation and idle fees of $27.0 million and $9.5 million for the years ended December 31, 2022 and 2021, respectively. +(4) The non‑GAAP financial measure of Adjusted EBITDA margin for the Completion Services segment is calculated by taking Adjusted EBITDA for the Completion Services segment as a percentage of our revenues for the Completion Services segment. +41 +Revenue. Revenue increased 46.3%, or $405.2 million, to $1,279.7 million for the year ended December 31, 2022, as compared to $874.5 million for the year ended December 31, 2021. Our Completion Services segment revenues increased 47.6%, or $408.6 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The increases were primarily attributable to the significant increase in our existing and new customers' activity levels, resulting in higher demand for completion services and improved pricing, and the additional revenue of $31.2 million following the Silvertip Acquisition. The increase in demand for our completion services resulted in an approximately 25% increase in our average effectively utilized fleet count to 15 active fleets in 2022 from 12 active fleets in 2021. Our revenue for the year ended December 31, 2022 included reservation fees charged to a customer of approximately $27.0 million and our revenue for the year ended December 31, 2021 included idle fees charged to a customer of approximately $9.5 million. The increase in these fees was driven by the A&R Pressure Pumping Services Agreement with Pioneer that required six dedicated fleets throughout 2022. +Revenues from services other than completion services decreased 20.3%, or approximately $3.4 million, for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The decrease in revenues from services other than completion services during the year ended December 31, 2022, was primarily attributable to the discontinuation of our coiled tubing operations effective September 1, 2022. +Cost of Services. Cost of services increased 33.3%, or $220.6 million, to $882.8 million for the year ended December 31, 2022, from $662.3 million during the year ended December 31, 2021. Cost of services in our Completion Services seg ment increased $221.5 million durin g the year ended December 31, 2022, as compared to the year ended December 31, 2021 . The increases were primarily attributable to the significantly increased activity levels resulting from the increased demand for our services, the Silvertip Acquisition and the impact of general cost inflation. A s a percentage of Completion Services segment revenues (including idle fees), Completion Services cost of services decre ased to 68.6% for the year ended December 31, 2022, as compared to 75.5% for the year ended December 31, 2021. Excluding idle fees revenue of $27.0 million and $9.5 million for the years ended December 31, 2022 and 2021, respectively, our Completion Services cost of services as a percentage of Completion Services revenues for the years ended December 31, 2022 and 2021 was approximately 70.1% and 76.4%, respectively. The decrease in the percentages was a result of increased operational efficiencies, reduction in operational downtime and improved pricing across our customer base. +General and Administrative Expenses. General and administrative expen ses increased 34.8%, or $28.8 million, to $111.8 million for the y ear ended December 31, 2022, as compared to $82.9 million for the year ended December 31, 2021. The net increase was primarily attributable to (i) an increase in non-recurring legal expenses (net of insurance recoveries) by $11.1 million incurred primarily in connection with shareholder litigation and settlement with a vendor, (ii) an increase in stock-based compensation expense by $10.4 million, primarily attributable to the non-recurring incremental stock-based compensation associated with the acceleration of stock awards upon resignation of former executives, (iii) an increase in consulting and professional fees by $5.2 million, and (iv) the transaction costs related to the Silvertip Acquisition of approximately $2.2 million, partially offset by a net decrease of approximately $0.1 million in other general and administrative expenses. +Depreciation and Amortization. Depreciation and amortization decreased 4.0%, or $5.3 million, to $128.1 million for the yea r ended December 31, 2022, as compared to $133.4 million for the year ended December 31, 2021. The decrease was primarily attributable to the decrease in our fixed asset base as of December 31, 2022, partly attributable to the disposal and impairment of certain fixed assets during the period. +Impairment Expense. During the year ended December 31, 2022, we recorded $57.5 million in connection with the impairment of our DuraStim® assets, which is included in our Completion Services reportable segment. There was no impairment expense during the year ended December 31, 2021. +Loss on Disposal of Assets. Loss on the disposal of assets increased 58.0%, or $37.5 million, to $102.1 million for the year ended December 31, 2022, as compared to $64.6 million for the year ended December 31, 2021. The increase was primarily attributable to the divestiture of our coiled tubing operations. We recorded a loss of $13.8 million in connection with the divestiture of our coiled tubing operations. In addition, upon replacement of certain property and equipment, including certain major components like fluid ends and power ends of our completion services equipment, the cost and related accumulated depreciation are removed from the balance sheet and the net amount is recognized as loss on disposal of assets. +Interest Expense. Interest expense increased 161.4%, or $1.0 million, to $1.6 million for the yea r ended December 31, 2022, as compared to $0.6 million for t he year ended December 31, 2021. The increase was primarily attributable to the partial write down of unamortized capitalized loan origination cost in connection with the modification to our credit facility and interest on borrowings under our ABL Credit Facility. We had $30.0 million in borrowings under our ABL Credit Facility at the end of 2022 compared to zero at the end of 2021 . +42 +Other (Income) Expense. Other income increased to approximately $11.6 million for the year ended December 31, 2022, as compared to $0.9 million in income for the year ended December 31, 2021. The increase in other income is primarily attributable to the net tax refund to the Company of $10.7 million of sales, excise and use taxes, $2.7 million of non-cash income from equipment parts inventory received from an equipment manufacturer as settlement of our warranty claims, partially offset by a $1.6 million unrealized loss on short-term investment. +Income Taxes. Income tax expense was $5.4 million for the year ended December 31, 2022, as compared to income tax benefit of $14.3 million for the year ended December 31, 2021. The reduction in income tax benefit recorded during the year ended December 31, 2022 is primarily attributable to the Company recording pre-tax income in 2022 as compared to pre-tax loss in 2021. +43 +Liquidity and Capital Resources +Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows and (iii) borrowings under our ABL Credit Facility. Our cash is primarily used to fund our operations, support growth opportunities and satisfy future debt payments. Our restricted cash, which was received from a customer will be used solely for the construction or operation of certain electric hydraulic fracturing equipment. Our Borrowing Base (as defined below), as redetermined monthly, is tied to 85.0% to 90.0% of eligible accounts receivable. Changes to our operational activity levels and our customers’ credit ratings have an impact on our total eligible accounts receivable, which could result in significant changes to our Borrowing Base and, therefore, our availability under our ABL Credit Facility. +As of December 31, 2022, our borrowings under our ABL Credit Facility were $30.0 million and our total liquidity was $155.2 million, consisting of cash, cash equivalents and restricted cash of $88.9 million and $66.3 million of availability under our ABL Credit Facility. +As of February 20, 2023, our borrowings under our ABL Credit Facility were $30.0 million and our total liquidity was approximately $142.8 million, consisting of cash and cash equivalents of $35.4 million and $107.4 million of availability under our ABL Credit Facility. +In 2020 when demand for our services was significantly depressed following the rapidly rising health crisis associated with the COVID-19 pandemic and the energy industry disruptions, the Company experienced a significant decrease in its liquidity. However, with the gradual recovery in the energy industry and the reduced impact of the COVID-19 pandemic, we have seen improvements in the demand for our services and improved pricing, and our liquidity position gradually improved. However, we expect our overall liquidity to decline if we make additional or accelerate our future capital investments. Moreover, the current market conditions may be impacted by increasing interest rates and potential economic slowdown or a new outbreak of a COVID-19 variant or other health crisis, which could negatively impact our future operations, revenue, profitability and cash flows. +There can be no assurance that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Future cash flows are subject to a number of variables, and are highly dependent on the drilling, completion, and production activity by our customers, which in turn is highly dependent on oil and natural gas prices. Depending upon market conditions and other factors, we may issue equity and debt securities or take other actions necessary to fund our business, strategy or meet our future long-term liquidity requirements. +Cash, Restricted Cash and Cash Flows +The following table sets forth our net cash provided by (used in) operating, investing and financing activities during the years ended December 31, 2022 and 2021, respectively. +Year Ended December 31, +($ in thousands) +2022 2021 +Net cash provided by operating activities +$ 300,429 $ 154,714 +Net cash used in investing activities +$ (349,745) $ (104,292) +Net cash provided by (used in) financing activities +$ 26,260 $ (7,276) +Operating Activities +Net cash provided by operating activities was $300.4 million for the year ended December 31, 2022, as compared to $154.7 million for the year ended December 31, 2021. The net increase of $145.7 million was primarily due to the improvement in our net income, resulting from the significant increase in our existing and new customers' activity levels, resulting in higher demand for completion services and improved pricing. The net increase in cash provided by operating activities was also impacted by timing of our receivable collections from our customers and payment to our vendors. +Investing Activities +Net cash used in investing activities increased to $349.7 million for the year ended December 31, 2022, from $104.3 million for the year ended December 31, 2021. The net increase in our cash used in investing activities was primarily attributable to our investment in Tier IV DGB equipment (conversion of Tier II equipment to Tier IV DGB equipment and new Tier IV DGB equipment). The remaining cash payments in 2022 were incurred in connection with our maintenance capital expenditures, acquisition of our wireline business and other growth initiatives. +Financing Activities +Net cash provided by financing activities was $26.3 million for the year ended December 31, 2022, compared to net cash used of $7.3 million for the year ended December 31, 2021. The net increase in cash flow from financing activities during the year ended December 31, 2022 was primarily driven by borrowings of $30.0 million under our ABL Credit Facility during 2022 compared to no borrowings during the year ended December 31, 2021. During the year ended December 31, 2022, there was no cash inflow or outflow in connection with insurance financing, whereas during the year ended December 31, 2021 we had net cash outflow of approximately $5.5 million. +Credit Facility and Other Financing Arrangements +Our amended and revolving credit facility, as amended in 2018, had a total borrowing capacity of $300.0 million (subject to the borrowing base limit), with a maturity date of December 19, 2023. The revolving credit facility had a borrowing base of 85% of monthly eligible accounts receivable less customary reserves, as redetermined monthly. The revolving credit facility included a springing fixed charge coverage ratio to apply when excess availability was less than the greater of (i) 10% of the lesser of the facility size or the borrowing base or (ii) $22.5 million. Borrowings under the revolving credit facility accrued interest based on a three-tier pricing grid tied to availability, and we had the option to elect for loans to be based on either LIBOR or base rate, plus the applicable margin, which ranged from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans, with a LIBOR floor of zero. +Effective April 13, 2022, the Company entered into an amendment and restatement of its revolving credit facility (as a mended and restated, the "ABL Credit Facility"). The ABL Credit Facility decreased the borrowing capacity to $150.0 million (subject to the Borrowing Base (as defined below) limit), with the maturity date extended to April 13, 2027. The ABL Credit Facility has a borrowing base of 85% to 90%, depending on the credit ratings of our accounts receivable counterparties, of monthly eligible accounts receivable less customary reserves (the "Borrowing Base"), as redetermined monthly. The Borrowing Base as of December 31, 2022, was approximately $102.3 million. The ABL Credit Facility includes a springing fixed charge coverage ratio to apply when excess availability is less than the greater of (i) 10% of the lesser of the facility size or the Borrowing Base or (ii) $10.0 million. Under this facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. +Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either the Secured Overnight Financing Rate ("SOFR") or the base rate, plus the applicable margin, which ranges from 1.50% to 2.00% for SOFR loans and 0.50% to 1.00% for base rate loans. +The loan origination costs relating to the ABL Credit Facility are classified as an asset in our balance sheet. As of December 31, 2022, we had borrowings of $30.0 million outstanding under our ABL Credit Facility. +Off Balance Sheet Arrangements +We had no material off balance sheet arrangements as of December 31, 2022. +Capital Requirements, Future Sources and Use of Cash +Capital expenditures incurred were $365.3 million during the year ended December 31, 2022, as compared to $165.2 million during the year ended December 31, 2021. During the year ended December 31, 2022, we increased our capital expenditures to support the increase in our existing and new customers’ activity levels and the transition of our hydraulic fracturing equipment +to lower emissions equipment. The significant portion of our total capital expenditures in 2022 comprised of maintenance capital expenditures and conversion of our hydraulic fracturing equipment to lower emissions equipment. +Our future material use of cash will be to fund our capital expenditures. Capital expenditures for 2023 are projected to be primarily related to capital expenditures to extend the useful life of our existing completion services assets, costs to convert some existing equipment to lower emissions equipment, strategic purchases and other ancillary equipment purchases, subject to market conditions and customer demand. Our future capital expenditures depend on our projected operational activity, emission requirements and planned conversions to lower emissions equipment, among other factors, which could vary significantly throughout the year. Based on our current plan and projected activity levels for 2023, we expect our capital expenditures to range betwe en $250 million to $300 million. We could incur significant additional capital expenditures if our projected activity levels increase during the course of the year, inflation and supply chain tightness continues to adversely impact on our operations or we invest in new or different lower emissions equipment. The Company will continue to evaluate the emissions profile of its equipment over the coming years and may, depending on market conditions, convert or retire additional conventional Tier II equipment in favor of lower emissions equipment. The Company’s decisions regarding the retirement or conversion of equipment or the addition of lower emissions equipment will be subject to a number of factors, including (among other factors) the availability of equipment, including parts and major components, supply chain disruptions, prevailing and expected commodity prices, customer demand and requirements and the Company’s evaluation of projected returns on conversion or other capital expenditures. Depending on the impacts of these factors, the Company may decide to retain conventional equipment for a longer period of time or accelerate the retirement, replacement or conversion of that equipment. +We anticipate our capital expenditures will be funded by existing cash, cash flows from operations, and if needed, borrowings under our ABL Credit Facility. Our cash flows from operations will be generated from services we provide to our customers. +Contractual Obligations +The following table presents our contractual obligations and other commitments as of December 31, 2022: +($ in thousands) +Period +Total 1 year or less More than 1 year +ABL Credit Facility (1) +$ 30,000 $ — $ 30,000 +Operating leases (2)(3) +105,398 16,101 89,297 +Sand commitment (4) +31,680 31,680 — +Equipment purchase commitments (5) +59,862 59,862 — +Total $ 226,940 $ 107,643 $ 119,297 +____________________ +(1) Exclusive of future commitment fees, amortization of deferred financing costs, interest expense or other fees on our ABL Credit Facility because obligations thereunder are floating rate instruments and we cannot determine with accuracy the timing of future loan advances, repayments of future interest rates to be changed. However, assuming a weighted average interest rate of 5.43% , and that our ABL Credit Facility debt balance remains the same, our estimated annual interest payment will be $1.6 million. +(2) Operating leases exclude short-term leases and other commitments (see Note 16. Leases and Note 17. Commitments and Contingencies in the financial statements for additional disclosures). +(3) Includes our leases for electric fracturing equipment (240,000 HHP), and power equipment to support electric equipment (70 MW). This equipment is expected to be delivered in 2023. +(4) Relates to a take-or-pay sand commitment with one of our sand vendors. +(5) Relates to commitments to purchase Tier IV DGB equipment. +We enter into other purchase agreements with Sand suppliers to secure supply of sand in the normal course of our business. The agreements with the Sand suppliers require that we purchase minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the mi nimum volumes or a fixed price per ton of unpurchased volumes. Our current agreements with Sand suppliers expire at different times prior to December 31, 2025 . Our agreed upon sand requirements or minimum volumes are based on certain future events such as our customer demand, which cannot be reasonably estimated. If the activity level of our customers declines and the future demand for our services is materially and adversely affected, we may be required to pay for more sand from one of our Sand suppliers than we need in the performance of our services, regardless of whether we take physical delivery of such sand. In such an event, we may be required to pay shortfall fees or other penalties under the purchase agreement, which could have a material adverse effect on our business, financial condition, or results of operations. +In January 2023, we entered into an equipment lease (the " Power Equipment Lease " ) for certain power generation equipment. The Power Equipment Lease has not yet commenced. We currently do not control the assets under the lease and have not taken possession of the assets. Therefore, the Company has not accounted for the right of use and lease obligation in its balance sheet as of December 31, 2022. The total estimated contractual commitment in connection with the Power Equipment Lease is approximately $59.6 million. +Recent Accounting Pronouncements +Disclosure concerning recently issued accounting standards is incorporated by reference to " Note 2- Significant Accounting Policies " of our Consolidated Financial Statements contained in this Annual Report. +Critical Accounting Policies and Estimates +The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally acceptable in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported revenues and expenses during the years. We evaluate these estimates and assumptions on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates. +Listed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved, and that we believe are critical to the understanding of our operations. +Property and Equipment +Our property and equipment are recorded at cost, less accumulated depreciation. +Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in earnings. +We primarily retired certain components of equipment such as fluid ends and power ends, rather than the entire pieces of equipment, and the associated loss is recorded in our statement of operations as part of net loss on disposal of assets, which was $102.1 million , $64.6 million and $58.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. +The estimated useful lives and salvage values of property and equipment is subject to key assumptions such as maintenance, utilization and job variation. Unanticipated future changes in these assumptions could negatively or positively impact our net income (loss). A 10% change in the useful lives of our property and equipment would have resulted in approximately $12.7 million impact on pre-tax loss during the year ended December 31, 2022. Depreciation of property and equipment is provided on the straight‑line method over estimated useful lives as shown in the table below. +Land +Indefinite +Buildings and property improvements +5 - 30 years +Vehicles +1 ‑ 5 years +Equipment +1 ‑ 22 years +Leasehold improvements +5 ‑ 20 years +44 +Impairment of Long-Lived Assets +In accordance with the Financial Accounting Standards Board ( " FASB " ) Accounting Standards Codification ( " ASC " ) 360 regarding Accounting for the Impairment or Disposal of Long‑Lived Assets , we review the long‑lived assets including intangible assets to be held and used whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future undiscounted cash flows attributable to the assets is less than the carrying amount of such assets. In this circumstance, we recognize an impairment loss for the amount by which the carrying amount of the assets exceeds the estimated fair value of the asset. Our cash flow forecasts require us to make certain judgments regarding long‑term forecasts of future revenue and costs and cash flows related to the assets subject to review. The significant assumption in our cash flow forecasts is our estimated equipment utilization and profitability. The significant assumption is uncertain in that it is driven by future demand for our services and utilization, which could be impacted by crude oil market prices, future market conditions and technological advancements. Our fair value estimates for certain long‑lived assets require us to use significant other observable inputs, including assumptions related to market based on recent auction sales or selling prices of comparable equipment. The estimates of fair value are also subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future. +If the crude oil market declines or the demand for our services does n ot recover, and if our equipment remains idle or under‑utilized, the estimated fair value of such equipment may decline, which could result in future impairment charges. Though the impacts of variations in any of these factors can have compounding or off‑setting impacts, a 10% decline in the estimated future cash flows of our existing asset groups will not indicate an impairment. +In 2022, we recorded impairment expense of $57.5 million on our DuraStim® equipment because it remained idled and there were no near term plans to deploy the DuraStim® equipment to the customers’ wellsite. +Goodwill and Other Intangible Assets +Goodwill is the excess of the consideration transferred over the fair value of the tangible and identifiable intangible assets and liabilities recognized. Goodwill is not amortized. We perform an annual impairment test of goodwill and intangible assets as of December 31, or more frequently if circumstances indicate that impairment may exist. +In connection with the Silvertip Acquisition, we added $23.6 million of goodwill during the year ended December 31, 2022. There was no write-off of goodwill during the year ended December 31, 2022. We performed our annual goodwill impairment test in accordance with ASC 350, Intangibles—Goodwill and Other , on December 31, 2022, at which time, we determined that the fair value of our wireline reporting unit was substantially in excess of its carrying value. The wireline operating segment is the only segment which has goodwill at December 31, 2022. The quantitative impairment test we perform for goodwill utilizes certain assumptions, including forecasted equipment utilization, pricing and cost assumptions. Our discounted cash flow analysis includes significant assumptions regarding discount rates, utilization, expected profitability margin, forecasted maintenance capital expenditures, and the timing of expected cash flow. As such, our goodwill analysis incorporates inherent uncertainties that are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecast. The carrying value of goodwill in our balance sheet as of December 31, 2022 was $23.6 million. +Intangible assets consist of customer relationships and trademark/trade name. In connection with the Silvertip Acquisition, we added intangible assets consisting of $46.5 million of customer relationships and $10.8 million of trademark/trade name. Intangible assets are amortized on a straight‑line basis with an estimated useful life of ten years. Our estimated useful life could be sensitive to changes in market conditions and management’s judgment, and are likely to change in the future if certain events occur. Presently, there are no events or circumstances that will cause us to believe that our estimated useful life for our intangible assets are likely to change. +Income Taxes +Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. +45 +We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and the results of recent operations. If we determine that we would not be able to fully realize our deferred tax assets in the future in excess of their net recorded amount, we would record a valuation allowance, which would increase our provision for income taxes. In determining our need for a valuation allowance as of December 31, 2022, we have considered and made judgments and estimates regarding estimated future taxable income. These estimates and judgments include some degree of uncertainty and changes in these estimates and assumptions could require us to record additional valuation allowances for our deferred tax assets and the ultimate realization of tax assets depends on the generation of sufficient taxable income. +Our methodology for recording income taxes requires a significant amount of judgment in the use of assumptions and estimates. Additionally, we forecast certain tax elements, such as future taxable income, as well as evaluate the feasibility of implementing tax planning strategies. Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results. Unforeseen events may significantly impact these variables, and changes to these variables could have a material impact on our income tax accounts. The final determination of our income tax liabilities involves the interpretation of local tax laws and related authorities in each jurisdiction. Changes in the operating environments, including changes in tax law, could impact the determination of our income tax liabilities for a tax year. +46 +Item 7A. Quantitative and Qualitative Disclosure of Market Risks +Foreign Currency Exchange Risk +Our operations are currently conducted entirely within the U.S; therefore, we had no significant exposure to foreign currency exchange risk in 2022. +Commodity Price Risk +Our materials and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our completion services such as proppants, perforating guns, chemicals, guar, trucking and fluid supplies. Our fuel costs consist primarily of diesel and natural gas used by our various trucks and other motorized equipment. The prices for fuel and materials in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Historically, we have generally been able to pass along a significant portion of our commodity price risk to our customers; however, we may be unable to do so in the future. We do not engage in commodity price hedging activities. +Interest Rate Risk +We may be subject to interest rate risk on variable rate borrowings under our ABL Credit Facility. We do not currently engage in interest rate derivatives to hedge our interest rate risk. The impact of a 1% increase in interest rates on our variable rate debt would have resulted in an increase in interest expense and corresponding decrease/(increase) in pre‑tax income/(loss) of approximately $0.1 million , $0 and $0.4 million , for the years ended December 31, 2022, 2021 and 2020, respectively. +Credit Risk +Financial instruments that potentially subject us to concentrations of credit risk are trade receivables. We extend credit to customers and other parties in the normal course of business. We have established various procedures to manage our credit exposure, including maintaining an allowance for doubtful accounts. +47 +Item 8. Financial Statements and Supplementary Data. +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of +ProPetro Holding Corp. and Subsidiaries +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of ProPetro Holding Corp. and Subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively, referred to as, the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. +Basis for Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. +Impairment of Long-Lived Assets — Refer to Note 2 and 5 to the consolidated financial statements +Critical Audit Matter Description +The Company reviews the carrying value of long-lived assets such as property and equipment and other assets, whenever events or circumstances indicate that the carrying value of long-lived assets may not be recoverable. The Company’s evaluation of the recoverability of assets involves the comparison of undiscounted future cash flows attributable to the asset over the Company’s estimated carrying amount of such asset. As a result of a triggering event for the quarter ended June 30, 2022, management deemed it necessary to assess the recoverability of its DuraStim® hydraulic fracturing equipment. The Company determined that the DuraStim® hydraulic fracturing equipment was impaired and an impairment expense of approximately $57.5 million was recorded for the three months ended June 30, 2022. The estimated fair value of the DuraStim® hydraulic fracturing equipment was determined using the cost approach and significant unobservable inputs, including cost Index curve selection, +48 +trend factor calculation, replacement cost, normal useful life, functional obsolescence selections, and minimum percent good, among others. +We identified the impairment of DuraStim® hydraulic fracturing equipment as a critical audit matter because of the significant estimates and assumptions management makes to evaluate the recoverability of these assets. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s assumptions related to cost index curve selection, trend factor calculation, replacement cost, normal useful life, functional obsolescence selection, and minimum percent good. +How the Critical Audit Matter Was Addressed in the Audit +Our audit procedures related to the fair value of DuraStim® hydraulic fracturing equipment included the following, among others: +• We tested the operating effectiveness of controls over management’s evaluation of the recoverability of long-lived assets. +• With the assistance of our fair value specialists: +– We evaluated the reasonableness of the valuation analysis, including estimates of cost index curve selection, trend factor calculation, replacement cost, normal useful life, functional obsolescence selections, and minimum percent good by (1) evaluating the source information and assumptions used by management, (2) testing the mathematical accuracy of the valuation analysis, and (3) developing independent estimates and comparing our estimates to those used by management. +• We considered any events occurring after the impairment date that may indicate a different valuation for the assets impaired. +• We considered events and circumstances and performed procedures to ensure the accuracy of the triggering event date. +Acquisition — Silvertip Completion Services Operating, LLC — Fair value of assets acquired and liabilities assumed - Refer to Notes 1, 2, and 4 to the financial statements +Critical Audit Matter Description +The Company completed the acquisition of Silvertip Completion Operating Services, LLC ("Silvertip") for a total purchase consideration of $148.1 million on November 1, 2022 (the "Acquisition"). The Company accounted for the Acquisition using the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective estimated fair values. The largest asset classes acquired include property and equipment consisting mainly of pumpdown pumps, pumpdown wireline trucks, vehicles, pressure control and wireline equipment, and intangible assets consisting of customer relationships and trademark/trade name. The method for determining fair value varied depending on the type of the asset or liability and involved management making significant estimates related to assumptions such as future cash flows, discount rate, attrition rate, royalty rate, cost index curve selection, trend factor calculation, replacement cost, normal useful life, and minimum percent good. +We identified the valuation of property and equipment and intangible assets arising out of the Acquisition as a critical audit matter because of the estimates and assumptions management makes to determine the fair value of these assets. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s assumptions related to future cash flows, discount rate, attrition rate, royalty rate, cost index curve selection, trend factor calculation, replacement cost, normal useful life, and minimum percent good. +How the Critical Audit Matter Was Addressed in the Audit +Our audit procedures related to the fair value of property and equipment and intangible assets acquired as part of the Acquisition included the following, among others: +• We tested the effectiveness of controls over business combinations. +• With the assistance of our fair value specialists: +49 +– For property and equipment, we evaluated the reasonableness of the valuation methodology and significant assumptions including estimates of cost index curve selection, trend factor calculation, replacement cost, normal useful life, and minimum percent good by (1) evaluating the source information and assumptions used by management, (2) testing the mathematical accuracy of the calculation, and (3) comparing our estimates to those used by management. +– For intangible assets, we evaluated the reasonableness of the valuation methodology and significant assumptions including discount rate, attrition rate, and royalty rate by (1) evaluating the source information and assumptions used by management, (2) testing the mathematical accuracy of the calculation, and (3) comparing our estimates to those used by management. +– For intangible assets, we evaluated whether the estimated future cash flows used in the income approach were consistent with projections used by the Company, as well as evidence obtained in other areas of the audit +• We considered any events or transactions occurring after the Acquisition date that may indicate a different valuation for the assets acquired and liabilities assumed. +/s/ DELOITTE & TOUCHE LLP +Houston, Texas +February 23, 2023 +We have served as the Company's auditor since 2013. +50 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of +ProPetro Holding Corp. and Subsidiaries +Opinion on Internal Control over Financial Reporting +We have audited the internal control over financial reporting of ProPetro Holding Corp. and Subsidiaries (the "Company") as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated February 23, 2023, expressed an unqualified opinion on those consolidated financial statements. +As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Silvertip Completion Services Operating, LLC, which was acquired on November 1, 2022 and whose financial statements constitute 13.0% and 2.4% of total assets and revenue, respectively of the consolidated financial statement amounts as of and for the year ended December 31, 2022. Accordingly, our audit did not include the internal control over financial reporting at Silvertip Completion Services Operating, LLC. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ DELOITTE & TOUCHE LLP +Houston, Texas +February 23, 2023 +51 +PROPETRO HOLDING CORP. +CONSOLIDATED BALANCE SHEETS +AS OF DECEMBER 31, 2022 AND 2021 +(In thousands, except share data) +2022 2021 +ASSETS +CURRENT ASSETS: +Cash, cash equivalents and restricted cash $ 88,862 $ 111,918 +Accounts receivable - net of allowance for credit losses of $ 419 and $ 217 , respectively +215,925 128,148 +Inventories +5,034 3,949 +Prepaid expenses +8,643 6,752 +Short-term investment, net 10,283 — +Other current assets +38 297 +Total current assets +328,785 251,064 +PROPERTY AND EQUIPMENT - Net of accumulated depreciation +922,735 808,494 +OPERATING LEASE RIGHT-OF-USE ASSETS +3,147 409 +OTHER NONCURRENT ASSETS: +Goodwill 23,624 — +Intangible assets - net of amortization 56,345 — +Other noncurrent assets +1,150 1,269 +Total other noncurrent assets +81,119 1,269 +TOTAL ASSETS +$ 1,335,786 $ 1,061,236 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES: +Accounts payable +$ 234,299 $ 152,649 +Accrued and other current liabilities +49,027 20,767 +Operating lease liabilities +854 369 +Total current liabilities +284,180 173,785 +DEFERRED INCOME TAXES +65,265 61,052 +LONG-TERM DEBT +30,000 — +NONCURRENT OPERATING LEASE LIABILITIES +2,308 97 +Total liabilities +381,753 234,934 +COMMITMENTS AND CONTINGENCIES (Note 17) +SHAREHOLDERS’ EQUITY: +Preferred stock, $ 0.001 par value, 30,000,000 shares authorized, none issued, respectively +— — +Common stock, $ 0.001 par value, 200,000,000 shares authorized, 114,515,008 and 103,437,177 shares issued, respectively +114 103 +Additional paid-in capital +970,519 844,829 +Accumulated deficit +( 16,600 ) ( 18,630 ) +Total shareholders’ equity +954,033 826,302 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ 1,335,786 $ 1,061,236 +See notes to consolidated financial statements. 52 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF OPERATIONS +FOR THE YEARS ENDED DECEMBER 31, 2022 , 2021 AND 2020 +(In thousands, except per share data) +2022 2021 2020 +REVENUE - Service revenue +$ 1,279,701 $ 874,514 $ 789,232 +COSTS AND EXPENSES: +Cost of services (exclusive of depreciation and amortization) +882,820 662,266 584,279 +General and administrative (inclusive of stock‑based compensation) 111,760 82,921 86,768 +Depreciation and amortization +128,108 133,377 153,290 +Impairment expense +57,454 — 38,002 +Loss on disposal of assets +102,150 64,646 58,136 +Total costs and expenses +1,282,292 943,210 920,475 +OPERATING INCOME (LOSS) +( 2,591 ) ( 68,696 ) ( 131,243 ) +OTHER INCOME (EXPENSE): +Interest expense +( 1,605 ) ( 614 ) ( 2,383 ) +Other income (expense) +11,582 873 ( 874 ) +Total other income (expense) +9,977 259 ( 3,257 ) +INCOME (LOSS) BEFORE INCOME TAXES 7,386 ( 68,437 ) ( 134,500 ) +INCOME TAX (EXPENSE) BENEFIT +( 5,356 ) 14,252 27,480 +NET INCOME (LOSS) +$ 2,030 $ ( 54,185 ) $ ( 107,020 ) +NET INCOME (LOSS) PER COMMON SHARE: +Basic +$ 0.02 $ ( 0.53 ) $ ( 1.06 ) +Diluted +$ 0.02 $ ( 0.53 ) $ ( 1.06 ) +WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: +Basic +105,868 102,655 100,829 +Diluted +106,939 102,655 100,829 +See notes to consolidated financial statements. 53 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +FOR THE YEARS ENDED DECEMBER 31, 2022 , 2021 AND 2020 +(In thousands) +Common Stock +Shares Amount Additional +Paid‑In +Capital Retained Earnings (Accumulated +Deficit) Total +BALANCE - January 1, 2020 100,624 $ 101 $ 826,629 $ 142,575 $ 969,305 +Stock‑based compensation cost — — 9,100 — 9,100 +Issuance of equity award—net 289 — — — — +Tax withholdings paid for net settlement of equity awards — — ( 614 ) — ( 614 ) +Net loss — — — ( 107,020 ) ( 107,020 ) +BALANCE - December 31, 2020 100,913 $ 101 $ 835,115 $ 35,555 $ 870,771 +Stock‑based compensation cost — — 11,519 — 11,519 +Issuance of equity awards—net 2,524 2 4,015 — 4,017 +Tax withholdings paid for net settlement of equity awards — — ( 5,820 ) — ( 5,820 ) +Net loss — — — ( 54,185 ) ( 54,185 ) +BALANCE - December 31, 2021 103,437 $ 103 $ 844,829 $ ( 18,630 ) $ 826,302 +Stock‑based compensation cost — — 21,881 — 21,881 +Issuance of equity—net 11,078 11 107,688 — 107,699 +Tax withholdings paid for net settlement of equity awards — — ( 3,879 ) — ( 3,879 ) +Net income — — — 2,030 2,030 +BALANCE - December 31, 2022 114,515 $ 114 $ 970,519 $ ( 16,600 ) $ 954,033 +See notes to consolidated financial statements. 54 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF CASH FLOWS +FOR THE YEARS ENDED DECEMBER 31, 2022 , 2021 AND 2020 +(In thousands) +2022 2021 2020 +CASH FLOWS FROM OPERATING ACTIVITIES: +Net income (loss) $ 2,030 $ ( 54,185 ) $ ( 107,020 ) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depreciation and amortization +128,108 133,377 153,290 +Impairment expense 57,454 — 38,002 +Deferred income tax expense (benefit) 4,213 ( 14,288 ) ( 27,701 ) +Amortization of deferred debt issuance costs +785 542 543 +Stock‑based compensation +21,881 11,519 9,100 +Provision for credit losses 202 282 448 +Loss on disposal of assets +102,150 64,646 58,136 +Unrealized loss on short-term investment 1,570 — — +Non-cash income from settlement with equipment manufacturer ( 2,668 ) — — +Changes in operating assets and liabilities: +Accounts receivable +( 66,900 ) ( 43,742 ) 127,491 +Other current assets +354 310 1,978 +Inventories +124 ( 1,220 ) ( 293 ) +Prepaid expenses +743 4,463 ( 232 ) +Accounts payable +27,428 51,764 ( 95,697 ) +Accrued and other current liabilities 22,602 1,246 ( 18,527 ) +Accrued interest +353 — ( 394 ) +Net cash provided by operating activities +300,429 154,714 139,124 +CASH FLOWS FROM INVESTING ACTIVITIES: +Capital expenditures +( 319,683 ) ( 143,523 ) ( 100,603 ) +Silvertip Acquisition, net of cash acquired ( 38,639 ) — — +Proceeds from sale of assets +8,577 39,231 6,386 +Net cash used in investing activities +( 349,745 ) ( 104,292 ) ( 94,217 ) +CASH FLOWS FROM FINANCING ACTIVITIES: +Proceeds from borrowings +30,000 — — +Repayments of borrowings +— — ( 130,000 ) +Payment of finance lease obligation +— — ( 30 ) +Proceeds from insurance financing +— — 6,821 +Repayments of insurance financing +— ( 5,473 ) ( 1,348 ) +Payment of debt issuance costs +( 824 ) — — +Proceeds from exercise of equity awards +963 4,017 — +Tax withholdings paid for net settlement of equity awards ( 3,879 ) ( 5,820 ) ( 614 ) +Net cash provided by (used in) financing activities +26,260 ( 7,276 ) ( 125,171 ) +NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH ( 23,056 ) 43,146 ( 80,264 ) +CASH, CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of year +111,918 68,772 149,036 +CASH, CASH EQUIVALENTS AND RESTRICTED CASH — End of year +$ 88,862 $ 111,918 $ 68,772 +See notes to consolidated financial statements. 55 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) +FOR THE YEARS ENDED DECEMBER 31, 2022 , 2021 AND 2020 +(In thousands) +The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the consolidated balance sheets: +2022 2021 2020 +Summary of cash, cash equivalents and restricted cash +Cash and cash equivalents $ 78,862 $ 111,918 $ 68,772 +Restricted cash 10,000 — — +Total cash, cash equivalents and restricted cash — End of year $ 88,862 $ 111,918 $ 68,772 +See notes to consolidated financial statements. 56 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. ORGANIZATION AND HISTORY +ProPetro Holding Corp. ("Holding"), a Texas corporation was formed on April 14, 2007, and it is a holding company for its wholly owned subsidiaries ProPetro Services, Inc., a Texas corporation ("Services"), and Silvertip Completion Services Operating, LLC, a Delaware limited liability company ("Silvertip"). Services and Silvertip together offer hydraulic fracturing, wireline, cementing and other complementary services to oil and gas producers, located primarily in Texas, New Mexico and Utah. Holding was converted and incorporated as a Delaware Corporation on March 8, 2017. +On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip, which provides wireline perforation and ancillary services solely in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $ 106.7 million, $ 30.0 million of cash, the payoff of $ 7.2 million of assumed debt, and the payment of certain other closing and transaction costs ("the Silvertip Acquisition"). +Unless otherwise indicated, references in these notes to consolidated financial statements to "ProPetro Holding Corp.," "the Company," "we," "our," "us" or like terms refer to ProPetro Holding Corp., Servi ces, and Silvertip. +On December 31, 2018, we consummated the purchase of certain pressure pumping and related assets of Pioneer Natural Resources USA, Inc. ( " Pioneer " ) and Pioneer Pumping Services, LLC (the " Pioneer Pressure Pumping Acquisition " ). The pressure pumping assets acquired were used to provide integrated well completion services in the Permian Basin to Pioneer’s completion and production operations. The acquisition cost of the assets was comprised of $ 110.0 million of cash and 16.6 million shares of our common stock. The pressure pumping assets acquired included hydraulic fracturing pumps of 510,000 hydraulic horsepower ( " HHP " ), four coiled tubing units and the associated equipment maintenance facility. In connection with the acquisition, we became a long-term service provider to Pioneer under a pressure pumping services agreement (the " Pioneer Services Agreement " ), providing pressure pumping and related services for a term of up to 10 years, with eight committed fleets; provided, with Pioneer having the right to terminate the Pioneer Services Agreement, in whole or in part, effective as of December 31 of each of the calendar years of 2022, 2024 and 2026 and the right to increase the number of committed fleets prior to December 31, 2022 . Under the Pioneer Services Agreement, the Company was entitled to receive compensation if Pioneer were to idle committed fleets ( " idle fees " ); however, we were first required to use all economically reasonable effort to deploy the idled fleets to another customer. This agreement was superseded by the agreement below. +On March 31, 2022, we entered into an amended and restated A&R Pressure Pumping Services Agreement in place of the Pioneer Services Agreement. The A&R Pressure Pumping Services Agreement, which was effective from January 1, 2022 to December 31, 2022, reduced the number of committed fleets from eight fleets to six fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, and replaced the idle fees arrangement with equipment reservation fees (the "Reservation fees"). As part of the Reservation fees arrangement, the Company was entitled to receive compensation for all eligible committed fleets that were made available to Pioneer at the beginning of every quarter in 2022 through the term of the A&R Pressure Pumping Services Agreement. This agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and the Fleet Two Agreement described below. +On October 31, 2022, we entered into two pressure pumping services agreements with Pioneer, pursuant to which we will provide hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and will terminate on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was originally planned to terminate on the one year anniversary of the date on which the fleet dedicated thereunder converted from a Tier II diesel simultaneous hydraulic fracturing ("Simul-Frac") fleet to a Tier IV dual fuel zipper fleet, which was expected to occur in May 2023. In February 2023, Pioneer provided the Company notice (i) stating that Pioneer intended to release Fleet Two effective upon the completion of operations on the pad where the performance of Services (as defined in the Fleet Two Agreement) is in progress on May 12, 2023 (the " Release Date " ) and (ii) requesting that the Company agree to the termination of the Fleet Two Agreement as of the Release Date. The Company agreed with such request, and, as a result, the Fleet Two Agreement will be terminated as of the Release Date. +57 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES +A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements are as follows: +Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Holding and its wholly owned subsidiaries, Services and Silvertip. All intercompany accounts and transactions have been eliminated in consolidation. +Basis of Presentation — The accompanying consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") and in conformity with accounting principles generally accepted in the United States of America ("GAAP"). +Use of Estimates — Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Such estimates include, but are not limited to, allowance for credit losses, useful lives for depreciation of property and equipment, estimates of fair value of property and equipment, estimates related to fair value of reporting units for purposes of assessing goodwill, intangible assets, estimates related to deferred tax assets and liabilities, including any related valuation allowances, and estimates of fair value of stock‑based compensation. Actual results could differ from those estimates. +Revenue Recognition — The Company’s services are sold based upon contracts with customers. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The following is a description of the principal activities, aggregated into our one reportable segme nt—"Completion Services," from which the Company generates its revenues and "All Other" category. +Completion Services — Completion services consists of downhole pumping services, which includes hy draulic fracturing, cementin g and wireline operations. +Hydraulic fracturi ng is an oil well completion technique, which is part of the overall well completions process. It is a well-stimulation technique intended to optimize hydrocarbon flow paths during the completion phase of shale w ellbores. The process involves the injection of water, sand and chemicals under high pressure into shale formations. Our hydraulic fracturing contracts with our customers have one performance obligation, which is the contracted total stages, satisfied over time. We recognize revenue over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed faithfully depicts how our hydraulic fracturing services are transferred to our customers over time. In addition, certain of our hydraulic fracturing equipment may be entitled to reservation or idle fee charges if a customer were to reserve or idle committed hydraulic fracturing equipment. The Company recognizes revenue related to reservation or idle fee charges on a daily basis as the performance obligations are met. +Acidizing, which is part of our hydraulic fracturing operating segment, involves a well-stimulation technique where acid or similar chemicals are injected under pressure into formations to form or expand fissures. Our acidizing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service or sale of acid or chemical when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize acidizing revenue at a point-in-time, upon completion of the performance obligation. +Our cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Our cementing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize cementing revenue at a point-in-time, upon completion of the performance obligation. +Wireline services (including pumpdown) are oil well completion techniques, which are part of the well completions services. Our wireline services utilize equipment with a drum of wireline to deploy perforating guns in the well to perforate the casing, cement, and formation. Once the well is perforated, the well can be fractured. Pumpdown utilizes pressure pumping equipment to pump water into the well to deploy perforating guns attached to wireline through the lateral section of a well. Our wireline contracts with our customers have one performance obligation, which is the +58 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +contracted total stages, satisfied over time. We recognize revenue over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed faithfully depicts how our wireline services are transferred to our customers over time. In addition, certain of our wireline equipment is entitled to daily equipment charges while the equipment is on the customer’s locations. The Company recognizes revenue related daily equipment charges on a daily basis as the performance obligations are met. +The transaction price for each performance obligation for all our completion services is fixed per our contracts with our customers. +All Other — All Other consists o f other complementary services such as coiled tubing, drilling and flowback operations, which are downhole well completion/remedial services. The performance obligation for these services had a fixed transaction price which was satisfied at a point-in-time upon completion of the service when control was transferred to the customer. Accordingly, we recognized revenue at a point-in-time, upon completion of the service and transfer of control to the customer. +Cash, Cash Equivalents and Restricted Cash — All highly liquid investments with an original maturity of three months or less. Our restricted cash relates to cash received from a customer in connection with our contract with the customer to provide electric hydraulic fracturing services. The restricted cash advance from the customer will be credited towards the customer’s invoice as our revenue performance obligations are met over the contract period. +Accounts Receivable — Accounts receivables are stated at the amount billed and billable to customers. At December 31, 2022 and 2021 accrued revenue (unbilled receivable) included as part of our accounts receivable was $ 51.9 million and $ 19.4 million, respectively. At December 31, 2022, the transaction price allocated to the remaining performance obligation for our partially completed hydraulic fracturing and wireline operations was $ 38.7 million, which is expected to be completed and recognized within one month following the current period balance sheet date, in our Completion Services reportable segment. At December 31, 2021 the transaction price allocated to the remaining performance obligation for our then partially completed hydraulic fracturing and wireline operations was $ 16.8 million , which was recorded as part of our Completion Services segment revenue for the year ended December 31, 2022. +As of December 31, 2022, the Company had $ 0.4 million allowance for credit losses. Our allowance for credit losses is based on the evaluation of both our historic collection experience and economic outlook for the oil and gas industry. We evaluated the historic loss experience on our accounts receivable and also considered separately customers with receivable balances that may be negatively impacted by current or future economic developments and market conditions. While the Company has not experienced significant credit losses in the past and has not yet seen material changes to the payment patterns of its customers, the Company cannot predict with any certainty the degree to which the impacts of depressed economic activities, including the potential impact of periodically adjusted borrowing base limits, level of hedged production, or unforeseen well shut-downs may affect the ability of its customers to timely pay receivables when due. Accordingly, in future periods, the Company may revise its estimates of expected credit losses. +The table below shows a summary of allowance for credit losses during the year ended December 31, 2022: +($ in thousands) +2022 2021 2020 +Balance - January 1, 2022 $ 217 $ 1,497 $ 1,049 +Provision for credit losses during the period 202 282 448 +Write-off during the period — ( 1,562 ) — +Balance - December 31, 2022 $ 419 $ 217 $ 1,497 +Inventories — Inventories, which consists only of raw materials, are stated at lower of average cost and net realizable value. +Property and Equipment — The Company’s property and equipment are recorded at cost, less accumulated depreciation. +Depreciation — Depreciation of property and equipment is provided on the straight‑line method over the following estimated useful lives: +59 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +Land +Indefinite +Buildings and property improvements +5 - 30 years +Vehicles +1 ‑ 5 years +Equipment +1 ‑ 22 years +Leasehold improvements +5 ‑ 20 years +Upon sale or retirement of property and equipment, including certain major components of our completion services equipment that are replaced, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in the statement of operations. A significant portion of our loss on disposal of assets relates to replacement of major components like fluid and power ends. The Company recorded a loss on disposal of assets of $ 102.1 million, $ 64.6 million and $ 58.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. +Impairment of Long‑Lived Assets — In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 360, Accounting for the Impairment or Disposal of Long‑Lived Assets , the Company reviews its long‑lived assets to be held and used whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. +An impairment loss is indicated if the sum of the expected future undiscounted cash flows attributable to the asset group is less than the carrying amount of such asset group. In this circumstance, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. D uring the year ended December 31, 2022, w e recorded impairment expense of approximately $ 57.5 million in connection with our DuraStim® hydraulic fracturing equipment which remained idle because the pumps did not meet the manufacturer's specifications or our expectations. No impairment expense was recorded during the year ended December 31, 2021. Property and equipment impairment loss of $ 27.5 million and $ 1.1 million was recorded during the year ended December 31, 2020 relating to our completions and drilling assets, respectively. +The Company accounts for long‑lived assets to be disposed of at the lower of their carrying amount or fair value, less cost to sell once management has committed to a plan to dispose of the assets. +Goodwill — Goodwill is the excess of the consideration transferred over the fair value of the tangible and identifiable intangible assets and liabilities recognized. Goodwill is not amortized. We perform an annual impairment test of goodwill as of December 31, or more frequently if circumstances indicate that impairment may exist. The determination of impairment is made by comparing the carrying amount of a reporting unit with its fair value, which is generally calculated using a combination of market and income approaches. If the fair value of the reporting unit exceeds the carrying value, no further testing is performed. If the fair value of the reporting unit is less than the carrying value, we consider goodwill to be impaired, and the amount of impairment loss is calculated and recorded in the statement of operations. +In 2011, we acquired Technology Stimulation Services, LLC ("TSS") for $ 24.4 million. The assets acquired from TSS were recorded as $ 15.0 million of equipment with the excess of the purchase price over fair value of the assets recorded as goodwill of $ 9.4 million. The acquisition complemented our existing business. The transaction was accounted for using the acquisition method of accounting and, accordingly, assets and liabilities assumed were recorded at their fair values as of the acquisition date. In the first quarter of 2020, we performed an interim impairment test and concluded that goodwill was fully impaired. As a result of our interim impairment test during the first quarter of 2020, we recorded goodwill impairment expense of $ 9.4 million during the year ended December 31, 2020 , which fully wrote off our goodwill carrying value. +On November 1 2022, we acquired Silvertip for $ 148.1 million. We accounted for the Silvertip Acquisiton as a business combination using the acquisition method of accounting. Goodwill of $ 23.6 million was recorded as of the Silvertip Acquisition Date (as defined below), which represents the excess of the purchase price over the fair value of the assets and liabilities assumed. The acquisition complemented our existing business. Based on our goodwill impairment test as of December 31, 2022, we concluded that the goodwill related to the Silvertip Acquisition was not impaired. The goodwill related to the Silvertip Acquisition of $ 23.6 million is recorded in our wireline operating segment. +There were no goodwill impairment losses during the years ended December 31, 2022 and 2021. +60 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +Intangible Assets — Intangible assets consist of customer relationships and trademark/trade name purchased in connection with the Silvertip Acquisition. In connection with the Silvertip Acquisition, we added intangible assets consisting of $ 46.5 million of customer relationships and $ 10.8 million of trademark/trade name. Intangible assets are amortized on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized on a straight‑line basis over the asset’s estimated useful life, which is ten years . No significant residual value is estimated for intangible assets. +Income Taxes — Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. +We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and the results of recent operations. If we determine that we would not be able to fully realize our deferred tax assets in the future, we would record a valuation allowance. +Deferred Loan Costs — The Company capitalized certain costs in connection with the amendment and restatement of its revolving credit facility, including lender, legal, and accounting fees. These costs are being amortized over the term of the related loan using the straight‑line method. Unamortized deferred loan costs associated with loans paid off or refinanced with different lenders are expensed in the period in which such an event occurs. Deferred loan costs are classified as a reduction of long‑term debt or in certain instances as an asset in the consolidated balance sheet. Amortization of deferred loan costs is recorded as interest expense in the statement of operations, and during the years ended December 31, 2022, 2021 and 2020, the amount of expense recorded was $ 0.8 million, $ 0.5 million and $ 0.5 million, respectively. +Stock-Based Compensation — The Company recognizes the cost of stock‑based awards on a straight‑line basis over the requisite service period of the award, which is usually the vesting period under the fair value method. Total compensation cost is measured on the grant date or modification date, as applicable, using fair value estimates. +Insurance Financing — The Company annually renews its commercial insurance policies, and may choose to either directly pay the insurance premium or finance a portion of the premium. If the Company finances a portion of the premium, a prepaid insurance asset is recorded and amortized monthly over the relevant period. +Concentration of Credit Risk — The Company’s assets that are potentially subject to concentrations of credit risk are cash and cash equivalents and trade accounts receivable. Cash balances are maintained in financial institutions, which at times exceed federally insured limits. The Company monitors the financial condition of the financial institutions in which accounts are maintained and has not experienced any losses in such accounts. The receivables of the Company are with credible operators in the oil and natural gas industries. The Company performs ongoing evaluations as to the financial condition of its customers with respect to trade receivables. +Recently Issued Accounting Standards Adopted in 2022 +In March 2020, the FASB issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform , which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate ("LIBOR"). The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified. This guidance was effective upon issuance and expired on December 31, 2022. Effective January 1, 2022, we adopted this guidance, and the adoption did not materially affect the Company’s consolidated financial statements. +Recently Issued Accounting Standards Not Yet Adopted in 2022 +There were no recently issued ASUs the have not yet been adopted. +61 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +3. SUPPLEMENTAL CASH FLOWS INFORMATION +($ in thousands) +Year Ended December 31, +2022 2021 2020 +Supplemental cash flows disclosures +Interest paid +$ 467 $ 72 $ 2,207 +Income taxes paid +$ 129 $ 196 $ 1,786 +Supplemental disclosure of non‑cash investing and financing activities +Capital expenditures included in accounts payable and accrued liabilities +$ 82,452 $ 36,818 $ 14,803 +Common stock issued for Silvertip Acquisition $ 106,736 $ — $ — +Non-cash purchases of property and equipment $ 2,668 $ — $ — +Equity securities received in exchange for sale of assets $ 11,853 $ — $ — +4. SILVERTIP ACQUISITION +On November 1, 2022 (the "Silvertip Acquisition Date"), the Company entered into a purchase and sale agreement with New Silvertip Holdco, LLC, pursuant to which the Company acquired 100 % of the outstanding limited liability company interests of Silvertip, a wireline services company in the Permian Basin, in exchange for total consideration of $ 148.1 million (the "Silvertip Purchase Price") consisting of 10.1 million shares of our common stock valued at $ 106.7 million, $ 30.0 million of cash, the payoff of $ 7.2 million of assumed debt, and the payment of $ 4.1 million of certain closing and transaction costs. The Silvertip Acquisition positions the Company as a more integrated completions-focused oilfield services provider headquartered in the Permian Basin. +The Company accounted for the Silvertip Acquisition using the acquisition method of accounting. The Silvertip Purchase Price was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair value at the Silvertip Acquisition Date. The estimated fair values of certain assets and liabilities, including accounts receivable, require significant judgments and estimates. The measurements of assets acquired and liabilities assumed, are based on inputs that are not observable in the market and thus represent Level 3 inputs. +The following table summarizes the fair value of the consideration transferred in the Silvertip Acquisition and the Silvertip Purchase Price to the fair value of the assets acquired and liabilities assumed (which are included within the accompanying consolidated balance sheet as of December 31, 2022) as of November 1, 2022, the Silvertip Acquisition Date: +62 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. SILVERTIP ACQUISITION (Continued) +($ in thousands) +Total Purchase Consideration: +Cash consideration $ 30,000 +Equity consideration 106,736 +Debt payments and closing costs 11,320 +Total consideration $ 148,056 +Cash and cash equivalents $ 2,681 +Accounts receivable and unbilled revenue 21,079 +Inventories 1,209 +Prepaid expenses 2,476 +Other current assets 1,059 +Property and equipment (1) +52,478 +Intangible assets: +Trademark/trade name (2) +10,800 +Customer relationships (2) +46,500 +Goodwill 23,624 +Operating lease right-of-use asset 2,783 +Total identifiable assets acquired 164,689 +Accounts payable 7,659 +Accrued and other current liabilities 6,178 +Operating lease liability 2,796 +Total liabilities assumed 16,633 +Total purchase consideration $ 148,056 +(1) Remaining useful lives ranging from less than one to 22 years. +(2) Definite lived intangibles with amortization period of 10 years. +The goodwill arising from the Silvertip Acquisition is attributable to the expected operational synergies resulting from our integrated service offerings. The goodwill arising from the Silvertip Acquisition has been allocated to our wireline operations, and are included in our wireline operating segment. +The Company’s transaction costs were recognized separately from the acquisition of assets and assumptions of liabilities in the Silvertip Acquisition, and were expensed as incurred. These costs are included within general and administrative expenses in our consolidated statements of operations. +The following combined pro forma information assumes the Silvertip Acquisition occurred on January 1, 2021. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2022 or any operating efficiencies or inefficiencies that may result from the Silvertip Acquisition. The information is not necessarily indicative of results that would have been achieved had the Company controlled Silvertip during the periods presented. +(unaudited, $ in thousands) +Year Ended December 31, +2022 2021 +Revenue $ 1,428,282 $ 1,013,261 +Net income ( loss) (1) +26,716 ( 43,957 ) +(1) The nonrecurring acquisition costs of $ 2.2 million were included in our pro forma results for the year ended December 31, 2021. +63 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. SILVERTIP ACQUISITION (Continued) +The Company’s consolidated statement of operations for the year ended December 31, 2022 includes 61 days of Silvertip operations as the Silvertip Acquisition closed on November 1, 2022. +5. FAIR VALUE MEASUREMENTS +Fair value ("FV") is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. +In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used, when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions other market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows: +Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment. +Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. +Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. +A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. +Assets and Liabilities Measured at Fair Value on a Recurring Basis +The fair values of cash, cash equivalents and restricted cash, accounts receivable, accounts payable, accrued and other current liabilities, and long-term debt are estimated to be approximately equivalent to carrying amounts as of December 31, 2022 and 2021 and have been excluded from the table below. +Assets measured at fair value on a recurring basis as of December 31, 2022 are set forth below: +(In thousands) +Estimated fair value measurements +Balance +Quoted prices in +active market +(Level 1) +Significant other +observable inputs +(Level 2) +Significant other +unobservable inputs +(Level 3) +Total gains +(losses) +December 31, 2022: +Short-term investment $ 10,283 $ 10,283 $ — $ — $ ( 1,570 ) +December 31, 2021: +Short-term investment $ — $ — $ — $ — $ — +Short-term investment — On September 1, 2022, the Company received 2.6 million common shares of STEP Energy Services (USA) L td. ("STEP") with an estimated fair value of $ 11.8 million as part of the consideration for the sale of our coiled tubing assets to STEP. The shares were treated as an investment in equity securities measured at fair value using Level 1 inputs based on observable prices on the Toronto Stock Exchange and are shown under current assets in our consolidated balance sheets. As of December 31, 2022, the fair value of the short-term investment was estimated at $ 10.3 million, and the unrealized loss resulting from the fluctuation in stock price was $ 1.6 million. Included in the unrealized loss was a loss of $ 0.3 million resulting from non-cash foreign currency translation . The unrealized l osses resulting from stock price fluctuation and foreign currency translation are included in other income (expense) in our consolidated statements of operations. +64 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +5. FAIR VALUE MEASUREMENTS (Continued) +Assets Measured at Fair Value on a Nonrecurring Basis +Certain assets and liabilities are measured at fair value on a nonrecurring basis. These items are not measured at fair value on an ongoing basis but may be subject to fair value adjustments in certain circumstances. These assets and liabilities include those acquired through the Silvertip Acquisition, which are required to be measured at fair value on the acquisition date according to ASC Topic 805, Business Combinations (see Note 4. Silvertip Acquisition). +During the year ended December 31, 2022, we recorded impairment expense of approximately $ 57.5 million in connection with our DuraStim® hydraulic fracturing pumps that did not meet the manufacturer's specifications or our expectations. There was no impairment of assets during the year ended December 31, 2021 . During the year ended December 31, 2020, we recorded property and equipment impairment loss of approximately $ 28.6 million in connection with the depressed utilization of our completions (pressure pumping) and drilling assets . +On September 21, 2022, the Company received equipment inventory from the manufacturer of DuraStim® hydraulic fracturing equipment in connection with its settlement of warranty claims for the DuraStim® hydraulic fracturing equipment acquired from the manufacturer. T he fair value of this equipment inventory received from the manufacturer was estimated to be $ 2.7 million. The estimated fair value was determined using the cost approach, which represents a Level 3 in the fair value measurement hierarchy. Our fair value estimate required us to use significant unobservable inputs, including a third party valuation and assumptions related to replacement cost, among others. Accordingly, we recorded non-cash income of $ 2.7 million, which is presented within other income (expense) in our consolidated statements of operations, and the equipment inventory received included as part of our property and equipment in our consolidated balance sheets . +We generally apply fair value techniques to our reporting units on a nonrecurring basis associated with valuing potential impairment loss related to goodwill, if any. Our estimate of the reporting unit fair value is based on a combination of income and market approaches, Level 1 and 3, respectively, in the fair value hierarchy. The income approach involves the use of a discounted cash flow method, with the cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies’ market multiples in estimating the fair value. Significant assumptions include projected revenue growth, capital expenditures, utilization, gross margins, discount rates, terminal growth rates, and weight allocation between income and market approaches. If the reporting unit’s carrying amount exceeds its fair value, we consider goodwill impaired, and the impairment loss is calculated and recorded in the period. We added $ 23.6 million of goodwill during the year ended December 31, 2022 (see Note 4. Silvertip Acquisition). There were no additions to goodwill during the years ended December 31, 2021 and 2020. There were no write-offs of goodwill during the years ended December 31, 2022, 2021 and 2020. We conducted our annual impairment test of goodwill as of December 31, 2022 and determined that no impairment to the carrying value of goodwill for our reporting unit (wireline operating segment) was required. There were no goodwill impairment losses during the years ended December 31, 2022 and 2021. In the first quarter of 2020, the depressed crude oil prices and crude oil storage challenges faced in the U.S. oil and gas industry triggered the Company to perform an interim goodwill impairment test, and as a result, we compared the carrying value of the goodwill in our hydraulic fracturing reporting unit with the estimated fair value. Our interim impairment test also considered other relevant factors, including market capitalization and market participants’ view of the oil and gas industry in reaching our conclusion that the carrying value of our goodwill in our Completion Services reportable segment of $ 9.4 million was fully impaired during the first quarter of 2020. Accordingly, we recorded a goodwill impairment expense of $ 9.4 million in March 2020. +The wireline operating segment is the only segment which has goodwill at December 31, 2022. The table below sets forth the changes in the carrying amount of goodwill for the year ended December 31, 2022. +($ in thousands) +Goodwill as of January 1, 2021 — net $ — +Goodwill addition during the year — +Less impairment losses — +Goodwill as of December 31, 2021 — net — +Goodwill addition during the year 23,624 +Less impairment losses — +Goodwill as of December 31, 2022 — net $ 23,624 +65 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +6. PROPERTY AND EQUIPMENT +Property and equipment consisted of the following: +($ in thousands) +December 31, +2022 2021 +Land +$ 11,793 $ 10,551 +Buildings +34,298 30,045 +Equipment and vehicles +1,397,727 1,248,464 +Leasehold improvements +8,573 8,159 +Subtotal +1,452,391 1,297,219 +Less accumulated depreciation +( 529,656 ) ( 488,725 ) +Property and equipment — net +$ 922,735 $ 808,494 +During the years ended December 31, 2022 and 2021 and 2020, our depreciation expense was $ 127.2 million, $ 133.4 million and $ 153.3 million respectively. +In December 2021, the Company disposed of two turbine generators, which were included in our Completion Services reportable segment, for total cash proceeds of approximately $ 36.0 million. The net book value of the two turbines prior to the disposal was approximately $ 39.5 million, resulting in loss on disposal of approximately $ 3.5 million. +7. INTANGIBLE ASSETS +Intangible assets consist of customer relationships and trademark/trade name. Intangible assets are amortized on a straight‑line basis with a useful life of ten years . Amortization expense included in net income (loss) for the years ended December 31, 2022, 2021 and 2020 was $ 1.0 million, $ 0 and $ 0 , respectively. The Company’s intangible assets subject to amortization consisted of the following: +($ in thousands) +December 31, +2022 2021 +Intangible assets acquired: +Trademark/trade name $ 10,800 $ — +Customer relationships 46,500 — +Total intangible assets acquired 57,300 — +Accumulated amortization: +Trademark/trade name ( 180 ) — +Customer relationships ( 775 ) — +Total accumulated amortization ( 955 ) — +Intangible assets — net +$ 56,345 $ — +66 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +7. INTANGIBLE ASSETS (Continued) +Estimated remaining amortization expense subsequent fiscal years is expected to be as follows: +($ in thousands) +Year Estimated future amortization expense +2023 $ 5,730 +2024 5,730 +2025 5,730 +2026 5,730 +2027 and beyond 33,425 +Total $ 56,345 +The average amortization period remaining is approximately 9.8 years. +8. LONG‑TERM DEBT +Asset-Based Loan ( " ABL ") Credit Facility +Our revolving credit facility, as amended in 2018, had a total borrowing capacity of $ 300 million (subject to the borrowing base limit), with a maturity date of December 19, 2023. The revolving credit facility had a borrowing base of 85 % of monthly eligible accounts receivable less customary reserves, as redetermined monthly. The revolving credit facility, included a springing fixed charge coverage ratio to apply when excess availability is less than the greater of (i) 10 % of the lesser of the facility size or the borrowing base or (ii) $ 22.5 million. Borrowings under this revolving credit facility accrued interest based on a three-tier pricing grid tied to availability, and we had the option to elect for loans to be based on either LIBOR or base rate, plus the applicable margin, which ranged from 1.75 % to 2.25 % for LIBOR loans and 0.75 % to 1.25 % for base rate loans, with a LIBOR floor of zero . +Effective April 13, 2022, the Company entered into an amendment and restatement of its revolving credit facility (as a mended and restated, "ABL Credit Facility"). The ABL Credit Facility decreased the borrowing capacity to $ 150.0 million (subject to the Borrowing Base (as defined below) limit), with the maturity date extended to April 13, 2027. The ABL Credit Facility has a borrowing base of 85 % to 90 %, depending on the credit ratings of our accounts receivable counterparties, of monthly eligible accounts receivable less customary reserves (the "Borrowing Base"), as redetermined monthly. The Borrowing Base as of December 31, 2022, was approximately $ 102.3 million. The ABL Credit Facility includes a springing fixed charge coverage ratio to apply when excess availability is less than the greater of (i) 10 % of the lesser of the facility size or the Borrowing Base or (ii) $ 10.0 million. Under this facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. +Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either the Secured Overnight Financing Rate ("SOFR") or the base rate, plus the applicable margin, which ranges from 1.50 % to 2.00 % for SOFR loans and 0.50 % to 1.00 % for base rate loans. The weighted average interest rate for our ABL Credit Facility for the year ended December 31, 2022 was 5.43 % . +The loan origination costs relating to the ABL Credit Facility are classified as an asset in the balance sheet. As of December 31, 2022, we had borrowings of $ 30.0 million outstanding under our ABL Credit Facility. There were no borrowings under the ABL Credit Facility as of December 31, 2021. +67 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +9. ACCRUED AND OTHER CURRENT LIABILITIES +Accrued and other current liabilities consisted of the following: +($ in thousands) +December 31, +2022 2021 +Accrued insurance +517 — +Accrued payroll and related expenses +14,137 6,816 +Deferred revenue (advance from customer) 10,000 — +Capital expenditure, taxes and others accruals +24,373 13,951 +Total +$ 49,027 $ 20,767 +10. EMPLOYEE BENEFIT PLAN +The Company has a 401(k) plan, modified effective January 1, 2019, and the Company matches 100 % of the employee contributions up to 6 % of gross salary, up to the annual limit. The employees vest in the Company contributions to the 401(k) plan 25 % per year, beginning in the employee’s first year of service, with full vesting occurring after four years of service. The employees are fully vested in their contributions when made. Effective April 1, 2022, the Company modified its 401(k) plan to allow for immediate vesting of the Company’s contributions. During the years ended December 31, 2022, 2021 and 2020, the recorded expense under the plan was $ 4.6 million, $ 2.8 million and $ 2.1 million, respectively. +11. REPORTABLE SEGMENT INFORMATION +The Company currently has three operating segments for which discrete financial information is readily available: hydraulic fracturing (inclusive of acidizing), cementing and wireline. T hese operating segments represent how the Chief Operating Decision Maker evaluates performance and allocates resources. +In March 2020, the Company shut down its flowback operating segment and subsequently disposed of the assets for approximately $ 1.6 million. In September 2020, the Company shut down its drilling operations and disposed of all of its drilling rigs and ancillary assets for approximately $ 0.5 million. On September 1, 2022, the Company shut down its coiled tubing operations and disposed of its coiled tubing assets to STEP as part of a strategic repositioning, and recorded a loss on disposal of $ 13.8 million. The divestiture of our flowback, drilling and coiled tubing assets did not qualify for presentation and disclosure as discontinued operations, and accordingly, we have recorded the resulting losses from the disposal as part of our loss on disposal of assets in our consolidated statement of operations. Our flowback, drilling and coiled tubing operations were included in our " All Other " category. +The divestiture of our flowback, drilling and coiled tubing operations that were historically included in the "All Other" category and the Silvertip Acquisition, which resulted in our new wireline operations in 2022, resulted in a net change in the number of operating segments to three . All three remaining operating segments are now aggregated into Completion Services, which is our only reportable segment. +In accordance with FASB ASC 280— Segment Reporting , the Company has one reportable segment (Completion Services) comprised of the hydraulic fracturing, cementing and wireline operating segments. The Silvertip Acquisition which resulted in the addition of a new wireline operating segment, and the disposal of our flowback, drilling and coiled tubing operations (previously included in the " All Other " category), collectively resulted in a change to the structure and composition of our reportable segment and " All Other " category. Our previous Pressure Pumping reportable segment is now renamed to " Completion Services " because of the inclusion of the new wireline completion services. In addition, we have reclassified all our corporate overhead costs (inclusive of income taxes and interest expense) previously included in the "A ll other " category to Completion Services reportable segment. As a result of the change in the structure and composition of our reportable segment, we have restated our segment disclosure for the years ended December 31, 2022, 2021 and 2020 to include corporate costs in our Completion Services reportable segment. +Our hydraulic fracturing operating segment revenue approximated 90.3 % , 93.3 % and 94.2 % of our Completion Services revenue for the years ended December 31, 2022, 2021 and 2020, respectively. Our cementing operating segment revenue approximated 7.3 %, 6.7 % and 5.8 % of our Completion Services revenue for the years ended December 31, 2022, 2021 and 2020, respectively. Revenue from our wireline operating segment (resulting from the acquisition of Silvertip in 2022) +68 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION (Continued) +approximated 2.4 % of our Completion Services revenue for the year ended December 31, 2022. +Inter-segment revenues are not material and are not shown separately in the table below. +The Company manages and assesses the performance of the reportable segment by its adjusted EBITDA (earnings before other income (expense), interest expense, income taxes, depreciation and amortization, stock-based compensation expense, severance and related expense, impairment expense, (gain)/loss on disposal of assets and other unusual or nonrecurring expenses or (income)). +A reconciliation from segment level financial information to the consolidated statement of operations is provided in the table below (in thousands): +Completion +Services +All Other +Total +Year ended and as of December 31, 2022 +Service revenue +$ 1,266,261 $ 13,440 $ 1,279,701 +Adjusted EBITDA +$ 318,051 $ ( 1,461 ) $ 316,590 +Depreciation and amortization +$ 125,867 $ 2,241 $ 128,108 +Impairment expense $ 57,454 $ — $ 57,454 +Capital expenditures +$ 362,467 $ 2,849 $ 365,316 +Goodwill $ 23,624 $ — $ 23,624 +Total assets +$ 1,335,501 $ 285 $ 1,335,786 +Completion +Services +All Other +Total +Year ended and as of December 31, 2021 +Service revenue +$ 857,642 $ 16,872 $ 874,514 +Adjusted EBITDA +$ 134,309 $ 698 $ 135,007 +Depreciation and amortization +$ 129,780 $ 3,597 $ 133,377 +Capital expenditures +$ 162,222 $ 2,936 $ 165,158 +Total assets $ 1,029,992 $ 31,244 $ 1,061,236 +Completion +Services +All Other +Total +Year ended and as of December 31, 2020 +Service revenue +$ 773,474 $ 15,758 $ 789,232 +Adjusted EBITDA +$ 141,652 $ ( 189 ) $ 141,463 +Depreciation and amortization +$ 148,936 $ 4,354 $ 153,290 +Impairment expense $ 36,907 $ 1,095 $ 38,002 +Capital expenditures +$ 80,410 $ 835 $ 81,245 +Total assets +$ 1,018,536 $ 32,203 $ 1,050,739 +69 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION (Continued) +Reconciliation of net income (loss) to adjusted EBITDA (in thousands): +Completion +Services +All Other +Total +Year ended December 31, 2022 +Net income (loss) $ 19,754 $ ( 17,724 ) $ 2,030 +Depreciation and amortization +125,867 2,241 128,108 +Interest expense +1,605 — 1,605 +Income tax expense 5,356 — 5,356 +Loss on disposal of assets 88,145 14,005 102,150 +Impairment expense 57,454 — 57,454 +Stock‑based compensation +21,881 — 21,881 +Other income (2) (3) +( 11,582 ) — ( 11,582 ) +Other general and administrative expense (1) +8,460 — 8,460 +Severance expense 1,111 17 1,128 +Adjusted EBITDA +$ 318,051 $ ( 1,461 ) $ 316,590 +Completion +Services All Other Total +Year ended December 31, 2021 +Net loss $ ( 51,189 ) $ ( 2,996 ) $ ( 54,185 ) +Depreciation and amortization +129,780 3,597 133,377 +Interest expense +614 — 614 +Income tax benefit ( 14,252 ) — ( 14,252 ) +Loss on disposal of assets 64,549 97 64,646 +Stock‑based compensation +11,519 — 11,519 +Other income ( 873 ) — ( 873 ) +Other general and administrative expense (1) +( 6,471 ) — ( 6,471 ) +Severance expense 632 — 632 +Adjusted EBITDA +$ 134,309 $ 698 $ 135,007 +Completion +Services All Other Total +Year ended December 31, 2020 +Net loss $ ( 99,830 ) $ ( 7,190 ) $ ( 107,020 ) +Depreciation and amortization +148,936 4,354 153,290 +Interest expense +2,383 — 2,383 +Income tax benefit ( 27,480 ) — ( 27,480 ) +Loss on disposal of assets +56,584 1,552 58,136 +Impairment expense 36,907 1,095 38,002 +Stock‑based compensation +9,100 — 9,100 +Other expense +874 — 874 +Other general and administrative expense (1) +13,038 — 13,038 +Retention bonus and severance expense 1,140 — 1,140 +Adjusted EBITDA +$ 141,652 $ ( 189 ) $ 141,463 +(1) During the years ended December 31, 2022, 2021 and 2020, other general and administrative expense (net of reimbursement from insurance carriers) primarily relates to nonrecurring professional fees paid to external consultants in connection with our audit committee review, SEC investigation, shareholder litigation, legal settlement to a vendor and other legal matters, net of insurance recoveries. During the years ended December 31, 2022, 2021 and 2020, we received reimbursement of approximately $ 10.4 million, $ 9.8 million and $ 0.6 million, respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. +(2) Includes a $ 10.7 million net tax refund (net of advisory fees) received in March 2022 from the Texas Comptroller of Public Accounts in connection with limited sales, excise and use tax audit of the period from July 1, 2015 through December 31, 2018. +(3) Includes $ 2.7 million non-cash income from fixed asset inventory received as part of a settlement of warranty claims with an equipment manufacturer and a $ 1.6 million unrealized loss on short-term investment. +70 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION (Continued) +Major Customers +The Company had revenue from the following significant customers that accounted for the following percentages of the Company’s total revenue: +Year Ended December 31, +2022 2021 2020 +Customer A +33.1 % 54.2 % 42.5 % +Customer B +28.3 % 14.6 % 20.3 % +Customer C +15.0 % 8.8 % 9.3 % +Customer D +4.7 % 4.4 % 8.6 % +Customer E +2.9 % 3.8 % 5.8 % +The above significant customers’ revenue that relates to Completion Services reportable segment is below: +Year Ended December 31, +2022 2021 2020 +Customer A 99.8 % 99.6 % 99.8 % +Customer B 99.9 % 100.0 % 97.6 % +Customer C 100.0 % 99.7 % 99.9 % +Customer D 99.1 % 87.6 % 99.7 % +Customer E 99.4 % 100.0 % 85.7 % +12. NET (LOSS) INCOME PER SHARE +Basic net (loss) income per common share is computed by dividing the net (loss) income relevant to the common stockholders by the weighted-average number of shares outstanding during the year. Diluted net (loss) income per common share uses the same net (loss) income divided by the sum of the weighted-average number of shares of common stock outstanding during the period, plus dilutive effects of options, performance stock units and restricted stock units outstanding during the period calculated using the treasury method and the potential dilutive effects of preferred stocks (if any) calculated using the if-converted method. +(In thousands, except for per share data) +Year Ended December 31, +2022 2021 2020 +Numerator (both basic and diluted) +Net income (loss) relevant to common stockholders $ 2,030 $ ( 54,185 ) $ ( 107,020 ) +Denominator +Denominator for basic net income (loss) per share 105,868 102,655 100,829 +Dilutive effect of stock options 80 — — +Dilutive effect of performance stock units 506 — — +Dilutive effect of restricted stock units 484 — — +Denominator for diluted net income (loss) per share 106,939 102,655 100,829 +Basic net income (loss) per common share $ 0.02 $ ( 0.53 ) $ ( 1.06 ) +Diluted net income (loss) per common share $ 0.02 $ ( 0.53 ) $ ( 1.06 ) +71 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +12. NET (LOSS) INCOME PER SHARE (Continued) +As shown in the table below, the following stock options, restricted stock units and performance stock units outstanding as of December 31, 2022, 2021 and 2020 have not been included in the calculation of diluted (loss) income per common share for the years ended December 31, 2022, 2021 and 2020 because they would be anti-dilutive to the calculation of diluted net (loss) income per common share: +(In thousands) +2022 2021 2020 +Stock options 491 798 4,200 +Restricted stock units 12 1,413 1,165 +Performance stock units — 1,586 1,019 +Total 503 3,797 6,384 +13. STOCK‑BASED COMPENSATION +Stock Option Plan +In March 2013, we approved the Stock Option Plan of ProPetro Holding Corp. (the "Stock Option Plan") pursuant to which our Board of Directors may grant stock options to our consultants, directors, executives and employees. No awards have been granted under the Stock Option Plan following our Initial Public Offering ("IPO"), and no further awards will be granted under the Stock Option Plan. +2017 Incentive Award Plan +In March 2017, our shareholders approved the ProPetro Holding Corp. 2017 Incentive Award Plan (the "2017 Incentive Plan") pursuant to which our Board of Directors was authorized to grant stock options, restricted stock units ("RSUs"), performance stock units ("PSUs"), or other stock-based and cash awards to consultants, directors, executives and employees. The 2017 Incentive Plan originally authorized up to 5,800,000 shares of common stock to be issued with respect to awards granted pursuant to the plan. No awards have been granted under the 2017 Incentive Plan following approval of the 2020 Incentive Plan (as defined below), and no further awards will be granted under the 2017 Incentive Plan. +2020 Long Term Incentive Plan +In October 2020, our shareholders approved the ProPetro Holding Corp. 2020 Long Term Incentive Plan (the "2020 Incentive Plan") pursuant to which our Board of Directors may grant stock options, RSUs, PSUs, or other stock-based and cash awards to consultants, directors, executives and employees. The 2020 Incentive Plan authorizes up to 4,650,000 shares of common stock to be issued under awards granted pursuant to the plan. The 2020 Incentive Plan became effective October 22, 2020, and as of such date no further awards will be granted under the 2017 Incentive Plan. +The 2017 Incentive Plan and the 2020 Incentive Plan are herein collectively referred to as the "Incentive Plans." +Stock Options +On March 16, 2017, we granted 793,738 stock option awards to certain key employees, officers and directors pursuant to the 2017 Incentive Plan which are scheduled to vest in four substantially equal annual installments, subject to a continuing service requirement. The contractual term for the options awarded is 10 years. The fair value of each stock option award granted was estimated on the date of grant using the Black-Scholes option-pricing model. There were no new stock option grants during the years ended December 31, 2022, 2021 and 2020. +As of December 31, 2022, there was no aggregate intrinsic value for our outstanding or exercisable stock options because the closing stock price as of December 31, 2022 was below the cost to exercise the options. The aggregate intrinsic value for the exercised stock options during the year ended December 31, 2022 was $ 2.6 million . The weighted average remaining contractual term for the outstanding and exercisable stock options as of December 31, 2022, w as 1.9 years and 1.9 years, respec tively. +72 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +13. STOCK‑BASED COMPENSATION (Continued) +A summary of the stock option activity during the year ended December 31, 2022 is presented below (in thousands, except for exercise price): +Number +of Shares +Weighted +Average +Exercise +Price +Outstanding at January 1, 2022 798 $ 9.77 +Granted +— $ — +Exercised +( 310 ) $ 3.11 +Forfeited +— $ — +Expired +— $ — +Outstanding at December 31, 2022 488 $ 14.00 +Exercisable at December 31, 2022 488 $ 14.00 +Restricted Stock Units +In 2022, we granted 863,433 RSUs to employees, officers and directors pursuant to the ProPetro Holding Corp. 2020 Long Term Incentive Plan, which generally vest ratably over a three-year vesting period, in the case of awards to employees and officers, and generally vest in full after one year , in the case of awards to directors. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases to be an employee or director of the Company prior to vesting of the award. Each RSU represents the right to receive one share of common stock. The grant date fair value of the RSUs is based on the closing share price of our common stock on the date of grant. For the years ended December 31, 2022, 2021 and 2020, the Company recognized stock compensation expense for RSUs of approximately $ 11.1 million, $ 6.2 million and $ 5.1 million, respectively. +On March 31, 2022, the Company modified the RSUs previously granted to a former officer in 2019, 2020 and 2021 to accelerate the vesting of such RSUs in connection with his separation agreement. On December 31, 2022, the Company modified the RSUs previously granted to a former officer in 2020, 2021 and 2022 to accelerate the vesting of such RSUs in connection with his separation agreement. As a result of these modifications, we recorded a net incremental stock expense of $ 1.2 million duri ng the year ended December 31, 2022. +As of December 31, 2022, the total unrecognized compensation expense for all RSUs was approxima tely $ 8.8 million, and is expected to be recognized over a weighted-average period of approximately 1.7 years. +The following table summarizes the RSUs activity during the year December 31, 2022 (in thousands, except for fair value): +Number of +Shares Weighted +Average +Grant Date +Fair Value ("FV") +Outstanding at January 1, 2022 1,413 $ 9.19 +Granted 863 $ 12.00 +Vested ( 935 ) $ 9.31 +Forfeited ( 74 ) $ 11.06 +Canceled — $ — +Outstanding at December 31, 2022 1,268 $ 10.91 +Performance Stock Units +In 2022, we granted 327,939 P SUs to certain key employees and officers as new awards under the 2020 Incentive Plan. Each PSU earned represents the right to receive either one share of common stock or, as determined by the administrator in its sole discretion, a cash amount equal to the fair market value of one share of common stock or amount of cash on the day immediately preceding the settlement date. The actual number of shares of common stock that may be issued under the PSUs +73 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +13. STOCK‑BASED COMPENSATION (Continued) +ranges from 0 % up to a maximum of 200 % of the target number of PSUs granted to the participant, based on our total shareholder return ("TSR") relative to a designated peer group, generally at the end of a three-year period. In addition to the TSR conditions, vesting of the PSUs is generally subject to the recipient’s continued employment through the end of the applicable performance period. Compensation expense is recorded ratably over the corresponding requisite service period. The grant date fair value of PSUs is determined using a Monte Carlo probability model. Grant recipients do not have any shareholder rights until performance relative to the peer group has been determined following the completion of the performance period and shares have been issued. +In connection with a former officer’s separation agreement, on March 31, 2022, the Company modified the PSUs previously granted to such former officer in 2020 and 2021 to provide for deemed satisfaction of the service requirement applicable to such PSUs as of March 31, 2022, such that such PSUs shall remain outstanding and eligible to vest based on our TSR relative to a d esignated peer group over the applicable performance period. In connection with a former officer’s separation agreement, on December 31, 2022, the Company modified the PSUs previously granted to such former officer in 2021 and 2022 to provide for deemed satisfaction of the service requirement applicable to such PSUs as of December 31, 2022, such that such PSUs shall remain outstanding and eligible to vest based on our TSR relative to a designated peer group over the applicable performance period. As a result of these modifications, we recorded a net incremental stock expense of $ 2.6 million during the year ended December 31, 2022. +For the years ended December 31, 2022, 2021 and 2020 the Company recognized stock compensation expense for the PSUs of approximatel y $ 10.8 million, $ 5.5 million and $ 1.7 million, respectively. +The following table summarizes information about PSUs activity during the year ended December 31, 2022 (in thousands, except for fair value): +Period +Granted Target Shares Outstanding at January 1, 2022 Target +Shares +Granted Target Shares Vested Target +Shares +Forfeited Target Shares Outstanding at December 31, 2022 +2019 126 — ( 126 ) — — +2020 809 — — — 809 +2021 651 — — ( 18 ) 632 +2022 — 328 — ( 12 ) 316 +Total 1,586 328 ( 126 ) ( 30 ) 1,757 +Weighted Average FV Per Share $ 12.48 $ 19.99 $ 27.49 $ 17.19 $ 12.72 +The total stock compensation expense for the years ended December 31, 2022, 2021 and 2020 for all stock awards was approximately $ 21.9 million , $ 11.5 million and $ 9.1 million, respectively. The total unrecognized stock-based compensation expense as of December 31, 2022 was approximately $ 15.7 million, and is expected to be recognized over a weighted-average period of approximately 1.5 years. +74 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +14. INCOME TAXES +The components of the provision for income taxes are as follows: +($ in thousands) +Year Ended December 31, +2022 2021 2020 +Federal: +Current +$ — $ ( 52 ) $ — +Deferred +4,157 ( 15,143 ) ( 27,104 ) +4,157 ( 15,195 ) ( 27,104 ) +State: +Current +1,143 88 221 +Deferred +56 855 ( 597 ) +1,199 943 ( 376 ) +Total income tax expense +$ 5,356 $ ( 14,252 ) $ ( 27,480 ) +Reconciliation between the amounts determined by applying the federal statutory rate of 21% for years ended December 31, 2022, 2021 and 2020 to income tax (benefit) expense is as follows: +($ in thousands) +Year Ended December 31, +2022 2021 2020 +Taxes at federal statutory rate +$ 1,551 $ ( 14,372 ) $ ( 28,245 ) +State taxes, net of federal benefit +709 61 154 +Section 162(m) limitation 3,423 616 3 +Stock-based compensation +( 767 ) ( 2,549 ) 751 +Valuation allowance +( 336 ) 825 868 +Other +776 1,167 ( 1,011 ) +Total income tax (benefit) expense +$ 5,356 $ ( 14,252 ) $ ( 27,480 ) +75 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +14. INCOME TAXES (Continued) +Deferred tax assets and liabilities are recognized for estimated future tax effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. The significant items giving rise to deferred tax assets (liabilities) are as follows: +($ in thousands) +December 31, +2022 2021 +Deferred Income Tax Assets +Accrued liabilities +$ 1,280 $ 911 +Allowance for credit losses 88 46 +Goodwill and other intangible assets +2,451 2,161 +Stock‑based compensation +3,658 3,382 +Net operating losses +90,397 87,822 +Other +490 56 +Total deferred tax assets +98,364 94,378 +Valuation allowance +( 1,357 ) ( 1,693 ) +Total deferred tax assets — net +$ 97,007 $ 92,685 +Deferred Income Tax Liabilities +Property and equipment +$ ( 161,195 ) $ ( 152,624 ) +Prepaid expenses +( 1,077 ) ( 1,113 ) +Total deferred tax liabilities +$ ( 162,272 ) $ ( 153,737 ) +Net deferred tax liabilities +$ ( 65,265 ) $ ( 61,052 ) +The Tax Cuts and Jobs Act (the "TCJA") included a reduction to the maxi mum deduction allo wed for net o perating losses generated in tax years after December 31, 2017, and the elimination of carrybacks of net operating losses. Under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which modified the TCJA, U.S. federal net operating loss carryforwards ( " NOLs " ) generated in taxable periods beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such NOLs in taxable years beginning after December 31, 2020, is limited to 80% of taxable income. As of December 31, 2022, the Company had approximately $ 421.7 million of U.S.federal NOLs, some of which will begin to expire in 2035. Approximately $ 219.5 million of the Company’s U.S. federal NOLs relate to pre-2018 periods. As of December 31, 2022, the Company’s state NOLs were approximately $ 50.4 million and will begin to expire in 2024. Utilization of NOLs carryforwards may be limited due to past or future ownership changes. As of December 31, 2022, we determined that $ 1.4 million valuation allowance was necessary against our state deferred tax assets. +The Company’s U.S. federal income tax returns for the y ear ended December 31, 2019, and through the most recent filing remain open to examination by the Internal Revenue Service under the applicable U.S. federal statute of limitations provisions. The various states in which the Company is subject to income tax are generally open to examination for the tax years ended December 31, 2018, and through the most recent filing. +The Company records uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the related tax authority. As of December 31, 2022, 2021 and 2020, no uncertain tax positions were recorded. The Company will continue to evaluate its tax positions in accordance with ASC 740 and will recognize any future effect as either a benefit or charge to income in the applicable period. +Income tax penalties and interest assessments recognized under ASC 740 are accrued as a tax expense in the period that the Company’s taxes are in an uncertain tax position. Any accrued tax penalties or interest assessments will remain until the uncertain tax position is resolved with the taxing authorities or until the applicable statute of limitations has expired. +76 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +15. RELATED-PARTY TRANSACTIONS +Operations and Maintenance Yards +The Company rents five yards from an entity, in which a director of the Company has an equity interest and the total annual rent expense for each of the five yards was approximately $ 0.03 million, $ 0.03 million, $ 0.1 million, $ 0.1 million, and $ 0.2 million, respectively. +Pioneer +On December 31, 2018, we consummated the Pioneer Pressure Pumping Acquisition with Pioneer and Pioneer Pumping Services. In connection with the Pioneer Pressure Pumping Acquisition, Pioneer received 16.6 million shares of our common stock and approximately $ 110.0 million in cash. On March 31, 2022, we entered into an amended and restated pressure pumping services agreement (the "A&R Pressure Pumping Services Agreement"), which was initially entered into in connection with the Pioneer Pressure Pumping Acquisition. The A&R Pressure Pumping Services Agreement was effective January 1, 2022 through December 31, 2022. The A&R Pressure Pumping Services Agreement reduced the number of contracted fleets from eight fleets to six fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, and replaced the idle fees arrangement with equipment reservation fees (the "Reservation fees"). As part of the Reservation fees arrangement, the Company will be entitled to receive compensation for all eligible contracted fleets that are made available to Pioneer at the beginning of every quarter in 2022 through the term of the A&R Pressure Pumping Services Agreement. On October 31, 2022, we entered into two pressure pumping services agreements (the "Fleet One Agreement" and "Fleet Two Agreement") with Pioneer, where we will provide hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and will terminate on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was originally planned to terminate on the one year anniversary of the date on which the fleet dedicated thereunder converted from a Tier II diesel Simul-Frac fleet to a Tier IV dual fuel zipper fleet, which was expected to occur in May 2023. In February 2023, Pioneer provided the Company notice (i) stating that Pioneer intended to release Fleet Two effective upon the completion of operations on the pad where the performance of Services (as defined in the Fleet Two Agreement) is in progress on May 12, 2023 and (ii) requesting that the Company agree to the termination of the Fleet Two Agreement as of the Release Date. The Company agreed with such request, and, as a result, the Fleet Two Agreement will be terminated as of the Release Date. +Revenue from services provided to Pioneer (including reservation and idle fees) accounted for approximately $ 423.7 million, $ 473.8 million and $ 335.4 million of our total revenue during the years ended December 31, 2022, 2021 and 2020, respectively. +In connection with the Pioneer Pressure Pumping Acquisition, the Company agreed to reimburse Pioneer for a certain portion of the retention bonuses paid to former Pioneer employees that were subsequently employed by the Company. During years ended December 31, 2022, 2021 and 2020, the Company fully reimbursed Pioneer approximately $ 0 , $ 0 and $ 2.7 million respectively. +As of December 31, 2022, the total accounts receivable due from Pioneer, including estimated unbilled receivable for services (including reservation fees) we provided, amounted to $ 46.2 million a nd the amount due to Pioneer was $ 0 . As of December 31, 2021, the balance due from Pioneer for services (including idle fees) we provided amo unted to approximately $ 62.1 million and the amount due to Pioneer was $ 0 . +16. LEASES +On January 1, 2019, we implemented ASC 842, using the modified retrospective transition method and elected not to restate prior years. Accordingly, the effects of adopting ASC 842 were adjusted in the beginning of 2019 while prior periods are accounted for under the legacy GAAP, ASC 840. There was no cumulative effect adjustment on beginning retained earnings. We also elected other practical expedients provided by the new lease standard, the short-term lease recognition practical expedient in which leases with a term of twelve months or less will not be recognized on the balance sheet and the practical expedient to not separate lease and non-lease components for real estate class of assets. Our discount rate was based on our estimated incremental borrowing rate on a collateralized basis with similar terms and economic considerations as our lease payments at the lease commencement. Below is a description of our operating and finance leases. +77 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +16. LEASES (Continued) +Operating Leases +Description of Lease +In March 2013, we entered into a ten-year real estate lease contract (the " Real Estate One Lease " ) with a commencement date of April 1, 2013, as part of the expansion of our equipment yard. For the years ended December 31, 2022, 2021 and 2020, the Company made lease payments of approximately $ 0.4 million , $ 0.4 million and $ 0.4 million, respectively. The assets and liabilities under this contract are included in our Completion Services reportable segment. In addition to the contractual lease period, the contract includes an optional renewal of up to ten years , and in management’s judgm ent the exercise of the renewal option is not reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Real Estate One Lease does not contain variability in payments resulting from either an index change or rate change. +We accounted for our Real Estate One Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the real estate leases because we concluded that the accounting effect was insignificant. As of December 31, 2022, the weighted average discount rate and remaining lease ter m was 6.7 % and 0.3 years, re spectively. +As part of our expansion of our hydraulic fracturing equipment maintenance program, we entered into a two year maintenance facility real estate lease contract (the "Maintenance Facility Lease") with a commencement date of March 14, 2022 . During the year ended December 31, 2022 the Company made lease payments of approximately $ 0.3 million. In addition to the contractual lease period, the contract includes an optional renewal for three additional periods of one year each, and in management's judgment the exercise of the renewal option is not reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Maintenance Facility Lease does not contain variability in payments resulting from either an index change or rate change. +We accounted for our Maintenance Facility Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Maintenance Facility Lease because we concluded that the accounting effect was insignificant. As of December 31, 2022, the weighted average discount rate and remaining lease term was approximately 3.4 % and 1.2 years, respectively. +In August 2022 and December 2022, we entered into three year equipment leases (the "Electric Fleet Lease") for a total of four fleets with 60,000 HHP per fleet. The Electric Fleet Lease contains an option to purchase the equipment at any time during the period of the lease. The leases have not yet commenced. We currently do not control the assets under the Electric Fleet Lease because they are currently being manufactured by the vendor and we have not taken possession of the assets. The manufacturing and delivery of the electric fleets is estimated to take up to ten months from the lease execution date. Given that the Company has not yet taken possession of the assets under the Electric Fleet Lease, the Company has not accounted for the right of use and lease obligation in its balance sheet as of December 31, 2022. +In October 2022, we entered into a real estate lease contract for five years, four months (the "Real Estate Two Lease"), expected to commence in March 2023. Since the lease had not commenced because the Company has not taken possession of the asset as of December 31, 2022, the Company has not accounted for the right of use and lease obligation in its balance sheet as of December 31, 2022. In addition to the contractual lease period, the contract includes two optional renewals of one year each, and in management’s judgment the exercise of the renewal options is not reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Real Estate One Lease does not contain variability in payments resulting from either an index change or rate change. +As part of the Silvertip Acquisition, we assumed two real estate leases (the "Silvertip Leases") with remaining terms of four years, nine months and six years, one month , respectively, from the Silvertip Acquisition Date. During the period from November 1, 2022 to December 31, 2022, the Company made lease payments of approximately $ 0.03 million and $ 0.05 million, respectively. The assets and liabilities under these contracts are recorded in our wireline operating segment. The Silvertip Leases do not have any renewal options, residual value guarantees, covenants or financial restrictions. Further, the Silvertip Leases do not contain variability in payments resulting from either an index change or rate change. +We accounted for our Silvertip Leases as operating leases. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the real estate leases because we concluded that the accounting effect was insignificant. As of December 31, 2022, the weighted average discount rate and remaining lease term was 2.1 % and 5.5 years, re spectively. +78 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +16. LEASES (Continued) +As of December 31, 2022, our total operating lease right-of-use asset cost wa s $ 4.6 million, and accumulated amortization was $ 1.5 million. As of December 31, 2021, our total operating lease right-of-use ass et cost was $ 1.2 million, and accumulated amortization was $ 0.8 million. For the years ended December 31, 2022, 2021 and 2020 we recorded operating lease cost of $ 0.7 million, $ 0.3 million and $ 0.3 million respectively, in our statement of operations. +Finance Leases +Description of Ground Lease +In 2018, we entered into a ten-year land lease contract (the " Ground Lease " ) with an exclusive option to purchase the land exercisable beginning one year from the commencement date of October 1, 2018 through the end of the contractual lease term. In March 2020, the Company exercised its option and purchased the land associated with the Ground Lease for approximately $ 2.5 million. +The maturity analysis of liabilities and reconciliation to undiscounted and discounted remaining future lease payments for operating leases as of December 31, 2022 are as follows: +($ in thousands) Totals +2023 $ 912 +2024 570 +2025 526 +2026 533 +2027 463 +2028 322 +Total undiscounted future lease payments 3,326 +Amount representing interest ( 164 ) +Present value of future lease payments (lease obligation) $ 3,162 +The total cash paid for amounts included in the measurement of our operating lease liability during the year ended December 31, 2022 was approximately $ 0.7 million . The non-cash lease obligation we recorded upon execution of the Maintenance Facility Lease was approximately $ 0.6 million. During the year ended December 31, 2021, the total cash paid for amounts included in the measurement of our operating lease liability was approximately $ 0.4 million. +Short-Term Leases +We elected the practical expedient, consistent with ASC 842, to exclude leases with an initial term of twelve months or less ("short-term lease") from our balance sheet and continue to record short-term leases as a period expense. For the years ended December 31, 2022, 2021 and 2020 , our short-term asset lease expense was approximately $ 0.8 million, $ 0.6 million and $ 1.0 million, respectively. +79 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +17. COMMITMENTS AND CONTINGENCIES +Commitments +We entered into certain commitments for fixed assets, consumables and services incidental to the ordinary conduct of our business, generally for quantities required for our operations and at competitive market prices. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. The Company entered into contractual arrangements with our equipment manufacturers to purchase and convert Tier IV DGB equipment, with total cost of approximately $ 59.9 million. The Company also entered into the Electric Fleet Lease, which contains options to extend the lease or purchase the equipment at the end of the lease. The lease payments are expected to commence when the Company takes possession of the electric hydraulic fracturing pumps during the second half of 2023. The total estimated contractual commitment in connection with the Electric Fleet Lease arrangements is approximately $ 99.2 million , which excludes the cost associated with the option to purchase the equipment at the end of the lease. In January 2023, we entered into an equipment lease (the " Power Equipment Lease " ) for certain power generation equipment. The Power Equipment Lease has not yet commenced. We currently do not control the assets under the lease and have not taken possession of the assets. Therefore, the Company has not accounted for the right of use and lease obligation in its balance sheet as of December 31, 2022. The total estimated contractual commitment in connection with the Power Equipment Lease is approximately $ 59.6 million. +The Company enters into purchase agreements with its sand suppliers (the " Sand Suppliers " ) to secure supply of sand as part of its normal course of business. The agreements with the Sand Suppliers require that the Company purchase a minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the mi nimum volumes or a fixed price per ton of unpurchased volumes. Our agreements with the Sand Suppliers expire at different times prior to December 31, 2025. Our sand agreement with one of our Sand Suppliers has a one year take or pay commitment o f $ 31.7 million that will expire on June 12, 2023. During the years ended December 31, 2022, 2021 and 2020, no shortfall fee was recorded. +As of December 31, 2022 and 2021, the Company had issued le tters of credit of $ 6.0 million and $ 3.7 million, respectively, under the ABL Credit Facility in connection with the Company's casualty insurance policy. +Contingent Liabilities +Legal Matters +In September 2019, a complaint, captioned Richard Logan, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. ProPetro Holding Corp., et al., (the "Logan Lawsuit"), was filed against the Company and certain of its then current and former officers and directors in the U.S. District Court for the Western District of Texas. +In July 2020, a third amended class action complaint was filed in the Logan Lawsuit by Lead Plaintiffs Nykredit Portefølje Administration A/S, Oklahoma Firefighters Pension and Retirement System, Oklahoma Law Enforcement Retirement System, Oklahoma Police Pension and Retirement System, and Oklahoma City Employee Retirement System, and additional named plaintiff Police and Fire Retirement System of the City of Detroit. Plaintiffs sued individually and on behalf of a putative class of shareholders who purchased the Company’s common stock between March 17, 2017 and March 13, 2020 or purchased the Company’s common stock pursuant to the Company’s initial public offering in March 2017. Plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule l0b-5 promulgated thereunder, and Sections 11 and 15 of the Securities Act of 1933 against the Company, certain former officers and current and former directors, alleging that the defendants made allegedly inaccurate or misleading statements or omissions about the Company's business, operations and prospects. On September 13, 2021, the Court partially granted and partially denied motions to dismiss filed by the Company and the individual defendants. +On August 11, 2022, the Company agreed to a proposed settlement of the claims in the Logan Lawsuit, which the court has preliminarily approved. Under the proposed settlement agreement, the Company's insurers have paid a cash sum into a settlement fund to be distributed to members of the putative class. A final approval hearing before the court is scheduled for April 11, 2023. +In May 2020, the U.S. District Court for the Western District of Texas consolidated two shareholder derivative lawsuits previously filed against the Company and certain of its current and former officers and directors into a single lawsuit captioned In re ProPetro Holding Corp. Derivative Litigation (the "Shareholder Derivative Lawsuit"). In August 2020, the plaintiffs in the +80 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +17. COMMITMENTS AND CONTINGENCIES (Continued) +Shareholder Derivative Lawsuit filed a consolidated complaint alleging (i) breaches of fiduciary duties, (ii) unjust enrichment and (iii) contribution. The plaintiffs did not quantify any alleged damages in their complaint but, in addition to attorneys’ fees and costs, they sought various forms of relief, including (i) damages sustained by the Company as a result of the alleged misconduct, (ii) punitive damages and (iii) equitable relief in the form of improvements to the Company’s governance and controls. On September 15, 2021, the Court granted the Company's motion to dismiss the complaint in its entirety, without prejudice. +On November 19, 2021, the Company received a demand letter from a law firm representing one of the purported shareholders that previously filed the dismissed Shareholder Derivative Lawsuit. The demand letter alleged facts and claims substantially similar to the Shareholder Derivative Lawsuit. The Company's board of directors (the "Board") constituted a committee to evaluate the demand letter and recommend a course of action to the Board, and the committee retained counsel to assist with its review. The committee concluded its investigation and recommended that the Board reject the demand letter. In October 2022, the Board accepted the committee's recommendation and rejected the demand letter. +The Company incurred legal settlements totaling $ 34.1 million during the year December 31, 2022, consisting of the Logan Lawsuit and other settlements. The Logan Lawsuit settlement of $ 30.0 million was fully covered by insurance and was subsequently paid by the insurance company in October 2022. +Environmental and Equipment Insurance +The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company's business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company's liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification. +The Company is self-insured up to $ 10 million per occurrence for certain losses arising from or attributable to fire and/or explosion at wellsites. No accrual was recorded in our financial statements in connection with this self-insurance strategy because the occurrence of fire and/or explosion cannot be reasonably estimated. +Regulatory Audits +In 2020, the Texas Comptroller of Public Accounts (the “Comptroller”) commenced a routine audit of the Company's motor vehicle and other related fuel taxes for the periods of July 2015 through December 2020. As of December 31, 2022, the audit is still ongoing and the final outcome cannot be reasonably estimated. +In January 2022, we entered into a settlement agreement with the Comptroller for a $ 10.7 million tax refund, net of consulting fees, in connection with certain limited sales and use tax for the audit period July 1, 2015 through December 31, 2018. The net refund to the company of $ 10.7 million was recorded as part of other income in our statement of operations during the year December 31, 2022. During the year December 31, 2021, we recorded a net refund of approximately $ 2.1 million. +In May 2022, the Company received a notification from the Comptroller that it will commence a routine audit of the Company’s gross receipt taxes, which will routinely cover up to a four-year period. As of December 31, 2022, the audit is still ongoing and the final outcome cannot be reasonably estimated. +81 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2022. As noted in Management’s Report on Internal Control over Financial Reporting, management’s evaluation of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of Silvertip Completion Services Operating, LLC, which was acquired on November 1, 2022. Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company. We are in the process of integrating Silvertip’s internal controls with our internal controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. +Management’s Report on Internal Control over Financial Reporting +The management of ProPetro Holding Corp. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. ProPetro Holding Corp. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with U.S. GAAP. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any control system. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company will be detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our internal cont rol over financial reporting as of December 31, 2022 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management believes that ProPetro Holding Corp. maintained effective internal control over financial reporting as of December 31, 2022. Management’s evaluation of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of the Silvertip Completion Services Operating, LLC, which was acquired on November 1, 2022 and whose financial statements constitute 13.0% and 2.4% of total assets and revenue, respectively of the consolidated financial statement amounts as of and for the year ended December 31, 2022. T he independent registered public accounting firm, Deloitte & Touche LLP , Houston, Texas, United States , Auditor Firm ID # 34 , has audited the consolidated financial statements as of and for the year ended December 31, 2022, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this Annual Report under Part II, Item 8 above. +82 +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2022, we acquired Silvertip Completion Services Operating, LLC and integrated its financial reporting processes with ours. Other than such changes, there were no changes in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +None. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +83 +Part III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by Item 10 is incorporated by reference to the Company’s Proxy Statement for its 2023 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2023. +Item 11. Executive Compensation +The information required by Item 11 is incorporated by reference to the Company’s Proxy Statement for its 2023 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2023. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by Item 12 is incorporated by reference to the Company’s Proxy Statement for its 2023 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2023. +Item 13. Certain Relationships and Related Party Transactions, and Director Independence. +The information required by Item 13 is incorporated by reference to the Company’s Proxy Statement for its 2023 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2023. +Item 14. Principal Accounting Fees and Services +The information required by Item 14 is incorporated by reference to the Company’s Proxy Statement for its 2023 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2023. +84 +Part IV +Item 15. Exhibits and Financial Statement Schedules. +(a)(1) Financial Statements +The Financial Statements in Item 8 are filed as part of this Annual Report. +(a)(2) Financial Statement Schedules +None. +(a)(3) Exhibits +The exhibits required to be filed by this Item 15(b) are set forth in the Exhibit Index included below. +(b) See Exhibit Index +(c) None +85 +EXHIBIT INDEX +Exhibit +Number Description +2.1 +Purchase and Sale Agreement, dated as of November 1, 2022, between ProPetro Holding Corp. and New Silvertip Holdco, LLC (incorporated by reference herein to Exhibit 2.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated October 31, 2022). +3.1 +Amended and Restated Certificate of Incorporation of ProPetro Holding Corp., dated as of June 19, 2019 (incorporated by reference herein to Exhibit 3.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated June 19, 2019). +3.2 +Amended and Restated Bylaws of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 3.2 to ProPetro Holding Corp.’s Current Report on Form 8-K dated June 19, 2019). +3.3 +Certificate of Designations of Series B Junior Participating Preferred Stock of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 3.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated April 14, 2020). +4.1 +Specimen Stock Certificate (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940). +4.2 +Investor Rights Agreement, dated as of December 31, 2018, by and between Pioneer Natural Resources Pumping Services LLC and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 31, 2018). +4.3 +Registration Rights Agreement, dated as of December 31, 2018, by and between Pioneer Natural Resources Pumping Services LLC and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 4.2 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 31, 2018). +4.4 +Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference herein to Exhibit 4.4 to ProPetro Holding Corp.'s Annual Report on Form 10-K for the year ended December 31, 2019). +4.5 +Rights Agreement, dated as of April 14, 2020, by and between ProPetro Holding Corp. and American Stock Transfer & Trust Company, LLC (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated April 14, 2020) . +4.6 +R egistration Rights and Lock-Up Agreement, dated as of November 1, 2022 by and between ProPetro Holding Corp. and New Silvertip Holdco, LLC (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 31, 2022). +10.1# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan (incorporated by reference herein to Exhibit 10.18 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated March 7, 2017 (Registration No. 333-215940)). +10.2# +ProPetro Holding Corp. 2020 Long Term Incentive Plan (incorporated by reference herein to Exhibit 10.3 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 26, 2020) . +10.3# +Form of ProPetro Holding Corp. Senior Executive Incentive Bonus Plan (incorporated by reference herein to Exhibit 10.19 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated February 23, 2017 (Registration No. 333-215940)). +10.4# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement (incorporated by reference herein to Exhibit 10.22 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated February 23, 2017 (Registration No. 333-215940)). +10.5# +Form of ProPetro Holding Corp. Amendment to Non‑Qualified Stock Option Agreement (incorporated by reference herein to Exhibit 10.23 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated February 23, 2017 (Registration No. 333-215940)). +10.6# +2017 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Performance Restricted Stock Unit Grant Notice and Performance Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017). +10.7# +2017 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.2 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017). +10.8# +2019 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.26 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019). +86 +10.9# +2019 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Performance Restricted Stock Unit Grant Notice and Performance Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.27 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019). +10.10# +2019 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Directors) (incorporated by reference herein to Exhibit 10.28 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019). +10.11# +2020 Form of ProPetro Holding Corp. 2020 Long Term Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Directors). (incorporated by reference herein to Exhibit 10.29 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2020). +10.12# +Letter Agreement, dated October 4, 2019, by and between Phillip Gobe and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 9, 2019). +10.13# +ProPetro Services, Inc. Executive Severance Plan (incorporated by reference herein to Exhibit 10.3 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 16, 2020). +10.14# +Form of Participation Agreement pursuant to the ProPetro Services, Inc. Executive Severance Plan (incorporated by reference herein to Exhibit 10.4 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 16, 2020). +10.15# +Participation Agreement pursuant to the ProPetro Services, Inc. Executive Severance Plan, between Phillip A. Gobe and ProPetro Services, Inc., dated March 13, 2020 (incorporated by reference herein to Exhibit 10.5 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 16, 2020). +10.16# +Amended and Restated ProPetro Holding Corp. Executive Incentive Bonus Plan (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated February 18, 2020). +10.17# +Amendment No. 1 to Credit Agreement, dated as of February 22, 2018 by and among ProPetro Holding Corp., ProPetro Services, Inc., the Incremental Lenders therein, the Required Lenders and Barclays Bank PLC, as Administrative Agent for the Lenders (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated February 27, 2018) . +10.18# +Amendment No. 2 to Credit Agreement, dated as of December 19, 2018, by and among ProPetro Holding Corp., ProPetro Services, Inc., the Incremental Lenders therein, the Required Lenders and Barclays Bank PLC, as Administrative Agent for the Lenders (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated December 21, 2018). +10.19# +Amended and Restated Pressure Pumping Services Agreement, dated March 31, 2022, between Pioneer Natural Resources USA, Inc. and ProPetro Services, Inc. (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 31, 2022). +10.20# +Form of Indemnification Agreement for Pioneer Designated Directors (incorporated by reference herein to Exhibit 10.32 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2018). +10.21# +Form of Indemnification Agreement for Officers and Directors of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 10.33 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2018). +10.22# +ProPetro Services, Inc. Amended and Restated Executive Severance Plan (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated April 10, 2020). +10.23# +ProPetro Services, Inc. Second Amended and Restated Executive Severance Plan (incorporated by reference herein to Exhibit 10.4 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 26, 2020). +10.24# +Form of Participation Agreement pursuant to the ProPetro Services, Inc. Second Amended and Restated Executive Severance Plan (incorporated by reference herein to Exhibit 10.5 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 26, 2020). +10.25# +Amended and Restated ProPetro Holding Corp. Non-Employee Director Compensation Policy (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated January 23, 2023). +10.26# +2020 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.54 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019) . +10.27# +2020 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Performance Restricted Stock Unit Grant Notice and Performance Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.55 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019). +10.28# +2021 Form of ProPetro Holding Corp. 2020 Long Term Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021). +10.29# +2021 Form of ProPetro Holding Corp. 2020 Long Term Incentive Plan Performance Share Unit Grant Notice and Performance Share Unit Agreement (incorporated by reference herein to Exhibit 10.2 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021). +10.30# +Resignation From Employment, effective as of March 31, 2022, by and between Phillip A. Gobe, ProPetro Services Inc. and, solely for purposes set forth therein, ProPetro Holding Corp. (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 31, 2022). +87 +10.31 +Restatement Agreement, dated as of April 13, 2022, by and among ProPetro Holding Corp., and ProPetro Services, Inc., Barclays Bank PLC, as the Administrative Agent, the Collateral Agent, a Letter of Credit Issuer and the Swingline Lender, and each of the Lenders and Letter of Credit Issuers from time to time party thereto (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated April 13, 2022). +10.32# +Pressure Pumping Services Agreement – Fleet One Simulfrac, dated as of October 31, 2022, between Pioneer Natural Resources USA, Inc. and ProPetro Services, Inc. (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 31, 2022). +10.33# +Pressure Pumping Services Agreement - Fleet Two, dated as of October 31, 2022, between Pioneer Natural Resources USA, Inc. and ProPetro Services, Inc. (incorporated by reference herein to Exhibit 10. 2 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 31 , 2022). +10.34# +Resignation From Employment, effective as of December 31, 2022, by and between Newton W. Wilson III, ProPetro Services Inc. and, solely for purposes set forth therein, ProPetro Holding Corp. (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated December 31, 2022) . +21.1(a) +List of Subsidiaries of ProPetro Holding Corp. +23.1(a) +Consent of Independent Registered Public Accounting Firm. +31.1(a) +Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +31.2(a) +Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1(b) +Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2(b) +Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +101.INS(a) XBRL Instance Document +101.SCH(a) XBRL Taxonomy Extension Schema Document +101.CAL(a) XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB(a) XBRL Taxonomy Extension Label Linkbase Document +101.PRE(a) XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF(a) XBRL Taxonomy Extension Definition Linkbase Document +104(a) Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document +(a) Filed herewith. +(b) Furnished herewith. +# Compensatory plan, contract or arrangement. +Item 16. Form 10-K Summary +None. +88 +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on February 23, 2023. +ProPetro Holding Corp. +/s/ Samuel D. Sledge +Samuel D. Sledge +Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated on the date indicated. +89 +Signature +Title +Date +/s/ Samuel D. Sledge +Chief Executive Officer and Director (Principal Executive Officer) +February 23, 2023 +Samuel D. Sledge +/s/ David S. Schorlemer +Chief Financial Officer (Principal Financial Officer) +February 23, 2023 +David S. Schorlemer +/s/ Elo Omavuezi +Chief Accounting Officer (Principal Accounting Officer) +February 23, 2023 +Elo Omavuezi +/s/ Phillip A. Gobe +Chairman of the Board February 23, 2023 +Phillip A. Gobe +/s/ Spencer D. Armour, III +Director +February 23, 2023 +Spencer D. Armour, III +/s/ Mark Berg +Director +February 23, 2023 +Mark Berg +/s/ Anthony Best +Director +February 23, 2023 +Anthony Best +/s/ G. Larry Lawrence +Director +February 23, 2023 +G. Larry Lawrence +/s/ Michele Vion +Director +February 23, 2023 +Michele Vion +/s/ Alan E. Douglas +Director +February 23, 2023 +Alan E. Douglas +/s/ Jack Moore +Director +February 23, 2023 +Jack Moore +/s/ Mary Ricciardello +Director +February 23, 2023 +Mary Ricciardello +90 \ No newline at end of file diff --git a/raw/filings/0001680247/2022/0001680247-23-000026/filing_metadata.csv b/raw/filings/0001680247/2022/0001680247-23-000026/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..d3dcf53288080f8aab4b9d670d157d0be7187426 --- /dev/null +++ b/raw/filings/0001680247/2022/0001680247-23-000026/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001680247,PUMP,ProPetro Holding Corp.,10-K,2023-02-23,2022-12-31,2023-02-23T21:04:12.000Z,0001680247-23-000026,pump-20221231.htm,10-K,10838126,1,1,https://www.sec.gov/Archives/edgar/data/1680247/000168024723000026/pump-20221231.htm,https://www.sec.gov/Archives/edgar/data/1680247/000168024723000026/,2022,2022,1 diff --git a/raw/filings/0001680247/2022/0001680247-23-000026/item1.txt b/raw/filings/0001680247/2022/0001680247-23-000026/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..0c11f88eeac1c8ece06fedf5c341b057937e08f7 --- /dev/null +++ b/raw/filings/0001680247/2022/0001680247-23-000026/item1.txt @@ -0,0 +1,100 @@ +Item 1. Business. +Our Company +We are a leading integrated oilfield services company, located in Midland, Texas, focused on providing innovative hydraulic fracturing, wireline, and other complementary oilfield completion services to leading upstream oil and gas companies engaged in the exploration and production ("E&P") of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil‑producing areas in the United States, and we believe we are one of the leading providers of completion services in the region. +On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip Completion Services Operating, LLC (the "Silvertip Acquisition"), which provides wireline perforation and ancillary services solely in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed debt, and the payment of certain other closing and transaction costs. The Silvertip Acquisition positions the Company as a leading completions-focused oilfield services provider headquartered in the Permian Basin. +Our competitors include many large and small oilfield services companies, including Halliburton Company, Liberty Energy Inc., ProFrac Holding Corp., Nextier Oilfield Solutions Inc., Patterson-UTI Energy Inc., RPC, Inc., and a number of private and locally-oriented businesses. The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies' criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company's selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the service industry because of the capital requirements, lack of large scale deployment of certain new technology such as electric powered equipment, and the pricing for our services and expected return on invested capital. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +Our substantial market presence in the Permian Basin positions us well to capitalize on drilling and completion activity in the region. Our operational focus has primarily been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have increased our operations in the Delaware sub-basin and are well-positioned to support further increases to our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending. +We primarily provide hydraulic fracturing, wireline, and cementing completion services to E&P companies in the Permian Basin. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region's increasingly high-intensity well completions (including Simul-Frac, which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. +Effective September 1, 2022, we disposed of our coiled tubing assets to STEP Energy Services (USA) L td. ("STEP") and shut down our coiled tubing operations. We received approximately $2.8 million in cash and 2.6 million common shares of STEP, which have an estimated fair value of $11.8 million, as consideration. Upon the sale of our coiled tubing assets, we recorded a loss on sale of $13.8 million . +Commodity Price and Other Economic Conditions +The oil and gas industry has traditionally been volatile and is characterized by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, war and political instability in oil producing +1 +countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. +The global public health crisis associated with the COVID-19 pandemic has had an adverse effect on global economic activity and the oil and gas industry in 2020 and 2021. Some of the challenges resulting from the COVID-19 pandemic that have impacted our business include restrictions on movement of personnel and associated gatherings, shortage of skilled labor, cost inflation and supply chain disruptions. In light of the COVID-19 pandemic, most companies, including our customers in the Permian Basin, reacted by closely managing their operating budget and exercising capital discipline in 2020 and 2021. +In February 2022, Russia launched a large-scale invasion of Ukraine that has led to significant armed hostilities. As a result, the United States, the United Kingdom, the member states of the European Union and other public and private sectors have levied severe sanctions on Russian financial institutions, businesses and individuals. This conflict, and the resulting sanctions, have contributed to significant increases and volatility in the prices for oil and natural gas. The geopolitical and macroeconomic consequences of this invasion and associated sanctions remain uncertain, and such events, or any further hostilities in Ukraine or elsewhere, could severely impact the world economy and the oil and gas industry and may adversely affect our financial condition. +The Russia-Ukraine war, and the adverse impacts of the COVID-19 pandemic in recent years, including inflation, have resulted in volatility in supply and demand dynamics for crude oil and associated volatility in crude oil pricing. In 2022, West Texas Intermediate ( "WTI") average crude oil price was approximately $94 per barrel, which is the highest average price in the last nine years. We believe that the recent surge in global crude oil prices is partly due to the lack of reinvestment in the oil and gas industry in the last two years, and increased demand for oil and gas products, coupled with the adverse impact of the Russia-Ukraine war, which has led to various sanctions on Russian crude oil supply and businesses. With the significant increase in global crude oil prices, including WTI crude oil prices, there has been an increase in the Permian Basin rig count from approximately 179 at the beginning of 2021 to approximately 353 at the end of December 2022, according to Baker Hughes. Following the increase in rig count and WTI crude oil price, the oilfield service industry has experienced increased demand for its oil well completion services, and improved pricing. As a result of the growing demand for oil well completion services and significant cost inflation across the industry, we negotiated pricing increases with certain of our customers for our oil well completion services, depending on job design. Although we are currently operating in an improved pricing environment compared to 2020 and 2021, the rapid increase in cost inflation and supply chain tightness could adversely impact our future profitability. The U.S. inflation rate has been steadily increasing since 2021. These inflationary pressures have resulted in and may result in additional increases to the costs of our oilfield goods, services and personnel, which in turn cause our capital expenditures and operating costs to rise. Sustained levels of high inflation have likewise caused the U.S. Federal Reserve and other central banks to increase interest rates, and to the extent elevated inflation remains, we may experience further cost increases for our operations, including labor costs and equipment. We cannot predict any future trends in the rate of inflation and a significant increase in inflation, to the extent we are unable to timely pass-through the cost increases to our customers, would negatively impact our business, financial condition and results of operations. See Part II, Item 1A. " Risk Factors—Continuing or worsening inflationary issues and associated changes in monetary policy have resulted in and may result in additional increases to the cost of our goods, services and personnel, which in turn cause our capital expenditures and operating costs to rise. " +Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including the upstream and oilfield services companies. As a result, we are working with our customers and equipment manufacturers to transition our equipment to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV Dynamic Gas Blending (" DGB ") , electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. We have transitioned our active hydraulic fracturing equipment portfolio from approximately 10% lower emissions equipment in 2021 to approximately 35% in 2022, and expect to increase to approximately 65% in 2023. +The Permian Basin rig count increase, demand for oil and gas products, WTI crude oil price increase and costs inflation could be indicative of an energy market recovery. I f the rig count and market conditions continue to improve, including improved customers' pricing and labor availability, and we are able to continue to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also continue to improve. However, if market conditions do not improve or decline in the future, and we are unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows. +2 +Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment. +Our Services +We have historically conducted our business through five operating segments: hydraulic fracturing, cementing, coiled tubing, drilling and flowback. For reporting purposes, the hydraulic fracturing and cementing operating segments were aggregated into one reportable segment—"Pressure Pumping" while coiled tubing, drilling and flowback operating segments, and corporate administrative expenses were aggregated into the "All Other" category. In connection with the Silvertip Acquisition, we now have a wireline operating segment which has been aggregated with Pressure Pumping. Additionally, the divestitures of our coiled tubing operations in September 2022 and our drilling and flowback operations in 2020 resulted in the "All Other" category having no operating segments and therefore in 2022, our corporate administrative expenses were aggregated into "Pressure Pumping", and prior periods have been restated accordingly. During the fourth quarter of 2022, we renamed our "Pressure Pumping" reportable segment to "Completion Services" since the Company is now positioned to provide highly complementary completion services to its customers and has significant cross-selling opportunities across its combined customer base. For additional financial information on our reportable segments presentation, please see reportable segment information in Part II - Item 8, "Financial Statements and Supplementary Data." +Completion Services +Hydraulic Fracturing +We provide hydraulic fracturing services to E&P companies in the Permian Basin. These services are intended to optimize hydrocarbon flow paths during the completion phase of horizontal shale wellbores. We have significant expertise in multi‑stage fracturing of horizontal oil‑producing wells in unconventional geological formations. Our total available hydraulic horsepower ("HHP") at December 31, 2022 wa s 1,315,000 HHP, which was comprised of 252,500 HHP of our Tier IV DGB equipment and 1,062,500 HHP of convention al Tier II equipment. An individual fleet could range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsite. During the year ended December 31, 2022, we recorded an impairment with respect to our DuraStim® hydraulic fracturing pumps (108,000 HHP) that did not meet the manufacturer’s specifications or our expectations and have remained idled. With the industry transition to lower emissions equipment and simultaneous hydraulic fracturing ("Simul-Frac"), in addition to several other changes to our customers' job designs, we believe that our available fleet capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at wellsites. In addition, in September 2021, August 2022 and December 2022, we committed to additional conversions of our Tier II equipment to Tier IV DGB, and purchase of new Tier IV DGB equipment. As such, we entered into conversion and purchase agreements with our equipment manufacturers for a total of 362,500 HH P of Tier IV DGB equipment and as of December 31, 2022, we have received 192,500 HH P of the converted and new Tier IV DGB equipment and expect to receive the remaining 170,000 HHP by the second quarter of 2023. In August 2022 and December 2022, we entered into leases for four electric fleets of 60,000 HHP per fleet. We expect to take delivery of the electric fleets at different times during the second half of 2023. We have entered into a contract with a customer for the use of one of our electric hydraulic fracturing fleets to provide committed services for a period of three years after we take delivery of the fleet. +The hydraulic fracturing process consists of pumping fracturing fluid into a well at sufficient pressure to fracture the formation. Materials known as proppants, which in our business are comprised primarily of sand, are suspended in the fracturing fluid and are pumped into the fracture to prop it open. The fracturing fluid is designed to break, or loosen viscosity, and be forced out of the formation by its pressure, leaving the proppants suspended in the fractures created, thereby increasing the mobility of the hydrocarbons. As a result of the fracturing process, production rates are usually enhanced substantially, thus increasing the rate of return of hydrocarbons for the operator. +We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We also refer to all of our fracturing units, other equipment and vehicles necessary to perform a fracturing job as a "fleet" and the personnel assigned to each fleet as a "crew." Our hydraulic fracturing units consist primarily of a high pressure hydraulic pumps, diesel or dual gas engines, transmissions and various hoses, valves, tanks and other supporting equipment like blenders, irons, hoses and datavans. +We provide dedicated equipment, personnel and services that are tailored to meet each of our customer’s needs. Each fleet has a designated team of personnel, which allows us to provide responsive and customized services, such as project design, proppant and other consumables procurement, real‑time data provision and post‑completion analysis for each of our jobs. Many of our +3 +hydraulic fracturing fleets and associated personnel have worked continuously with the same customer for the past several years promoting deep relationships and a high degree of coordination and visibility into future customer activity levels. Furthermore, in light of our substantial market presence and historically high fleet utilization levels, we have established a variety of trusted relationships with key equipment, sand and other downhole consumable suppliers. We believe these strategic relationships position us to acquire equipment, parts and materials on a timely and economic basis and allow our dedicated procurement and logistics team to support consistently safe and reliable operations. +Cementing +We provide cementing services for completion of new wells and remedial work on existing wells. Cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Cementing provides isolation between fluid zones behind the casing to minimize potential damage to hydrocarbon bearing formations or the integrity of freshwater aquifers, and provides structural integrity for the casing by securing it to the earth. Cementing is also done when re-completing wells, where one zone is plugged and another is opened. +We believe that our cementing segment provides an organic growth opportunity for us to expand our service offerings within our existing customer base. +Wireline +We provide wireline and ancillary services such as pumpdown on new oil well completions in the Permian Basin. Wireline utilizes equipment with a drum of wireline to deploy perforating guns in the well to perforate the casing, cement, and formation. Once the well is perforated, it is ready to be fractured. Pumpdown utilizes pressure pumping equipment to pump water into the well to deploy or push the perforating guns attached to wireline through the lateral section of a well. +We own and operate a fleet of mobile wireline units and other auxiliary equipment to perform well completion services. We also refer to our wireline units, pressure control equipment, other equipment and vehicles necessary to perform a job as a " spread " and the personnel assigned to the spread as a " crew. " On average, one wireline spread consists of a wireline tractor truck with a large cab functioning as mobile office where the engineer controls the wireline spooled drum along with associated pressure control iron and equipment, trailers and vehicles. We currently have 23 wireline units. +Other Services +Coiled Tubing +Coiled tubing services involve injecting coiled tubing into wells to perform various completion well intervention operations. Coiled tubing is a flexible steel pipe with a diameter of typically less than three inches and manufactured in continuous lengths of thousands of feet. It is wound or coiled on a truck‑mounted reel for onshore applications. Due to its small diameter, coiled tubing can be inserted into existing production tubing and used to perform a variety of services (including drillout of plugs) to enhance the flow of oil or natural gas. Effective September 1, 2022, we shut down our coiled tubing operations and disposed of all of the assets. +Our Customers +Our customers consist primarily of oil and natural gas producers in North America. Our top five customers accounted for a pproximately 84.0%, 85.7% and 86.5% of our revenue, for the years ended December 31, 2022, 2021 and 2020, respectively. For the year ended December 31, 2022, Pioneer Natural Resources USA Inc. ("Pioneer"), Endeavor Energy Resources and XTO Energy accounted for 33.1%, 28.3% and 15.0%, respectively, of total revenue. No other customer accounted for more than 10% of our total revenue for the year ended December 31, 2022. +On March 31, 2022, we entered into an amended and restated pressure pumping services agreement (the "A&R Pressure Pumping Services Agreement") with Pioneer , which was initially entered into in connection with our purchase of certain pressure pumping assets and real property from Pioneer and Pioneer Pumping Services (the "Pioneer Pressure Pumping Acquisition") . The A&R Pressure Pumping Services Agreement, which was effective from January 1, 2022 to December 31, 2022, reduced the number of contracted fleets to six fleets from eight fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, and replaced the idle fees arrangement with equipment reservation fees (the "Reservation fees"). As part of the Reservation fees arrangement, the Company was entitled to receive compensation for all eligible contracted fleets that were made available to Pioneer at the beginning of every quarter in 2022 through the term of the A&R Pressure Pumping Services Agreement. The A&R Pressure Pumping Services Agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and the Fleet Two Agreement described below. +4 +On October 31, 2022, we entered into two pressure pumping services agreements with Pioneer, pursuant to which we will provide hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and will terminate on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was originally planned to terminate on the one year anniversary of the date on which the fleet dedicated thereunder converted from a Tier II diesel Simul-Frac fleet to a Tier IV dual fuel zipper fleet, which was expected to occur in May 2023. In February 2023, Pioneer provided the Company notice (i) stating that Pioneer intended to release Fleet Two effective upon the completion of operations on the pad where the performance of Services (as defined in the Fleet Two Agreement) is in progress on May 12, 2023 (the “Release Date”) and (ii) requesting that the Company agree to the termination of the Fleet Two Agreement as of the Release Date. The Company agreed with such request, and, as a result, the Fleet Two Agreement will be terminated as of the Release Date. +Competition +The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services and equipment that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies’ criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company’s selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the oilfield service industry because of the capital requirements. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment portfolio and quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +We provide our services primarily in the Permian Basin, and we compete against different companies in each service and product line we offer. Our competition includes many large and small oilfield services companies, including the largest integrated oilfield services companies. Our major competitors include Halliburton Company, Liberty Energy Inc., ProFrac Holding Corp., Nextier Oilfield Solutions Inc., Patterson‑UTI Energy Inc., RPC, Inc., and a number of private and locally-oriented businesses. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the fourth quarter, relating to the conclusion of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather during which we may experience declines in our operating and financial results. +Operating Risks and Insurance +Our operations are subject to hazards inherent in the oilfield services industry, such as accidents, blowouts, explosions, fires and spills and releases that can cause personal injury or loss of life, damage or destruction of property, equipment, natural resources and the environment and suspension of operations. +In addition, claims for loss of oil and natural gas production and damage to formations can occur in the oilfield services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in us being named as a defendant in lawsuits asserting large claims. +Our business involves the transportation of heavy equipment and materials, and as a result, we may also experience traffic accidents which may result in spills, property damage and personal injury. +Despite our efforts to maintain safety standards, we have suffered accidents from time to time in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations. +5 +We maintain commercial general liability, workers’ compensation, business automobile, commercial property, umbrella liability, excess liability, and directors and officers insurance policies providing coverages of risks and amounts that we believe to be customary in our industry. Further, we have pollution legal liability coverage for our business entities, which would cover, among other things, third party liability and costs of clean up relating to environmental contamination on our premises while our equipment is in transit and on our customers’ job site. With respect to our operations, coverage would be available under our pollution legal liability policy for any surface or subsurface environmental clean‑up and liability to third parties arising from any surface or subsurface contamination. We also have certain specific coverages for some of our businesses, including our hydraulic fracturing and wireline services. +We maintain directors and officers insurance; however, our insurance coverage is subject to certain exclusions (including, for example, any required SEC disgorgement or penalties) and we are responsible for meeting certain deductibles under the policies. Moreover, we cannot assure you that our insurance coverage will adequately protect us from all future claims. +Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of the high premium costs relative to perceived risk. Further, insurance rates have in the past been subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us. See " Risk Factors " for a description of certain risks associated with our insurance policies. +Environmental and Occupational Health and Safety Regulations +Our operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection, and occupational health and safety. Numerous federal, state and local governmental agencies issue regulations that often require difficult and costly compliance measures that could carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may, for example, restrict the types, quantities and concentrations of various substances that can be released into the environment, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas and other protected areas, or require action to prevent or remediate pollution from current or former operations. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental, health and safety laws and regulations occur frequently, and any changes that result in more stringent and costly requirements could materially adversely affect our operations and financial position. For example, following the election of President Biden and passage of laws such as the IRA 2022, it is possible that our operations may be subject to greater environmental, health and safety restrictions, particularly with regards to hydraulic fracturing and wireline, permitting and greenhouse gases ( " GHG " ) emissions. We have not experienced any material adverse effect from compliance with current requirements; however, this trend may not continue in the future. +Below is an overview of some of the more significant environmental, health and safety requirements with which we must comply. Our customers’ operations are subject to similar laws and regulations. Any material adverse effect of these laws and regulations on our customers’ operations and financial position may also have an indirect material adverse effect on our operations and financial position. +Waste Handling. We handle, transport, store and dispose of wastes that are subject to the Resource Conservation and Recovery Act ( " RCRA " ) and comparable state laws and regulations, which affect our activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although certain petroleum production wastes are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. Moreover, the U.S. Environmental Protection Agency ( " EPA " ) or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or recategorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to recategorize certain oil and natural gas exploration, development and production wastes as hazardous wastes. Several environmental organizations have also petitioned the EPA to modify existing regulations to recategorize certain oil and natural gas exploration, development and production wastes as hazardous. Any such changes in these laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any +6 +legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act ( " CERCLA " or " Superfund " ) and analogous state laws generally impose liability without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Liability for the costs of removing or remediating previously disposed wastes or contamination, damages to natural resources, the costs of conducting certain health studies, amongst other things, is strict and joint and several. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state laws. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such hazardous substances have been released. +NORM. In the course of our operations, some of our equipment may be exposed to naturally occurring radioactive materials ( " NORM " ) associated with oil and gas deposits and, accordingly, may result in the generation of wastes and other materials containing NORM. NORM exhibiting levels of radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. +Water Discharges. The Clean Water Act, Safe Drinking Water Act, Oil Pollution Act and analogous state laws and regulations impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into regulated waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Also, spill prevention, control and countermeasure plan requirements require appropriate containment berms and similar structures to help prevent the contamination of regulated waters. +Air Emissions. The Clean Air Act ( " CAA " ) and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other emissions control requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants from specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. These and other laws and regulations may increase the costs of compliance for some facilities where we operate. Obtaining or renewing permits also has the potential to delay the development of oil and natural gas projects. +Climate Change. In the United States, no comprehensive climate change legislation has been implemented at the federal level, though recently passed laws such as the IRA 2022 advance numerous climate-related objectives. Additionally, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, implement New Source Performance Standards directing the reduction of certain pollutants from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the Department of Transportation ("DOT"), implementing GHG emissions limits on vehicles manufactured for operation in the United States. In September 2020, the Trump Administration revised prior regulations to rescind certain methane standards and remove the transmission and storage segments from the source category for certain regulations. However, subsequently, the U.S. Congress approved, and President Biden signed into law, a resolution under the Congressional Review Act to repeal the September 2020 revisions to the methane standards, effectively reinstating the prior standards. Additionally, the EPA has proposed more recent rules covering the standards of performance for methane and volatile organic compounds emissions for oil and gas facilities, including leak detection, monitoring and repair, and a "super-emitter" response program to timely mitigate emissions events as detected by governmental agencies or qualified third parties. Certain of these requirements are currently subject to public comment, and the rule is expected to be finalized in 2023; however, it is likely that these requirements will be subject to legal challenge. +Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas such as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored " Paris Agreement, " requires member states to submit non-binding, individually-determined reduction goals known as Nationally Determined Contributions ( " NDCs " ) every five years after 2020. Following President Biden’s executive order in January 2021, the United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. Some countries, including the United States, have additionally made commitments to reduce global methane +7 +emissions through initiatives such as the Global Methane Pledge, and have been called upon to phase out inefficient fossil fuel subsidies. However, the impacts of these actions are unclear at this time. For more information, see our risk factors titled "Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide" and "The IRA 2022 could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations." +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, including climate-change-related pledges made by certain candidates for public office. On January 27, 2021, President Biden issued an executive order that commits to substantial action on climate change, calling for, among other things, the increased use of zero-emissions vehicles by the federal government, the elimination of subsidies provided to the fossil fuel industry and an increased emphasis on climate-related risk across government agencies and economic sectors. The executive order also suspends the issuance of new leases for oil and gas development on federal land; for more information, see our regulatory disclosure titled " Regulation of Hydraulic Fracturing and Related Activities. " Other actions that the Biden Administration may take include the imposition of more restrictive requirements for the development of pipeline infrastructure or liquefied natural gas export facilities or more restrictive GHG emissions limitations for oil and gas facilities. Litigation risks are also increasing as a number of parties have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. +The adoption and implementation of new or more stringent international, federal or state legislation, regulations or other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate GHG emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for, oil and natural gas, which could reduce demand for our services and products. +Moreover, climate change may result in various physical risks, such as the increased frequency or intensity of extreme weather events or changes in the meteorological and hydrological patterns, that could adversely impact us, our customers’ and our suppliers’ operations. Such physical risks may result in damage to our customers’ facilities or otherwise adversely impact our operations, such as if facilities are subject to water use curtailments in response to drought, or demand for our customers’ products, such as to the extent warmer winters reduce the demand for energy for heating purposes, which may ultimately reduce demand for the products and services we provide. Such physical risks may also impact our suppliers, which may adversely affect our ability to provide our products and services. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Endangered and Threatened Species. Environmental laws such as the Endangered Species Act ( " ESA " ) and analogous state laws may impact exploration, development and production activities in areas where we operate. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and various state analogs. The U.S. Fish and Wildlife Service ( " FWS " ) may identify previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species. For example, the dunes sagebrush lizard, which is found only in the active and semi-stable shinnery oak dunes of southeastern New Mexico and adjacent portions of Texas (including areas where our customers operate), was a candidate species for listing under the ESA by the FWS for many years. As a result of a recent settlement with certain environmental groups, the FWS, in July 2020, acted on a petition to list the dunes sagebrush lizard finding sufficient information to warrant a formal one-year review to consider listing the species. While that deadline has been missed, the listing review is reportedly ongoing and a decision is expected in June 2023; additionally, FWS has also solicited comments on a proposed conservation agreement that would implement certain protective practices for the species and authorize incidental take of the species resulting from certain covered activities, including exploration and development of oil and gas fields. However, to the extent any protections are implemented for this or any other species, it could cause us or our customers to incur additional costs or become subject to operating restrictions or operating bans in the affected areas. +Regulation of Hydraulic Fracturing and Related Activities. Our hydraulic fracturing operations are a significant component of our business. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. Although several of these rulemakings have been rescinded, modified or subjected to legal challenges, new or more +8 +stringent regulations may be promulgated by the Biden administration. For example, the Bureau of Land Management (“BLM”) recently proposed a rule that would limit flaring from well sites on federal lands, as well as allow the delay or denial of permits if BLM finds that an operator’s methane waste minimization plan is insufficient. The Biden Administration has also called for revisions and restrictions to the leasing and permitting programs for oil and gas development on federal lands and, for a time, suspended federal oil and gas leasing activities. The Department of the Interior ( " DOI " ) has also issued a report recommending various changes to the federal leasing program, though many such changes would require Congressional action. As a result, we cannot predict the final scope of regulations or restrictions that may apply to oil and gas operations on federal lands. However, any regulations that ban or effectively ban such operations may adversely impact demand for our products and services. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have previously been proposed in Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +Federal and state governments have also investigated whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for wastewater disposal wells that impose permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission’s well completion seismicity guidelines for operators in the SCOOP and STACK require hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division has previously issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission ( "TRRC") has adopted similar rules including the indefinite suspension of all deep oil and gas produced water injection wells in certain areas covered by the TRRC’s seismic response program. +Increased regulation of hydraulic fracturing and related activities could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and record keeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. For more information on each of these items, see our risk factor titled "Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays." +OSHA Matters. The Occupational Safety and Health Act ( " OSHA " ) and comparable state statutes regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. +Human Capital +Our employees are our key asset. Our primary human capital management objectives are to effectively engage, develop, retain and reward our employees. As of December 31, 2022, we employed approximatel y 2,000 people , none of which are unionized. All of our employees work for or support our Completion Services reportable segment. Our employees are a key component of our ability to attract and retain customers as a result of their operational excellence in the field. +Some examples of significant programs and initiatives that are focused to attract, develop and retain our diverse workforce include: +• Diversity and inclusion. We believe that in order to attract and retain talent with the skill sets and expertise required to maximize our operational efficiencies across all levels in the Company, it is in our best interest to attempt to recruit and develop a diverse team and create a culture that is inclusive and provides equal opportunities for hiring and advancement for all employees and prospective employees. Some examples of this effort include; +◦ a commitment to conducting business in a manner that respects all human rights in compliance within the requirements of applicable laws; +9 +◦ efforts to promote and encourage respect for human rights and fundamental freedoms for all without distinctions of any kind such as race, color, sex, language, religion, political or other opinions; +◦ working in partnership with personnel, business parties and other parties directly linked to our operations that share our commitment to these same principles; +◦ efforts in our employment practices, including through our code of conduct, our equal employment opportunity employer policy, and our anti-harassment policy; and +◦ to make it possible for grievances regarding health and safety to be addressed early and remediated directly, in confidence and without fear of retaliation; the Company provides an anonymous Ethics and Compliance hotline that is promoted internally and accessible from our intranet and internet. +• Training and Safety. We offer in-depth, role-appropriate safety training upon hiring and as part of the continuous development of our employees. The safety of our employees, our customers, and the communities in which we operate is paramount. We track and evaluate safety incidents at wellsites and offices, and if an accident does occur, we take actions to mitigate similar incidents from reoccurring in the future. The Company incentivizes employees to focus on conducting operations in accordance with our strict safety standards and encourages employees to immediately report any breach of safety protocol. Ten percent of our executive officers’ annual target bonuses under the 2022 annual incentive program were based upon the Company’s achievement of certain safety goals, including a target total recordable incident rate of less than 0.65. +• Professional Development. In 2022, ProPetro launched a leadership training initiative for all positions that are responsible for supervision and oversight of other employees. This effort includes development of 255 frontline and above leadership positions over a seven month period. In 2021, ProPetro introduced a Tuition Reimbursement Program to encourage employees to pursue professional development interests that will help strengthen skills and competencies required for their current position or future roles in the business. +• Health, Wellness and Benefits. Our employee benefit offerings are designed to meet the varied and evolving needs of a diverse workforce across the Company and we believe are consistent with those provided by our peer companies with which we compete for talent. The Company provides employees with the ability to participate in health and welfare plans, including medical, dental, life, accidental death and dismemberment and short-term and long-term disability insurance plans. +We periodically review of our health-related benefits program to ensure that our offerings are market competitive and effectively utilized by employees. Based on our recent review, we made comprehensive adjustments to our health-related benefits programs, which improved the cost and quality of coverage. We significantly increased the number of employee meetings to provide education and encourage individuals to maximize the value of benefits offered, resulting in an overall increase in participation and positive feedback from employees. +In 2022, we implemented improvements to our 401(k) plan with a focus on improving plan structure, allowing for immediate vesting of employer’s contributions, reducing program administration, providing employee education and increasing plan participation. We also implemented an hourly bonus structure in 2022 to provide greater reward and recognition and improve employee retention. For hydraulic fracturing field employees and related field support positions, a performance element was included to drive key operating metrics. +Availability of Filings +Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the " Exchange Act " ), are made available free of charge on our internet website at www.propetroservices.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the SEC. The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that website is www.sec.gov. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Annual Report or the documents incorporated by reference in this Annual Report. +10 \ No newline at end of file diff --git a/raw/filings/0001680247/2022/0001680247-23-000026/item13.txt b/raw/filings/0001680247/2022/0001680247-23-000026/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..428bd5a9f11e08a7eb2d75ae75d26efc2a84f5e2 --- /dev/null +++ b/raw/filings/0001680247/2022/0001680247-23-000026/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Party Transactions, and Director Independence. +The information required by Item 13 is incorporated by reference to the Company’s Proxy Statement for its 2023 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2023. \ No newline at end of file diff --git a/raw/filings/0001680247/2022/0001680247-23-000026/item9a.txt b/raw/filings/0001680247/2022/0001680247-23-000026/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..78a0aeb8d0dee2489b989276f1952795f6a9be8f --- /dev/null +++ b/raw/filings/0001680247/2022/0001680247-23-000026/item9a.txt @@ -0,0 +1,11 @@ +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2022. As noted in Management’s Report on Internal Control over Financial Reporting, management’s evaluation of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of Silvertip Completion Services Operating, LLC, which was acquired on November 1, 2022. Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company. We are in the process of integrating Silvertip’s internal controls with our internal controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. +Management’s Report on Internal Control over Financial Reporting +The management of ProPetro Holding Corp. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. ProPetro Holding Corp. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with U.S. GAAP. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any control system. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company will be detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our internal cont rol over financial reporting as of December 31, 2022 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management believes that ProPetro Holding Corp. maintained effective internal control over financial reporting as of December 31, 2022. Management’s evaluation of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of the Silvertip Completion Services Operating, LLC, which was acquired on November 1, 2022 and whose financial statements constitute 13.0% and 2.4% of total assets and revenue, respectively of the consolidated financial statement amounts as of and for the year ended December 31, 2022. T he independent registered public accounting firm, Deloitte & Touche LLP , Houston, Texas, United States , Auditor Firm ID # 34 , has audited the consolidated financial statements as of and for the year ended December 31, 2022, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this Annual Report under Part II, Item 8 above. +82 +Changes in Internal Control over Financial Reporting +During the quarter ended December 31, 2022, we acquired Silvertip Completion Services Operating, LLC and integrated its financial reporting processes with ours. Other than such changes, there were no changes in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001680247/2022/0001680247-23-000026/rp_note.txt b/raw/filings/0001680247/2022/0001680247-23-000026/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..046c39a4d847091fbc53655331a942c2339656e5 --- /dev/null +++ b/raw/filings/0001680247/2022/0001680247-23-000026/rp_note.txt @@ -0,0 +1,8 @@ +15. RELATED-PARTY TRANSACTIONS +Operations and Maintenance Yards +The Company rents five yards from an entity, in which a director of the Company has an equity interest and the total annual rent expense for each of the five yards was approximately $ 0.03 million, $ 0.03 million, $ 0.1 million, $ 0.1 million, and $ 0.2 million, respectively. +Pioneer +On December 31, 2018, we consummated the Pioneer Pressure Pumping Acquisition with Pioneer and Pioneer Pumping Services. In connection with the Pioneer Pressure Pumping Acquisition, Pioneer received 16.6 million shares of our common stock and approximately $ 110.0 million in cash. On March 31, 2022, we entered into an amended and restated pressure pumping services agreement (the "A&R Pressure Pumping Services Agreement"), which was initially entered into in connection with the Pioneer Pressure Pumping Acquisition. The A&R Pressure Pumping Services Agreement was effective January 1, 2022 through December 31, 2022. The A&R Pressure Pumping Services Agreement reduced the number of contracted fleets from eight fleets to six fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, and replaced the idle fees arrangement with equipment reservation fees (the "Reservation fees"). As part of the Reservation fees arrangement, the Company will be entitled to receive compensation for all eligible contracted fleets that are made available to Pioneer at the beginning of every quarter in 2022 through the term of the A&R Pressure Pumping Services Agreement. On October 31, 2022, we entered into two pressure pumping services agreements (the "Fleet One Agreement" and "Fleet Two Agreement") with Pioneer, where we will provide hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and will terminate on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was originally planned to terminate on the one year anniversary of the date on which the fleet dedicated thereunder converted from a Tier II diesel Simul-Frac fleet to a Tier IV dual fuel zipper fleet, which was expected to occur in May 2023. In February 2023, Pioneer provided the Company notice (i) stating that Pioneer intended to release Fleet Two effective upon the completion of operations on the pad where the performance of Services (as defined in the Fleet Two Agreement) is in progress on May 12, 2023 and (ii) requesting that the Company agree to the termination of the Fleet Two Agreement as of the Release Date. The Company agreed with such request, and, as a result, the Fleet Two Agreement will be terminated as of the Release Date. +Revenue from services provided to Pioneer (including reservation and idle fees) accounted for approximately $ 423.7 million, $ 473.8 million and $ 335.4 million of our total revenue during the years ended December 31, 2022, 2021 and 2020, respectively. +In connection with the Pioneer Pressure Pumping Acquisition, the Company agreed to reimburse Pioneer for a certain portion of the retention bonuses paid to former Pioneer employees that were subsequently employed by the Company. During years ended December 31, 2022, 2021 and 2020, the Company fully reimbursed Pioneer approximately $ 0 , $ 0 and $ 2.7 million respectively. +As of December 31, 2022, the total accounts receivable due from Pioneer, including estimated unbilled receivable for services (including reservation fees) we provided, amounted to $ 46.2 million a nd the amount due to Pioneer was $ 0 . As of December 31, 2021, the balance due from Pioneer for services (including idle fees) we provided amo unted to approximately $ 62.1 million and the amount due to Pioneer was $ 0 . \ No newline at end of file diff --git a/raw/filings/0001680247/2022/0001680247-23-000026/rpt_disclosure.txt b/raw/filings/0001680247/2022/0001680247-23-000026/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a6417cedea26fd55291e75bc6b56200d638dc60 --- /dev/null +++ b/raw/filings/0001680247/2022/0001680247-23-000026/rpt_disclosure.txt @@ -0,0 +1,13 @@ +Certain Relationships and Related Party Transactions +RELATED PARTY TRANSACTIONS +Operations and Maintenance Yards +The Company also rents five yards from South Midkiff Partners, LLC, an entity partially owned by Spencer D. Armour III (a director) and David Sledge, the father of Sam Sledge, our Chief Executive Officer. Total annual rent expense in 2022 for each of the five yards was approximately $0.03 million, $0.03 million, $0.1 million, $0.1 million, and $0.2 million, respectively. +Transportation and Equipment Rental +Adam Muñoz, our President and Chief Operating Officer, has a family relationship with an employee of J&M Burns Transportation, an entity that provides transportation services to the Company. The employee receives a portion of his compensation from J&M Burns Transportation based on the amount of services sold by him to customers, including the Company. The Company incurred approximately $36.8 million in expense for the year ended December 31, 2022 for services provided to the Company by J&M Burns Transportation. +Executive Officer Family Members +J. Oscar Dominguez is our former Vice President of Frac Technical Services and the father-in-law of Adam Muñoz. Mr. Dominguez received total compensation of approximately $2.1 million for his services for the year ended December 31, 2022 (including $459,000 cash compensation, $286,000 non-cash equity compensation, $1.3 million cash as a severance payment and $15,000 cash payout for accrued paid time off). +Oscar M. Dominguez is our Vice President of Frac Operations and the brother-in-law of Adam Muñoz. Mr. Dominguez received total compensation of approximately $1.1 million for his services for the year ended December 31, 2022 (including $781,000 cash compensation and $276,000 non-cash equity compensation). +Roger Dominguez is our Supply Chain Logistics Manager and the brother-in-law of Adam Muñoz. Mr. Dominguez received total compensation of approximately $312,000 for his services for the year ended December 31, 2022 (including $260,000 cash compensation and $52,000 non-cash equity compensation). +Pioneer +On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property in connection with the Pioneer Pressure Pumping Acquisition. In connection with the consummation of the Pioneer Pressure Pumping Acquisition and effective January 1, 2019, we became a long-term service provider to Pioneer, providing pressure pumping and related services. In March, 2022, we amended and restated our agreement to provide pressure pumping and related services to Pioneer, which reduced the number of contracted fleets to six fleets from eight fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, replaced the idle fees arrangement with equipment reservation fees and provided for an initial term from January 1, 2022 through December 31, 2022, subject to extension and termination as described therein. On October 31, 2022, we entered into (i) a certain Pressure Pumping Services Agreement—Fleet One Simulfrac (the “Fleet One Pressure Pumping Agreement”) and (ii) a certain Pressure Pumping Services Agreement—Fleet Two (the “Fleet Two Pressure Pumping Agreement”), which replaced all previous agreements with Pioneer and reduced the number of contracted fleets to two fleets. The Fleet One Pressure Pumping Agreement is effective as of January 1, 2023 and will terminate on August 31, 2023 and is subject to certain extension, termination and release rights as described therein. The Fleet Two Pressure Pumping Agreement is effective as of January 1, 2023. In February 2023, we mutually agreed with Pioneer to terminate the Fleet Two Pressure Pumping Agreement, effective on or about May 12, 2023. 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+______________________________ +☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31 , 2023 +or +☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File Number: 001-38035 +______________________________ +ProPetro Holding Corp. +(Exact name of registrant as specified in its charter) +______________________________ +Delaware 26-3685382 +(State or other jurisdiction of +incorporation or organization) (I.R.S. Employer +Identification No.) +303 W. Wall Street, Suite 102 , Midland , Texas 79701 +(Address of principal executive offices) (Zip Code) +Registrant’s telephone number, including area code: ( 432 ) 688-0012 +Former address: 1706 South Midkiff, Midland, Texas 79701 +(Former name, former address and former fiscal year, if changed since last report) +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock ($0.001 par value) PUMP New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: +None +______________________________________________________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities A ct. Yes ý No ¨ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. +Large accelerated filer +ý +Accelerated filer ☐ +Non-accelerated filer +☐ (Do not check if a smaller reporting company) +Smaller reporting company ☐ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý +The aggregate market value of the Company’s Common Stock held by nonaffiliates on June 30, 2023, determined using the per share closing price on the New York Stock Exchange Composite tape of $8.24 on that date, was approximately $ 787.8 million. +The number of the registrant’s common shares, par value $0.001 per share, outstanding at March 8, 2024 , was 107,567,074 . +TABLE OF CONTENTS +FORWARD-LOOKING STATEMENTS +i +SUMMARY OF RISK FACTORS +iii +PART I +BUSINESS +1 +RISK FACTORS +11 +UNRESOLVED STAFF COMMENTS +30 +CYBERSECURITY +30 +PROPERTIES +31 +LEGAL PROCEEDINGS +31 +MINE SAFETY DISCLOSURES +31 +PART II +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +31 +SELECTED FINANCIAL DATA +33 +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +34 +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +47 +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +48 +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +87 +CONTROLS AND PROCEDURES +87 +OTHER INFORMATION +88 +DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +88 +PART III +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +88 +EXECUTIVE COMPENSATION +89 +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +89 +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +89 +PRINCIPAL ACCOUNTING FEES AND SERVICES +89 +PART IV +EXHIBITS AND FINANCIAL SCHEDULES +90 +FORM 10-K SUMMARY +92 +SIGNATURES +93 +i +FORWARD‑LOOKING STATEMENTS +This Annual Report on Form 10-K (the "Annual Report") contains forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Form 10-K are forward-looking statements. Forward-looking statements are all statements other than statements of historical fact, and given our expectations or forecasts of future events as of the effective date of this Form 10-K. Words such as "may," "could," "plan," "project," "budget," "predict," "pursue," "target," "seek," "objective," "believe," "expect," "anticipate," "intend," "estimate, " "will," "should" and similar expressions are generally used to identify forward-looking statements. These statements include, but are not limited to, statements about our business strategy, industry, future profitabilit y, future capital expenditu res, our fleet conversion strategy and our share repurchase program. Such statements are subject to risks and uncertainties. Many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those implied or projected by the forward-looking statements. Factors that could cause our actual results to differ materially from those contemplated by such forward‑looking statements include: +• changes in general economic and geopolitical conditions, including higher interest rates, the rate of inflation and a potential economic recession; +• central bank policy actions, bank failures and associated liquidity risks and other factors; +• the severity and duration of any world events and armed conflict, including the Russian-Ukraine war, conflicts in the Israel-Gaza region and associated repercussions to supply and demand for oil and gas and the economy generally; +• the actions taken by the members of the Organization of the Petroleum Exporting Countries ("OPEC") and Russia (together with OPEC and other allied producing countries, "OPEC+") with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations; +• actions taken by the current government, such as executive orders or new regulations, that may negatively impact the future production of oil and natural gas in the United States and may adversely affect our future operations; +• the level of production and resulting market prices for crude oil, natural gas and other hydrocarbons; +• the effects of existing and future laws and governmental regulations (or the interpretation thereof) on us, our suppliers and our customers; +• cost increases and supply chain constraints related to our services, including any delays and/or supply chain disruptions due to increased hostilities in the Middle East; +• competitive conditions in our industry; +• our ability to attract and retain employees; +• changes in the long-term supply of, and demand for, oil and natural gas; +• actions taken by our customers, suppliers, competitors and third-party operators and the possible loss of customers or work to our competitors; +• technological changes, including lower emissions oilfield service equipment and similar advancements; +• changes in the availability and cost of capital; +• our ability to successfully implement our business plan, including execution of potential mergers and acquisitions; +• large or multiple customer defaults, including defaults resulting from actual or potential insolvencies; +• the effects of consolidation on our customers or competitors; +• the price and availability of debt and equity financing (including increasing interest rates) for us and our customers; +• our ability to complete growth projects on time and on budget; +• increases in tax rates or types of taxes enacted that specifically impact E&P and related operations resulting in changes in the amount of taxes owed by us; +• regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our services; +i +• new or expanded regulations that materially limit our customers’ access to federal and state lands for oil and gas development, thereby reducing demand for our services in the affected areas; +• growing demand for electric vehicles that result in reduced demand for gasoline and therefore the demand for our services; +• our ability to successfully implement technological developments and enhancements, including our new Tier IV Dynamic Gas Blending (" DGB ") dual-fuel and FORCE SM electric-powered hydraulic fracturing equipment, and other lower-emissions equipment we may acquire or that may be sought by our customers; +• the projected timing, purchase price and number of shares purchased under our share repurchase program, the sources of funds under the repurchase program and the impacts of the repurchase program; +• operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control, such as fires, which risks may be self-insured, or may not be fully covered under our insurance programs; +• exposure to cyber-security events which could cause operational disruptions or reputational harm; +• acts of terrorism, war or political or civil unrest in the United States or elsewhere; and +• the effects of current and future litigation. +Readers are cautioned not to place undue reliance on our forward‑looking statements. Although forward‑looking statements reflect our good faith beliefs at the time they are made, forward‑looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under "Item 1A. Risk Factors" of this Annual Report, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward‑looking statements. We do not undertake, and expressly disclaim, any duty to update or revise any forward‑looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except as required by applicable securities laws. +Unless the context indicates otherwise, all references to "ProPetro Holding Corp.," "the Company," "we," "our" or "us" or like terms refer to ProPetro Holding Corp. and its co nsolidated subsidiaries, ProPetro Services, Inc. and Silvertip Completion Services Operating, LLC. +ii +SUMMARY RISK FACTORS +Our business is subject to varying degrees of risk and uncertainty. Investors should consider the risks and uncertainties summarized below, as well as the risks and uncertainties discussed in Part I, "Item 1A. Risk Factors" of this Annual Report. Additional risks not presently known to us or that we currently deem immaterial may also affect us. If any of these risks occur, our business, financial condition or results of operations could be materially and adversely affected. +Our business is subject to the following principal risks and uncertainties: +Risks Inherent in Our Business and Industry +• Our business and financial performance depends on the historically cyclical oil and natural gas industry and particularly on the level of capital spending and exploration and production (“E&P”) activity within the United States and in the Permian Basin, and a decline in prices for oil and natural gas may cause fluctuation in operating results or otherwise have an adverse effect on our revenue, cash flows, profitability and growth. +• The cyclical nature of the oil and natural gas industry may cause our operating results to fluctuate. +• The majority of our operations are located in the Permian Basin, making us vulnerable to risks associated with operating in one major geographic area. +• The Inflation Reduction Act of 2022 ("IRA 2022") and actions taken by the United States and other countries on climate change or to transition away from fossil fuels could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations. +• The COVID-19 pandemic has negatively impacted crude oil prices and demand for our products and services in recent years, and may negatively impact crude oil prices and demand for our products and services in the future. +• Our business may be adversely affected by a deterioration in general economic conditions or a weakening of the broader energy industry. +• Our operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms, or at all, which could limit our ability to grow. +• Our indebtedness and liquidity needs could restrict our operations and make us more vulnerable to adverse economic conditions. +• Restrictions in our ABL Credit Facility (as defined herein) and any future financing agreements may limit our ability to finance future operations or capital needs or capitalize on potential acquisitions and other business opportunities. +• Our operations are subject to unforeseen interruptions and hazards inherent in the oil and natural gas industry, for which we may not be adequately insured and which could cause us to lose customers and substantial revenue. +• We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +• We may grow through acquisitions and our failure to properly plan and manage those acquisitions may adversely affect our performance. +Risks Related to Customers, Suppliers and Competition +• Reliance upon a few large customers may adversely affect our revenue and operating results. +• We face significant competition that may cause us to lose market share, and competition in our industry has intensified during the recent industry downturn. +• We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our business, results of operations and financial conditions. +• Our business depends upon the ability to obtain specialized equipment, parts and key raw materials, including sand and chemicals, from third‑party suppliers, and we may be vulnerable to delayed deliveries and future price increases. +iii +• We may be required to pay fees to certain of our sand suppliers (the “Sand Suppliers”) based on minimum volumes under long-term contracts regardless of actual volumes received. +Risks Related to Employees +• We rely on a few key employees whose absence or loss could adversely affect our business. +• If we are unable to employ a sufficient number of skilled and qualified workers, our capacity and profitability could be diminished and our growth potential could be impaired. +Risks Related to Regulatory Matters +• We are subject to environmental laws and regulations, and future compliance, claims, and liabilities relating to such matters may have a material adverse effect on our results of operations, financial position or cash flows. +• Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide. +• Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +• Increased attention to environmental, social and governance (“ESG”) matters, conservation measures, commercial development and technological advances could reduce demand for oil and natural gas and our services. +• Certain of our completion services, particularly our hydraulic fracturing services, are substantially dependent on the availability of water. Restrictions on our or our customers’ ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows. +Risks Related to our Tax Matters +• Our ability to use our net operating loss carryforwards (“NOLs”) may be limited. +• Changes to applicable tax laws and regulations or exposure to additional income tax liabilities could adversely affect our operating results and cash flows. +Risks Inherent to an Investment in our Common Stock +• We have identified a material weakness in our internal control over financial reporting with regard to segregation of certain accounting duties and management review controls. We may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements, cause us to fail to meet our reporting obligations, investors may lose confidence in our financial reporting, and our stock price may decline as a result. +• Certain provisions of our certificate of incorporation, and bylaws, as well as Delaware law, may discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock. +• Our business could be negatively affected as a result of the actions of activist shareholders. +• Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to pursue actions in another judicial forum for disputes with us or our directors, officers, employees or agents. +• There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock. +iv +PART I +Item 1. Business. +Our Company +We are a leading integrated oilfield service company, located in Midland, Texas, focused on providing innovative hydraulic fracturing, wireline, and other complementary oilfield completion services to leading upstream oil and gas companies engaged in the E&P of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil‑producing areas in the United States, and we believe we are one of the leading providers of completion services in the region. +On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip Completion Services Operating, LLC (the "Silvertip Acquisition"), which provides wireline perforation and ancillary services solely in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed debt, and the payment of certain other closing and transaction costs. The Silvertip Acquisition positioned the Company as a more integrated and diversified completions-focused oilfield service provider headquartered in the Permian Basin. +On December 1, 2023, we consummated the purchase of the assets and operations of Par Five Energy Services LLC (“Par Five”), which provides cementing services in the Delaware Basin in exchange for $25.4 million of cash . Par Five’s business complements our existing cementing business and enables us to serve both the Midland and Delaware Basins of the Permian Basin. +Our competitors include many large and small oilfield service companies, including Halliburton Company, Liberty Energy Inc., Patterson-UTI Energy Inc., ProFrac Holding Corp., RPC, Inc., and a number of private and locally-oriented businesses. The markets in which we operate are highly competitive. To be successful, an oilfield service company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies' criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company's selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the service industry because of the capital requirements, lack of large scale deployment of certain new technology such as electric-powered equipment, and the pricing for our services and expected return on invested capital. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +Our substantial market presence in the Permian Basin positions us well to capitalize on drilling and completion activity in the region. Our operational focus has primarily been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have increased our operations in the Delaware sub-basin and are well-positioned to support further increases to our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending. +We primarily provide hydraulic fracturing, wireline, and cementing completion services to E&P companies in the Permian Basin. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region's increasingly high-intensity well completions (including simultaneous hydraulic fracturing (“Simul-Frac”), which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. +Effective September 1, 2022, we disposed of our coiled tubing assets to STEP Energy Services L td. ("STEP") and shut down our coiled tubing operations. We received approximately $2.8 million in cash and 2.6 million common shares of STEP, valued at $11.8 million, as consideration. Upon the sale of our coiled tubing assets, we recorded a loss on sale of $13.8 million . +1 +Commodity Price and Other Economic Conditions +The oil and gas industry has traditionally been volatile and is characterized by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, war and political instability in oil producing countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. +Since October 2023, an ongoing conflict between Israel and Palestinian militants in the Israel-Gaza region has led to significant armed hostilities. The geopolitical and macroeconomic consequences of this conflict remain uncertain, and such events, or any further hostilities in the Israel-Gaza region or elsewhere, could severely impact the world economy, the demand for and price of crude oil and the oil and gas industry generally and may adversely affect our financial condition. +Similarly, the geopolitical and macroeconomic consequences of the Russian invasion of Ukraine, including the associated sanctions, and the adverse impacts of the COVID-19 pandemic in recent years have resulted in volatility in supply and demand dynamics for crude oil and associated volatility in crude oil pricing. As the global response to the COVID-19 pandemic began to wane, the demand and prices for crude oil increased from the lows experienced in 2020, with the West Texas Intermediate (“WTI”) average crude oil price reaching approximately $94 per barrel in 2022, the highest average price in the prior nine years. However, in 2023, the WTI average crude oil price declined to approximately $78 per barrel. We believe that the volatility of crude oil prices in recent years has been partly driven by declines in crude oil supplies, concerns over sanctions resulting from Russia's invasion of Ukraine, concerns over a potential disruption of Middle Eastern oil supplies resulting from the ongoing conflict between Israel and Palestinian militants in the Israel-Gaza region, slower crude oil production growth due to the lack of reinvestment in the oil and gas industry in the last two years, recent OPEC+ production cuts of approximately 1.3 million barrels per day and concerns of a potential global recession resulting from high inflation and interest rates. +With the significant increase in global crude oil prices from 2021, including the WTI crude oil price, there was a significant increase in the Permian Basin rig count from approximately 179 at the beginning of 2021 to approximately 353 at the end of 2022, according to the Baker Hughes Company (“Baker Hughes”). Following the increase in rig count and the WTI crude oil price, the oilfield service industry has experienced increased demand for its completion services, and improved pricing. However, we have recently experienced a 13% decrease in the rig count in 2023 to 309 at the end of 2023 which resulted in a reduction in the demand for completion services and pressure on pricing of our services. +Sustained levels of high inflation have likewise caused the U.S. Federal Reserve and other central banks to increase interest rates, and to the extent elevated inflation remains, we may experience further cost increases for our operations, including interest rates, labor costs and equipment. We cannot predict any future trends in the rate of inflation and crude oil prices. A significant increase in or continued high levels of inflation, to the extent we are unable to timely pass-through the cost increases to our customers, or further declines in crude oil prices would negatively impact our business, financial condition and results of operations. See Part II, Item 1A. "Risk Factors—We may be adversely affected by the effects of inflation." +Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including upstream and oilfield service companies. As a result, we are working with our customers and equipment manufacturers to transition our equipment to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB dual-fuel , FORCE SM electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. We have transitioned our hydraulic fracturing available equipment portfolio from approximately 10% lower emissions equipment in 2021 to approximately 35% in 2022 and 60% in 2023, and expect to increase to approximately 65% by the end of the first half of 2024. To the extent any of our customers have certain expectations or requirements with respect to emissions reductions from their contractors, if we are unable to continue quickly transitioning to lower emissions equipment, the demand for our services could be adversely impacted. +If the Permian Basin rig count and market conditions improve, including improved pricing for our services and labor availability, and we are able to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also improve. If the rig count or market conditions do not improve or decline in the future, and we are +2 +unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows . +Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment. +Our Services +We have historically conducted our business through four operating segments: hydraulic fracturing, wireline, cementing and coiled tubing. Prior to the fourth quarter of fiscal year 2023, our operating segments met the aggregation criteria and were aggregated into the “Completion Services” reportable segment and our coiled tubing operations (which were divested in September 2022) were shown in the “All Other” category. Effective as of the fourth quarter of fiscal year 2023, we revised our segment reporting as we determined that our three operating segments no longer met the criteria to be aggregated. Our Hydraulic Fracturing and Wireline operating segments meet the criteria of a reportable segment. Our cementing and our divested coiled tubing segments do not meet the reportable segment criteria and are included within the “All Other” category. Prior period segment information has been revised to conform to our current presentation. For additional financial information on our reportable segments presentation, please see reportable segment information in Part II - Item 8, "Financial Statements and Supplementary Data." +Completion Services +Hydraulic Fracturing +We provide hydraulic fracturing services to E&P companies in the Permian Basin. These services are intended to optimize hydrocarbon flow paths during the completion phase of horizontal shale wellbores. We have significant expertise in multi‑stage fracturing of horizontal oil‑producing wells in unconventional geological formations. Our total available hydraulic horsepower ("HHP") at December 31, 2023 w as 1,461,500 HHP, which was comprised of 452,500 HHP of our Tier IV DGB dual-fuel equipment, 144,000 HHP of FORCE SM electric-powered equipment and 865,000 HHP of conventional Tier II equipment. An individual fleet could range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsite. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region’s increasingly high-intensity well completions (including Simul-Frac, which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. With the industry transition to lower emissions equipment and Simul-Frac, in addition to several other changes to our customers' job designs, we believe that our available fleet capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at wellsites. In addition, in 2021 and 2022, we committed to additional conversions of our Tier II equipment to Tier IV DGB dual-fuel equipment, and to purchase new Tier IV DGB dual-fuel equipment. As such, we entered into conversion and purchase agreements with our equipment manufacturers for a total of 452,500 HHP of Tier IV DGB du al-fuel equipment and as of December 31, 2023, we have received all of the converted and new Tier IV DGB dual-fuel equipment. In 2022, we entered into three-year electric fleet leases for a total of four FORCE SM electric-powered hydraulic fracturing fleets with 60,000 HHP per fleet. As of December 31, 2023, we have re ceived 144,000 HHP of FORC E SM electric-powered equipment. We currently expect to receive the remaining equipment associated with the second and third fleets and all equipment associated with the fourth fleet in the first half of 2024. We have entered into contracts with customers for the use of two of our FORCE SM electric-powered hydraulic fracturing fleets to provide committed services for a period of up to three years . +The hydraulic fracturing process consists of pumping fracturing fluid into a well at sufficient pressure to fracture the formation. Materials known as proppants, which in our business are comprised primarily of sand, are suspended in the fracturing fluid and are pumped into the fracture to prop it open. The fracturing fluid is designed to break, or loosen viscosity, and be forced out of the formation by its pressure, leaving the proppants suspended in the fractures created, thereby increasing the mobility of the hydrocarbons. As a result of the fracturing process, production rates are usually enhanced substantially, thus increasing the rate of return of hydrocarbons for the operator. +We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We also refer to all of our fracturing units, other equipment and vehicles necessary to perform a fracturing job as a "fleet" and the personnel assigned to each fleet as a "crew." Our hydraulic fracturing units consist primarily of a high pressure hydraulic pumps, diesel or dual gas engines, transmissions and various hoses, valves, tanks and other supporting equipment like blenders, irons, hoses and datavans. +3 +We provide dedicated equipment, personnel and services that are tailored to meet each of our customer’s needs. Each fleet has a designated team of personnel, which allows us to provide responsive and customized services, such as project design, proppant and other consumables procurement, real-time data provision and post‑completion analysis for each of our jobs. Many of our hydraulic fracturing fleets and associated personnel have worked continuously with the same customer for the past several years promoting deep relationships and a high degree of coordination and visibility into future customer activity levels. Furthermore, in light of our substantial market presence and historically high fleet utilization levels, we have established a variety of trusted relationships with key equipment, sand and other downhole consumable suppliers. We believe these strategic relationships position us to acquire equipment, parts and materials on a timely and economic basis and allow our dedicated procurement and logistics team to support consistently safe and reliable operations. +Wireline +We provide wireline and ancillary services on new oil well completions in the Permian Basin. Wireline utilizes equipment with a drum of wireline to deploy perforating guns in the well to perforate the casing, cement, and formation. Once the well is perforated, it is ready to be fractured. Pumpdown utilizes pressure pumping equipment to pump water into the well to deploy or push the perforating guns attached to the wireline through the lateral section of a well. +We own and operate a fleet of mobile wireline units and other auxiliary equipment to perform well completion services. We also refer to our wireline units, pressure control equipment, other equipment and vehicles necessary to perform a job as a "spread" and the personnel assigned to the spread as a "crew." On average, one wireline spread consists of a wireline tractor truck with a large cab functioning as a mobile office where the engineer controls the wireline spooled drum along with associated pressure control iron and equipment, trailers and vehicles. We currently have 23 wireline units. +Cementing +We provide cementing services for completion of new wells and remedial work on existing wells. Cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Cementing provides isolation between fluid zones behind the casing to minimize potential damage to hydrocarbon bearing formations or the integrity of freshwater aquifers, and provides structural integrity for the casing by securing it to the earth. Cementing is also done when re-completing wells, where one zone is plugged and another is opened. +We believe that our cementing segment provides an organic growth opportunity for us to expand our service offerings within our existing customer base. We currently have 40 cementing units. +Our Customers +Our customers consist primarily of oil and natural gas producers in North America. Our top five customers accounted for a pproximately 63.2%, 84.0% and 85.7% of our revenue, for the years ended December 31, 2023, 2022 and 2021, respectively. For the year ended December 31, 2023, Endeavor Energy Resources and XTO Energy accounted for 19.7% and 18.2%, respectively, of total revenue. No other customer accounted for more than 10% of our total revenue for the year ended December 31, 2023. There have been many recent mergers and acquisitions in the oil and gas industry. In October 2023, Pioneer Natural Resources USA, Inc. (“Pioneer”) entered into a merger agreement with Exxon Mobil Corporation. Mergers and acquisitions involving our customers could negatively impact our future business with them or positively impact our business by providing us access to potential new customers. +On March 31, 2022, we entered into an amended and restated pressure pumping services agreement (the "A&R Pressure Pumping Services Agreement") with Pioneer , which was initially entered into in connection with our purchase of certain pressure pumping assets and real property from Pioneer and Pioneer Pumping Services, LLC (the "Pioneer Pressure Pumping Acquisition") . The A&R Pressure Pumping Services Agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and the Fleet Two Agreement described below. +On October 31, 2022, we entered into two pressure pumping services agreements (the “Fleet One Agreement” and “Fleet Two Agreement”) with Pioneer, pursuant to which we provided hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and was terminated on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was terminated on May 12, 2023. +4 +Competition +The markets in which we operate are highly competitive. To be successful, an oilfield service company must provide services and equipment that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies’ criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company’s selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the oilfield service industry because of the capital requirements. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment portfolio and quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +We provide our services primarily in the Permian Basin, and we compete against different companies in each service and product line we offer. Our competition includes many large and small oilfield service companies, including the largest integrated oilfield service companies. Our major competitors include Halliburton Company, Liberty Energy Inc., Patterson‑UTI Energy Inc., ProFrac Holding Corp., RPC, Inc., and a number of private and locally-oriented businesses. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the fourth quarter, relating to the conclusion of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather during which we may experience declines in our operating and financial results. +Operating Risks and Insurance +Our operations are subject to hazards inherent in the oilfield service industry, such as accidents, blowouts, explosions, fires and spills and releases that can cause personal injury or loss of life, damage or destruction of property, equipment, natural resources and the environment and suspension of operations. +In addition, claims for loss of oil and natural gas production and damage to formations can occur in the oilfield service industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in us being named as a defendant in lawsuits asserting large claims. +Our business involves the transportation of heavy equipment and materials, and as a result, we may also experience traffic accidents which may result in spills, property damage and personal injury. +Despite our efforts to maintain safety standards, we have suffered accidents from time to time in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations. +We maintain commercial general liability, workers’ compensation, business automobile, commercial property, umbrella liability, excess liability, and directors and officers insurance policies providing coverages of risks and amounts that we believe to be customary in our industry. Further, we have pollution legal liability coverage for our business entities, which would cover, among other things, third party liability and costs of clean up relating to environmental contamination on our premises while our equipment is in transit and on our customers’ job site. With respect to our operations, coverage would be available under our pollution legal liability policy for any surface or subsurface environmental cleanup and liability to third parties arising from any surface or subsurface contamination. We also have certain specific coverages for some of our businesses, including our hydraulic fracturing and wireline services. +We maintain directors and officers insurance; however, our insurance coverage is subject to certain exclusions (including, for example, any required United States Securities and Exchange Commission (“SEC”) disgorgement or penalties) and we are +5 +responsible for meeting certain deductibles under the policies. Moreover, we cannot assure you that our insurance coverage will adequately protect us from all future claims. +Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of the high premium costs relative to perceived risk. Further, insurance rates have in the past been subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us. See " Risk Factors " for a description of certain risks associated with our insurance policies. +Environmental and Occupational Health and Safety Regulations +Our operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection, and occupational health and safety. Numerous federal, state and local governmental agencies issue regulations that often require difficult and costly compliance measures that could carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may, for example, restrict the types, quantities and concentrations of various substances that can be released into the environment, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas and other protected areas, or require action to prevent or remediate pollution from current or former operations. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental, health and safety laws and regulations occur frequently, and any changes that result in more stringent and costly requirements could materially adversely affect our operations and financial position. For example, following the passage of laws such as the IRA 2022, it is possible that our operations may be subject to greater environmental, health and safety restrictions, particularly with regards to hydraulic fracturing and wireline, permitting and greenhouse gases ( " GHG " ) emissions. We have not experienced any material adverse effect from compliance with current requirements; however, this trend may not continue in the future. +Below is an overview of some of the more significant environmental, health and safety requirements with which we must comply. Our customers’ operations are subject to similar laws and regulations. Any material adverse effect of these laws and regulations on our customers’ operations and financial position may also have an indirect material adverse effect on our operations and financial position. +Waste Handling. We handle, transport, store and dispose of wastes that are subject to the Resource Conservation and Recovery Act ( " RCRA " ) and comparable state laws and regulations, which affect our activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although certain petroleum production wastes are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. Moreover, the U.S. Environmental Protection Agency ( " EPA " ) or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or recategorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to recategorize certain oil and natural gas exploration, development and production wastes as hazardous wastes. Several environmental organizations have also petitioned the EPA to modify existing regulations to recategorize certain oil and natural gas exploration, development and production wastes as hazardous. Any such changes in these laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas E&P wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act ( " CERCLA " or " Superfund " ) and analogous state laws generally impose liability without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Liability for the costs of removing or remediating previously disposed wastes or contamination, damages to natural resources, the costs of conducting certain health studies, amongst other things, is strict and joint and several. In the course of +6 +our operations, we use materials that, if released, would be subject to CERCLA and comparable state laws. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such hazardous substances have been released. +NORM. In the course of our operations, some of our equipment may be exposed to naturally occurring radioactive materials ( " NORM " ) associated with oil and gas deposits and, accordingly, may result in the generation of wastes and other materials containing NORM. NORM exhibiting levels of radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. +Water Discharges. The Clean Water Act, Safe Drinking Water Act, Oil Pollution Act and analogous state laws and regulations impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into regulated waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Also, spill prevention, control and countermeasure plan requirements require appropriate containment berms and similar structures to help prevent the contamination of regulated waters. +Air Emissions. The Clean Air Act ( " CAA " ) and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other emissions control requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants from specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. These and other laws and regulations may increase the costs of compliance for some facilities where we operate. Obtaining or renewing permits also has the potential to delay the development of oil and natural gas projects. +Climate Change. In the United States, no comprehensive climate change legislation has been implemented at the federal level, though recently passed laws such as the IRA 2022 advance numerous climate-related objectives. Additionally, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, implement New Source Performance Standards directing the reduction of certain pollutants from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the Department of Transportation ("DOT"), implementing GHG emissions limits on vehicles manufactured for operation in the United States. Additionally, the EPA has recently finalized rules covering the standards of performance for methane and volatile organic compounds emissions for oil and gas facilities, including leak detection, monitoring and repair, and a "super-emitter" response program to timely mitigate emissions events as detected by governmental agencies or qualified third parties, triggering certain investigation and repair requirements. These requirements were finalized in 2023, but may be subject to legal challenge. +Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas such as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored " Paris Agreement, " requires member states to submit non-binding, individually-determined reduction goals known as Nationally Determined Contributions ( " NDCs " ) every five years after 2020. Following the president’s executive order in January 2021, the United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. Some countries, including the United States, have additionally made commitments to reduce global methane emissions through initiatives such as the Global Methane Pledge, and have been called upon to phase out inefficient fossil fuel subsidies. However, the impacts of these actions are unclear at this time. For more information, see our risk factors titled "Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide" and "The IRA 2022 could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations." +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, including climate-change-related pledges made by certain candidates for public office. On January 27, 2021, the president issued an executive order that commits to substantial action on climate change, calling for, among other things, the increased use of zero-emissions vehicles by the federal government, the elimination of subsidies provided to the fossil fuel industry and an increased emphasis on climate-related risk across government agencies and economic sectors. The executive order also suspended the issuance of new leases for oil and gas development on federal land for a time; for more information, see our regulatory disclosure titled "Regulation of Hydraulic Fracturing and Related +7 +Activities." Other actions that the current government may take include the imposition of more restrictive requirements for the development of pipeline infrastructure or liquefied natural gas export facilities or more restrictive GHG emissions limitations for oil and gas facilities. For example, in January 2024 the government announced a temporary pause on pending decisions on liquefied natural gas exports to certain countries. Litigation risks are also increasing as a number of parties have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. +The adoption and implementation of new or more stringent international, federal or state legislation, regulations or other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate GHG emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for, oil and natural gas, which could reduce demand for our services and products. +Moreover, climate change may result in various physical risks, such as the increased frequency or intensity of extreme weather events or changes in the meteorological and hydrological patterns, that could adversely impact us, our customers’ and our suppliers’ operations. Such physical risks may result in damage to our customers’ facilities or otherwise adversely impact our operations, such as if facilities are subject to water use curtailments in response to drought, or demand for our customers’ products, such as to the extent warmer winters reduce the demand for energy for heating purposes, which may ultimately reduce demand for the products and services we provide. Such physical risks may also impact our suppliers, which may adversely affect our ability to provide our products and services. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Endangered and Threatened Species. Environmental laws such as the Endangered Species Act ("ESA") and analogous state laws may impact exploration, development and production activities in areas where we operate. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and various state analogs. The U.S. Fish and Wildlife Service ("FWS") may identify previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species. For example, the dunes sagebrush lizard, which is found only in the active and semi-stable shinnery oak dunes of southeastern New Mexico and adjacent portions of Texas (including areas where our customers operate), was a candidate species for listing under the ESA by the FWS for many years. Most recently, the dunes sagebrush lizard has been proposed for listing as endangered in July 2023, FWS has also entered into voluntary conservation agreements that implement certain protective practices for the species and authorize incidental take of the species resulting from certain covered activities, including exploration and development of oil and gas fields. However, to the extent any protections are implemented for this or any other species, it could cause us or our customers to incur additional costs or become subject to operating restrictions or operating bans in the affected areas. +Regulation of Hydraulic Fracturing and Related Activities. Our hydraulic fracturing operations are a significant component of our business. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. Although several of these rulemakings have been rescinded, modified or subjected to legal challenges, new or more stringent regulations may be promulgated by the current government. For example, the Bureau of Land Management (“BLM”) recently proposed a rule that would limit flaring from well sites on federal lands, as well as allow the delay or denial of permits if BLM finds that an operator’s methane waste minimization plan is insufficient. The current government has also called for revisions and restrictions to the leasing and permitting programs for oil and gas development on federal lands and, for a time, suspended federal oil and gas leasing activities. The Department of the Interior ("DOI") has also issued a report recommending various changes to the federal leasing program, though many such changes would require congressional action. In July 2023, the BLM proposed a rule to update the fiscal terms of federal oil and gas leases, which would increase fees, rents, royalties, and bonding requirements. The rule would also add new criteria for BLM to consider when determining whether to lease nominated land, including the presence of important habitats or wetlands, the presence of historical properties or sacred sites, and recreational use of the land. BLM anticipates a final action on the proposal in Spring 2024. As a result, we cannot predict the final scope of regulations or restrictions that may apply to oil and gas operations on federal lands. However, any regulations that restrict, ban or effectively ban such operations may adversely impact demand for our products and services. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from +8 +the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have previously been proposed in Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +Federal and state governments have also investigated whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for wastewater disposal wells that impose permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission’s well completion seismicity guidelines for operators in the SCOOP and STACK require hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division has previously issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission ("TRRC") has adopted similar rules including the indefinite suspension of all deep oil and gas produced water injection wells in certain areas covered by the TRRC’s seismic response program. +Increased regulation of hydraulic fracturing and related activities could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and record keeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. For more information on each of these items, see our risk factor titled "Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays." +OSHA Matters. The Occupational Safety and Health Act ( " OSHA " ) and comparable state statutes regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. +Human Capital +Our employees are our key asset. Our primary human capital management objectives are to effectively engage, develop, retain and reward our employees. As of December 31, 2023, we emplo yed approximately 2,070 people, and n one of our employees are represented by a union. All of our employees work for or support our hydraulic fracturing, wireline and cementing operating segments. We believe that we have good relations with our employees. We believe that our employees are a key component of our ability to attract and retain customers as a result of their operational excellence in the field. +Some examples of significant programs and initiatives that support our objective of attracting, developing and retaining our diverse and inclusive workforce include: +• Opportunity and Engagement. We are an equal opportunity employer and prohibit discrimination against any employee and applicant on the basis of any legally protected characteristic. We believe that in order to attract and retain talent with the skill sets and expertise that can help to maximize our operational efficiencies across all levels in the Company, it is in our best interest to create a culture that is inclusive. We conducted an employee engagement survey in 2023 related to inclusion, belonging and other engagement efforts. Some examples of this effort to recruit and develop a diverse team and create an inclusive culture include: +◦ a commitment to conducting business in a manner that respects all human rights in compliance within the requirements of applicable laws; +◦ a commitment within our business operations to promoting and encouraging respect for human rights and fundamental freedoms for all without distinctions of any kind, such as race, color, sex, language, religion, political or other opinions; +◦ working with personnel, business partners and other parties directly linked to our operations that share our commitment to these same principles; +9 +◦ maintaining employment policies reflecting our commitments, including our code of conduct, our equal employment opportunity employer policy, and our anti-harassment and anti-discrimination policy; and +◦ providing an anonymous Ethics and Compliance hotline that is promoted internally and accessible from our intranet and website to make it possible for grievances regarding health and safety to be addressed early and remediated directly, in confidence and without fear of retaliation. +• Training and Safety. We offer in-depth, role-appropriate safety training upon hiring and as part of the continuous development of our employees. The safety of our employees, our customers, and the communities in which we operate is paramount. We track and evaluate safety incidents at wellsites and offices, and if an accident does occur, we aim to take actions to mitigate similar incidents from reoccurring in the future. The Company seeks to incentivize employees to focus on conducting operations in accordance with our strict safety standards and encourages employees to immediately report any breach of safety protocol. Ten percent of our executive officers’ annual target bonuses under the 2023 annual incentive program were based upon the Company’s achievement of certain safety goals, including a target total recordable incident rate. +• Professional Development. In 2023, the Company continued its focus on leadership development, targeting leadership positions including frontline supervisors and above. In addition, we sought to make improvements to our succession planning tools and process to enable greater consistency, talent identification and development planning. We also introduced behavioral optimization tools to aid individual and team performance and talent acquisition efforts. +• Compensation, Health, Wellness and Benefits. Our employee benefit offerings are designed to meet the varied and evolving needs of a diverse workforce across the Company and we believe are consistent with those provided by our peer companies with which we compete for talent. The Company provides employees with the ability to participate in health and welfare plans, including medical, dental, life, accidental death and dismemberment and short-term and long-term disability insurance plans. +In 2023, as part of our 401(k) plan, we introduced opportunities for holistic financial wellness education and group and individual consultations for employees. The program opportunities included many crucial topics ranging from budgeting and debt management to understanding plan options and investment strategy. Concerning health benefits, in 2023 we added additional services focused on emotional and mental health, as well as certain preventative health services related to the early detection of concerns including breast cancer, diabetes and cardiovascular disease. +We also strive to give back to the areas in which we conduct business operations, and in which our employees live and work. Our employees give generously and receive up to 8 hours per year of paid time off to participate in community service. Our employee-led P.U.M.P. Committee also organizes or sponsors events in which employees can choose to participate in addition to our paid community service time benefit. +Availability of Filings +Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are made available free of charge on our internet website at www.propetroservices.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the SEC. The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that website is www.sec.gov. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Annual Report or the documents incorporated by reference in this Annual Report. +10 +Item 1A. Risk Factors. +The following is a description of significant factors that could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report and presented elsewhere by management from time to time. Such factors may have a material adverse effect on our business, financial condition and results of operations. It is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete statement of all our potential risks or uncertainties. Due to these, and other factors, past performance should not be considered an indication of future performance. +Risks Inherent in Our Business and Industry +Our business and financial performance depends on the historically cyclical oil and natural gas industry and particularly on the level of capital spending and E&P activity within the United States and in the Permian Basin, and a decline in prices for oil and natural gas may cause fluctuation in operating results or otherwise have an adverse effect on our revenue, cash flows, profitability and growth. +Demand for most of our services depends substantially on the level of capital expenditures in the Permian Basin by companies in the oil and natural gas industry. As a result, our operations are dependent on the levels of capital spending and activity in oil and gas exploration, development and production. Demand for our services is largely dependent on oil and natural gas prices, and our customers’ well completion budgets and rig count. Prolonged low oil and gas prices would generally depress the level of oil and natural gas exploration, development, production, and well completion activity and would result in a corresponding decline in the demand for the completion services that we provide. Historically, oil prices and markets have been extremely volatile. Prices are affected by many factors beyond our control. The average WTI oil price per barrel was approximately $78 , $94 and $68 for the years ended December 31, 2023, 2022 and 2021, respectively. In 2023, the volatility and overall decline in oil and natural gas prices caused a reduction in our customers’ spending and associated drilling and completion activities, which has had and may continue to have an adverse effect on our revenue and cash flows, if the WTI oil price remains highly volatile or declines in the future. +Many factors over which we have no control affect the supply of, and demand for our services, and our customers’ willingness to explore, develop and produce oil and natural gas, and therefore, influence prices for our services, including: +• the actions by the members of OPEC+ with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations; +• the domestic and foreign supply of, and demand for, oil and natural gas; +• the level of prices, and expectations about future prices, of oil and natural gas; +• the level of global oil and natural gas E&P; +• the cost of exploring for, developing, producing and delivering oil and natural gas; +• the supply of and demand for drilling and hydraulic fracturing and wireline equipment, including the supply and demand for lower emissions hydraulic fracturing and wireline equipment; +• cost increases and supply chain constraints related to our services; +• the expected decline in rates of current production; +• the price and quantity of foreign imports; +• political and economic conditions in oil and natural gas producing countries and regions, including the United States, the Middle East, Africa, South America and Russia; +• the actions taken by the United States and other countries on climate change or to transition away from fossil fuels; +• the severity and duration of world health events and related economic repercussions; +• speculative trading in crude oil and natural gas derivative contracts; +• the level of consumer product demand; +11 +• the discovery rates of new oil and natural gas reserves; +• contractions in the credit market; +• the strength or weakness of the U.S. dollar; +• available pipeline and other transportation capacity; +• the levels of oil and natural gas storage; +• weather conditions and other natural disasters; +• domestic and foreign tax policy; +• domestic and foreign governmental approvals and regulatory requirements and conditions, including tighter emissions standards in the energy industry; +• the continued threat of terrorism and the impact of military and other action, including military action in the Middle East; +• political or civil unrest in the United States or elsewhere, including the Russia-Ukraine war and the conflict in the Israel-Gaza region and related instability in the Middle East, including from Houthi rebels in Yemen; +• technical advances affecting energy consumption; +• the proximity and capacity of oil and natural gas pipelines and other transportation facilities; +• the price and availability of alternative fuels; +• the ability of oil and natural gas producers to raise equity capital and debt financing; +• merger and divestiture activity among oil and natural gas producers; and +• overall domestic and global economic conditions. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. In 2022, Russia launched a large-scale invasion of Ukraine, leading to armed hostilities and imposition of sanctions on Russian economic trades. Since October 2023, an ongoing conflict between Israel and Palestinian militants in the Israel-Gaza region has led to armed hostilities. These events, which have impacted economic activity and disrupted global supply chain dynamics, have contributed to the unpredictable nature of crude oil prices. +The cyclical nature of the oil and natural gas industry may cause our operating results to fluctuate. +We derive our revenues from companies in the oil and natural gas E&P industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices. We have experienced, and may in the future experience, significant fluctuations in operating results as a result of the reactions of our customers to changes in oil and natural gas prices. For example, a decline in oil and gas prices, combined with adverse changes in the capital and credit markets, could cause many E&P companies to significantly reduce their 2020 and 2021 capital budgets and drilling activity. This could result in a significant decline in demand for oilfield services and could adversely impact the prices oilfield service companies can charge for their services. These factors have materially and adversely affected our business, results of operations and financial condition. In addition, a majority of the service revenue we earn is based upon a charge for a relatively short period of time (for example, a day, a week or a month) for the actual period of time the service is provided to our customers. By contracting services on a short‑term basis, we are exposed to the risks of a rapid reduction in market prices and utilization and resulting volatility in our revenues. +The majority of our operations are located in the Permian Basin, making us vulnerable to risks associated with operating in one major geographic area. +Our operations are geographically concentrated in the Permian Basin. For the years ended December 31, 2023, 2022 and 2021, approximately 98.1% , 98.3% and 98.7%, respectively, of our revenues were attributable to our operations in the Permian Basin. As a result of this concentration, we may be disproportionately exposed to the impact of regional supply and demand factors, +12 +delays or interruptions of production from wells in the Permian Basin caused by significant governmental regulation, processing or transportation capacity constraints, market limitations, curtailment of production or interruption of the processing or transportation of oil and natural gas produced from the wells in these areas. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil and natural gas producing areas such as the Permian Basin, which may cause these conditions to occur with greater frequency or magnify the effects of these conditions. Due to the concentrated nature of our operations, we could experience any of the same conditions at the same time, resulting in a relatively greater impact on our revenue than they might have on other companies that have more geographically diverse operations. +The IRA 2022 could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations. +In August 2022, the president signed the IRA 2022 into law. The IRA 2022 provides for hundreds of billions of dollars in incentives for the development of renewable energy, clean hydrogen, clean fuels, electric vehicles and supporting infrastructure and carbon capture and sequestration, amongst other provisions. These incentives could further accelerate the transition of the economy away from the use of fossil fuels towards lower- or zero-carbon emissions alternatives, which could decrease demand for oil and gas and consequently adversely affect the business of our customers, thereby reducing demand for our services. In addition, the IRA 2022 imposes the first ever federal fee on the emission of GHG through a methane emissions charge. The IRA 2022 amends the federal CAA to impose a fee on the emission of methane from sources required to report their GHG emissions to the EPA, including those sources in the offshore and onshore petroleum and natural gas production and gathering and boosting source categories. The methane emissions charge will start in calendar year 2024 at $900 per ton of methane, increase to $1,200 in 2025, and be set at $1,500 for 2026 and each year after. Calculation of the fee is based on certain thresholds established in the IRA 2022. The methane emissions charge could increase our customers’ operating costs and adversely affect their businesses, thereby reducing demand for our services. +Our business may be adversely affected by a deterioration in general economic conditions or a weakening of the broader energy industry. +A prolonged economic slowdown or recession in the United States, adverse events relating to the energy industry or regional, national and global economic conditions and factors, particularly a further slowdown in the E&P industry, could negatively impact our operations and therefore adversely affect our results. The risks associated with our business are more acute during periods of economic slowdown or recession because such periods may be accompanied by decreased exploration and development spending by our customers, decreased demand for oil and natural gas and decreased prices for oil and natural gas. +New technology may cause us to become less competitive. +The oilfield service industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. As competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. The transition to lower emissions equipment is capital intensive and could require us to convert all our conventional Tier II equipment to lower emissions equipment. If we are unable to quickly transition to lower emissions equipment, the demand for our services could be adversely impacted. For example, many E&P companies, including our customers, are transitioning to a lower emissions operating environment and may require us to invest in equipment with lower emissions profiles. Further, we may face competitive pressure to develop, implement or acquire and deploy certain technology improvements at a substantial cost, such as our FORCE SM electric-powered hydraulic fracturing fleets deployed in 2023, or the cost of implementing or purchasing a technology like FORCE SM may be substantially higher than anticipated, and we may not be able to successfully implement the technologies we may purchase. In 2022, we recorded an impairment of $57.5 million on our DuraStim® electric-powered equipment because they did not meet our expectations. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, effectively use and implement new and emerging technologies could have a material adverse effect on our business, financial condition, prospects or results of operations. +Our operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms, or at all, which could limit our ability to grow. +The oilfield service industry is capital intensive. In conducting our business and operations, we have made, and expect to continue to make, substantial capital expenditures. Our total capital expenditures incurred were approximately $310.0 million , $365.3 million and $165.2 million during the years ended December 31, 2023, 2022 and 2021. We have historically financed capital expenditures primarily with funding from cash on hand, cash flow from operations, equipment and vendor financing and +13 +borrowings under our credit facility. We may be unable to generate sufficient cash from operations and other capital resources to maintain planned or future levels of capital expenditures which, among other things, may prevent us from acquiring new equipment (including equipment with a lower emissions profile) or properly maintaining our existing equipment. Any disruptions or volatility in the global financial markets may lead to an increase in interest rates or a contraction in credit availabil ity impacting our ability to finance our operations. Our borrowing base was $152.0 million as of December 31, 2023 . If our customer activity levels decline in the future resulting in a decrease in our eligible accounts receivable, our borrowing base could decline. This could put us at a competitive disadvantage or interfere with our growth plans. Further, our actual capital expenditures could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of liquidity we have available, we could be required to seek additional sources of capital, which may include debt financing, joint venture partnerships, sales of assets, offerings of debt or equity securities or other means. We may not be able to obtain any such alternative source of capital. We may be required to curtail or eliminate contemplated activities. If we can obtain alternative sources of capital, the terms of such alternative may not be favorable to us. In particular, the terms of any debt financing may include covenants that significantly restrict our operations. Our inability to grow as planned may reduce our chances of maintaining and improving profitability. +Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, geopolitical issues (including the Russia-Ukraine war and conflicts in the Israel-Gaza region), public health crises, interest rates, inflation, the availability and cost of credit in the United States and foreign financial markets have contributed to increased economic uncertainty and diminished expectations for the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, could precipitate an economic slowdown. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. T he historically unpredictable nature of oil and natural gas prices, and particularly the volatility over the past two years have caused a reduction in our customers’ spending and associated drilling and completion activities, which had and may continue to have an adverse effect on our revenue and cash flows. If the economic climate in the United States or abroad deteriorates or remains uncertain, worldwide demand for petroleum products could diminish, which could impact the price at which oil, natural gas and natural gas liquids can be sold, which could affect the ability of our customers to continue operations and adversely impact our results of operations, liquidity and financial condition. +Our indebtedness and liquidity needs could restrict our operations and adversely affect our financial condition. +Our business is capital intensive and our existing and future indebtedness, whether incurred in connection with acquisitions, operations or otherwise, may adversely affect our operations and limit our growth, and we may have difficulty making debt service payments on such indebtedness as payments become due. Our level of indebtedness may affect our operations in several ways, including the following: +• increasing our vulnerability to general adverse economic and industry conditions; +• the covenants that are contained in the agreements governing our indebtedness could limit our ability to borrow funds, dispose of assets, pay dividends and make certain investments; +• our debt covenants could also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry; +• any failure to comply with the financial or other debt covenants, including covenants that impose requirements to maintain certain financial ratios, could result in an event of default, which could result in some or all of our indebtedness becoming immediately due and payable; +• our level of debt could impair our ability to obtain additional financing, or obtain additional financing on favorable terms in the future for working capital, capital expenditures, research and development efforts, potential strategic acquisitions or other general corporate purposes; +• placing us at a competitive disadvantage relative to competitors that have less debt; and +• our business may not generate sufficient cash flow from operations to enable us to meet our obligations under our indebtedness. +14 +Furthermore, interest rates on future indebtedness could be higher than current levels, causing our financing costs to increase accordingly. Changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our shares, and a rising interest rate environment could have an adverse impact on the price of our shares, our ability to issue equity or incur debt. +Restrictions in our ABL Credit Facility and any future financing agreements may limit our ability to finance future operations or capital needs or capitalize on potential acquisitions and other business opportunities. +The operating and financial restrictions and covenants in our credit facility and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities. For example, our ABL Credit Facility restricts or limits our ability to: +• grant liens; +• incur additional indebtedness; +• engage in a merger, consolidation or dissolution; +• enter into transactions with affiliates; +• sell or otherwise dispose of assets, businesses and operations; +• materially alter the character of our business as currently conducted; and +• make acquisitions, investments and capital expenditures. +Furthermore, our ABL Credit Facility contains certain other operating and financial covenants. Our ability to comply with the covenants and restrictions contained in the ABL Credit Facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in our ABL Credit Facility, a significant portion of our indebtedness may become immediately due and payable and our lenders’ commitment to make further loans to us may terminate. Further, our borrowing base, as redetermined monthly, has a borrowing base of the sum of 85.0% to 90.0% of eligible accounts receivable and 80% of eligible unbilled accounts (up to a maximum of 25% of the borrowing base), in each case, depending on the credit ratings of our accounts receivable counterparties, less customary reserves (the “Borrowing Base”). Changes to our operational activity levels or customer concentration levels have an impact on our total eligible accounts receivable, which could result in significant changes to our borrowing base and therefore our availability under our ABL Credit Facility. If our customer activity declines in the future, our borrowing base could decline. If our borrowing base is reduced below the amount of our outstanding borrowings, we will be required to re pay the excess borrowings immediately on demand by the lenders. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Any subsequent replacement of our ABL Credit Facility or any new indebtedness could have similar or greater restrictions. Please read " Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facility and Other Financing Arrangements. " +We may record losses or impairment charges related to goodwill and long-lived assets including intangible assets. +Changes in future market conditions and prolonged periods of low utilization, changes in technology or the sale of assets below their carrying value may cause us to experience losses in our results of operations. These events could result in the recognition of impairment charges or losses from asset sales that negatively impact our financial results. Significant impairment charges or losses from asset sales as a result of a decline in market conditions or otherwise could have a material adverse effect on our results of operations in future periods. For example, in 2021, we recorded loss on disposal of asset $3.5 million in connection with the sale of our two turbines . In 2022, we recorded impairment charges of $57.5 million in connection with our DuraStim® electric powered hydraulic fracturing equipment . If oil and natural gas prices trade at depressed price levels, and our equipment remains idle or under-utilized, the estimated fair value of such equipment may decline, which will result in additional impairment expense in the future. +Our operations are subject to unforeseen interruptions and hazards inherent in the oil and natural gas industry, for which we may not be adequately insured and which could cause us to lose customers and substantial revenue. +Our operations are exposed to the risks inherent to our industry, such as equipment defects, vehicle accidents, worksite injuries to our or third-party personnel, fires, explosions, blowouts, surface cratering, uncontrollable flows of gas or well fluids, pipe or pipeline failures, abnormally pressured formations and various environmental hazards, such as oil spills and releases of, and +15 +exposure to, hazardous substances. For example, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including hydrochloric acid and other chemical additives. In addition, our operations are exposed to potential natural disasters, including blizzards, tornadoes, storms, floods, other adverse weather conditions and earthquakes. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigations and penalties or other damage resulting in curtailment or suspension of our operations or the loss of customers. The cost of managing such risks may be significant. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our environmental or safety record as unacceptable, which could cause us to lose customers and substantial revenues. +Our insurance may not be adequate to cover all losses or liabilities we may suffer. We are also self-insured up to $10 million per occurrence for certain losses arising from or attributable to fire and/or explosion at wellsites that do not have qualified fire suppression measures. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased and could escalate further. In addition, sub‑limits have been imposed for certain risks. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our business, results of operations and financial condition. In addition, we may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. +Since hydraulic fracturing activities are part of our operations, they are covered by our insurance against claims made for bodily injury, property damage and cleanup costs stemming from a sudden and accidental pollution event. However, we may not have coverage if we are unaware of the pollution event and unable to report the " occurrence " to our insurance company within the time frame required under our insurance policy. In addition, these policies do not provide coverage for all liabilities, and the insurance coverage may not be adequate to cover claims that may arise, or we may not be able to maintain adequate insurance at rates we consider reasonable. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +A terrorist attack, armed conflict or political or civil unrest could harm our business. +Terrorist activities, anti‑terrorist efforts, other armed conflicts and political or civil unrest, including the Russia-Ukraine war and conflicts in the Israel-Gaza region, could adversely affect the U.S. and global economies and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants, refineries or transportation facilities are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas, which, in turn, could also reduce the demand for our services. Terrorist activities, the threat of potential terrorist activities, political or civil unrest and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies. +We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition and results of operations. +We operate with most of our customers under master service agreements ( " MSAs " ). We endeavor to allocate potential liabilities and risks between the parties in the MSAs. Generally, under our MSAs, including those relating to our hydraulic fracturing services, we assume responsibility for, including control and removal of, pollution or contamination which originates above surface and originates from our equipment or services. Our customer assumes responsibility for, including control and removal of, all other pollution or contamination which may occur during operations, including that which may result from seepage or any other uncontrolled flow of drilling fluids. We may have liability in such cases if we are negligent or commit willful acts. Generally, our customers also agree to indemnify us against claims arising from their employees’ personal injury or death to the extent that, in the case of our hydraulic fracturing operations, their employees are injured or their properties are damaged by such operations, unless resulting from our gross negligence or willful misconduct. Similarly, we generally agree to indemnify our customers for liabilities arising from personal injury to or death of any of our employees, unless resulting from gross negligence or willful misconduct of the customer. In addition, our customers generally agree to indemnify us for loss or destruction of customer‑owned property or equipment and in turn, we agree to indemnify our customers for loss or destruction of property or equipment we own. Losses due to catastrophic events, such as blowouts, are generally the responsibility of the customer. However, despite this general allocation of risk, we might not succeed in enforcing such contractual allocation, might incur an unforeseen liability falling outside the scope of such allocation or may be required to enter into an MSA with terms +16 +that vary from the above allocations of risk. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in us being named as a defendant in lawsuits asserting large claims. As a result, we may incur substantial losses which could materially and adversely affect our financial condition and results of operation. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. For example, we depend on digital technologies to perform many of our services and process and record operational and accounting data. At the same time, cyber incidents, including deliberate attacks or unintentional events, have increased. +The frequency and magnitude of cybersecurity attacks is increasing and attackers have become more sophisticated. Cybersecurity attacks are similarly evolving and include without limitation use of malicious software, surveillance, credential stuffing, spear phishing, social engineering, use of deepfakes (i.e., highly realistic synthetic media generated by artificial intelligence), attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. We may be unable to anticipate, detect or prevent future attacks, particularly as the methodologies used by attackers change frequently or are not identifiable until deployed. We may also be unable to investigate or remediate incidents as attackers are increasingly using techniques and tools designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence. +The U.S. government has issued public warnings indicating that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary information, personal information and other data, or other disruption of our business operations. In addition, certain cyber incidents, such as unauthorized surveillance, may remain undetected for an extended period. Our systems and insurance coverage (if any) for protecting against cyber security risks, including cyberattacks, may not be sufficient and may not protect against or cover all of the losses (including potential reputational loss) we may experience as a result of the realization of such risks. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate the effects of cyber incidents. +We utilize technologies, controls and procedures, as well as internal staff and external service providers to protect our systems and data, to identify and remediate vulnerabilities and to monitor and respond to threats. However, there can be no assurance that such measures will be sufficient to prevent security breaches from occurring. No security measure is infallible. If we or the third parties with whom we interact were to experience a successful attack, the potential consequences to our business, workforce and the communities in which we operate could be significant, including financial losses, regulatory fines, loss of business, an inability to settle transactions or maintain operations, litigation costs, remediation costs, disruptions related to investigation, and significant damage to our reputation. +We may grow through acquisitions and our failure to properly plan and manage those acquisitions may adversely affect our performance. +We have completed and may in the future pursue, asset acquisitions or acquisitions of businesses. Any acquisition of assets or businesses involves potential risks, including the failure to realize expected profitability, growth or accretion; environmental or regulatory compliance matters or liability; title or permit issues; the incurrence of significant charges, such as impairment of goodwill, property and equipment or intangible assets or restructuring charges; and the incurrence of unanticipated liabilities and costs for which indemnification is unavailable or inadequate. The process of upgrading acquired assets to our specifications and integrating acquired assets or businesses may also involve unforeseen costs and delays or other operational, technical and financial difficulties and may require a significant amount of time and resources and may divert management’s attention from existing operations or other priorities. For example, in 2023, we acquired the assets and operations of Par Five, and we are in the process of fully integrating all parts of the acquired business into our operations. +We must plan and manage any acquisitions effectively to achieve revenue growth and maintain profitability in our evolving market. Any failure to manage acquisitions effectively or integrate acquired assets or businesses into our existing operations successfully, or to realize the expected benefits from an acquisition or minimize any unforeseen operational difficulties, could have a material adverse effect on our business, financial condition, prospects or results of operations. +We may be adversely affected by the effects of inflation. +17 +The U.S. inflation rate steadily increased in 2021 and 2022 before decreasing to a moderate level in 2023. Inflation in wages, materials, parts, equipment and other costs has the potential to adversely affect our results of operations, cash flows and financial position by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers for our products and services. In addition, the existence of inflation in the economy has the potential to result in higher interest rates, which could result in higher borrowing costs, supply shortages, increased costs of labor, weakening exchange rates and other similar effects. Sustained levels of high inflation have likewise caused the U.S. Federal Reserve and other central banks to increase interest rates multiple times in 2023 and the U.S. Federal Reserve may continue to raise benchmark interest rates into 2024 in an effort to curb inflationary pressure on the costs of goods and services across the U.S., which could have the effects of raising the cost of capital and depressing economic growth, either of which—or the combination thereof—could hurt the financial and operating results of our business. To the extent elevated inflation remains, we may experience further cost increases for our operations, including labor costs and equipment. We cannot predict any future trends in the rate of inflation and a significant increase in inflation, to the extent we are unable to timely pass-through the cost increases to our customers, would negatively impact our business, financial condition and results of operations. +Adverse developments affecting the financial services industry, such as events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect the Company’s current and projected business operations and its financial condition and results of operations. +Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, concerns or rumors about such events or other similar risks, have in the past and may in the future lead to acute or market-wide liquidity problems. In addition, if any of the Company’s customers, suppliers or other business counterparties are unable to access funds held by such a financial institution, such parties’ ability to pay their obligations to the Company or to enter into new commercial arrangements requiring additional payments to the Company could be adversely affected. +Inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. Although the U.S. Department of Treasury, Federal Deposit Insurance Corporation ("FDIC") and Federal Reserve Board have announced a program to mitigate the risk of potential losses on the sale of such instruments, widespread demands for customer withdrawals or other needs of financial institutions for immediate liquidity may exceed the capacity of such program. Additionally, the Company maintains cash balances at third-party financial institutions in excess of the FDIC standard insurance limits, and there is no guarantee that the U.S. Department of Treasury, FDIC and Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of such banks or financial institutions, or that they would do so in a timely fashion. +Access to funding sources and other credit arrangements in amounts adequate to finance the Company’s business operations could be significantly impaired by the foregoing factors that affect the Company, any financial institutions with which the Company enters into credit agreements or arrangements directly, or the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. +The results of events or concerns that involve one or more of these factors could include a variety of material and adverse impacts on the Company’s current and projected business operations and the Company’s financial condition and results of operations. These risks include, but may not be limited to, the following: +• delayed access to deposits or other financial assets or the uninsured loss of deposits or other financial assets; +• inability to enter into credit facilities or other working capital resources; +• potential or actual breach of contractual obligations that require the Company to maintain letters of credit or other credit support arrangements; or +• termination of cash management arrangements and/or delays in accessing or actual loss of funds subject to cash management arrangements. +In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for the Company to acquire financing on acceptable +18 +terms or at all. Any decline in available funding or access to cash and liquidity resources could, among other risks, adversely impact the Company’s ability to meet operating expenses or other obligations, financial or otherwise, result in breaches of the Company’s financial and/or contractual obligations, or result in violations of federal or state wage and hour laws. In addition, any further deterioration in the macroeconomic economy or financial services industry could lead to losses or defaults by the Company’s customers, vendors or suppliers. Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors, could have material adverse impacts on the Company’s liquidity and their current and/or projected business operations and financial condition and results of operations. +Risks Related to Customers, Suppliers and Competition +Reliance upon a few large customers may adversely affect our revenue and operating results. +The majority of our revenue is generated from our hydraulic fracturing services. Due to the large percentage of our revenue historically derived from our hydraulic fracturing services with recurring customers and the limited availability of our fracturing units, we have had some degree of customer concentration. Our top ten customers represented approximately 85.5% , 91.2% and 91.4% of our consolidated revenue for the years ended December 31, 2023, 2022 and 2021, respectively. It is likely that we will depend on a relatively small number of customers for a significant portion of our revenue in the future. If a major customer fails to pay us, revenue would be impacted and our operating results and financial condition could be harmed. Additionally, if we were to lose any material customer, we may not be able to redeploy our equipment at similar utilization or pricing levels and such loss could have an adverse effect on our business until the equipment is redeployed at similar utilization or pricing levels. +Endeavor Energy Resources and XTO Energy accounted for 19.7% and 18.2% , respectively, of our revenue for the year ended December 31, 2023. If either of these customers were to significantly reduce or discontinue our services, it could have a material adverse effect on our financial condition, results of operations and cash flows. There have been many recent mergers and acquisitions in the oil and gas industry. In October 2023, Pioneer entered into a merger agreement with Exxon Mobil Corporation. Mergers and acquisitions involving our customers could negatively impact our future business with them or positively impact our business by providing us access to potential new customers. +We face significant competition that may cause us to lose market share, and competition in our industry has intensified during the industry downturn. +The oilfield service industry is highly competitive and has relatively few barriers to entry. The principal competitive factors impacting sales of our services are price, reputation and technical expertise, equipment and service quality and health and safety standards. The market is also fragmented and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial and other resources than we do. Our larger competitors’ greater resources could allow those competitors to compete more effectively than we can. For instance, our larger competitors may offer services at below‑market prices or bundle ancillary services at no additional cost to our customers. We compete with large national and multi‑national companies that have longer operating histories, greater financial, technical and other resources and greater name recognition than we do. Several of our competitors provide a broader array of services and have a stronger presence in more geographic markets. In addition, we compete with several smaller companies capable of competing effectively on a regional or local basis. +Some jobs are awarded on a bid basis, which further increases competition based on price. Pricing is often the primary factor in determining which qualified contractor is awarded a job. The competitive environment may be further intensified by tighter emissions standards in the energy industry and mergers and acquisitions among oil and natural gas companies or other events that have the effect of reducing the number of available customers. As a result of competition, we may lose customers or customer work and lose market share or be unable to maintain or increase prices for our present services or to acquire additional business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. +Our competitors may be able to respond more quickly to new or emerging technologies and services and changes in customer requirements. The amount of equipment available may exceed demand, which could result in active price competition. In addition, some E&P companies have commenced completing their wells using their own hydraulic fracturing equipment and personnel. Any increase in the development and utilization of in‑house fracturing capabilities by our customers could decrease the demand for our services and have a material adverse impact on our business. +Pressure on pricing for our services resulting from the industry downturn has impacted, and may continue to impact, our ability to maintain utilization and pricing for our services or implement price increases. During periods of declining pricing for our services, we may not be able to reduce our costs accordingly, which could further adversely affect our results of operations. +19 +Also, we may not be able to successfully increase prices without adversely affecting our utilization levels. The inability to maintain our utilization and pricing levels, or to increase our prices as costs increase, could have a material adverse effect on our business, financial condition and results of operations. +Furthermore, competition among oilfield service and equipment providers is affected by each provider’s reputation for safety and quality. We cannot assure that we will be able to maintain our competitive position. +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our business, results of operations and financial condition. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we fail to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re‑market or otherwise use the production could have a material adverse effect on our business, results of operations and financial condition. In weak economic environments, we may experience increased delays and failures to pay due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets or other sources of capital. The unpredictable nature of oil and gas prices in recent years and other factors may have negatively impacted the financial condition and liquidity of some of our customers, and future declines or continued volatility could impact their ability to meet their financial obligations to us. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, results of operations, and financial condition. +Our business depends upon the ability to obtain specialized equipment, parts and key raw materials, including sand and chemicals, from third‑party suppliers, and we may be vulnerable to delayed deliveries and future price increases. +We purchase specialized equipment, parts and raw materials (including, for example, frac sand, chemicals and fluid ends) from third party suppliers and affiliates. In some cases, our customers are responsible for supplying necessary raw materials (including frac sand), parts and/or equipment. At times during the business cycle, there is a high demand for hydraulic fracturing and other oilfield services and extended lead times to obtain equipment and raw materials needed to provide these services. For example, in 2021 and 2022, there was significant disruption in supply chains around the world caused by the COVID-19 pandemic that impacted our operations. Should our current suppliers (or our customers’ suppliers where applicable) be unable or unwilling to provide the necessary equipment, parts or raw materials or otherwise fail to deliver the products timely and/or in the quantities required, any resulting delays in the provision of our services could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, future price increases for this type of equipment, parts and raw materials could negatively impact our ability to purchase new equipment, to update or expand our existing fleets, to timely repair equipment in our existing fleets or meet the current demands of our customers. +We may be required to pay fees to certain of our Sand Suppliers based on minimum volumes under long-term contracts regardless of actual volumes received. +We enter into purchase agreements with the Sand Suppliers to secure supply of sand in the normal course of our business. The agreements with the Sand Suppliers require that we purchase minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the mi nimum volumes or a fixed price per ton of unpurchased volumes. Our current agreements with Sand Suppliers expire at different times prior to December 31, 2025. +Disruption of our supply chain could adversely impact our ability to provide our services. +Our suppliers use multiple forms of transportation to bring their products to market, including truck, ocean and air-cargo shipments. Disruption to the timely supply of raw materials, parts and finished goods or increases in the cost of transportation services, including due to general inflationary pressures, cost of fuel and labor, labor disputes, governmental regulation or governmental restrictions limiting specific forms of transportation, could have an adverse effect on our ability to provide our services, which would adversely affect our results of operations, cash flows and financial position. +Risks Related to Employees +We rely on a few key employees whose absence or loss could adversely affect our business. +20 +Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services could adversely affect our business. In particular, the loss of the services of one or more members of our executive team, such as our Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer, Chief Accounting Officer, Chief Commercial Officer and General Counsel could disrupt our operations. We do not maintain " key person " life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees. +If we are unable to employ a sufficient number of skilled and qualified workers, our capacity and profitability could be diminished and our growth potential could be impaired. +The delivery of our services requires skilled and qualified workers with specialized skills and experience who can perform physically demanding work. As a result of the volatility of the oilfield service industry and the demanding nature of the work, workers may choose to pursue employment in fields that offer a less challenging work environment at wage rates that are competitive. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled workers. As a result of the physical nature of our operations, we have experienced difficulties in attracting and retaining skilled workers. If demand for our services increases, we may experience difficulty in hiring or re-hiring skilled and unskilled workers in the future to meet that demand. At times, the demand for skilled workers in our geographic areas of operations is high, and the supply is limited. As a result, competition for experienced oilfield service personnel is intense, and we face significant challenges in competing for crews and management with large and well‑established competitors. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Furthermore, if we are unable to adjust wages to account for rapidly rising inflationary cost, there could be a reduction in the available skilled labor force we could attract or retain. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired. +Risks Related to Regulatory Matters +We are subject to environmental laws and regulations, and future compliance, claims, and liabilities relating to such matters may have a material adverse effect on our results of operations, financial position or cash flows. +The nature of our operations, including the handling, storing, transporting and disposing of a variety of fluids and substances, including hydraulic fracturing fluids, which can contain substances such as hydrochloric acid, and other regulated substances, air emissions and wastewater discharges exposes us to some risks of environmental liability, including the release of pollutants from oil and natural gas wells and associated equipment to the environment. The cost of compliance with these laws can be significant. Failure to properly handle, transport or dispose of these materials or otherwise conduct our operations in accordance with these and other environmental laws could expose us to substantial liability for administrative, civil and criminal penalties, cleanup and site restoration costs and liability associated with releases of such materials, damages to natural resources and other damages, as well as potentially impair our ability to conduct our operations. Such liability is commonly on a strict, joint and several liability basis, without regard to fault. Liability may be imposed as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Neighboring landowners and other third parties may file claims against us for personal injury or property damage allegedly caused by the release of pollutants into the environment. Environmental laws and regulations have changed in the past, and they may change in the future and become more stringent. For example, the current government has made climate change a focus of its administration. For more information, see our risk factor titled, “Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide.” Separately, current and future claims and liabilities may have a material adverse effect on us because of potential adverse outcomes, defense costs, diversion of management resources, unavailability of insurance coverage and other factors. The ultimate costs of these liabilities are difficult to determine and may exceed any reserves we may have established. If existing environmental requirements or enforcement policies change, we may be required to make significant unanticipated capital and operating expenditures. +Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide. +The threat of climate change continues to attract considerable attention in the United States and in foreign countries. Numerous proposals have been made and could continue to be made at the international, national, regional and state levels of government to monitor and limit existing emissions of GHGs as well as to restrict or eliminate future GHG emissions. As a result, our +21 +operations as well as the operations of our oil and natural gas E&P customers are subject to a series of regulatory, political, litigation, and financial risks associated with the production and processing of fossil fuels and emission of GHGs. +In the United States, no comprehensive climate change legislation has been implemented at the federal level, though recently passed laws such as the IRA 2022 advance numerous climate-related objectives. Additionally, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, implement New Source Performance Standards directing the reduction of certain pollutants from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the DOT, implementing GHG emissions limits on vehicles manufactured for operation in the United States. In September 2020, the government revised prior regulations to rescind certain methane standards and remove the transmission and storage segments from the source category for certain regulations. However, subsequently, the U.S. Congress approved, and the president signed into law, a resolution under the Congressional Review Act to repeal the September 2020 revisions to the methane standards, effectively reinstating the prior standards. Additionally, in November 2021, the EPA finalized a rule that established OOOOb more stringent new source and OOOOc first-time existing source standards of performance for methane and volatile organic compound emissions for oil and gas facilities. Under the final rule, states will have two years to prepare and submit their plans to impose methane emissions controls on existing sources. The presumptive standards under the final rule are generally the same for both new and existing sources, including enhanced leak detection using optical gas imaging and subsequent repair equipment, and reduction of emissions by 95% through capture and control systems. The rule also revises requirements for fugitive emissions monitoring and repair as well as equipment leaks and the frequency of monitoring surveys, establishes a " super-emitter " response program to timely mitigate emissions events as detected by governmental agencies or qualified third parties, triggering certain investigation and repair requirements, and provides additional options for the use of advanced monitoring to encourage the deployment of innovative technologies to detect and reduce methane emissions. It is likely that these requirements will be subject to legal challenge. Failure to comply with these new methane rules may result in substantial fines and penalties for non-compliance, as well as injunctive relief. Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas such as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored Paris Agreement, requires member states to submit non-binding, individually-determined reduction goals known as NDCs every five years after 2020. Following the president’s executive order in January 2021, the United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. Additionally, at the 26th Conference of the Parties ("COP26") in Glasgow in November 2021, the United States and the European Union jointly announced the launch of the Global Methane Pledge; an initiative committing to a collective goal of reducing global methane emissions by at least 30% from 2020 levels by 2030, including "all feasible reductions" in the energy sector. At the 27th Conference of the Parties in November 2022, countries reiterated the agreements from COP26 and were called upon to accelerate efforts toward the phase out of inefficient fossil fuel subsidies. The U.S. also announced, in conjunction with the European Union and other partner countries, that it would develop standards for monitoring and reporting methane emissions to help create a market for low methane-intensity natural gas. At the 28th Conference of the Parties (“COP28”) in December 2023, countries reached an agreement to tackle climate change by transitioning away from fossil fuels in energy systems in a just, orderly and equitable manner. The agreement set global targets to triple the capacity of renewable energy like wind and solar power, and to double the rate of energy efficiency improvements, both by 2030, and also called on countries to accelerate low- and zero-emission technologies like carbon capture and storage. Although no firm commitment or timeline to transition away from fossil fuels was made at COP28, there can be no guarantees that countries will not seek to implement plans to transition away from fossil fuels in the future. Additionally, the agreements could result in increased pressure among financial institutions and various stakeholders to reduce or otherwise impose more stringent limitations on funding for and increase potential opposition to the production and use of fossil fuels. However, the impacts of these actions are unclear at this time. +Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored Paris Agreement, requires member states to submit non-binding, individually-determined reduction goals known as NDC’s every five years after 2020. Following the president’s executive order in January 2021, the United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. Additionally, at the COP26 in Glasgow in November 2021, the United States and the European Union jointly announced the launch of a Global Methane Pledge; an initiative committing to a collective goal of reducing global methane emissions by at least 30% from 2020 levels by 2030, including “all feasible reductions” in the energy sector. However, the impacts of these actions are unclear at this time. +22 +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, including climate-change-related pledges made by certain candidates for public office. On January 27, 2021, the president issued an executive order that commits to substantial action on climate change, calling for, among other things, the increased use of zero-emissions vehicles by the federal government, the elimination of subsidies provided to the fossil fuel industry, and an increased emphasis on climate-related risk across government agencies and economic sectors. The executive order also suspended the issuance of new leases for oil and gas development on federal land; for more information, see our risk factor titled " Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. " +Other actions that the current government may take include the imposition of more restrictive requirements for the development of pipeline infrastructure or liquefied natural gas export facilities, or more restrictive GHG emissions limitations for oil and gas facilities. For example, on January 26, 2024, the president announced a temporary pause on pending decisions on new exports of LNG to countries that the United States does not have free trade agreements with, pending Department of Energy review of the underlying analyses for authorizations. The pause is intended to provide time to integrate certain considerations, including potential energy cost increases for consumers and manufacturers and the latest assessment of the impact of GHG emissions, to ensure adequate guards against health risks are in place.Litigation risks are also increasing as a number of parties have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. +There are also increasing financial risks for companies in the fossil fuel sector as shareholders currently invested in fossil-fuel energy companies concerned about the potential effects of climate change may elect in the future to shift some or all of their investments into non-fossil fuel related sectors. Institutional lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable lending practices and some of them may elect not to provide funding for fossil fuel energy companies. For example, at COP26, the Glasgow Financial Alliance for Net Zero ("GFANZ") announced that commitments from over 450 firms across 45 countries had resulted in over $130 trillion in capital committed to net zero goals. The various sub-alliances of GFANZ generally require participants to set short-term, sector-specific targets to transition their financing, investing, and/or underwriting activities to net zero emissions by 2050. There is also a risk that financial institutions will be required to adopt policies that have the effect of reducing the funding provided to the fossil fuel sector. In late 2020, the Federal Reserve announced that it has joined the Network for Greening the Financial System ("NGFS"), a consortium of financial regulators focused on addressing climate-related risks in the financial sector. Subsequently, the Federal Reserve has issued a statement in support of the efforts of the NGFS to identify key issues and potential solutions for the climate-related challenges most relevant to central banks and supervisory authorities. Limitation of investments in and financings for fossil fuel energy companies could result in the restriction, delay or cancellation of drilling programs or development or production activities. In January 2023, the Federal Reserve launched a pilot climate scenario analysis exercise, with six of the United States’ largest banks participating to enhance the ability of firms and supervisors to measure and manage climate-related financial risk. Additionally, the SEC released a final rule on climate-related disclosures on March 6, 2024, requiring the disclosure of certain climate-related risks and financial impacts, as well as GHG emissions. Large accelerated filers will be required to incorporate the applicable climate-related disclosures into their filings beginning in fiscal year 2025, with additional requirements relating to the disclosure of Scope 1 and 2 GHG emissions, if material, and attestation reports for certain large accelerated filers subsequently phasing in. Similarly, certain states have enacted or are otherwise considering disclosure requirements for certain climate-related risks. While we are still assessing our obligations under the rule, enhanced climate-related disclosure requirements could increase our operating costs and lead to reputational or other harm with customers, regulators, or other stakeholders to the extent our disclosures do not meet their own standards or expectations. Consequently, we are also exposed to increased litigation risks relating to alleged climate-related damages resulting from our operations, statements alleged to have been made by us or others in our industry regarding climate change risks, or in connection with any future disclosures we may make regarding reported emissions, particularly given the inherent uncertainties and estimation required with respect to calculating and reporting GHG emissions. We also cannot predict how financial institutions and investors might consider any information disclosed under any such requirements when making investment decisions, and as a result it is possible that we could face increases with respect to the costs of, or restrictions imposed on, our access to capital. +The adoption and implementation of new or more stringent international, federal or state legislation, regulations or other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate GHG emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for, oil and natural gas, which could reduce demand for our services and products. Additionally, political, litigation and financial risks may result in our oil and natural gas customers restricting or cancelling production activities, incurring liability for infrastructure damages as a result of climatic changes, or +23 +impairing their ability to continue to operate in an economic manner, which also could reduce demand for our services and products. One or more of these developments could have a material adverse effect on our business, financial condition and results of operations. +Moreover, climate change may result in various physical risks, such as the increased frequency or intensity of extreme weather events or changes in the meteorological and hydrological patterns, that could adversely impact us, our customers’ and our suppliers’ operations. Such physical risks may result in damage to our customers’ facilities or otherwise adversely impact our operations, such as if facilities are subject to water use curtailments in response to drought, or demand for our customers’ products, such as to the extent warmer winters reduce the demand for energy for heating purposes, which may ultimately reduce demand for the products and services we provide. Such physical risks may also impact our suppliers, which may adversely affect our ability to provide our products and services. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +Our hydraulic fracturing operations are a significant component of our business, and it is an important and common practice that is used to stimulate production of hydrocarbons, particularly oil and natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has previously issued a series of rules under the CAA that establish new emission control requirements for emissions of volatile organic compounds and methane from certain oil and natural gas production and natural gas processing operations and equipment. Separately, the BLM finalized a rule governing hydraulic fracturing on federal lands but this rule was subsequently rescinded. Although several of these rulemakings have been rescinded, modified or subjected to legal challenges, new or more stringent regulations may be promulgated by the government. For example, the BLM recently proposed a rule that would limit flaring from well sites on federal lands, as well as allow the delay or denial of permits if BLM finds that an operator’s methane waste minimization plan is insufficient. In January 2021, the president issued an executive order suspending new leasing activities, but not operations under existing leases, for oil and gas E&P on non-Indian federal lands pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices that take into consideration potential climate and other impacts associated with oil and gas activities on such lands and waters. Although the leasing pause was effectively halted by a permanent injunction in August 2022, in response to the executive order, the DOI issued a report recommending various changes to the federal leasing program, though many such changes would require Congressional action. In July 2023, the BLM proposed a rule to update the fiscal terms of federal oil and gas leases, which would increase fees, rents, royalties, and bonding requirements. The rule would also add new criteria for BLM to consider when determining whether to lease nominated land, including the presence of important habitats or wetlands, the presence of historical properties or sacred sites, and recreational use of the land. BLM anticipates a final action on the proposal in Spring 2024. As a result, we cannot predict the final scope of regulations or restrictions that may apply to oil and gas operations on federal lands. However, any regulations that ban or effectively ban such operations may adversely impact demand for our products and services. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in previous sessions of Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +Federal and state governments have also investigated whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for wastewater disposal wells in 2014 that imposed certain permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission released well completion seismicity guidelines for operators in the SCOOP and STACK require hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division has previously issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The TRRC has adopted similar rules and, in September 2021, issued a notice to disposal well operators in the Gardendale Seismic Response +24 +Area near Midland, Texas to reduce daily injection volumes following multiple earthquakes above a 3.5 magnitude over an 18 month period. The notice also required disposal well operators to provide injection data to TRRC staff to further analyze seismicity in the area. Subsequently, the TRRC ordered the indefinite suspension of all deep oil and gas produced water injection wells in the area, effective December 31, 2021. The Gardendale Seismic Response area has since been expanded in response to an additional earthquake in December 2022, covering 17 additional wells. In December 2023, a further 23 deep disposal well permits were suspended in the Northern Culberson-Reeves Seismic Response Area. While we cannot predict the ultimate outcome of these actions, any action that temporarily or permanently restricts the availability of disposal capacity for produced water or other oilfield fluids may increase our customers’ costs or require them to suspend operations, which may adversely impact demand for our products and services. +Increased regulation of hydraulic fracturing and related activities could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. +Increasing trucking regulations may increase our costs and negatively impact our results of operations. +In connection with our business operations, including the transportation and relocation of our hydraulic fracturing equipment and shipment of frac sand, we operate trucks and other heavy equipment. As such, we operate as a motor carrier in providing certain of our services and therefore are subject to regulation by the DOT and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations, driver licensing, insurance requirements, financial reporting and review of certain mergers, consolidations and acquisitions, and transportation of hazardous materials. Our trucking operations are subject to possible regulatory and legislative changes that may increase our costs. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive or work in any specific period, onboard black box recorder device requirements or limits on vehicle weight and size. +Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Matters such as the weight and dimensions of equipment are also subject to federal and state regulations. From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +Certain motor vehicle operators require registration with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria that could result in a suspension of operations. +Increased attention to ESG matters, conservation measures, commercial development and technological advances could reduce demand for oil and natural gas and our services. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, increased attention to climate change and other ESG matters, and technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas, resulting in reduced demand for oilfield services. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +The commercial development of economically‑viable alternative energy sources and related products (such as electric vehicles, wind, solar, geothermal, tidal, fuel cells and biofuels) could have a similar effect. The IRA 2022 appropriates significant federal funding for renewable energy initiatives, which could accelerate the use and commercial viability of alternative energy sources and decrease demand for oil and natural gas. The IRA 2022 has incentivized the further development of and investment in clean energy through the use of tax credits, and future legislation could expand these benefits for alternative energy sources. In addition, certain U.S. federal income tax deductions currently available with respect to oil and natural gas exploration and development, including the allowance of percentage depletion for oil and natural gas properties, may be eliminated as a result of proposed legislation. Any future decreases in the rate at which oil and natural gas reserves are discovered or developed, whether due to the passage of legislation, increased governmental regulation leading to limitations, or prohibitions on exploration and drilling activity, including hydraulic fracturing, or other factors, could have a material adverse effect on our business and financial condition, even in a stronger oil and natural gas price environment. +25 +Moreover, while we may create and publish voluntary disclosures regarding ESG matters from time to time, certain statements in those voluntary disclosures may be based on hypothetical expectations and assumptions that may or may not be representative of current or actual risks or events or forecasts of expected risks or events, including the costs associated therewith. Such expectations and assumptions are necessarily uncertain and may be prone to error or subject to misinterpretation given the long timelines involved and the lack of an established single approach to identifying, measuring and reporting on many ESG matters. Additionally, we may announce various targets or product and service offerings in an attempt to improve our ESG profile. However, we cannot guarantee that we will be able to meet any such targets or that such targets or offerings will have the intended results on our ESG profile, including but not limited to as a result of unforeseen costs, consequences or technical difficulties associated with such targets or offerings. Also, despite any voluntary actions, we may receive pressure from certain investors, lenders or other groups to adopt more aggressive climate or other ESG-related goals or policies, but we cannot guarantee that we will be able to implement such goals because of potential costs or technical or operational obstacles. +In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings and recent activism directed at shifting funding away from companies with energy-related assets could lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital. Additionally, to the extent ESG matters negatively impact our reputation, we may not be able to compete as effectively to recruit or retain employees, which may adversely affect our operations. +Certain of our completion services, particularly our hydraulic fracturing services, are substantially dependent on the availability of water. Restrictions on our or our customers’ ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows. +Water is an essential component of unconventional shale oil and natural gas production during both the drilling and hydraulic fracturing processes. Over the past several years, certain of the areas in which we and our customers operate have experienced extreme drought conditions and competition for water in such areas is growing. In addition, some state and local governmental authorities have begun to monitor or restrict the use of water subject to their jurisdiction for hydraulic fracturing to ensure adequate local water supply. For instance, some states require E&P companies to report certain information regarding the water they use for hydraulic fracturing and to monitor the quality of groundwater surrounding some wells stimulated by hydraulic fracturing. Generally, our water requirements are met by our customers from sources on or near their sites, but there is no assurance that our customers will be able to obtain a sufficient supply of water from sources in these areas. Our or our customers’ inability to obtain water from local sources or to effectively utilize flowback water could have an adverse effect on our financial condition, results of operations and cash flows. +Risks Related to our Tax Matters +Our ability to use our NOLs may be limited. +The Tax Cuts and Jobs Act included a reduction to the maximum deduction allowed for net operating losses generated in tax years after December 31, 2017, and the elimination of carrybacks of net operating losses. As of December 31, 2023, we had approximately $296.6 million of U.S. federal NOLs, some of which will begin to expire in 2035. Approximately $87.7 million of our U.S. federal NOLs relate to pre-2018 periods. As of December 31, 2023, our state net operating losses were approximately $48.1 million and will begin to expire in 2030. +Utilization of these NOLs depends on many factors, including our future income, which cannot be assured. In addition, Section 382 ( " Section 382 " ) of the Internal Revenue Code of 1986, as amended (the " Code " ), generally imposes an annual limitation on the amount of taxable income that may be offset by NOLs when a corporation has undergone an " ownership change " (as determined under Section 382). Generally, a change of more than 50% in the ownership of a corporation’s stock, by value, over a three‑year period constitutes an ownership change for U.S. federal income tax purposes. Any unused annual limitation may, subject to certain limitations, be carried over to later years. We may experience ownership changes, which may result in annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long‑term tax‑exempt rate as defined in Section 382, increased under certain circumstances as a result of recognizing built‑in gains in our assets existing at the time of the ownership change. The limitations arising from ownership changes may prevent utilization of our NOLs prior to their expiration. Future ownership changes or regulatory changes could further limit our ability to utilize our NOLs. To the extent we are not able to offset our future income with our NOLs, this could adversely affect our operating results and cash flows if we attain profitability. +26 +Changes to applicable tax laws and regulations or exposure to additional income tax liabilities could adversely affect our operating results and cash flows. +We are subject to various complex and evolving U.S. federal, state and local tax laws. U.S. federal, state and local tax laws, policies, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us, in each case, possibly with retroactive effect. Any significant variance in our interpretation of current tax laws or a successful challenge of one or more of our tax positions by the Internal Revenue Service or other tax authorities could increase our future tax liabilities and adversely affect our operating results and cash flows. +Risks Inherent to an Investment in our Common Stock +We have identified a material weakness in our internal control over financial reporting with regard to segregation of certain accounting duties and management review controls. We may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements, cause us to fail to meet our reporting obligations, investors may lose confidence in our financial reporting, and our stock price may decline as a result or cause us to fail to meet our reporting obligations. +In connection with the preparation of our financial statements for the year ended December 31, 2023, we identified a material weakness in our internal control over financial reporting, resulting from our failure to maintain adequate segregation of duties or sufficient compensating management review controls to effectively mitigate an inadequate system access control configuration in our accounting system in which manual journal entry approvers can modify the entries before posting. This deficiency is solely related to manual journal entries and has no impact on system-generated journal entries flowing through our accounting system and other feeder systems. Due to this control deficiency, other manual-dependent controls were deemed ineffective. This material weakness could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected. Notwithstanding such material weakness, our management believes that our financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). +We have taken steps to remediate this material weakness and plan to take additional steps to further improve our overall internal control environment. We have implemented a segregation of duties conflict process by limiting access of certain employees of the Company who are owners of management review controls; tested whether this access resulted in any inappropriate entries being recorded or revised and concluded that no such instances occurred; implemented a technical solution to ensure that access to our system of records adequately limits incompatible duties and strengthened our monitoring and review controls over journal entry processing; and implemented control activities related to additional independent reviews of manual entries posted in the accounting system and are currently evaluating additional procedures to further strengthen the Company’s overall segregation of duties. These actions are subject to ongoing management review and the oversight of our Audit Committee and Board. +The material weakness described above or any newly identified material weakness could limit our ability to prevent or detect a misstatement of our accounts or disclosures that could result in a material misstatement of our annual or interim financial statements. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the control deficiencies that led to the material weakness in our internal control over financial reporting described above or to avoid potential future material weaknesses. +Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we are unable to successfully remediate our existing or any future material weakness in our internal control over financial reporting, or identify any additional material weaknesses that may exist, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, we may be unable to prevent fraud, investors may lose confidence in our financial reporting, and our stock price may decline as a result. +Certain provisions of our certificate of incorporation, and bylaws, as well as Delaware law, may discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock. +Our certificate of incorporation authorizes our board of directors (the " Board " ) to issue preferred stock without shareholder approval. If our Board elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our shareholders, including: +27 +• limitations on the removal of directors; +• limitations on the ability of our shareholders to call special meetings; +• advance notice provisions for shareholder proposals and nominations for elections to the Board to be acted upon at meetings of shareholders; +• providing that the Board is expressly authorized to adopt, or to alter or repeal our bylaws; and +• establishing advance notice and certain information requirements for nominations for election to our Board or for proposing matters that can be acted upon by shareholders at shareholder meetings. +Our business could be negatively affected as a result of the actions of activist shareholders. +Publicly traded companies have increasingly become subject to campaigns by investors seeking to increase shareholder value by advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases, sales of assets or even sale of the entire company. Given our shareholder composition and other factors, it is possible such shareholders or future activist shareholders may attempt to effect such changes or acquire control over us. Responding to proxy contests and other actions by such activist shareholders or others in the future would be costly and time-consuming, disrupt our operations and divert the attention of our Board and senior management from the pursuit of business strategies, which could adversely affect our results of operations and financial condition. Additionally, perceived uncertainties as to our future direction as a result of shareholder activism or changes to the composition of the Board may lead to the perception of a change in the direction of our business, instability or lack of continuity which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. If customers choose to delay, defer or reduce transactions with us or transact with our competitors instead of us because of any such issues, then our business, financial condition, revenues, results of operations and cash flows could be adversely affected. +Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to pursue actions in another judicial forum for disputes with us or our directors, officers, employees or agents. +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our shareholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. +The exclusive forum provision would not apply to suits brought to enforce any liability or duty created by the Securities Act or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. +The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation or similar governing documents has been challenged in legal proceedings, and it is possible that a court could find the choice of forum provisions contained in our certificate of incorporation to be inapplicable or unenforceable, including with respect to claims arising under the U.S. federal securities laws. +Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our certificate of incorporation regarding exclusive forum. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations. +The market price of our common stock is subject to volatility. +28 +The market price of our common stock could be subject to wide fluctuations in response to, and the level of trading of our common stock may be affected by, numerous factors, many of which are beyond our control. These factors include, among other things, our limited trading volume, the concentration of holdings or our common stock, actual or anticipated variations in our operating results and cash flow, the nature and content of our earnings releases, announcements or events that impact our products, customers, competitors or markets, business conditions in our markets and the general state of the securities markets, volatility in oil and gas prices and the market for energy-related stocks, as well as general economic and market conditions and other factors that may affect our future results, including those described in this report. Significant sales of our common stock, or the expectation of these sales, by significant shareholders, officers or directors could materially and adversely affect the market price of our common stock. +There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock. +We are not restricted from issuing additional common stock, including securities that are convertible into or exchangeable for, or that represent a right to receive, common stock. In addition, we may issue common stock as consideration in future mergers and acquisitions, as we did in the Silvertip Acquisition. Any issuance of additional shares of our common stock or convertible securities will dilute the ownership interest of our common stockholders. Sales of a substantial number of shares of our common stock or other equity-related securities in the public market, or the perception that these sales could occur, could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our common stock or other equity-related securities would have on the market price of our common stock. +There can be no assurance that our share repurchase program will be fully consummated or that such program will enhance the long-term value of our share price. +On May 17, 2023, the Company's Board approved a share repurchase program that allows the Company to repurchase up to $100 million of the Company's common stock through and including May 31, 2024. There is no obligation for the Company to continue to repurchase or to repurchase any specific dollar amount of stock. The timing, as well as the number and value of shares repurchased under the program, will be determined by the Company at its discretion and will depend on a variety of factors, including management's assessment of the intrinsic value of the Company's common stock, the market price of the Company's common stock, general market and economic conditions, available liquidity, compliance with the Company's debt and other agreements, applicable legal requirements, and other considerations. The Company is not obligated to purchase any shares under the repurchase program, and the program may be suspended, modified, or discontinued at any time without prior notice. The repurchase program could affect the price of our stock and increase volatility in the market. We cannot guarantee that the repurchase program will be fully consummated or that such program will enhance the long-term value of our share price. In addition, repurchase regulations and taxes may add additional payment burden to the Company from our share repurchase program. For example, the current government has proposed increasing the amount of the excise tax from 1% to 4%. However, it is unclear whether such a change in the amount of the excise tax will be enacted and, if enacted, how soon any such change could take effect. +29 +Item 1B. Unresolved Staff Comments. +None. +Item 1C. Cybersecurity. +We have established an Information Security Management System (the “ISMS”), which is integrated into our overall risk management system, to help us achieve our business goals. The ISMS defines our information security risk management approach and specifies the requirements for establishing, implementing, operating, monitoring, reviewing, maintaining and improving a risk assessment framework within the context of our overall business risks. The ISMS also specifies the requirements for implementing security controls designed to meet the needs of individual departments or parts thereof. +Risk Management and Strategy +Our cybersecurity strategy focuses on implementing controls, technologies, and other processes to assess, identify, and manage material cybersecurity risks. We have processes in place designed to assess, identify, manage, and address material cybersecurity threats and incidents, including: annual security awareness training for employees, mechanisms designed to detect and monitor unusual network activity, and containment and incident response tools. Our ISMS is designed to help us identify and manage material risks from cybersecurity threats, and as part of our ISMS, we engage a range of third-party service providers, including assessors, consultants, and auditors, to assist us in these processes. Our risk assessment framework involves an information security risk assessment procedure that helps us identify potential cybersecurity threats and vulnerabilities (including relating to the use of third-party service providers) and then determine strategies to mitigate or counter the threats. As part of this process, we conduct annual penetration testing utilizing a third-party service provider. We have implemented controls designed to identify and mitigate cybersecurity threats associated with our use of third-party service providers. Such providers are subject to security risk assessments at the time of onboarding, contract renewal, and upon detection of an increase in risk profile. We use a variety of inputs in such risk assessments, including information supplied by providers and third parties. In addition, we require our providers to meet appropriate security requirements, controls and responsibilities and investigate security incidents that have impacted our third-party providers, as appropriate. Our Information Technology Director also works with third-party service providers to assess potential cybersecurity threats and determines risk scores based on the likelihood of threats and the potential impacts of the threats, prioritizes risk and determines and recommends to our management controls aimed to counter such threats. We assess third-party cybersecurity controls through a cybersecurity questionnaire and include security and privacy addenda to our contracts where applicable. +We also maintain procedures designed to protect the security of personally identifiable information, and our Privacy Policy provides details regarding the collection, storage, usage, and destruction of data. We require all employees to engage in data-security training upon hire and receive ongoing training thereafter. In the event of an incident, we intend to follow our incident response plan, which outlines the steps to be followed from incident detection to mitigation, recovery and notification, including notifying functional areas (e.g., legal), as well as senior leadership and the Board, as appropriate. +Governance +Management is responsible for assessing, identifying, and managing risks from cybersecurity threats. Our cybersecurity risk management efforts are led by our Information Technology Director, who oversees our cybersecurity activities and is informed about and monitors the prevention, detection, mitigation and remediation of cybersecurity incidents as part of our ISMS. The Information Technology Director is part of the Company’s Security Committee and reports to the Security Committee with respect to emerging cybersecurity incidents deemed to have a moderate or higher business impact, even if immaterial to us. Our Security Committee, comprised of the Information Technology Director, the Chief Financial Officer, the Chief Legal Counsel and the Vice President of Human Resources is ultimately responsible for the implementation of our cybersecurity risk management processes. To facilitate effective oversight, our Security Committee holds discussions on cybersecurity risks, incident trends, and the effectiveness of cybersecurity measures as necessitated by emerging cybersecurity risks. The Security Committee has experience managing enterprises relying on technology and business systems with cybersecurity risks and consults with trusted advisors where appropriate. +The audit committee of our Board is responsible for oversight of risks from cybersecurity threats. The Information Technology Director presents an update on cybersecurity risk management to the audit committee of our Board during quarterly meetings and the audit committee reports to the Board. +30 +Impact of Risks from Cybersecurity Threats +As of the date of this report, though the Company and our service providers have experienced certain cybersecurity incidents, we are not aware of any previous cybersecurity incidents that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations and financial condition. We acknowledge that cybersecurity threats are continually evolving, and the possibility of future cybersecurity incidents remains. Despite the implementation of our cybersecurity processes, our security measures cannot guarantee that a significant cybersecurity attack will not occur. While we devote resources to our security measures designed to protect our systems and information, no security measure is infallible. See Part I, "Item 1A. Risk Factors" of this Annual Report for additional information about the risks to our business associated with a breach or other compromise to our information and operational technology systems. +Item 2. Properties. +Our corporate headquarters is located at 303 W. Wall Street, Suite 102, Midland, Texas 79701. In addition to our headquarters, we also own and lease other properties that are used for field offices, yards or storage in the Permian Basin. We believe that our facilities are adequate for our current operations. +Item 3. Legal Proceedings. +Disclosure concerning legal proceedings is incorporated by reference to " Note 18. Commitments and Contingencies— Contingent Liabilities " o f our Consolidated Financial Statements contained in this Annual Report. +From time to time, we may be subject to various other legal proceedings and claims incidental to or arising in the ordinary course of our business. +Item 4. Mine and Safety Disclosures. +None. +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +On March 22, 2017, we consummated our initial public offering of our common stock at a price of $14.00 per share. Our common stock is traded on the New York Stock Exchange under the symbol "PUMP." +Holders +As of December 31, 2023, there were 109,483,281 shares of common stock outstanding, held of record by twelve holders. The number of record holders of our common stock does not include Depository Trust Company participants or beneficial owners holding shares through nominee names. +Dividend +We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the growth of our business and repay borrowings under our ABL Credit Facility, if any. Our future dividend policy is within the discretion of our Board and will depend upon then‑existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory restrictions on our ability to pay dividends and other factors our Board may deem relevant. In addition, our ABL Credit Facility places certain restrictions on our ability to pay cash dividends. +31 +Share Repurchase Program +The following sets forth information with respect to our repurchases of shares of common stock during the three months ended December 31, 2023: +Period Total number of shares purchased +Average price paid per share (2) +Total number of shares purchased as part of publicly announced plans or programs (1) +Approximate dollar value of shares that may yet be purchased under the plans or programs (1) +October 1, 2023 to October 31, 2023 894,300 $ 10.21 894,300 $ 54,611,997 +November 1, 2023 to November 30, 2023 213,967 $ 9.75 213,967 $ 52,526,741 +December 1, 2023 to December 31, 2023 505,455 $ 8.44 505,455 $ 48,261,638 +Total 1,613,722 $ 9.59 1,613,722 $ 48,261,638 +(1) On May 17, 2023, the Board authorized and the Company announced a share purchase program that allows the Company to repurchase up to $100 million of the Company's common stock beginning immediately and continuing through and including May 31, 2024. The shares may be repurchased from time to time in open market transactions, block trades, accelerated share repurchases, privately negotiated transactions, derivative transactions or otherwise, certain of which may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act, as amended, in compliance with applicable state and federal securities laws. +(2) The average price paid per share includes commissions. +Performance Graph +The annual changes for the periods shown in the following graph are based on the assumption that $100 had been invested in our common stock, the Russell 2000 Index ("Russell 2000") and a self-constructed peer group index of comparable companies ("Peer Group") on December 31, 2018, and that all dividends were reinvested at the closing prices of the dividend payment dates. The relevant companies included in our Peer Group consists of Liberty Energy Inc., Patterson-UTI Energy, Inc., RPC, Inc., Calfrac Well Services Ltd., and Mammoth Energy Services, Inc. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on the last trading date of 2023. The calculations exclude trading commissions and taxes. The stock price performance on the following graph and table is not necessarily indicative of future stock price performance. +32 +Date Peer Group Russell 2000 ProPetro Holding Corp. +12/31/2018 $ 100.0 $ 100.0 $ 100.0 +12/31/2019 $ 70.8 $ 125.5 $ 91.3 +12/31/2020 $ 45.4 $ 150.6 $ 59.7 +12/31/2021 $ 56.9 $ 172.9 $ 65.8 +12/31/2022 $ 108.5 $ 137.6 $ 84.2 +12/31/2023 $ 92.1 $ 160.9 $ 68.0 +Item 6. [Reserved] +33 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward‑looking statements that involve risks and uncertainties. You should read the " Risk Factors " section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis. +Basis of Presentation +This discussion of our results omits our results of operations and cash flows for the year ended December 31, 2021 and the comparison of our results of operations for the years ended December 31, 2022 and 2021, which may be found in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 23, 2023. +Unless otherwise indicated, references in this " Management’s Discussion and Analysis of Financial Condition and Results of Operations " to " ProPetro Holding Corp., " " the Company, " " we, " " our, " " us " or like terms refer to ProPetro Holding Corp. and its subsidiaries. +Overview +Our Business +We are a leading integrated oilfield service company, located in Midland, Texas, focused on providing innovative hydraulic fracturing, wireline and other complementary oilfield completion services to leading upstream oil and gas companies engaged in the exploration and production (“E&P”) of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil‑producing areas in the United States, and we believe we are one of the leading providers of completion services in the region. +Our completion services includes our operating segments comprised of hydraulic fracturing, wireline and cementing operations. Our hydraulic fracturing operations account for approximately 78.5% of our total revenues and operations. Our total available hydraulic horsepower ("HHP") at December 31, 2023 w as 1,461,500 HHP, which was comprised of 452,500 HHP of our Tier IV Dynamic Gas Blending (“DGB”) dual-fuel equipment, 144,000 HHP of FORCE SM electric-powered equipment and 865,000 HHP of conventional Tier II equipment. Our hydraulic fracturing fleets range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsite. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region’s increasingly high-intensity well completions (including simultaneous hydraulic fracturing ("Simul-Frac"), which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. With the industry transition to lower emissions equipment and Simul-Frac, in addition to several other changes to our customers' job designs, we believe that our available fleet capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at wellsites. In addition, in 2021 and 2022, we committed to additional conversions of our Tier II equipment to Tier IV DGB, and to purchase new Tier IV DGB dual-fuel equipment. As such, we entered into conversion and purchase agreements with our equipment manufacturers for a total of 452,500 HHP of Tier IV DGB dual-fuel equipment and as of December 31, 2023, we have received all of the converted and new Tier IV DGB dual-fuel equipment. In 2022, we entered into three-year electric fleet leases for a total of four FORCE SM electric-powered hydraulic fracturing fleets with 60,000 HHP per fleet. As of December 31, 2023, we have recei ved 144,000 HHP of FOR CE SM electric-powered equipment. We currently expect to receive the remaining equipment associated with the second and third fleets and all equipment associated with the fourth fleet in the first half of 2024. +On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip Completion Services Operating, LLC (the “Silvertip Acquisition”), which provides wireline perforation and ancillary services solely in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed debt, and the payment of certain other closing and transaction costs. At December 31, 2023, we had 23 wireline units available to provide wireline perforation and ancillary services. The Silvertip Acquisition positions the Company as a more resilient and diversified completions-focused oilfield service provider headquartered in the Permian Basin. +34 +On December 1, 2023, we consummated the purchase of the assets and operations of Par Five Energy Services LLC (“Par Five”), which provides cementing services in the Delaware Basin, in exchange for $25.4 million of cash . Par Five’s business complements our existing cementing business and enables us to serve both the Midland and Delaware Basins of the Permian Basin. +Our substantial market presence in the Permian Basin positions us well to capitalize on drilling and completion activity in the region. Primarily, our operational focus has been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have increased our operations in the Delaware sub-basin and are well-positioned to support further increases to our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending. +We have historically conducted our business through four operating segments: hydraulic fracturing, wireline, cementing and coiled tubing. Prior to the fourth quarter of fiscal year 2023, our operating segments met the aggregation criteria and were aggregated into the “Completion Services” reportable segment and our coiled tubing operations (which were divested in September 2022) were shown in the “All Other” category. Effective as of the fourth quarter of fiscal year 2023, we revised our segment reporting as we determined that our three operating segments no longer met the criteria to be aggregated. Our Hydraulic Fracturing and Wireline operating segments meet the criteria of a reportable segment. Our cementing and our divested coiled tubing segments are not material, are not separately reportable, and are included within the “All Other” category. Prior period segment information has been revised to conform to our current presentation. For additional financial information on our reportable segments presentation, please see reportable segment information in Part II - Item 8, "Financial Statements and Supplementary Data." +Pioneer Pressure Pumping Acquisition +On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer Natural Resources USA, Inc. (“Pioneer”) and Pioneer Pumping Services, LLC in the Pioneer Pressure Pumping Acquisition in exchange for 16.6 million shares of our common stock and $110.0 million in cash, and concurrently entered into a pressure pumping services agreement (the "Pioneer Services Agreement") with Pioneer. +On March 31, 2022, we entered into an amended and restated pressure pumping services agreement (the “A&R Pressure Pumping Services Agreement”) to replace the Pioneer Services Agreement that was entered into in connection with the Pioneer Pressure Pumping Acquisition. This agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and Fleet Two Agreement described below. +On October 31, 2022, we entered into two pressure pumping services agreements (the “Fleet One Agreement” and the “Fleet Two Agreement”) with Pioneer, pursuant to which we provided hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and was terminated on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was terminated on May 12, 2023. In October 2023, Pioneer entered into a merger agreement with Exxon Mobil Corporation. +Commodity Price and Other Economic Conditions +The oil and gas industry has traditionally been volatile and is characterized by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, war and political instability in oil producing countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. +Since October 2023, an ongoing conflict between Israel and Palestinian militants in the Israel-Gaza region has led to significant armed hostilities. The geopolitical and macroeconomic consequences of this conflict remain uncertain, and such events, or any further hostilities in the Israel-Gaza region or elsewhere, could severely impact the world economy, the demand for and price of crude oil and the oil and gas industry generally and may adversely affect our financial condition. +Similarly, the geopolitical and macroeconomic consequences of the Russian invasion of Ukraine, including the associated sanctions, and the adverse impacts of the COVID-19 pandemic in recent years have resulted in volatility in supply and demand dynamics for crude oil and associated volatility in crude oil pricing. As the global response to the COVID-19 pandemic began to wane, the demand and prices for crude oil increased from the lows experienced in 2020, with the WTI average crude oil price +35 +reaching approximately $94 per barrel in 2022, the highest average price in the prior nine years. However, in 2023, the WTI average crude oil price declined to approximately $78 per barrel. We believe that the volatility of crude oil prices in recent years has been partly driven by declines in crude oil supplies, concerns over sanctions resulting from Russia's invasion of Ukraine, concerns over a potential disruption of Middle Eastern oil supplies resulting from the ongoing conflict between Israel and Palestinian militants in the Israel-Gaza region, slower crude oil production growth due to the lack of reinvestment in the oil and gas industry in the last two years, recent OPEC+ production cuts of approximately 1.3 million barrels per day and concerns of a potential global recession resulting from high inflation and interest rates. +With the significant increase in global crude oil prices from 2021, including the WTI crude oil price, there was a significant increase in the Permian Basin rig count from approximately 179 at the beginning of 2021 to approximately 353 at the end of 2022, according to the Baker Hughes Company (“Baker Hughes”). Following the increase in rig count and the WTI crude oil price, the oilfield service industry has experienced increased demand for its completion services, and improved pricing. However, we have recently experienced a 13% decrease in the rig count in 2023 to 309 at the end of 2023 which resulted in a reduction in the demand for completion services and pressure on pricing of our services. +Sustained levels of high inflation have likewise caused the U.S. Federal Reserve and other central banks to increase interest rates, and to the extent elevated inflation remains, we may experience further cost increases for our operations, including interest rates, labor costs and equipment. We cannot predict any future trends in the rate of inflation and crude oil prices. A significant increase in or continued high levels of inflation, to the extent we are unable to timely pass-through the cost increases to our customers, or further declines in crude oil prices would negatively impact our business, financial condition and results of operations. See Part II, Item 1A. "Risk Factors—We may be adversely affected by the effects of inflation." +Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including upstream and oilfield service companies. As a result, we are working with our customers and equipment manufacturers to transition our equipment to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB dual-fuel , FORCESM electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. We have transitioned our hydraulic fracturing available equipment portfolio from approximately 10% lower emissions equipment in 2021 to approximately 35% in 2022 and 60% in 2023, and expect to increase to approximately 65% by the end of the first half of 2024. To the extent any of our customers have certain expectations or requirements with respect to emissions reductions from their contractors, if we are unable to continue quickly transitioning to lower emissions equipment, the demand for our services could be adversely impacted. +If the Permian Basin rig count and market conditions improve, including improved pricing for our services and labor availability, and we are able to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also continue to improve. If the rig count or market conditions do not improve or decline in the future, and we are unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows . +Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment. +2023 Operational Highlights +Over the course of the year ended December 31, 2023: +• improved pricing and increased operational efficiency at wellsites ; +• our average effectively utilized hydraulic fracturing fleet count was approximately 15 active fleets, consistent with 15 active fleets in 2022; +• successfully integrated our wireline business with our existing hydraulic fracturing and cementing businesses; +36 +• deployed two FORCE SM electric-powered hydraulic fracturing fleets with a total capacity of 120,000 HHP, and transitioned 452,500 HHP of our equipment portfolio to lower emissions, Tier IV DGB dual-fuel equipment. By adding two additional electric fleets by the end of the first half of 2024, our available equipment portfolio is expected to be comprised of approximately 65% lower emissions (FORCE SM electric and Tier IV DGB dual-fuel), and 35% conventional diesel equipment; +• published our inaugural sustainability report, which describes our commitment to building a sustainable business that supports the safe, reliable production of the energy the world needs by offering competitive, value-driving services to customers, while benefitting our shareholders, communities, and other stakeholders; and +• on December 1, 2023, we consummated the purchase of the assets and operations of Par Five, which provides cementing services in the Delaware Basin. +2023 Financial Highlights +Financial highlights for the year ended December 31, 2023: +• revenue increased $350.7 million, or 27.4%, to $1,630.4 million, as compared to $1,279.7 million for the year ended December 31, 2022; +• cost of services (exclusive of depreciation and amortization) increased $249.0 million or 28.2% to $1,131.8 million, as compared to $882.8 million for the year ended December 31, 2022; cost of services as a percentage of revenue increased to 69.4% in 2023 compared to 69.0% for the year ended December 31, 2022; +• general and administrative expenses, inclusive of stock-based compensation, increased $2.6 million, or 2.3% to $114.4 million, as compared to $111.8 million for the year ended December 31, 2022; +• no impairment expense was recorded during the year December 31, 2023, compared to $57.5 million impairment expense recorded during the year ended December 31, 2022 related to our DuraStim® electric-powered hydraulic fracturing equipment; +• net income was $85.6 million, compared to $2.0 million for the year ended December 31, 2022. Diluted net income per common share was $0.76, compared to $0.02 for the year ended December 31, 2022. Adjusted EBITDA of approximately $404.0 million increased 27.6%, compared to $316.6 million for the year ended December 31, 2022 (see reconciliation of Adjusted EBITDA to net income in the subsequent section "How We Evaluate Our Operations"); +• our total liquidity was $134.4 million , consisting of cash, cash equivalents and restricted cash of $33.4 million and remaining availability of $101.0 million under our ABL Credit Facility; $45.0 million of borrowings as of December 31, 2023 under our ABL Credit Facility; and +• the Company repurchased and retired 5.8 million shares of common stock for an aggregate of $51.7 million, an average price per share of $8.93 including commissions, under the repurchase program. As of December 31, 2023, $48.3 million remained authorized for future repurchases of common stock under the repurchase program. +• In connection with the review of our power ends estimated useful life, effective January 1, 2023, we are writing off the remaining book value of power ends that prematurely fail as accelerated depreciation. These write-off amounts were $12.5 million, $11.8 million, $8.4 million and $6.0 million for the three months ended March, 31, 2023, June 30, 2023, September 30, 2023 and December 31, 2023, respectively. However, to conform to prior year presentation, we have presented these write-off amounts within loss on disposal of assets for the year ended December 31, 2023. In 2022 and 2021, we wrote off the remaining book value of prematurely failed and disposed of power ends to loss on disposal of assets. +Our Assets and Operations +Completion services includes our hydraulic fracturing, wireline and cementing operations. We primarily provide these services to E&P comp anies in the Permian Basin. During the year ended December 31, 2023, our hydraulic fracturing, wireline and cementing operations accounted for 78.5%, 14.1% and 7.4% of our total revenue, respectively. Our equipment has been designed to handle Permian Basin specific operating conditions and the region’s increasingly high‑intensity well completions, which are characterized by longer horizontal wellbores, more frac stages per lateral and increasing amounts of proppant per well. We plan to continually reinvest in our equipment to ensure optimal performance and reliability. +37 +How We Generate Revenue +We generate revenue through our completion services, and more specifically, by providing hydraulic fracturing services to our customers. We own and operate a fleet of mobile hydraulic fracturing, wireline and cementing units and other auxiliary equipment to perform completion services to E&P companies. We also provide personnel and services that are tailored to meet each of our customers’ needs. +Hydraulic fracturing operations account for a significant portion of our total revenue. We charge our customers on a per‑job basis, in which we set pricing terms after receiving full specifications for the requested job, including the lateral length of the customer’s wellbore, the number of frac stages per well, the amount of proppant and chemicals to be used and other parameters of the job. +In addition to hydraulic fracturing services, we generate revenue through other completion services that we provide to our customers, including cementing, wireline and other related services. These completion services are complementary to each other and are undertaken in unison with hydraulic fracturing services. They are provided through various contractual arrangements, including on a turnkey contract basis, in which we set a price to perform a particular job, or a daywork contract basis, in which we are paid a set price per day for our services. We are also sometimes paid by the hour for these complementary services. +Demand for our services is largely dependent on oil and natural gas prices, and our customers’ well completion budgets and rig count. Our revenue, profitability and cash flows are highly dependent upon prevailing crude oil prices and expectations about future prices. For many years, oil prices and markets have been extremely volatile. Prices are affected by many factors beyond our control. The average WTI oil price per barrel was approximately $78 , $94 and $68 for the years ended December 31, 2023, 2022 and 2021, respectively. In January 2024, the WTI oil price was approximately $74 p er barrel. If the WTI oil price declines in the future or remains highly volatile, demand for our services may be negat ively impacted, which could result in a significant decrease in our future profitability and cash flows. We monitor oil and natural gas prices and the Permian Basin rig count to enable us to more effectively plan our business and forecast the demand for our services. +The historical weekly average Permian Basin rig count based on Baker Hughes rig count information was as follows: +Year Ended December 31, +Drilling Rig Type (Permian Basin) 2023 2022 2021 +Directional 3 3 2 +Horizontal 323 318 227 +Vertical 9 14 11 +Total 335 335 240 +Average Permian Basin rig count to U.S. rig count 48.7 % 46.3 % 50.5 % +Costs of Conducting our Business +The principal direct costs involved in operating our business are direct labor, expendables and other direct costs. +Direct Labor Costs. Payroll and benefit expenses related to our crews and other employees that are directly or indirectly attributable to the effective delivery of services are included in our operating costs. Direct lab or costs amounted to 28.7% and 27.7% of total costs of service for the years ended December 31, 2023 and 2022, respectively. The increase in our direct labor costs percentage is driven by wage adjustments and higher headcount resulting from business acquisitions. +Expendables. Expendables include the product and freight costs associated with proppant, chemicals and other consumables used in our completion services and other operations. These costs comprise a substantial variable component of our service costs, particularly with respect to the quantity and quality of sand and chemicals demanded when providing hydraulic fracturing services. Expendable product costs comprised approximately 32.9% and 33.6% of total costs of service for the years ended December 31, 2023 and 2022, respectively. The percentage decrease in our expendables in 2023 was primarily attributable to certain customers electing to directly source sand and the associated logistics. +Other Direct Costs. We incur other direct expenses related to our service offerings, including the costs of fuel, repairs and maintenance, general supplies, equipment rental and other miscellaneous operating expenses. Fuel is consumed both in the operation and movement of our equipment. Repairs and maintenance costs are expenses directly related to upkeep of equipment, which have been amplified by the demand for higher horsepower jobs. Capital expenditures to upgrade or extend the useful life of equipment are capitalized and are not included in other direct costs. Other direct costs were 38.4% and 38.7% of total costs of service for the years ended December 31, 2023 and 2022, respectively. +38 +How We Evaluate Our Operations +Our management uses Adjusted EBITDA or Adjusted EBITDA margin to evaluate and analyze the performance of our various operating segments. +Adjusted EBITDA and Adjusted EBITDA Margin +We view Adjusted EBITDA and Adjusted EBITDA margin as important indicators of performance. We define EBITDA as our earnings, before (i) interest expense, (ii) income taxes and (iii) depreciation and amortization. We define Adjusted EBITDA as EBITDA, plus (i) loss/(gain) on disposal of assets, (ii) stock-based compensation, (iii) other expense/(income) and (iv) other unusual or nonrecurring (income)/expenses, such as impairment charges, retention bonuses, severance, costs related to asset acquisitions, insurance recoveries, one-time professional fees and legal settlements. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues. +Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures utilized by our management and other users of our financial statements such as investors, commercial banks, and research analysts, to assess our financial performance because it allows us and other users to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), nonrecurring (income) expenses and items outside the control of our management team (such as income taxes). Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income (loss), operating income (loss), cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP. +Note Regarding Non‑GAAP Financial Measures +Adjusted EBITDA and Adjusted EBITDA margin are not financial measures presented in accordance with GAAP ( " non-GAAP " ), except when specifically required to be disclosed by GAAP in the financial statements. We believe that the presentation of Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors in assessing our financial condition and results of operations because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure, asset base, nonrecurring expenses (income) and items outside the control of the Company. Net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA. Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some, but not all, items that affect the most directly comparable GAAP financial measures. You should not consider Adjusted EBITDA and Adjusted EBITDA margin in isolation or as a substitute for an analysis of our results as reported under GAAP. Because Adjusted EBITDA and Adjusted EBITDA margin may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. +The following tables provide a reconciliation of Adjusted EBITDA to the GAAP financial measure of net income (loss) for each of our reportable segments for the specified periods (in thousands): +Hydraulic Fracturing +Wireline All Other +Year ended December 31, 2023 +Net income $ 131,343 $ 42,051 $ 17,882 +Depreciation and amortization 156,057 18,762 5,845 +Interest expense +1,014 — 14 +Loss on disposal of assets 71,756 562 796 +Other expense (1) +6,000 — — +Other general and administrative expense +4 — 28 +Retention bonus and severance expense 635 555 100 +Adjusted EBITDA +$ 366,809 $ 61,930 $ 24,665 +39 +Hydraulic Fracturing Wireline All Other +Year ended December 31, 2022 +Net income (loss) $ 71,697 $ 5,388 $ (7,865) +Depreciation and amortization +117,753 2,619 7,329 +Impairment expense (2) +57,454 — — +Loss (gain) on disposal of assets 88,765 (77) 13,953 +Other income (3) +(2,668) (4) — +Other general and administrative expense (4) +5,124 — — +Severance expense 1,061 — 17 +Adjusted EBITDA +$ 339,186 $ 7,926 $ 13,434 +Hydraulic Fracturing Wireline All Other +Year ended December 31, 2021 +Net loss $ (15,292) $ — $ (427) +Depreciation and amortization +124,999 — 8,076 +Loss on disposal of assets +64,986 — 14 +Severance expense — — 30 +Adjusted EBITDA +$ 174,693 $ — $ 7,693 +____________________ +(1) Includes settlement expenses resulting from routine audits. +(2) Represents expense in connection with the impairment of our DuraStim® electric-powered hydraulic fracturing equipment. +(3) Includes $2.7 million of non-cash income from fixed asset inventory received as part of a settlement of warranty claims with an equipment manufacturer. +(4) Includes legal settlement to a vendor and other legal matters, net of reimbursement from insurance carriers. +40 +Results of Operations +In 2023, we conducted our business through three operating segments: hydraulic fracturing, wireline, and cementing. Our cementing operating segment and coiled tubing operations are shown in the “All Other” category for segment reporting purposes. We disposed of our coiled tubing assets and shut down our coiled tubing operations effective September 1, 2022 . +Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 +(in thousands, except percentages) +Year Ended December 31, Change +2023 2022 Variance % +Revenue +Hydraulic Fracturing $ 1,280,523 $ 1,143,216 $ 137,307 12.0 % +Wireline 229,599 31,188 198,411 636.2 % +All Other (1) +120,277 105,297 14,980 14.2 % +Total revenue 1,630,399 1,279,701 350,698 27.4 % +Cost of services (2) +Hydraulic Fracturing 886,157 776,021 110,136 14.2 % +Wireline 155,357 21,141 134,216 634.9 % +All Other (1) +90,287 85,658 4,629 5.4 % +Total cost of services 1,131,801 882,820 248,981 28.2 % +General and administrative expense (3) +114,354 111,760 2,594 2.3 % +Depreciation and amortization 180,886 128,108 52,778 41.2 % +Impairment expense — 57,454 (57,454) (100.0) % +Loss on disposal of assets 73,015 102,150 (29,135) (28.5) % +Interest expense 5,308 1,605 3,703 230.7 % +Other expense (income) 9,533 (11,582) 21,115 182.3 % +Income tax expense 29,868 5,356 24,512 457.7 % +Net income $ 85,634 $ 2,030 $ 83,604 4,118.4 % +Adjusted EBITDA (4) +$ 403,960 $ 316,590 $ 87,370 27.6 % +Adjusted EBITDA Margin (4) +24.8 % 24.7 % 0.1 % 0.4 % +Hydraulic Fracturing segment results of operations: +Revenue $ 1,280,523 $ 1,143,216 $ 137,307 12.0 % +Cost of services $ 886,157 $ 776,021 $ 110,136 14.2 % +Adjusted EBITDA $ 366,809 $ 339,186 $ 27,623 8.1 % +Adjusted EBITDA Margin (5) +28.6 % 29.7 % (1.1) % (3.7) % +____________________ +(1) Includes our cementing and our disposed of coiled tubing operations. +(2) Exclusive of depreciation and amortization. +(3) Inclusive of stock‑based compensation. +(4) For definitions of the non‑GAAP financial measures of Adjusted EBITDA and Adjusted EBITDA margin and reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to our most directly comparable financial measures calculated in accordance with GAAP, please read " How We Evaluate Our Operations. " Included in our Adjusted EBITDA is reservation and idle fees of $0 and $27.0 million for the years ended December 31, 2023 and 2022, respectively. +41 +(5) The non‑GAAP financial measure of Adjusted EBITDA margin for the Hydraulic Fracturing segment is calculated by taking Adjusted EBITDA for the Hydraulic Fracturing segment as a percentage of our revenues for the Hydraulic Fracturing segment. +Revenue. Revenue increased 27.4%, or $350.7 million, to $1,630.4 million for the year ended December 31, 2023, as compared to $1,279.7 million for the year ended December 31, 2022. Revenue by reportable segment was as follows: +Hydraulic Fracturing. Our hydraulic fracturing segment revenues increased 12.0%, or $137.3 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022. The increase was primarily attributable to the increase in our existing and new customers' activity levels, resulting in higher demand for completion services, and improved pricing. Our effectively utilized hydraulic fracturing fleet count was flat at 15 active fleets for the year ended December 31, 2023, as in the year ended December 31, 2022. The effectively utilized fleet count is determined by dividing the total number of days our fleets were actively working at wellsites during the month by 25 days (predetermined number of expected active work days in the month). Our revenue for the years ended December 31, 2023 and December 31, 2022 included reservation fees charged to a customer of approximately $0 and $27.0 million, respectively. +Wireline. Our wireline segment revenue increased 636.2%, or $198.4 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022. The increase was primarily attributable to a full year of activity for the year ended December 31, 2023 compared to only 61 days of activity during year ended December 31, 2022 since the wireline business was acquired on November 1, 2022. +All Other. Revenue from the All Other category comprising of our cementing and our disposed of coiled tubing operations increased 14.2%, or $15.0 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022. The increase was primarily attributable to the increase in our existing and new customers' activity levels, resulting in higher demand for completion services, and improved pricing, partially offset by the discontinuation of our coiled tubing operations effective September 1, 2022. +Cost of Services. Cost of services increased 28.2%, or $249.0 million, to $1,131.8 million for the year ended December 31, 2023, from $882.8 million during the year ended December 31, 2022. Cost of services by reportable segment was as follows: +Hydraulic Fracturing. C ost of services for our hydraulic fracturing segment increased $110.1 million during the year ended December 31, 2023, as compared to the year ended December 31, 2022. The increase was primarily attributable to increased activity levels resulting from the increased demand for our services as compared to 2022, and the impact of general cost inflation. As a percentage of hydraulic fracturing revenues (including reservation fees), hydraulic fracturing cost of services increased to 69.2% for the year ended December 31, 2023, as compared to 67.9% for the year ended December 31, 2022. Excluding reservation fees revenue of $0 and $27.0 million for the years ended December 31, 2023 and 2022, respectively, our hydraulic fracturing cost of services as a percentage of hydraulic fracturing revenues for the years ended December 31, 2023 and 2022 was approximately 69.2% and 69.5%, respectively. The decrease was a result of increased operational efficiencies and improved customer pricing, partially offset by costs of $38.0 million associated with the replacement of fluid ends during the year ended December 31, 2023 . Fluid ends were capitalized and depreciated in 2022. Effective January 1, 2023, the Company commenced expensing fluid ends as part of cost of services rather than capitalizing fluid ends as part of property and equipment as a result of the change in estimated useful life. +Wireline. Our wireline segment cost of services increased 634.9%, or $134.2 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022. The increase was primarily attributable to a full year of activity for the the year ended December 31, 2023 compared to only 61 days of activity during year ended December 31, 2022 since the wireline business was acquired on November 1, 2022. +All Other. Cost of services for the All Other category comprising of our cementing and our disposed of coiled tubing operations increased 5.4%, or $4.6 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022. The increase was primarily attributable to increased activity levels resulting from the increased demand for our services as compared to 2022, and the impact of general cost inflation, partially offset by the discontinuation of our coiled tubing operations effective September 1, 2022. +General and Administrative Expenses. General and administrative expen ses increased 2.3%, or $2.6 million, to $114.4 million for the y ear ended December 31, 2023, as compared to $111.8 million for the year ended December 31, 2022. The net increase was primarily attributable to (i) a $6.3 million increase in payroll and related expenses, (ii) a $5.1 million increase in utilities, advertising and other office expenses, (iii) a $2.1 million increase in travel expenses, and (iv) a $0.4 million net increase in +42 +other general and administrative expenses, partially offset by (i) a $7.4 million decrease in stock-based compensation expense primarily attributable to non-recurring incremental stock-based compensation in 2022 resulting from the acceleration of stock awards in connection with the resignation of former executives and (ii) a $3.9 million decrease in one-time legal settlement expenses. +Excluding nonrecurring and non-cash items ( i.e., stock-based compensation of $14.5 million, legal settlements (net of insurance reimbursements) of $0.7 million, transaction expenses of $2.3 million, and retention bonuses and severance expenses of $2.3 million), general and administrative expenses were $94.6 million for the year ended December 31, 2023, as compared to $80.3 million for the year ended December 31, 2022. +Depreciation and Amortization. Depreciation and amortization increased 41.2%, or $52.8 million, to $180.9 million for the yea r ended December 31, 2023, as compared to $128.1 million for the year ended December 31, 2022. The increase was primarily attributable to the increase in our fixed asset base as of December 31, 2023. +Impairment Expense. There was no impairment expense during the year ended December 31, 2023. During the year ended December 31, 2022, we recorded $57.5 million in connection with the impairment of our DuraStim® electric powered hydraulic fracturing equipment, which is included in our Hydraulic Fracturing reportable segment. +Loss on Disposal of Assets. Loss on the disposal of assets decreased 28.5%, or $29.1 million, to $73.0 million for the year ended December 31, 2023, as compared to $102.1 million for the year ended December 31, 2022. The decrease was primarily attributable to a loss of approximately $13.8 million from the disposal of our coiled tubing assets on September 1, 2022 and the Company expensing costs associated with replacement of fluid ends as part of cost of services resulting from the change in estimated useful life effective January 1, 2023, partially offset by losses incurred from the decommissioning/conversion of certain hydraulic fracturing equipment and the write-off of certain hydraulic fracturing equipment as a result of an accidental fire at a wellsite in March 2023. +Interest Expense. Interest expense increased to $5.3 million for the yea r ended December 31, 2023, as compared to $1.6 million for t he year ended December 31, 2022. The increase was primarily attributable to higher average outstanding borrowings under our ABL Credit Facility during the year ended December 31, 2023 and the addition of a finance lease for certain power generation equipment in August 2023. +Other Expense (Income). Other expense was approximately $9.5 million for the year ended December 31, 2023, as compared to other income of $11.6 million for the year ended December 31, 2022. Other expense during the year ended December 31, 2023 is primarily comprised of settlement expenses resulting from routine audits and one-time health insurance costs totaling approximately $7.4 million, and a $2.5 million unrealized loss on short-term investment. Other income during the year ended December 31, 2022 is comprised of a $10.7 million net tax refund of sales, excise and use taxes and $2.7 million of non-cash income from equipment parts inventory received from an equipment manufacturer as settlement of our warranty claims, partially offset by a $1.6 million unrealized loss on short-term investment. +Income Taxes. Total income tax expense was $29.9 million resulting in an effective tax rate of 25.9% for the year ended December 31, 2023, as compared to $5.4 million or an effective tax rate of 72.5% for the year ended December 31, 2022. The change in income tax expense recorded during the year ended December 31, 2023, compared to the year ended December 31, 2022, is primarily attributable to the difference in the impact of nondeductible expenses on the pre-tax income for 2023, as compared to 2022. +43 +Liquidity and Capital Resources +Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows and (iii) borrowings under our ABL Credit Facility (as defined below). Our cash is primarily used to fund our operations, support growth opportunities, fund share repurchases under our share repurchase program and satisfy future debt payments. Our restricted cash, which was received from a customer will be used solely for the construction or operation of FORCE SM electric-powered hydraulic fracturing equipment. Our Borrowing Base (as defined below), as redetermined monthly, is tied to the sum of 85% to 90% of monthly eligible accounts receivable and 80% of eligible unbilled accounts (up to a maximum of 25% of the Borrowing Base), in each case, depending on the credit ratings of our accounts receivable counterparties, less customary reserves. Changes to our operational activity levels and our customers’ credit ratings have an impact on our total eligible accounts receivable, which could result in significant changes to our Borrowing Base and, therefore, our availability under our ABL Credit Facility. +We received advance payments from a customer for our services, and the amount outstanding in connection with the advance payments was $19.2 million and $10.0 million as of December 31, 2023 an d 2022, respectively. These amounts included restricted cash of $0 and $10.0 million as of December 31, 2023 an d 2022, respectively. +As of December 31, 2023, our borrowings under our ABL Credit Facility were $45.0 million and our total liquidity was $134.4 million, consisting of cash and cash equivalents of $33.4 million and $101.0 million of availability under our ABL Credit Facility. +On May 17, 2023, the Board authorized and the Company announced a share repurchase program that allows the Company to repurchase up to $100 million of the Company's common stock beginning immediately and continuing through and including May 31, 2024. The shares may be repurchased from time to time in open market transactions, block trades, accelerated share repurchases, privately negotiated transactions, derivative transactions or otherwise, certain of which may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act, as amended, in compliance with applicable state and federal securities laws. The timing, as well as the number and value of shares repurchased under the program, will be determined by the Company at its discretion and will depend on a variety of factors, including management's assessment of the intrinsic value of the Company's common stock, the market price of the Company's common stock, general market and economic conditions, available liquidity, compliance with the Company's debt and other agreements, applicable legal requirements, and other considerations. The Company is not obligated to purchase any shares under the repurchase program, and the program may be suspended, modified, or discontinued at any time without prior notice. The Company expects to fund the repurchases using cash on hand and expected free cash flow to be generated through May 2024. During the year ended December 31, 2023 , the Company repurchased and retired 5.8 million shares of common stock for an aggregate of $51.7 million, an average price per share of $8.93 including commissions, under the repurchase program. As of December 31, 2023 , $48.3 million remained authorized for future repurchases of common stock under the repurchase program. +As part of our real estate consolidation strategy, we sold our corporate office building and the associated real property in August 2023 for cash proceeds of $4.7 million after commission and closing costs and recognized a gain on disposal of assets of $0.1 million during the year ended December 31, 2023 . We have subsequently relocated our corporate office to a leased office space. See "Note 17 - Leases" for further information. +On December 1, 2023, the Company consummated the purchase of the assets and operations of Par Five, which provides cementing services in the Delaware Basin in exchange for cash consideration of $25.4 million. Par Five’s business complements our existing cementing business and enables us to serve both the Midland and Delaware Basins of the Permian Basin. +There can be no assurance that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures and to continue with our share repurchases under our share repurchase program or fund future business acquisitions. Future cash flows are subject to a number of variables, and are highly dependent on the drilling, completion, and production activity by our customers, which in turn is highly dependent on oil and natural gas prices. Depending upon market conditions and other factors, we may issue equity and debt securities or take other actions necessary to fund our business, strategy or meet our future long-term liquidity requirements. +Cash, Restricted Cash and Cash Flows +The following table sets forth our net cash provided by (used in) operating, investing and financing activities during the years ended December 31, 2023 and 2022, respectively. +Year Ended December 31, +(in thousands) +2023 2022 +Net cash provided by operating activities +$ 374,742 $ 300,429 +Net cash used in investing activities +$ (384,127) $ (349,745) +Net cash (used in) provided by financing activities +$ (46,123) $ 26,260 +Operating Activities +Net cash provided by operating activities was $374.7 million for the year ended December 31, 2023, as compared to $300.4 million for the year ended December 31, 2022. The net increase of $74.3 million was primarily due to the improvement in our net income, resulting from the increase in our existing and new customers' activity levels, resulting in higher demand for completion services, increased operational efficiencies and the addition of wireline operations . The increase in cash provided by operating activities was also impacted by timing of our receivable collections from our customers and payments to our vendors, partially offset by increases in inventories and prepaid expenses. +Investing Activities +Net cash used in investing activities increased to $384.1 million for the year ended December 31, 2023, from $349.7 million for the year ended December 31, 2022. The increase was primarily attributable to maintenance capital expenditures and our investment in lower emissions Tier IV DGB dual-fuel equipment (conversion of Tier II equipment to Tier IV DGB equipment and new Tier IV DGB equipment). +The following table summarizes our capital expenditures incurred by reportable segment for the periods indicated: +Year Ended December 31, +(in thousands) 2023 2022 +Reportable Segments: +Hydraulic Fracturing $ 294,377 $ 347,757 +Wireline 12,203 2,265 +All Other (1) +3,440 9,645 +Reconciling Items (2) +— 5,649 +Total capital expenditures $ 310,020 $ 365,316 +_________________ +(1) All Other includes our cementing operating segment and our disposed coiled tubing operations. +(2) Reconciling Items include our corporate facilities. +Financing Activities +Net cash used in financing activities was $46.1 million for the year ended December 31, 2023, compared to net cash provided by of $26.3 million for the year ended December 31, 2022. The net increase was primarily driven by share repurchases of $51.7 million, repayments of borrowings of $15.0 million and payments of finance lease obligation of $4.7 million. +Credit Facility and Other Financing Arrangements +Our revolving credit facility, as amended and restated in April 2022, prior to giving effect to the amendment to the revolving credit facility in June 2023, had a total borrowing capacity of $150.0 million. The revolving credit facility had a borrowing base of 85% to 90%, depending on the credit ratings of our accounts receivable counterparties, of monthly eligible accounts receivable less customary reserves. The revolving credit facility included a springing fixed charge coverage ratio to apply when excess availability was less than the greater of (i) 10% of the lesser of the facility size or the borrowing base or (ii) $10.0 million. Under the revolving credit facility we were required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. +Effective June 2, 2023, the Company entered into an amendment to its amended and restated revolving credit facility the revolving credit facility (as amended and restated in April 2022, as amended in June 2023 and as may be amended further, "ABL Credit Facility"). The amendment increased the borrowing capacity under the ABL Credit Facility to $225.0 million (subject to the Borrowing Base limit), and extended the maturity date to June 2, 2028. The ABL Credit Facility has a borrowing base of the sum of 85% to 90% of monthly eligible accounts receivable and 80% of eligible unbilled accounts (up to a maximum of 25% of the Borrowing Base) less customary reserves (the "Borrowing Base"), in each case, depending on the credit ratings of our accounts receivable counterparties, as redetermined monthly. The Borrowing Base as of December 31, 2023, was approximately $152.0 million. The ABL Credit Facility includes a springing fixed charge coverage ratio to apply when excess availability is less than the greater of (i) 10% of the lesser of the facility size or the Borrowing Base or (ii) $15.0 million. Under the ABL Credit Facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens or indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. +Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either the Secured Overnight Financing Rate ("SOFR") or the base rate, plus the applicable margin, which ranges from 1.75% to 2.25% for SOFR loans and 0.75% to 1.25% for base rate loans. +The loan origination costs relating to the ABL Credit Facility are classified as an asset in our balance sheet. As of December 31, 2023 and 2022 , we had outstanding borrowings under our ABL Credit Facility of $45.0 million and $30.0 million, respectively. +Off Balance Sheet Arrangements +We had no material off balance sheet arrangements as of December 31, 2023. +Capital Requirements, Future Sources and Use of Cash +Capital expenditures incurred were $310.0 million during the year ended December 31, 2023, as compared to $365.3 million during the year ended December 31, 2022. The significant portion of our total capital expenditures incurred during the year ended December 31, 2023 were maintenance capital expenditures and conversion of our hydraulic fracturing equipment to lower emissions equipment. +Our future material use of cash will be to fund our capital expenditures. Capital expenditures for 2024 are projected to be primarily related to capital expenditures to extend the useful life of our existing completion services assets, costs to convert some existing equipment to lower emissions equipment, strategic purchases and other ancillary equipment purchases, subject to market conditions and customer demand. Our future capital expenditures depend on our projected operational activity, emission requirements and planned conversions to lower emissions equipment, among other factors, which could vary significantly throughout the year. Based on our current plan and projected activity levels for 2024, we expect our capital expenditures to range between $200 million to $250 million. We could incur significant additional capital expenditures if our projected activity levels increase during the course of the year, inflation and supply chain tightness continues to adversely impact our operations or we invest in new or different lower emissions equipment. The Company will continue to evaluate the emissions profile of its equipment over the coming years and may, depending on market conditions, convert or retire additional conventional Tier II equipment in favor of lower emissions equipment. The Company’s decisions regarding the retirement or conversion of equipment or the addition of lower emissions equipment will be subject to a number of factors, including (among other factors) +the availability of equipment, including parts and major components, supply chain disruptions, prevailing and expected commodity prices, customer demand and requirements and the Company’s evaluation of projected returns on conversion or other capital expenditures. Depending on the impacts of these factors, the Company may decide to retain conventional equipment for a longer period of time or accelerate the retirement, replacement or conversion of that equipment. +We anticipate our capital expenditures will be funded by existing cash, cash flows from operations, and if needed, borrowings under our ABL Credit Facility. Our cash flows from operations will be generated from services we provide to our customers. +Contractual Obligations +The following table presents our contractual obligations and other commitments as of December 31, 2023: +(in thousands) +Period +Total 1 year or less More than 1 year +ABL Credit Facility (1) +$ 45,000 $ — $ 45,000 +Operating leases (2)(3) +110,083 33,680 76,403 +Finance lease (4) +52,534 19,872 32,662 +Sand commitment (5) +17,659 17,659 — +Par Five deferred cash consideration (6) +3,180 — 3,180 +Total $ 228,456 $ 71,211 $ 157,245 +____________________ +(1) Exclusive of future commitment fees, amortization of deferred financing costs, interest expense or other fees on our ABL Credit Facility because obligations thereunder are floating rate instruments and we cannot determine with accuracy the timing of future loan advances, repayments of future interest rates to be changed. However, assuming a weighted average interest rate of 6.69% , and that our ABL Credit Facility debt balance remains the same, our estimated annual interest payment will be $3.0 million. +(2) Operating leases exclude short-term leases and other commitments (see Note 17. Leases and Note 18. Commitments and Contingencies in the financial statements for additional disclosures). +(3) Includes our leases for FORCE SM electric-powered hydraulic fracturing fleets (240,000 HHP). We expect to receive the remaining equipment under these leases in the first half of 2024. +(4) Finance lease for certain power generation equipment (70 MW) to support electric-powered hydraulic fracturing equipment . +(5) Relates to a take-or-pay sand commitment with one of our sand vendors. +(6) Represents the unpaid portion of the purchase consideration on our acquisition of Par Five assets to be used to cover the amount by which the estimated purchase price exceeds the final purchase price, if any. +We enter into other purchase agreements with Sand Suppliers to secure supply of sand in the normal course of our business. The agreements with the Sand Suppliers require that we purchase minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the mi nimum volumes or a fixed price per ton of unpurchased volumes. Our current agreements with Sand Suppliers expire at different times prior to December 31, 2025 . Our agreed upon sand requirements or minimum volumes are based on certain future events such as our customer demand, which cannot be reasonably estimated. If the activity level of our customers declines and the future demand for our services is materially and adversely affected, we may be required to pay for more sand from one of our Sand Suppliers than we need in the performance of our services, regardless of whether we take physical delivery of such sand. In such an event, we may be required to pay shortfall fees or other penalties under the purchase agreement, which could have a material adverse effect on our business, financial condition, or results of operations. +Recent Accounting Pronouncements +Disclosure concerning recently issued accounting standards is incorporated by reference to " Note 2- Significant Accounting Policies " of our Consolidated Financial Statements contained in this Annual Report. +Critical Accounting Policies and Estimates +44 +The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported revenues and expenses during the years. We evaluate these estimates and assumptions on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates. +Listed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved, and that we believe are critical to the understanding of our operations. +Property and Equipment +Our property and equipment are recorded at cost, less accumulated depreciation. +Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in earnings. +We primarily retire certain components of equipment such as fluid ends and power ends, rather than the entire pieces of equipment. The associated loss is recorded in our statement of operations as part of net loss on disposal of assets, which was $73.0 million , $102.1 million and $64.6 million for the years ended December 31, 2023, 2022 and 2021, respectively. +The estimated useful lives and salvage values of property and equipment is subject to key assumptions such as maintenance, utilization and job variation. Unanticipated future changes in these assumptions could negatively or positively impact our net income (loss). A 10% change in the useful lives of our property and equipment would have resulted in approximately $17.0 million impact on pre-tax loss during the year ended December 31, 2023. Depreciation of property and equipment is provided on the straight‑line method over estimated useful lives as shown in the table below. +Land +Indefinite +Buildings and property improvements +5 - 30 years +Vehicles +1 ‑ 5 years +Equipment +1 ‑ 22 years +Leasehold improvements +5 ‑ 20 years +Impairment of Long-Lived Assets +In accordance with the Financial Accounting Standards Board Accounting Standards Codification ( " ASC " ) 360 regarding Accounting for the Impairment or Disposal of Long‑Lived Assets , we review the long‑lived assets including intangible assets to be held and used whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future undiscounted cash flows attributable to the assets is less than the carrying amount of such assets. In this circumstance, we recognize an impairment loss for the amount by which the carrying amount of the assets exceeds the estimated fair value of the asset. Our cash flow forecasts require us to make certain judgments regarding long‑term forecasts of future revenue and costs and cash flows related to the assets subject to review. The significant assumption in our cash flow forecasts is our estimated equipment utilization and profitability. The significant assumption is uncertain in that it is driven by future demand for our services and utilization, which could be impacted by crude oil market prices, future market conditions and technological advancements. Our fair value estimates for certain long‑lived assets require us to use significant other observable inputs, including assumptions related to market based on recent auction sales or selling prices of comparable equipment. The estimates of fair value are also subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future. +If the crude oil market declines or the demand for our services does n ot recover, and if our equipment remains idle or underutilized, the estimated fair value of such equipment may decline, which could result in future impairment charges. Though the impacts of variations in any of these factors can have compounding or offsetting impacts, a 10% decline in the estimated future cash flows of our existing asset groups will not indicate an impairment. +In 2022, we recorded impairment expense of $57.5 million on our DuraStim® electric-powered hydraulic fracturing equipment within the hydraulic fracturing operating segment . +45 +Goodwill and Other Intangible Assets +Goodwill is the excess of the consideration transferred over the fair value of the tangible and identifiable intangible assets and liabilities recognized. Goodwill is not amortized. We perform an annual impairment test of goodwill and intangible assets as of December 31, or more frequently if circumstances indicate that impairment may exist. +In connection with the Silvertip Acquisition, we added $23.6 million of goodwill during the year ended December 31, 2022. There were no additions to goodwill during the year ended December 31, 2023. The wireline operating segment is the only segment with goodwill at December 31, 2023 and 2022. There were no goodwill impairment losses during the years ended December 31, 2023 and 2022. We performed our annual goodwill impairment test in accordance with ASC 350, Intangibles—Goodwill and Other , on December 31, 2023, at which time, we determined that the fair value of our wireline reporting unit was substantially in excess of its carrying value. The quantitative impairment test we perform for goodwill utilizes certain assumptions, including forecasted equipment utilization, pricing and cost assumptions. Our discounted cash flow analysis includes significant assumptions regarding discount rates, utilization, expected profitability margin, forecasted maintenance capital expenditures, and the timing of expected cash flow. As such, our goodwill analysis incorporates inherent uncertainties that are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecast. As of December 31, 2023 and 2022, our goodwill carrying value was $23.6 million and $23.6 million, respectively. +Intangible assets consist of customer relationships and trademark/trade name. In connection with the Silvertip Acquisition, we added intangible assets consisting of $46.5 million of customer relationships and $10.8 million of trademark/trade name during the year ended December 31, 2022. Intangible assets are amortized on a straight‑line basis with an estimated useful life of ten years. Our estimated useful life could be sensitive to changes in market conditions and management’s judgment, and are likely to change in the future if certain events occur. Presently, there are no events or circumstances that will cause us to believe that our estimated useful life for our intangible assets are likely to change. +Income Taxes +Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. +We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and the results of recent operations. If we determine that we would not be able to fully realize our deferred tax assets in the future in excess of their net recorded amount, we would record a valuation allowance, which would increase our provision for income taxes. In determining our need for a valuation allowance as of December 31, 2023, we have considered and made judgments and estimates regarding estimated future taxable income. These estimates and judgments include some degree of uncertainty and changes in these estimates and assumptions could require us to record additional valuation allowances for our deferred tax assets and the ultimate realization of tax assets depends on the generation of sufficient taxable income. +Our methodology for recording income taxes requires a significant amount of judgment in the use of assumptions and estimates. Additionally, we forecast certain tax elements, such as future taxable income, as well as evaluate the feasibility of implementing tax planning strategies. Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results. Unforeseen events may significantly impact these variables, and changes to these variables could have a material impact on our income tax accounts. The final determination of our income tax liabilities involves the interpretation of local tax laws and related authorities in each jurisdiction. Changes in the operating environments, including changes in tax law, could impact the determination of our income tax liabilities for a tax year. +Share Repurchases +All shares of common stock repurchased through the Company's share repurchase program are retired upon repurchase. The Company accounts for the purchase price of repurchased common stock in excess of par value ($0.001 per share of common stock) as a reduction of additional paid-in capital, and will continue to do so until additional paid-in capital is reduced to zero. Thereafter, any excess purchase price will be recorded as a reduction of retained earnings. +46 +Item 7A. Quantitative and Qualitative Disclosure of Market Risks +Foreign Currency Exchange Risk +Our operations are currently conducted entirely within the U.S.; therefore, we had no significant exposure to foreign currency exchange risk in 2023. +Commodity Price Risk +Our materials and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our completion services such as proppants, perforating guns, chemicals, guar, trucking and fluid supplies. Our fuel costs consist primarily of diesel and natural gas used by our various trucks and other motorized equipment. The prices for fuel and materials in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Historically, we have generally been able to pass along a significant portion of our commodity price risk to our customers; however, we may be unable to do so in the future. We do not engage in commodity price hedging activities. +Interest Rate Risk +We may be subject to interest rate risk on variable rate borrowings under our ABL Credit Facility. We do not currently engage in interest rate derivatives to hedge our interest rate risk. The impact of a 1% increase in interest rates on our variable rate debt would have resulted in an increase in interest expense and corresponding decrease/(increase) in pre‑tax income/(loss) of approximately $0.5 million , $0.1 million and $0 , for the years ended December 31, 2023, 2022 and 2021, respectively. +Credit Risk +Financial instruments that potentially subject us to concentrations of credit risk are trade receivables. We extend credit to customers and other parties in the normal course of business. We have established various procedures to manage our credit exposure, including maintaining an allowance for doubtful accounts. +47 +Item 8. Financial Statements and Supplementary Data. +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of ProPetro Holding Corp. and Subsidiaries: +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheet of ProPetro Holding Corp. and Subsidiaries (the Company) as of December 31, 2023 , the related consolidated statements of operations, shareholders’ equity and cash flows, for the year then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 , and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 13, 2024, expressed an opinion that the Company had not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. +As discussed in Note 11 to the financial statements, the Company changed the composition of its segment information in 2023. We have audited the adjustments necessary to restate the 2022 and 2021 segment information as provided in Note 11. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review or apply any procedures to the 2022 or 2021 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2022 and 2021 financial statements taken as a whole. +Basis for Opinion +These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. +Critical Audit Matter +The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. +Acquisition — Par Five Energy Services, LLC — Fair value of assets acquired, and liabilities assumed — Refer to Notes 1 and 4 to the financial statements +Critical Audit Matter Description +The Company completed the acquisition of Par Five Energy Services, LLC (“Par Five”) for a total purchase consideration of $25.4 million on December 1, 2023 (the “Acquisition”). The Company accounted for the Acquisition using the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and +48 +liabilities assumed based on their respective estimated fair values. The largest asset classes acquired include property and equipment consisting mainly of oilfield cementing pumps, vehicles, trailer, tanks, and support equipment. The method for determining fair value varied depending on the type of the asset or liability and involved management making significant estimates related to assumptions such as replacement cost, normal useful life and economic obsolescence. +We identified the valuation of property and equipment arising out of the Acquisition as a critical audit matter because of the estimates and assumptions management makes to determine the fair value of these assets. This required a high degree of auditor judgement and an increased extent of effort, including the need to involve our internal valuation specialists, when performing audit procedures to evaluate the reasonableness of management’s assumptions such as replacement cost, normal useful life and economic obsolescence. +How the Critical Audit Matter Was Addressed in the Audit +Our audit procedures related to the fair value of property and equipment acquired as part of the Acquisition included the following, among others: +• We obtained an understanding of the relevant controls related to the recording of assets acquired and liabilities assumed in a business combination and tested such controls for design and operating effectiveness. +• With the assistance of our internal valuation specialists, we evaluated the reasonableness of the valuation methodology and significant assumptions including estimates of trend factor calculation, replacement cost, normal useful life, and economic obsolescence by (1) evaluating the source information and assumptions used by management, (2) testing the mathematical accuracy of the calculation, and (3) comparing our estimates to those used by management. +/s/ RSM US LLP +We have served as the Company's auditor since 2023. +Houston, Texas +March 13, 2024 +PCAOB ID: 49 +49 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of ProPetro Holding Corp. and Subsidiaries: +Opinion on Internal Control over Financial Reporting +We have audited ProPetro Holding Corp and Subsidiaries (the Company’s) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of and for the year ended December 31, 2023 and our report dated March 13, 2024 expressed an unqualified opinion on those consolidated financial statements. +A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. +The Company did not maintain adequate segregation of duties or sufficient compensating management review controls to effectively mitigate an inadequate system access control configuration in its accounting system in which manual journal entry approvers can modify the entries before posting. This deficiency is solely related to manual journal entries and has no impact on system-generated journal entries flowing through its accounting system and other feeder systems. This issue impacts all manual journal entries impacting all affected transaction cycles. Due to this control deficiency, other manual-dependent controls were deemed ineffective. +This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report dated March 13, 2024, on those consolidated financial statements. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control over Financial Reporting +A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the +50 +company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ RSM US LLP +Houston, Texas +March 13, 2024 +PCAOB ID: 49 +51 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of +ProPetro Holding Corp. and Subsidiaries +Opinion on the Financial Statements +We have audited, before the effects of the retrospective adjustments to the disclosures for a change in the composition of reportable segments discussed in Note 11 to the consolidated financial statements, the consolidated balance sheet of ProPetro Holding Corp. and Subsidiaries (the "Company") as of December 31, 2022, the related consolidated statements of operations, shareholders' equity, and cash flows, for each of the two years in the period ended December 31, 2022, and the related notes (collectively, referred to as, the "financial statements") (the 2022 and 2021 financial statements before the effects of the retrospective adjustments discussed in Note 11 to the financial statements are not presented herein). In our opinion, the 2022 and 2021 financial statements, before the effects of the retrospective adjustments to the disclosures for a change in the composition of reportable segments discussed in Note 11 to the financial statements, present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. +We were not engaged to audit, review, or apply any procedures to the retrospective adjustments to the disclosures for a change in the composition of reportable segments discussed in Note 11 to the financial statements, and accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors. +Basis of Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +/s/ DELOITTE & TOUCHE LLP +Houston, Texas +February 23, 2023 +We began serving as the Company's auditor since 2013. In 2023 we became the predecessor auditor. +52 +PROPETRO HOLDING CORP. +CONSOLIDATED BALANCE SHEETS +AS OF DECEMBER 31, 2023 AND 2022 +(In thousands, except share data) +2023 2022 +ASSETS +CURRENT ASSETS: +Cash, cash equivalents and restricted cash $ 33,354 $ 88,862 +Accounts receivable - net of allowance for credit losses of $ 236 and $ 419 , respectively +237,012 215,925 +Inventories +17,705 5,034 +Prepaid expenses +14,640 8,643 +Short-term investment, net 7,745 10,283 +Other current assets +353 38 +Total current assets +310,809 328,785 +PROPERTY AND EQUIPMENT - Net of accumulated depreciation +967,116 922,735 +OPERATING LEASE RIGHT-OF-USE ASSETS +78,583 3,147 +FINANCE LEASE RIGHT-OF-USE ASSETS 47,449 — +OTHER NONCURRENT ASSETS: +Goodwill 23,624 23,624 +Intangible assets - net of amortization 50,615 56,345 +Other noncurrent assets +2,116 1,150 +Total other noncurrent assets +76,355 81,119 +TOTAL ASSETS +$ 1,480,312 $ 1,335,786 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES: +Accounts payable +$ 161,441 $ 234,299 +Accrued and other current liabilities +75,616 49,027 +Operating lease liabilities +17,029 854 +Finance lease liabilities +17,063 — +Total current liabilities +271,149 284,180 +DEFERRED INCOME TAXES +93,105 65,265 +LONG-TERM DEBT +45,000 30,000 +NONCURRENT OPERATING LEASE LIABILITIES +38,600 2,308 +NONCURRENT FINANCE LEASE LIABILITIES +30,886 — +OTHER LONG-TERM LIABILITIES +3,180 — +Total liabilities +481,920 381,753 +COMMITMENTS AND CONTINGENCIES (Note 18) +SHAREHOLDERS’ EQUITY: +Preferred stock, $ 0.001 par value, 30,000,000 shares authorized, none issued, respectively +— — +Common stock, $ 0.001 par value, 200,000,000 shares authorized, 109,483,281 and 114,515,008 shares issued and outstanding, respectively +109 114 +Additional paid-in capital +929,249 970,519 +Retained earnings (accumulated deficit) +69,034 ( 16,600 ) +Total shareholders’ equity +998,392 954,033 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ 1,480,312 $ 1,335,786 +See notes to consolidated financial statements. +53 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF OPERATIONS +FOR THE YEARS ENDED DECEMBER 31, 2023 , 2022 AND 2021 +(In thousands, except per share data) +2023 2022 2021 +REVENUE - Service revenue +$ 1,630,399 $ 1,279,701 $ 874,514 +COSTS AND EXPENSES: +Cost of services (exclusive of depreciation and amortization) +1,131,801 882,820 662,266 +General and administrative expenses (inclusive of stock‑based compensation) 114,354 111,760 82,921 +Depreciation and amortization +180,886 128,108 133,377 +Impairment expense +— 57,454 — +Loss on disposal of assets +73,015 102,150 64,646 +Total costs and expenses +1,500,056 1,282,292 943,210 +OPERATING INCOME (LOSS) +130,343 ( 2,591 ) ( 68,696 ) +OTHER (EXPENSE) INCOME: +Interest expense +( 5,308 ) ( 1,605 ) ( 614 ) +Other (expense) income +( 9,533 ) 11,582 873 +Total other (expense) income +( 14,841 ) 9,977 259 +INCOME (LOSS) BEFORE INCOME TAXES 115,502 7,386 ( 68,437 ) +INCOME TAX (EXPENSE) BENEFIT +( 29,868 ) ( 5,356 ) 14,252 +NET INCOME (LOSS) +$ 85,634 $ 2,030 $ ( 54,185 ) +NET INCOME (LOSS) PER COMMON SHARE: +Basic +$ 0.76 $ 0.02 $ ( 0.53 ) +Diluted +$ 0.76 $ 0.02 $ ( 0.53 ) +WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: +Basic +113,004 105,868 102,655 +Diluted +113,416 106,939 102,655 +See notes to consolidated financial statements. +54 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +FOR THE YEARS ENDED DECEMBER 31, 2023 , 2022 AND 2021 +(In thousands) +Common Stock +Shares Amount Additional +Paid‑In +Capital Retained Earnings (Accumulated +Deficit) Total +BALANCE - January 1, 2021 100,913 $ 101 $ 835,115 $ 35,555 $ 870,771 +Stock‑based compensation cost — — 11,519 — 11,519 +Issuance of equity award—net 2,524 3 4,014 — 4,017 +Tax withholdings paid for net settlement of equity awards — — ( 5,820 ) — ( 5,820 ) +Net loss — — — ( 54,185 ) ( 54,185 ) +BALANCE - December 31, 2021 103,437 $ 104 $ 844,828 $ ( 18,630 ) $ 826,302 +Stock‑based compensation cost — — 21,881 — 21,881 +Issuance of equity awards—net 11,078 10 107,689 — 107,699 +Tax withholdings paid for net settlement of equity awards — — ( 3,879 ) — ( 3,879 ) +Net income — — — 2,030 2,030 +BALANCE - December 31, 2022 114,515 $ 114 $ 970,519 $ ( 16,600 ) $ 954,033 +Stock‑based compensation cost — — 14,450 — 14,450 +Issuance of equity—net 763 1 ( 1 ) — — +Tax withholdings paid for net settlement of equity awards — — ( 3,543 ) — ( 3,543 ) +Share repurchases ( 5,795 ) ( 6 ) ( 51,732 ) — ( 51,738 ) +Excise tax on share repurchases — — ( 444 ) — ( 444 ) +Net income — — — 85,634 85,634 +BALANCE - December 31, 2023 109,483 $ 109 $ 929,249 $ 69,034 $ 998,392 +See notes to consolidated financial statements. +55 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF CASH FLOWS +FOR THE YEARS ENDED DECEMBER 31, 2023 , 2022 AND 2021 +(In thousands) +2023 2022 2021 +CASH FLOWS FROM OPERATING ACTIVITIES: +Net income (loss) $ 85,634 $ 2,030 $ ( 54,185 ) +Adjustments to reconcile net income (loss) to net cash provided by operating activities: +Depreciation and amortization +180,886 128,108 133,377 +Impairment expense — 57,454 — +Deferred income tax expense (benefit) 27,840 4,213 ( 14,288 ) +Amortization of deferred debt issuance costs +359 785 542 +Stock‑based compensation +14,450 21,881 11,519 +Provision for credit losses 34 202 282 +Loss on disposal of assets +73,015 102,150 64,646 +Unrealized loss on short-term investment 2,538 1,570 — +Non-cash income from settlement with equipment manufacturer — ( 2,668 ) — +Changes in operating assets and liabilities: +Accounts receivable +( 12,408 ) ( 66,900 ) ( 43,742 ) +Other current assets +( 831 ) 354 310 +Inventories +( 6,017 ) 124 ( 1,220 ) +Prepaid expenses +( 6,143 ) 743 4,463 +Accounts payable +( 11,429 ) 27,428 51,764 +Accrued and other current liabilities 26,431 22,602 1,246 +Accrued interest +383 353 — +Net cash provided by operating activities +374,742 300,429 154,714 +CASH FLOWS FROM INVESTING ACTIVITIES: +Capital expenditures +( 370,869 ) ( 319,683 ) ( 143,523 ) +Business acquisitions, net of cash acquired ( 22,215 ) ( 38,639 ) — +Proceeds from sale of assets +8,957 8,577 39,231 +Net cash used in investing activities +( 384,127 ) ( 349,745 ) ( 104,292 ) +CASH FLOWS FROM FINANCING ACTIVITIES: +Proceeds from borrowings +30,000 30,000 — +Repayments of borrowings +( 15,000 ) — — +Payments of finance lease obligation ( 4,663 ) — — +Repayments of insurance financing +— — ( 5,473 ) +Payment of debt issuance costs +( 1,179 ) ( 824 ) — +Proceeds from exercise of equity awards +— 963 4,017 +Tax withholdings paid for net settlement of equity awards ( 3,543 ) ( 3,879 ) ( 5,820 ) +Share repurchases ( 51,738 ) — — +Net cash (used in) provided by financing activities +( 46,123 ) 26,260 ( 7,276 ) +NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH ( 55,508 ) ( 23,056 ) 43,146 +CASH, CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of year +88,862 111,918 68,772 +CASH, CASH EQUIVALENTS AND RESTRICTED CASH — End of year +$ 33,354 $ 88,862 $ 111,918 +See notes to consolidated financial statements. +56 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) +FOR THE YEARS ENDED DECEMBER 31, 2023 , 2022 AND 2021 +(In thousands) +The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the consolidated balance sheets: +2023 2022 2021 +Summary of cash, cash equivalents and restricted cash +Cash and cash equivalents $ 33,354 $ 78,862 $ 111,918 +Restricted cash — 10,000 — +Total cash, cash equivalents and restricted cash — End of year $ 33,354 $ 88,862 $ 111,918 +See notes to consolidated financial statements. +57 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. ORGANIZATION AND HISTORY +ProPetro Holding Corp. ("Holding"), a Texas corporation was formed on April 14, 2007, and it is a holding company for its wholly owned subsidiaries ProPetro Services, Inc., a Texas corporation ("Services"), and Silvertip Completion Services Operating, LLC, a Delaware limited liability company ("Silvertip"). Services and Silvertip together offer hydraulic fracturing, wireline, cementing and other complementary services to oil and gas producers, located primarily in Texas, New Mexico and Utah. Holding was converted and incorporated as a Delaware Corporation on March 8, 2017. +On December 1, 2023, we consummated the purchase of the assets and operations of Par Five Energy Services LLC (“Par Five”), which provides cementing services in the Delaware Basin in exchange for $ 25.4 million of cash (the “Par Five Acquisition”) . Par Five’s business complements our existing cementing business and enables us to serve both the Midland and Delaware Basins of the Permian Basin. +On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip, which provides wireline perforation and ancillary services solely in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $ 106.7 million, $ 30.0 million of cash, the payoff of $ 7.2 million of assumed debt, and the payment of certain other closing and transaction costs ("the Silvertip Acquisition"). +Unless otherwise indicated, references in these notes to consolidated financial statements to "ProPetro Holding Corp.," "the Company," "we," "our," "us" or like terms refer to Holding, Servi ces, and Silvertip. +On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer Natural Resources USA, Inc. (“Pioneer”) and Pioneer Pumping Services, LLC (“Pioneer Pumping Services”) in connection with our purchase of certain pressure pumping assets and real property (the “Pioneer Pressure Pumping Acquisition”) in exchange for 16.6 million shares of our common stock and $ 110.0 million in cash, and concurrently entered into a pressure pumping services agreement (the "Pioneer Services Agreement") with Pioneer. The pressure pumping assets acquired included hydraulic fracturing pumps of 510,000 hydraulic horsepower ("HHP"), four coiled tubing units and the associated equipment maintenance facility. +On March 31, 2022, we entered into an amended and restated pressure pumping services agreement (the “A&R Pressure Pumping Services Agreement”) to replace the Pioneer Services Agreement that was entered into in connection with the Pioneer Pressure Pumping Acquisition. This agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and Fleet Two Agreement described below. +On October 31, 2022, we entered into two pressure pumping services agreements (the “Fleet One Agreement” and the “Fleet Two Agreement”) with Pioneer, pursuant to which we provided hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and was terminated on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was terminated on May 12, 2023. In October 2023, Pioneer entered into a merger agreement with Exxon Mobil Corporation. +2. SIGNIFICANT ACCOUNTING POLICIES +A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements are as follows: +Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Holding and its wholly owned subsidiaries, Services and Silvertip. All intercompany accounts and transactions have been eliminated in consolidation. +Basis of Presentation — The accompanying consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") and in conformity with accounting principles generally accepted in the United States of America ("GAAP"). +Use of Estimates — Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Such estimates include, but are not limited to, allowance for credit losses, useful lives for depreciation of property and equipment, estimates of fair value of property and equipment, estimates related to fair value of reporting units for purposes of assessing goodwill, intangible assets, discount rates underlying our lease right-of-use assets and +58 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +liabilities, estimates related to deferred tax assets and liabilities, including any related valuation allowances, and estimates of fair value of stock‑based compensation. Actual results could differ from those estimates. +Revenue Recognition — The Company’s services are sold based upon contracts with customers. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. +Hydraulic fracturi ng is an oil well completion technique, which is part of the overall well completions process. It is a well-stimulation technique intended to optimize hydrocarbon flow paths during the completion phase of shale w ellbores. The process involves the injection of water, sand and chemicals under high pressure into shale formations. Our hydraulic fracturing contracts with our customers have one performance obligation, which is the contracted total stages, satisfied over time. We recognize revenue over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed faithfully depicts how our hydraulic fracturing services are transferred to our customers over time. In addition, certain of our hydraulic fracturing equipment may be entitled to reservation fee charges if a customer were to reserve committed hydraulic fracturing equipment. The Company recognizes revenue related to reservation fee charges on a daily basis as the performance obligations are met. +Acidizing, which is part of our hydraulic fracturing operating segment, involves a well-stimulation technique where acid or similar chemicals are injected under pressure into formations to form or expand fissures. Our acidizing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service or sale of acid or chemical when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize acidizing revenue at a point-in-time, upon completion of the performance obligation. +Our cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Our cementing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize cementing revenue at a point-in-time, upon completion of the performance obligation. +Wireline services (including pumpdown) are oil well completion techniques, which are part of the well completions services. Our wireline services utilize equipment with a drum of wireline to deploy perforating guns in the well to perforate the casing, cement, and formation. Once the well is perforated, the well can be fractured. Pumpdown utilizes pressure pumping equipment to pump water into the well to deploy perforating guns attached to wireline through the lateral section of a well. Our wireline contracts with our customers have one performance obligation, which is the contracted total stages, satisfied over time. We recognize revenue over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed faithfully depicts how our wireline services are transferred to our customers over time. In addition, certain of our wireline equipment is entitled to daily equipment charges while the equipment is on the customer’s locations. The Company recognizes revenue related daily equipment charges on a daily basis as the performance obligations are met. +The transaction price for each performance obligation for all our completion services is fixed per our contracts with our customers. +Coiled tubing involves complementary downhole well completion/remedial services. The performance obligation for these services had a fixed transaction price which was satisfied at a point-in-time upon completion of the service when control was transferred to the customer. Accordingly, we recognized revenue at a point-in-time, upon completion of the service and transfer of control to the customer. Effective September 1, 2022, we shut down our coiled tubing operations, and disposed of all of our coiled tubing assets. +Cash and Cash Equivalents — All highly liquid investments with an original maturity of three months or less. +Restricted Cash and Customer Cash Advances — Our restricted cash relates to cash received from a customer in connection with our contract with the customer to provide FORCE SM electric-powered hydraulic fracturing equipment and services. The restricted cash will be used to pay for contractually agreed upon expenditures. The cash advances from the customer will be credited towards the customer’s invoice as our revenue performance obligations are met over the contract period. Our restricted cash balances at December 31, 2023 and 2022 were $ 0 and $ 10.0 million , respectively. +59 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +The cash advances received represent contract liabilities in connection with the performance of certain completion services. The cash advance (contract liability) balances, which are included in accrued and other current liabilities in our consolidated balance sheets, were $ 19.2 million and $ 10.0 million as of December 31, 2023 an d 2022, respectively. During 2023, we recognized revenue of $ 5.7 million from the cash advance amount outstanding at the beginning of the period. We had no cash advance amounts outstanding at the beginning of 2022, and we recognized no associated revenue during 2022. +Accounts Receivable — Accounts receivable are stated at the amount billed and billable to customers. At December 31, 2023 and 2022 accrued revenue (unbilled receivable) included as part of our accounts receivable was $ 55.4 million and $ 51.9 million, respectively. At December 31, 2023, the transaction price allocated to the remaining performance obligation for our partially completed hydraulic fracturing and wireline operations was $ 33.8 million, which is expected to be completed and recognized within one month following the current period balance sheet date. At December 31, 2022, the transaction price allocated to the remaining performance obligation for our then partially completed hydraulic fracturing and wireline operations was $ 38.7 million, which was recorded as part of revenues for the year ended December 31, 2023. +As of December 31, 2023, the Company had $ 0.2 million allowance for credit losses. Our allowance for credit losses is based on the evaluation of both our historic collection experience and economic outlook for the oil and gas industry. We evaluated the historic loss experience on our accounts receivable and also considered separately customers with receivable balances that may be negatively impacted by current or future economic developments and market conditions. While the Company has not experienced significant credit losses in the past and has not yet seen material changes to the payment patterns of its customers, the Company cannot predict with any certainty the degree to which the impacts of depressed economic activities, including the potential impact of periodically adjusted borrowing base limits, level of hedged production, or unforeseen well shut-downs may affect the ability of its customers to timely pay receivables when due. Accordingly, in future periods, the Company may revise its estimates of expected credit losses. +The table below shows a summary of allowance for credit losses: +(in thousands) +Year Ended December 31, +2023 2022 2021 +Balance - January 1, $ 419 $ 217 $ 1,497 +Provision for credit losses during the period 34 202 282 +Write-off during the period ( 217 ) — ( 1,562 ) +Balance - December 31, $ 236 $ 419 $ 217 +Inventories — Inventories, which consists only of raw materials and fluid ends, are stated at lower of average cost and net realizable value. +Property and Equipment — The Company’s property and equipment are recorded at cost, less accumulated depreciation. +Depreciation — Depreciation of property and equipment is provided on the straight‑line method over the following estimated useful lives: +Land +Indefinite +Buildings and property improvements +5 - 30 years +Vehicles +1 ‑ 5 years +Equipment +1 ‑ 22 years +Leasehold improvements +5 ‑ 20 years +Upon sale or retirement of property and equipment, including certain major components of our completion services equipment that are replaced, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in the statement of operations. A significant portion of our loss on disposal of assets relates to replacement of major components like fluid and power ends. The Company recorded a loss on disposal of assets of $ 73.0 million , $ 102.1 million and $ 64.6 million for the years ended December 31, 2023, 2022 and 2021, respectively. +60 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +Impairment of Long‑Lived Assets — In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 360, Accounting for the Impairment or Disposal of Long‑Lived Assets , the Company reviews its long‑lived assets to be held and used whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. +An impairment loss is indicated if the sum of the expected future undiscounted cash flows attributable to the asset group is less than the carrying amount of such asset group. In this circumstance, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. No impairment expense was recorded during the year ended December 31, 2023. D uring the year ended December 31, 2022 , w e recorded impairment expense of approximately $ 57.5 million in connection with our DuraStim® electric-powered hydraulic fracturing equipment. No impairment expense was recorded during the year ended December 31, 2021. +The Company accounts for long‑lived assets to be disposed of at the lower of their carrying amount or fair value, less cost to sell once management has committed to a plan to dispose of the assets. +Goodwill — Goodwill is the excess of the consideration transferred over the fair value of the tangible and identifiable intangible assets and liabilities recognized. Goodwill is not amortized. We perform an annual impairment test of goodwill as of December 31, or more frequently if circumstances indicate that impairment may exist. The determination of impairment is made by comparing the carrying amount of a reporting unit with its fair value, which is generally calculated using a combination of market and income approaches. If the fair value of the reporting unit exceeds the carrying value, no further testing is performed. If the fair value of the reporting unit is less than the carrying value, we consider goodwill to be impaired, and the amount of impairment loss is calculated and recorded in the statement of operations. +On November 1, 2022, we acquired Silvertip for $ 148.1 million. We accounted for the Silvertip Acquisition as a business combination using the acquisition method of accounting. Goodwill of $ 23.6 million was recorded as of the Silvertip Acquisition Date (as defined below), which represents the excess of the purchase price over the fair value of the assets and liabilities assumed. The acquisition complemented our existing business. +As of December 31, 2023 and 2022, our goodwill carrying value was $ 23.6 million and $ 23.6 million, respectively. There were no additions to goodwill during the year ended December 31, 2023. The wireline operating segment is the only segment with goodwill at December 31, 2023 and 2022. We conducted our annual impairment test of goodwill in accordance with ASC 350, Intangibles—Goodwill and Other , as of December 31, 2023 and determined that no impairment to the carrying value of goodwill for our reporting unit (wireline operating segment) was required. There were no goodwill impairment losses during the years ended December 31, 2023 and 2022. +Intangible Assets — Intangible assets consist of customer relationships and trademark/trade name purchased in connection with the Silvertip Acquisition. In connection with the Silvertip Acquisition, we added intangible assets consisting of $ 46.5 million of customer relationships and $ 10.8 million of trademark/trade name. Intangible assets are amortized on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized on a straight‑line basis over the asset’s estimated useful life, which is ten years . No significant residual value is estimated for intangible assets. +Income Taxes — Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. +We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and the results of recent operations. If we determine that we would not be able to fully realize our deferred tax assets in the future, we would record a valuation allowance. +Deferred Loan Costs — The Company capitalized certain costs in connection with the amendment and restatement of its revolving credit facility, including lender, legal, and accounting fees. These costs are being amortized over the term of the related loan using the straight‑line method. Unamortized deferred loan costs associated with loans paid off or refinanced with different lenders are expensed in the period in which such an event occurs. Deferred loan costs are classified as a reduction of +61 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +long‑term debt or in certain instances as an asset in the consolidated balance sheet. Amortization of deferred loan costs is recorded as interest expense in the statement of operations, and during the years ended December 31, 2023, 2022 and 2021, the amount of expense recorded was $ 0.4 million, $ 0.8 million and $ 0.5 million, respectively. +Stock-Based Compensation — The Company recognizes the cost of stock-based awards on a straight‑line basis over the requisite service period of the award, which is usually the vesting period under the fair value method. Total compensation cost is measured on the grant date or modification date, as applicable, using fair value estimates. +Insurance Financing — The Company annually renews its commercial insurance policies, and may choose to either directly pay the insurance premium or finance a portion of the premium. If the Company finances a portion of the premium, a prepaid insurance asset is recorded and amortized monthly over the relevant period. +Concentration of Credit Risk — The Company’s assets that are potentially subject to concentrations of credit risk are cash and cash equivalents and trade accounts receivable. Cash balances are maintained in financial institutions, which at times exceed federally insured limits. The Company monitors the financial condition of the financial institutions in which accounts are maintained and has not experienced any losses in such accounts. The receivables of the Company are with credible operators in the oil and natural gas industries. The Company performs ongoing evaluations as to the financial condition of its customers with respect to trade receivables. +Share Repurchases — All shares of common stock repurchased through the Company's share repurchase program are retired upon repurchase. The Company accounts for the purchase price of repurchased common stock in excess of par value ($ 0.001 per share of common stock) as a reduction of additional paid-in capital, and will continue to do so until additional paid-in capital is reduced to zero. Thereafter, any excess purchase price will be recorded as a reduction of retained earnings. +Change in Accounting Estimates — Current trends in hydraulic fracturing equipment operating conditions such as larger pads, changes to job design and increased pumping hours per day have resulted in shorter useful lives for certain critical components that are included in our property and equipment assets. These recent trends necessitated a review of useful lives of our critical components like fluid ends, power ends, hydraulic fracturing units and other components in the first quarter of 2023. We determined that the estimated useful life of fluid ends is now less than one year, resulting in our determination that costs associated with the replacement of these components will no longer be capitalized, but instead recorded in inventories and amortized to cost of services over their estimated useful life. We have also shortened the estimated useful lives of power ends to two years from five years and hydraulic fracturing units to ten years from fifteen years . This change in accounting estimates was made effective January 1, 2023 and accounted for prospectively. The net effect of this change for the year ended December 31, 2023, was a $ 19.1 million decrease in net income, or $ 0.17 per basic and diluted share, respectively. +Additionally, in connection with the review of our fluid ends and power ends estimated useful life, effective January 1, 2023, we are writing off the remaining book value of power ends that prematurely fail as accelerated depreciation. These write-off amounts were $ 12.5 million, $ 11.8 million, $ 8.4 million and $ 6.0 million for the three months ended March, 31, 2023, June 30, 2023, September 30, 2023 and December 31, 2023, respectively. However, to conform to prior year presentation, we have presented these write-off amounts within loss on disposal of assets for the year ended December 31, 2023. In 2022 and 2021, we wrote off the remaining book value of prematurely failed and disposed of power ends to loss on disposal of assets. +Recently Issued Accounting Standards +In October 2023, the FASB issued Accounting Standards Update ("ASU") No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification (“Codification”). The amendments in the ASU represent changes to clarify or improve disclosure and presentation requirements of a variety of Codification topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. ASU 2023-06 will become effective for each amendment on the effective date of the SEC's corresponding disclosure rule changes. We do not expect ASU 2023-06 to have a material impact on our consolidated financial statements . +In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which requires public entities to disclose on an annual and interim basis, 1) significant segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of segment profit or loss (collectively referred to as the “significant expense principle”) and 2) an amount for other segment items +62 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +representing the difference between segment revenue less the segment expenses disclosed under the significant expense principle and each reported measure of segment profit or loss. This ASU also requires public entities to provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods, clarifies that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit or loss but at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles under GAAP. This ASU also requires disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources, and requires a public entity that has a single reportable segment to provide all the disclosures required by the amendments in this ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We do not expect ASU 2023-07 to have a material effect on our consolidated financial statements. +In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which requires disaggregation of certain components included in the Company’s effective tax rate and income taxes paid disclosures. The guidance is effective for annual periods beginning after December 15, 2024. We are currently assessing the impact of ASU 2023-09 on our consolidated financial statements but do not expect it will have a material impact. +3. SUPPLEMENTAL CASH FLOWS INFORMATION +(in thousands) +Year Ended December 31, +2023 2022 2021 +Supplemental cash flows disclosures +Interest paid +$ 4,564 $ 467 $ 72 +Income taxes paid +$ 1,110 $ 129 $ 196 +Supplemental disclosure of non‑cash investing and financing activities +Capital expenditures included in accounts payable and accrued liabilities +$ 21,604 $ 82,452 $ 36,818 +Par Five asset purchase consideration included in other long-term liabilities $ 3,180 $ — $ — +Common stock issued for Silvertip Acquisition $ — $ 106,736 $ — +Non-cash purchases of property and equipment $ — $ 2,668 $ — +Equity securities received in exchange for sale of assets $ — $ 11,853 $ — +4. BUSINESS ACQUISITIONS +Par Five Acquisition +On December 1, 2023, the Company completed the acquisition of certain assets and certain liabilities of Par Five. Par Five is an oilfield service company based in Artesia, New Mexico that provides cementing and remediation services across the Permian Basin in Texas and New Mexico. As a result of the acquisition, the Company expanded its operations in the cementing service business unit. +The following table summarizes the consideration transferred to Par Five and the recognized amounts of identified assets acquired and liabilities assumed at the acquisition date: +(in thousands) +Total purchase consideration: +Cash $ 22,215 +Deferred cash payment 3,180 +Total consideration $ 25,395 +63 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. BUSINESS ACQUISITIONS (Continued) +(in thousands) +Recognized amounts of assets acquired and liabilities assumed: +Accounts receivable $ 8,712 +Inventory 321 +Property, plant and equipment 17,175 +Accrued liabilities ( 813 ) +Total net assets acquired $ 25,395 +Preliminary estimates of fair values of the assets acquired and the liabilities assumed are based on information available through the issuance of these consolidated financial statements, and the Company is continuing to evaluate the underlying inputs and assumptions used in the valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the acquisition date. +The deferred cash consideration of $ 3.2 million will be used to cover the amount by which the estimated purchase price exceeds the final purchase price, if any. The unused amount is payable to Par Five or its beneficiary on June 1, 2025 and accrues interest at 4.0 % per annum. This obligation is shown within other long-term liabilities in our consolidated balance sheets. As of December 31, 2023, the outstanding amount for this obligation was $ 3.2 million. +The fair value of the assets acquired includes account receivables of $ 8.7 million. The gross amount due under contracts is $ 8.7 million, of which none is expected to be uncollectible. The Company did not acquire any other class of receivable as a result of the acquisition of Par Five. +The acquired business contributed revenues of $ 4.9 million and net income of $ 1.2 million to the Company for the period from December 1, 2023 to December 31, 2023. The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2022. +(unaudited, in thousands) +Year Ended December 31, +2023 2022 +Revenue $ 1,672,350 $ 1,315,970 +Net income 99,536 4,823 +The Company had material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and net income. These adjustments included nonrecurring acquisition costs incurred in 2023 but have been adjusted to be reflected in 2022. +These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Par Five to reflect the additional depreciation that would have been charged assuming the fair value adjustments to property, plant, and equipment had been applied from January 1, 2022, with the consequential tax effects. +For the year ended December 31, 2023, the Company incurred $ 1.3 million of acquisition costs. These expenses are included in general and administrative expenses on the Company’s consolidated income statement for the year ended December 31, 2023 and are reflected in pro forma net income for the year ended December 31, 2022, in the table above. +64 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. BUSINESS ACQUISITIONS (Continued) +The Company’s consolidated statement of operations for the year ended December 31, 2023 includes 31 days of Par Five operations as the Par Five Acquisition closed on December 1, 2023. +Silvertip Acquisition +On November 1, 2022 (the "Silvertip Acquisition Date"), the Company entered into a purchase and sale agreement with New Silvertip Holdco, LLC, pursuant to which the Company acquired 100 % of the outstanding limited liability company interests of Silvertip, a wireline services company in the Permian Basin, in exchange for total consideration of $ 148.1 million (the "Silvertip Purchase Price") consisting of 10.1 million shares of our common stock valued at $ 106.7 million, $ 30.0 million of cash, the payoff of $ 7.2 million of assumed debt, and the payment of $ 4.1 million of certain seller closing and transaction costs. The Silvertip Acquisition positions the Company as a more resilient and diversified completions-focused oilfield service provider headquartered in the Permian Basin. +The Company accounted for the Silvertip Acquisition using the acquisition method of accounting. The Silvertip Purchase Price was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair value at the Silvertip Acquisition Date. The estimated fair values of certain assets and liabilities, including accounts receivable, require significant judgments and estimates. The measurements of assets acquired and liabilities assumed, are based on inputs that are not observable in the market and thus represent Level 3 inputs. +The following table summarizes the fair value of the consideration transferred in the Silvertip Acquisition and the Silvertip Purchase Price to the fair value of the assets acquired and liabilities assumed (which are included within the accompanying consolidated balance sheet as of December 31, 2022) as of the Silvertip Acquisition Date: +(in thousands) +Total purchase consideration: +Cash consideration $ 30,000 +Equity consideration 106,736 +Debt payments and closing costs 11,320 +Total consideration $ 148,056 +Cash and cash equivalents $ 2,681 +Accounts receivable and unbilled revenue 21,079 +Inventories 1,209 +Prepaid expenses 2,476 +Other current assets 1,059 +Property and equipment (1) +52,478 +Intangible assets: +Trademark/trade name (2) +10,800 +Customer relationships (2) +46,500 +Goodwill 23,624 +Operating lease right-of-use asset 2,783 +Total assets acquired 164,689 +Accounts payable 7,659 +Accrued and other current liabilities 6,178 +Operating lease liability 2,796 +Total liabilities assumed 16,633 +Total purchase consideration $ 148,056 +(1) Remaining useful lives ranging from less than one to 22 years. +(2) Definite lived intangibles with amortization period of 10 years. +65 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. BUSINESS ACQUISITIONS (Continued) +The goodwill arising from the Silvertip Acquisition is attributable to the expected operational synergies resulting from our integrated service offerings. The goodwill arising from the Silvertip Acquisition has been allocated to our wireline operations, and are included in our wireline operating segment. +The Company’s transaction costs were recognized separately from the acquisition of assets and assumptions of liabilities in the Silvertip Acquisition, and were expensed as incurred. These costs are included within general and administrative expenses in our consolidated statements of operations. +The following combined pro forma information assumes the Silvertip Acquisition occurred on January 1, 2021. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2022 or any operating efficiencies or inefficiencies that may result from the Silvertip Acquisition. The information is not necessarily indicative of results that would have been achieved had the Company controlled Silvertip during the periods presented. +(unaudited, in thousands) +Year Ended December 31, +2022 2021 +Revenue $ 1,428,282 $ 1,013,261 +Net income (loss) (1) +26,716 ( 43,957 ) +(1) The nonrecurring acquisition costs of $ 2.2 million were included in our pro forma results for the year ended December 31, 2021. +The Company’s consolidated statement of operations for the year ended December 31, 2022, includes 61 days of Silvertip operations as the Silvertip Acquisition closed on November 1, 2022. +5. FAIR VALUE MEASUREMENTS +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. +In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used, when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions other market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows: +Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment. +Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. +Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. +A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. +66 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +5. FAIR VALUE MEASUREMENTS (Continued) +Assets and Liabilities Measured at Fair Value on a Recurring Basis +The fair values of cash, cash equivalents and restricted cash, accounts receivable, accounts payable, accrued and other current liabilities, and long-term debt are estimated to be approximately equivalent to carrying amounts as of December 31, 2023 and 2022 and have been excluded from the table below. +Assets measured at fair value on a recurring basis as of December 31, 2023 are set forth below: +(In thousands) +Estimated fair value measurements +Balance +Quoted prices in +active market +(Level 1) +Significant other +observable inputs +(Level 2) +Significant other +unobservable inputs +(Level 3) +Total gains +(losses) +December 31, 2023: +Short-term investment $ 7,745 $ 7,745 $ — $ — $ ( 2,538 ) +December 31, 2022: +Short-term investment $ 10,283 $ 10,283 $ — $ — $ ( 1,570 ) +Short-term investment — On September 1, 2022, the Company received 2.6 million common shares of STEP Energy Services L td. ("STEP") with an estimated fair value of $ 11.8 million as part of the consideration for the sale of our coiled tubing assets to STEP. The shares were treated as an investment in equity securities measured at fair value using Level 1 inputs based on observable prices on the Toronto Stock Exchange and are shown under current assets in our consolidated balance sheets. As of December 31, 2023, the fair value of the short-term investment was estimated at $ 7.7 million. The fluctuation in stock price resulted in an unrealized loss of $ 2.5 million and $ 1.6 million for 2023 and 2022 , respectively. Included in the unrealized loss was a gain of $ 0.1 million and a loss of $ 0.3 million resulting from non-cash foreign currency translation for the years ended December 31, 2023 and 2022, respectively . The unrealized losses resulting from stock price fluctuation and non-cash foreign currency translation are included in other income (expense) in our consolidated statements of operations. The Company is restricted from selling, transferring or assigning more than 0.9 million shares in any one calendar month . +Assets Measured at Fair Value on a Nonrecurring Basis +Certain assets and liabilities are measured at fair value on a nonrecurring basis. These items are not measured at fair value on an ongoing basis but may be subject to fair value adjustments in certain circumstances. These assets and liabilities include those acquired through the Par Five Acquisition, which are required to be measured at fair value on the acquisition date according to ASC Topic 805, Business Combinations (see Note 4. Business Acquisitions). +Whenever events or circumstances indicate that the carrying value of long-lived assets may not be recoverable, the Company reviews the carrying values of long‑lived assets, such as property and equipment and other assets to determine if they are recoverable. If any long‑lived assets are determined to be unrecoverable, an impairment expense is recorded in the period. No impairment of property and equipment was recorded during the year ended December 31, 2023. We recorded impairment expense of approximately $ 57.5 million during the year ended December 31, 2022, in connection with our DuraStim® electric-powered hydraulic fracturing pumps that did not meet the manufacturer's specifications or our expectations. There was no impairment of assets during the year ended December 31, 2021. +67 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +5. FAIR VALUE MEASUREMENTS (Continued) +We generally apply fair value techniques to our reporting units on a nonrecurring basis associated with valuing potential impairment loss related to goodwill, if any. Our estimate of the reporting unit fair value is based on a combination of income and market approaches, Level 1 and 3, respectively, in the fair value hierarchy. The income approach involves the use of a discounted cash flow method, with the cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies’ market multiples in estimating the fair value. Significant assumptions include projected revenue growth, capital expenditures, utilization, gross margins, discount rates, terminal growth rates, and weight allocation between income and market approaches. If the reporting unit’s carrying amount exceeds its fair value, we consider goodwill impaired, and the impairment loss is calculated and recorded in the period. There were no additions to goodwill during the year ended December 31, 2023. We added $ 23.6 million of goodwill during the year ended December 31, 2022 (see Note 4. Business Acquisitions). There were no additions to goodwill during the year ended December 31, 2021. We conducted our annual impairment test of goodwill as of December 31, 2023 and determined that no impairment to the carrying value of goodwill for our reporting unit (wireline operating segment) was required. There were no goodwill impairment losses during the years ended December 31, 2023, 2022 and 2021 . +The wireline operating segment is the only segment which has goodwill at December 31, 2023 and 2022. The table below sets forth the changes in the carrying amount of goodwill. +(in thousands) +Goodwill as of January 1, 2022 — net $ — +Goodwill addition during the year 23,624 +Less impairment losses — +Goodwill as of December 31, 2022 — net 23,624 +Goodwill addition during the year — +Less impairment losses — +Goodwill as of December 31, 2023 — net $ 23,624 +6. PROPERTY AND EQUIPMENT +Property and equipment consisted of the following: +(in thousands) +December 31, +2023 2022 +Land +$ 14,076 $ 11,793 +Buildings +37,888 34,298 +Equipment and vehicles +1,551,261 1,397,727 +Leasehold improvements +8,011 8,573 +Subtotal +1,611,236 1,452,391 +Less accumulated depreciation +( 644,120 ) ( 529,656 ) +Property and equipment — net +$ 967,116 $ 922,735 +Depreciation consisted of the following: +(in thousands) +Year Ended December 31, +2023 2022 2021 +Depreciation related to cost of services $ 169,771 $ 126,746 $ 133,075 +Depreciation related to general and administrative expenses 222 407 302 +Total depreciation $ 169,993 $ 127,153 $ 133,377 +68 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +The Company incurred amortization expense of $ 5.2 million on its finance lease right-of-use asset, which is related to cost of services for the year ended December 31, 2023 . There was no amortization expense related to finance leases for the years ended December 31, 2022 and 2021. The Company also incurred amortization expense on its intangible assets (see Note 7. Intangible Assets). +In December 2021, the Company disposed of two turbine generators, which were included in o ur Hydraulic Fracturing reportable segment, for total cash proceeds of approximately $ 36.0 million. The net book value of the two turbines prior to the disposal was approximately $ 39.5 million, resulting in loss on disposal of approximately $ 3.5 million. +7. INTANGIBLE ASSETS +Intangible assets consist of customer relationships and trademark/trade name. Intangible assets are amortized on a straight‑line basis with a useful life of ten years . Amortization expense, all of which was related to general and administrative expenses, was $ 5.7 million, $ 1.0 million and $ 0 for the years ended December 31, 2023, 2022 and 2021, respectively. The Company’s intangible assets subject to amortization consisted of the following: +(in thousands) +December 31, +2023 2022 +Intangible assets acquired: +Trademark/trade name $ 10,800 $ 10,800 +Customer relationships 46,500 46,500 +Total intangible assets acquired 57,300 57,300 +Accumulated amortization: +Trademark/trade name ( 1,260 ) ( 180 ) +Customer relationships ( 5,425 ) ( 775 ) +Total accumulated amortization ( 6,685 ) ( 955 ) +Intangible assets — net +$ 50,615 $ 56,345 +Estimated remaining amortization expense subsequent fiscal years is expected to be as follows: +(in thousands) +Year Estimated future amortization expense +2024 $ 5,730 +2025 5,730 +2026 5,730 +2027 5,730 +2028 and beyond 27,695 +Total $ 50,615 +The average amortization period remaining is approximately 8.8 years. +8. LONG‑TERM DEBT +Asset-Based Loan Credit Facility +Our revolving credit facility, as amended and restated in April 2022, prior to giving effect to the amendment to the revolving credit facility in June 2023, had a total borrowing capacity of $ 150 million. The revolving credit facility had a borrowing base of 85 % to 90 %, depending on the credit ratings of our accounts receivable counterparties, of monthly eligible accounts receivable less customary reserves. The revolving credit facility, included a springing fixed charge coverage ratio to apply when +69 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +excess availability was less than the greater of (i) 10 % of the lesser of the facility size or the borrowing base or (ii) $ 10.0 million. Under the revolving credit facility, we were required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. +Effective June 2, 2023, the Company entered into an amendment to its amended and restated revolving credit facility the revolving credit facility (as amended and restated in April 2022, as amended in June 2023 and as may be amended further, "ABL Credit Facility"). The amendment increased the borrowing capacity under the ABL Credit Facility to $ 225.0 million (subject to the Borrowing Base (as defined below) limit), and extended the maturity date to June 2, 2028. The ABL Credit Facility has a borrowing base of the sum of 85 % to 90 % of monthly eligible accounts receivable and 80 % of eligible unbilled accounts (up to a maximum of 25 % of the borrowing base), in each case, depending on the credit ratings of our accounts receivable counterparties, less customary reserves (the "Borrowing Base"), in each case, depending on the credit ratings of our accounts receivable counterparties, as redetermined monthly. The Borrowing Base as of December 31, 2023, was approximately $ 152.0 million. The ABL Credit Facility includes a springing fixed charge coverage ratio to apply when excess availability is less than the greater of (i) 10 % of the lesser of the facility size or the Borrowing Base or (ii) $ 15.0 million. Under the ABL Credit Facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens or indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. +Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either the Secured Overnight Financing Rate ("SOFR") or the base rate, plus the applicable margin, which ranges from 1.75 % to 2.25 % for SOFR loans and 0.75 % to 1.25 % for base rate loans. The weighted average interest rate for our ABL Credit Facility for the year ended December 31, 2023, was 6.69 % . +The loan origination costs relating to the ABL Credit Facility are classified as an asset in our balance sheet. As of December 31, 2023 and 2022 , we had outstanding borrowings under our ABL Credit Facility of $ 45.0 million and $ 30.0 million, respectively. +9. ACCRUED AND OTHER CURRENT LIABILITIES +Accrued and other current liabilities consisted of the following: +(in thousands) +December 31, +2023 2022 +Accrued insurance +$ 1,222 $ 517 +Accrued payroll and related expenses +14,284 14,137 +Deferred revenue (advance from customer) 19,190 10,000 +Capital expenditure, taxes and others accruals +40,920 24,373 +Total +$ 75,616 $ 49,027 +10. EMPLOYEE BENEFIT PLAN +The Company has a 401(k) plan, modified effective January 1, 2019 and further modified effective April 1, 2022. The Company matches 100 % of the employee contributions up to 6 % of gross salary, up to the annual limit. The employees are fully vested in their contributions when made. Prior to the April 1, 2022 modification, the employees vested in the Company’s contributions to the 401(k) plan 25 % per year, beginning in the employee’s first year of service, with full vesting occurring after four years of service. Effective April 1, 2022, the Company allows for immediate vesting of the Company’s contributions. During the years ended December 31, 2023, 2022 and 2021, the recorded expense under the plan was $ 5.9 million, $ 4.6 million and $ 2.8 million, respectively. +70 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION +The Company currently has three operating segments for which discrete financial information is readily available: hydraulic fracturing (inclusive of acidizing), wireline and cementing. T hese operating segments represent how the CODM evaluates performance and allocates resources. +On September 1, 2022, the Company shut down its coiled tubing operations and disposed of its coiled tubing assets to STEP as part of a strategic repositioning, and recorded a loss on disposal of $ 13.8 million. The divestiture of our coiled tubing assets did not qualify for presentation and disclosure as a discontinued operation, and accordingly, we have recorded the resulting loss from the disposal as part of our loss on disposal of assets in our consolidated statement of operations. +We have historically conducted our business through four operating segments: hydraulic fracturing, wireline, cementing and coiled tubing. Prior to the fourth quarter of fiscal year 2023, our operating segments met the aggregation criteria and were aggregated into the “Completion Services” reportable segment and our coiled tubing operations (which were divested in September 2022) were shown in the “All Other” category. Effective as of the fourth quarter of fiscal year 2023, we revised our segment reporting as we determined that our three operating segments no longer met the criteria to be aggregated. Our Hydraulic Fracturing and Wireline operating segments meet the criteria of a reportable segment. Our cementing and our divested coiled tubing segments do not meet the reportable segment criteria and are included within the “All Other” category. Additionally, our corporate administrative activities do not involve business activities from which it may earn revenues and its results are not regularly reviewed by the Company’s CODM when making key operating and resource decisions. As a result, corporate administrative expenses have been included under “Reconciling Items.” Prior period segment information has been revised to conform to our current presentation. +Our hydraulic fracturing operating segment revenue approximated 78.5 %, 89.3 % and 91.6 % of our revenue for the years ended December 31, 2023, 2022 and 2021, respectively. Revenue from our wireline operating segment (resulting from the acquisition of Silvertip in 2022) approximated 14.1 % and 2.4 % of our revenue for the years ended December 31, 2023 and 2022, respectively. Our cementing operating segment revenue approximated 7.4 %, 7.2 % and 6.5 % of our revenue for the years ended December 31, 2023, 2022 and 2021, respectively. Our coiled tubing revenue approximated 1.1 % and 1.9 % of our revenue for the years ended December 31, 2022 and 2021, respectively. Our operating segments are subject to inherent uncertainties which may influence our prospective activities. Inter-segment revenues are not material and are not shown separately in the tables below. +The Company manages and assesses the performance of the reportable segment by its adjusted EBITDA (earnings before interest expense, income taxes, depreciation and amortization, stock-based compensation expense, other income or expense, gain or loss on disposal of assets and other unusual or nonrecurring expenses or income such as impairment charges, retention bonuses, severance, costs related to asset acquisitions, insurance recoveries, one-time professional fees and legal settlements). +71 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION (Continued) +The following tables set forth certain financial information with respect to the Company’s reportable segments (in thousands): +Hydraulic Fracturing +Wireline All Other +Reconciling Items +Total +Year ended and as of December 31, 2023 +Service revenue +$ 1,280,523 $ 229,599 $ 120,277 $ — $ 1,630,399 +Adjusted EBITDA +$ 366,809 $ 61,930 $ 24,665 $ — $ 453,404 +Capital expenditures +$ 294,377 $ 12,203 $ 3,440 $ — $ 310,020 +Goodwill $ — $ 23,624 $ — $ — $ 23,624 +Total assets +$ 1,189,526 $ 198,957 $ 78,475 $ 13,354 $ 1,480,312 +Hydraulic Fracturing +Wireline All Other +Reconciling Items +Total +Year ended and as of December 31, 2022 +Service revenue +$ 1,143,216 $ 31,188 $ 105,297 $ — $ 1,279,701 +Adjusted EBITDA +$ 339,186 $ 7,926 $ 13,434 $ — $ 360,546 +Capital expenditures +$ 347,757 $ 2,265 $ 9,645 $ 5,649 $ 365,316 +Goodwill $ — $ 23,624 $ — $ — $ 23,624 +Total assets $ 1,092,658 $ 173,489 $ 46,944 $ 22,695 $ 1,335,786 +Hydraulic Fracturing +Wireline All Other +Reconciling Items +Total +Year ended and as of December 31, 2021 +Service revenue +$ 800,581 $ — $ 73,933 $ — $ 874,514 +Adjusted EBITDA +$ 174,693 $ — $ 7,693 $ — $ 182,386 +Capital expenditures +$ 161,537 $ — $ 3,569 $ 52 $ 165,158 +Total assets +$ 982,702 $ — $ 71,579 $ 6,955 $ 1,061,236 +72 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION (Continued) +A reconciliation from reportable segment level financial information to the consolidated statement of operations is provided in the table below (in thousands): +Year Ended December 31, +2023 2022 2021 +Service Revenue +Hydraulic Fracturing $ 1,280,523 $ 1,143,216 $ 800,581 +Wireline 229,599 31,188 — +All Other 120,277 105,297 73,933 +Total service revenue for reportable segments 1,630,399 1,279,701 874,514 +Elimination of intersegment service revenue — — — +Total consolidated service revenue $ 1,630,399 $ 1,279,701 $ 874,514 +Adjusted EBITDA +Hydraulic Fracturing $ 366,809 $ 339,186 $ 174,693 +Wireline 61,930 7,926 — +All Other 24,665 13,434 7,693 +Total Adjusted EBITDA for reportable segments 453,404 360,546 182,386 +Unallocated corporate administrative expenses ( 49,444 ) ( 43,956 ) ( 47,379 ) +Depreciation and amortization ( 180,886 ) ( 128,108 ) ( 133,377 ) +Impairment expense (1) +— ( 57,454 ) — +Interest expense ( 5,308 ) ( 1,605 ) ( 614 ) +Income tax (expense) benefit ( 29,868 ) ( 5,356 ) 14,252 +Loss on disposal of assets ( 73,015 ) ( 102,150 ) ( 64,646 ) +Stock-based compensation ( 14,450 ) ( 21,881 ) ( 11,519 ) +Other (expense) income (2) +( 9,533 ) 11,582 873 +Other general and administrative expense (3) +( 2,969 ) ( 8,460 ) 6,471 +Retention bonus and severance expense ( 2,297 ) ( 1,128 ) ( 632 ) +Net income (loss) $ 85,634 $ 2,030 $ ( 54,185 ) +Assets +Hydraulic Fracturing $ 1,189,526 $ 1,092,658 $ 982,702 +Wireline 198,957 173,489 — +All Other 78,475 46,944 71,579 +Total assets for reportable segments 1,466,958 1,313,091 1,054,281 +Unallocated corporate assets 13,354 22,695 6,955 +Total assets $ 1,480,312 $ 1,335,786 $ 1,061,236 +(1) Represents expense in connection with the impairment of our DuraStim® electric-powered hydraulic fracturing equipment. +(2) Other expense for the year ended December 31, 2023 includes settlement expenses resulting from routine audits and one-time health insurance costs totaling approximately $ 7.4 million, and a $ 2.5 million unrealized loss on short-term investment. Other income for the year ended December 31, 2022 includes a $ 10.7 million net tax refund (net of advisory fees) received in March 2022 from the Texas Comptroller of Public Accounts in connection with limited sales, excise and use tax audit of the period from July 1, 2015 through December 31, 2018, a $ 2.7 million non-cash income from fixed asset inventory received as part of a settlement of warranty claims with an equipment manufacturer, and a $ 1.6 million unrealized loss on short-term investment. +73 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION (Continued) +(3) Other general and administrative expense for the year ended December 31, 2023 primarily relates to nonrecurring professional fees paid to external consultants in connection with our business acquisitions and legal settlements, net of reimbursement from insurance carriers. Other general and administrative expense for the years ended December 31, 2022 and 2021 primarily relates to nonrecurring professional fees paid to external consultants in connection with our audit committee review, SEC investigation, shareholder litigation, legal settlement to a vendor and other legal matters, net of reimbursement from insurance carriers. During the years ended December 31, 2023, 2022 and 2021, we received reimbursement of approxim ately $ 0.4 million, $ 10.4 million and $ 9.8 million, respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. +Major Customers +The Company had revenue from the following significant customers that accounted for the following percentages of the Company’s total revenue: +Year Ended December 31, +2023 2022 2021 +Customer A +19.7 % 28.3 % 14.6 % +Customer B +18.2 % 15.0 % 8.8 % +Customer C +9.6 % 2.9 % 0.1 % +Customer D +8.0 % — % — % +Customer E +7.7 % 33.1 % 54.2 % +Customer F 2.3 % 4.7 % — % +Customer G 0.5 % 1.4 % 4.4 % +Customer H — % — % 3.8 % +12. NET INCOME (LOSS) PER SHARE +Basic net income (loss) per common share is computed by dividing the net income (loss) relevant to the common stockholders by the weighted-average number of shares outstanding during the year. Diluted net income (loss) per common share uses the same net income (loss) divided by the sum of the weighted-average number of shares of common stock outstanding during the period, plus dilutive effects of options, performance stock units (“PSUs”) and restricted stock units (“RSUs”) outstanding during the period calculated using the treasury method and the potential dilutive effects of preferred stocks (if any) calculated using the if-converted method. +(In thousands, except for per share data) +Year Ended December 31, +2023 2022 2021 +Numerator (both basic and diluted) +Net income (loss) relevant to common stockholders $ 85,634 $ 2,030 $ ( 54,185 ) +Denominator +Denominator for basic net income (loss) per share 113,004 105,868 102,655 +Dilutive effect of stock options — 80 — +Dilutive effect of performance stock units 42 506 — +Dilutive effect of restricted stock units 370 485 — +Denominator for diluted net income (loss) per share 113,416 106,939 102,655 +Basic net income (loss) per common share $ 0.76 $ 0.02 $ ( 0.53 ) +Diluted net income (loss) per common share $ 0.76 $ 0.02 $ ( 0.53 ) +74 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +12. NET INCOME (LOSS) PER SHARE (Continued) +As shown in the table below, the following stock options, RSUs and PSUs outstanding as of December 31, 2023, 2022 and 2021 have not been included in the calculation of diluted income (loss) per common share for the years ended December 31, 2023, 2022 and 2021 because they would be anti-dilutive to the calculation of diluted net income (loss) per common share: +(In thousands) +2023 2022 2021 +Stock options 286 491 798 +Restricted stock units 82 12 1,413 +Performance stock units 411 — 1,586 +Total 779 503 3,797 +13. SHARE REPURCHASE PROGRAM +On May 17, 2023, the Company's board of directors (the "Board") authorized and the Company announced a share repurchase program that allows the Company to repurchase up to $ 100 million of the Company's common stock beginning immediately and continuing through and including May 31, 2024. The shares may be repurchased from time to time in open market transactions, block trades, accelerated share repurchases, privately negotiated transactions, derivative transactions or otherwise, certain of which may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act, in compliance with applicable state and federal securities laws. The timing, as well as the number and value of shares repurchased under the program, will be determined by the Company at its discretion and will depend on a variety of factors, including management's assessment of the intrinsic value of the Company's common stock, the market price of the Company's common stock, general market and economic conditions, available liquidity, compliance with the Company's debt and other agreements, applicable legal requirements, and other considerations. The Company is not obligated to purchase any shares under the repurchase program, and the program may be suspended, modified, or discontinued at any time without prior notice. The Company expects to fund the repurchases using cash on hand and expected free cash flow to be generated through May 2024. The Inflation Reduction Act of 2022 ("IRA 2022") provides for, among other things, the imposition of a new 1% U.S. federal excise tax on certain repurchases of stock by publicly traded U.S. corporations such as us after December 31, 2022. Accordingly, the excise tax will apply to our share repurchase program in 2023 and in subsequent taxable years. The current government has proposed increasing the amount of the excise tax from 1% to 4%; however, it is unclear whether such a change in the amount of the excise tax will be enacted and, if enacted, how soon any such change could take effect. +All shares of common stock repurchased under the share repurchase program are canceled and retired upon repurchase. The Company accounts for the purchase price of repurchased shares of common stock in excess of par value ($ 0.001 per share of common stock) as a reduction of additional-paid-in capital, and will continue to do so until additional paid-in-capital is reduced to zero. Thereafter, any excess purchase price will be recorded as a reduction of retained earnings. During the year ended December 31, 2023, the Company paid an aggregate of $ 51.7 million , an average price per share of $ 8.93 including commissions, for share repurchases under the share repurchase program, thereby retiring 5.8 million shares. The Company has accrued $ 0.4 million in respect of the IRA 2022 repurchase excise tax as of December 31, 2023. As of December 31, 2023, $ 48.3 million remained authorized for future repurchases of common stock under the repurchase program. +14. STOCK‑BASED COMPENSATION +Stock Option Plan +In March 2013, we approved the Stock Option Plan of ProPetro Holding Corp. (the "Stock Option Plan") pursuant to which our Board may grant stock options to our consultants, directors, executives and employees. No awards have been granted under the Stock Option Plan following our Initial Public Offering ("IPO"), and no further awards will be granted under the Stock Option Plan. +2017 Incentive Award Plan +In March 2017, our shareholders approved the ProPetro Holding Corp. 2017 Incentive Award Plan (the "2017 Incentive Plan") pursuant to which our Board was authorized to grant stock options, RSUs, PSUs, or other stock-based and cash awards to consultants, directors, executives and employees. The 2017 Incentive Plan originally authorized up to 5,800,000 shares of common stock to be issued with respect to awards granted pursuant to the plan. No awards have been granted under the 2017 +75 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +14. STOCK‑BASED COMPENSATION (Continued) +Incentive Plan following approval of the 2020 Incentive Plan (as defined below), and no further awards will be granted under the 2017 Incentive Plan. +2020 Long Term Incentive Plan +In October 2020, our shareholders approved the ProPetro Holding Corp. 2020 Long Term Incentive Plan (the "2020 Incentive Plan") pursuant to which our Board may grant stock options, RSUs, PSUs, or other stock-based and cash awards to consultants, directors, executives and employees. The 2020 Incentive Plan authorized up to 4,650,000 shares of common stock to be issued under awards granted pursuant to the plan. The 2020 Incentive Plan became effective on October 22, 2020, and as of such date no further awards will be granted under the 2017 Incentive Plan. In May 2023, our stockholders approved the Amended and Restated ProPetro Holding Corp. 2020 Long Term Incentive Plan (the "A&R 2020 Incentive Plan"), which had been previously approved by the Board. The A&R 2020 Incentive Plan became effective on May 11, 2023 and replaced the 2020 Incentive Plan. The A&R 2020 Incentive Plan authorizes up to 8,050,000 shares of common stock to be issued under awards granted pursuant to the plan in lieu of the 4,650,000 shares of common stock available for issuance under the 2020 Incentive Plan. +The 2017 Incentive Plan and the A&R 2020 Incentive Plan are herein collectively referred to as the "Incentive Plans." +Stock Options +On March 16, 2017, we granted 793,738 stock option awards to certain key employees, officers and directors pursuant to the 2017 Incentive Plan which are scheduled to vest in four substantially equal annual installments, subject to a continuing service requirement. The contractual term for the options awarded is 10 years. The fair value of each stock option award granted was estimated on the date of grant using the Black-Scholes option-pricing model. There were no new stock option grants during the years ended December 31, 2023, 2022 and 2021. +As of December 31, 2023, there was no aggregate intrinsic value for our outstanding or exercisable stock options because the closing stock price as of December 31, 2023, was below the cost to exercise the options. No stock options were exercised during the year ended December 31, 2023. The weighted average remaining contractual term for the outstanding and exercisable stock options as of December 31, 2023, w as 3.2 years and 3.2 years, respec tively. +A summary of the stock option activity during the year ended December 31, 2023, is presented below (in thousands, except for exercise price): +Number +of Shares +Weighted +Average +Exercise +Price +Outstanding at January 1, 2023 488 $ 14.00 +Granted +— $ — +Exercised +— $ — +Forfeited +— $ — +Expired +( 308 ) $ 14.00 +Outstanding at December 31, 2023 180 $ 14.00 +Exercisable at December 31, 2023 180 $ 14.00 +Restricted Stock Units +In 2023, we granted 1,704,189 RSUs to employees, officers and directors pursuant to the 2020 Incentive Plan, which generally vest ratably over a three-year vesting period, in the case of awards to employees and officers, and generally vest in full after one year , in the case of awards to directors. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases to be an employee or director of the Company prior to vesting of the award. Each RSU represents the right to receive one share of common stock. The grant date fair value of the RSUs is based on the closing share price of our common stock on the date of grant. For the years ended December 31, 2023, 2022 and 2021, the Company recognized stock compensation expense for RSUs of approximately $ 7.8 million, $ 11.1 million and $ 6.2 million, respectively. +76 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +14. STOCK‑BASED COMPENSATION (Continued) +On March 31, 2022, the Company modified the RSUs previously granted to a former officer in 2019, 2020 and 2021 to accelerate the vesting of such RSUs in connection with his separation agreement. On December 31, 2022, the Company modified the RSUs previously granted to a former officer in 2020, 2021 and 2022 to accelerate the vesting of such RSUs in connection with his separation agreement. As a result of these modifications, we recorded a net incremental stock expense of $ 1.2 million during the year ended December 31, 2022. +As of December 31, 2023, the total unrecognized compensation expense for all RSUs was approxima tely $ 15.4 million, and is expected to be recognized over a weighted-average period of approximately 1.8 years. +The following table summarizes the RSUs activity during the year December 31, 2023 (in thousands, except for fair value): +Number of +Shares Weighted +Average +Grant Date +Fair Value ("FV") +Outstanding at January 1, 2023 1,268 $ 10.91 +Granted 1,704 $ 9.30 +Vested ( 558 ) $ 10.59 +Forfeited ( 150 ) $ 10.40 +Canceled — $ — +Outstanding at December 31, 2023 2,264 $ 9.81 +Performance Stock Units +In 2023, we granted 454,788 P SUs to certain key employees and officers as new awards under the 2020 Incentive Plan. Each PSU earned represents the right to receive either one share of common stock or, as determined by the administrator in its sole discretion, a cash amount equal to the fair market value of one share of common stock or amount of cash on the day immediately preceding the settlement date. The actual number of shares of common stock that may be issued under the PSUs ranges from 0 % up to a maximum of 200 % of the target number of PSUs granted to the participant, based on our total shareholder return ("TSR") relative to a designated peer group of comparable companies (“Peer Group”), generally at the end of a three-year period. In addition to the TSR conditions, vesting of the PSUs is generally subject to the recipient’s continued employment through the end of the applicable performance period. Compensation expense is recorded ratably over the corresponding requisite service period. The grant date fair value of PSUs is determined using a Monte Carlo probability model. Grant recipients do not have any shareholder rights until performance relative to the Peer Group has been determined following the completion of the performance period and shares have been issued. +In connection with a former officer’s separation agreement, on March 31, 2022, the Company modified the PSUs previously granted to such former officer in 2020 and 2021 to provide for deemed satisfaction of the service requirement applicable to such PSUs as of March 31, 2022, such that such PSUs shall remain outstanding and eligible to vest based on our TSR relative to the P eer Group over the applicable performance period. In connection with a former officer’s separation agreement, on December 31, 2022, the Company modified the PSUs previously granted to such former officer in 2021 and 2022 to provide for deemed satisfaction of the service requirement applicable to such PSUs as of December 31, 2022, such that such PSUs shall rem ain outstanding and eligible to vest based on our TSR relative to the Peer Group over the applicable performance period. As a result of these modifications, we recorded a net incremental stock expense of $ 2.6 million during the year ended December 31, 2022. +For the years ended December 31, 2023, 2022 and 2021 the Company recognized stock compensation expense for the PSUs of approximatel y $ 6.6 million, $ 10.8 million and $ 5.5 million, respectively. +77 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +14. STOCK‑BASED COMPENSATION (Continued) +The following table summarizes information about PSUs activity during the year ended December 31, 2023 (in thousands, except for fair value): +Period +Granted Target Shares Outstanding at January 1, 2023 Target +Shares +Granted Target Shares Vested Target +Shares +Forfeited Target Shares Outstanding at December 31, 2023 +2020 809 — ( 493 ) ( 316 ) — +2021 632 — — ( 12 ) 620 +2022 316 — — ( 10 ) 306 +2023 — 455 — ( 17 ) 438 +Total 1,757 455 ( 493 ) ( 355 ) 1,364 +Weighted Average Fair Value Per Share $ 12.72 $ 14.40 $ 8.30 $ 9.17 $ 15.80 +The total stock compensation expense for the years ended December 31, 2023, 2022 and 2021 for all stock awards was approximately $ 14.5 million , $ 21.9 million and $ 11.5 million, respectively, and the associated tax benefit related thereto was $ 3.0 million, $ 4.6 million and $ 2.4 million, respectively. The total unrecognized stock-based compensation expense as of December 31, 2023 was approximately $ 21.6 million, and is expected to be recognized over a weighted-average period of approximately 1.5 years. +15. INCOME TAXES +The components of the provision for income taxes are as follows: +(in thousands) +Year Ended December 31, +2023 2022 2021 +Federal: +Current +$ — $ — $ ( 52 ) +Deferred +28,109 4,157 ( 15,143 ) +28,109 4,157 ( 15,195 ) +State: +Current +2,028 1,143 88 +Deferred +( 269 ) 56 855 +1,759 1,199 943 +Total income tax expense (benefit) +$ 29,868 $ 5,356 $ ( 14,252 ) +Reconciliation between the amounts determined by applying the federal statutory rate of 21% for years ended December 31, 2023, 2022 and 2021 to income tax (benefit) expense is as follows: +78 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +15. INCOME TAXES (Continued) +(in thousands) +Year Ended December 31, +2023 2022 2021 +Taxes at federal statutory rate +$ 24,256 $ 1,551 $ ( 14,372 ) +State taxes, net of federal benefit +2,092 709 61 +Section 162(m) limitation 2,089 3,423 616 +Stock-based compensation +1,718 ( 767 ) ( 2,549 ) +Valuation allowance +( 780 ) ( 336 ) 825 +Other +493 776 1,167 +Total income tax expense (benefit) +$ 29,868 $ 5,356 $ ( 14,252 ) +Deferred tax assets and liabilities are recognized for estimated future tax effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. The significant items giving rise to deferred tax assets (liabilities) are as follows: +(in thousands) +December 31, +2023 2022 +Deferred Income Tax Assets +Accrued liabilities +$ 1,410 $ 1,280 +Allowance for credit losses 50 88 +Goodwill and other intangible assets +1,900 2,451 +Stock‑based compensation +1,979 3,658 +Net operating losses +63,983 90,397 +Lease liabilities +11,736 — +Other +895 490 +Total deferred tax assets +81,953 98,364 +Valuation allowance +( 577 ) ( 1,357 ) +Total deferred tax assets — net +$ 81,376 $ 97,007 +Deferred Income Tax Liabilities +Property and equipment +$ ( 156,393 ) $ ( 161,195 ) +Prepaid expenses +( 1,509 ) ( 1,077 ) +Right-of-use assets ( 16,579 ) — +Total deferred tax liabilities +$ ( 174,481 ) $ ( 162,272 ) +Net deferred tax liabilities +$ ( 93,105 ) $ ( 65,265 ) +The Tax Cuts and Jobs Act included a reduction to the maxi mum deduction allo wed for net o perating losses generated in tax years after December 31, 2017, and the elimination of carrybacks of net operating losses. As of December 31, 2023, the Company had approximately $ 296.6 million of U.S. federal NOLs, some of which will begin to expire in 2035. Approximately $ 87.7 million of the Company’s U.S. federal NOLs relate to pre-2018 periods. As of December 31, 2023, the Company’s state NOLs were approximately $ 48.1 million and will begin to expire in 2030. Utilization of NOLs carryforwards may be limited due to past or future ownership changes. As of December 31, 2023, we determined that $ 0.6 million valuation allowance was necessary against our state deferred tax assets. +The Company’s U.S. federal income tax returns for the y ear ended December 31, 2020, and through the most recent filing remain open to examination by the Internal Revenue Service under the applicable U.S. federal statute of limitations provisions. The various states in which the Company is subject to income tax are generally open to examination for the tax years ended December 31, 2019, and through the most recent filing. +The Company records uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical +79 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +15. INCOME TAXES (Continued) +merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. As of December 31, 2023, 2022 and 2021, no uncertain tax positions were recorded. The Company will continue to evaluate its tax positions in accordance with ASC 740 and will recognize any future effect as either a benefit or charge to income in the applicable period. +Income tax penalties and interest assessments recognized under ASC 740 are accrued as a tax expense in the period that the Company’s taxes are in an uncertain tax position. Any accrued tax penalties or interest assessments will remain until the uncertain tax position is resolved with the taxing authorities or until the applicable statute of limitations has expired. +16. RELATED-PARTY TRANSACTIONS +Operations and Maintenance Yards +The Company rents three yards from an entity in which a director of the Company has an equity interest, and the total annual rent expense for each of the three yards was approximately $ 0.03 million, $ 0.1 million and $ 0.1 million, respectively. The Company previously rented two additional yards from this entity and incurred rent expense of $ 0.02 million and $ 0.1 million, respectively during the year ended December 31, 2023. +Pioneer +On December 31, 2018, we consummated the Pioneer Pressure Pumping Acquisition with Pioneer and Pioneer Pumping Services. In connection with the Pioneer Pressure Pumping Acquisition, Pioneer received 16.6 million shares of our common stock and approximately $ 110.0 million in cash. In October 2023, Pioneer entered into a merger agreement with Exxon Mobil Corporation. On March 31, 2022, we entered into the A&R Pressure Pumping Services Agreement, which was initially entered into in connection with the Pioneer Pressure Pumping Acquisition. The A&R Pressure Pumping Services Agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and Fleet Two Agreement described below. +On October 31, 2022, we entered into two pressure pumping services agreements (the "Fleet One Agreement" and "Fleet Two Agreement") with Pioneer, pursuant to which we provided hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and was terminated on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was terminated on May 12, 2023. In October 2023, Pioneer entered into a merger agreement with Exxon Mobil Corporation. +Revenue from services provided to Pioneer (including reservation fees) accounted for approximately $ 125.1 million, $ 423.7 million and $ 473.8 million of our total revenue during the years ended December 31, 2023, 2022 and 2021, respectively. +As of December 31, 2023, the total accounts receivable due from Pioneer, including estimated unbilled receivable for services we provided, amounted to $ 2.4 million a nd the amount due to Pioneer was $ 0 . As of December 31, 2022, the balance due from Pioneer for services (including reservation fees) we provided amo unted to approximately $ 46.2 million and the amount due to Pioneer was $ 0 . +17. LEASES +On January 1, 2019, we implemented ASC 842, using the modified retrospective transition method and elected not to restate prior years. Accordingly, the effects of adopting ASC 842 were adjusted in the beginning of 2019 while prior periods are accounted for under the legacy GAAP, ASC 840. There was no cumulative effect adjustment on beginning retained earnings. We also elected other practical expedients provided by the new lease standard, the short-term lease recognition practical expedient in which leases with a term of twelve months or less will not be recognized on the balance sheet, and the practical expedient to not separate lease and non-lease components for real estate class of assets. Our discount rate was based on our estimated incremental borrowing rate on a collateralized basis with similar terms and economic considerations as our lease payments at the lease commencement. Below is a description of our operating and finance leases. +80 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +17. LEASES (Continued) +Operating Leases +Description of Lease +In March 2013, we entered into a ten-year real estate lease contract (the " Real Estate One Lease " ) with a commencement date of April 1, 2013, as part of the expansion of our equipment yard. For the years ended December 31, 2023, 2022 and 2021, the Company made lease payments of approximately $ 0.1 million , $ 0.4 million and $ 0.4 million, respectively. The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. In addition to the contractual lease period, the contract includes an optional renewal of up to ten years . However, the Company terminated the Real Estate One Lease at the end of the term, March 1, 2023. +We accounted for our Real Estate One Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Real Estate One Lease because we concluded that the accounting effect was insignificant. +As part of our expansion of our hydraulic fracturing equipment maintenance program, we entered into a two-year maintenance facility real estate lease contract (the "Maintenance Facility Lease") with a commencement date of March 14, 2022. During the year ended December 31, 2023 the Company made lease payments of approximately $ 0.3 million. In addition to the contractual lease period, the contract includes an optional renewal for three additional periods of one year each, however, the Company plans to terminate the Maintenance Facility Lease at the end of the term, February 29, 2024. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Maintenance Facility Lease does not contain variability in payments resulting from either an index change or rate change. +We accounted for our Maintenance Facility Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Maintenance Facility Lease because we concluded that the accounting effect was insignificant. As of December 31, 2023, the weighted average discount rate and remaining lease term was approximately 3.4 % and 0.2 years, respectively. +In August 2022 and December 2022, we entered into equipment lease contracts (the "Electric Fleet Leases") for a duration of approximately three years each for a total of four FORCE SM electric-powered hydraulic fracturing fleets with 60,000 HHP per fleet. The Electric Fleet Leases contain options to either extend each lease for up to three additional periods of one year each or purchase the equipment at the end of their initial term of approximately 3.0 years or at the end of each subsequent renewal period. +The first of the Electric Fleet Leases (the "Electric Fleet One Lease") commenced on August 23, 2023 when we received some of the equipment associated with the first FORCE SM electric-powered hydraulic fracturing fleet. During the year ended December 31, 2023, the Company made lease payments of approximately $ 2.2 million, including variable lease payments of approximately $ 0.1 million. During the year ended December 31, 2023, the Company incurred initial direct costs of approximately $ 14.3 million to place the leased equipment into its intended use, which are included in the right-of-use asset cost related to the Electric Fleet One Lease. The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. In management's judgment the exercise of neither the renewal option nor the purchase option is reasonably assured. In addition to fixed rent payments, the Electric Fleet One Lease contains variable payments based on equipment usage. The Electric Fleet One Lease does not include a residual value guarantee, covenants or financial restrictions. +We accounted for the Electric Fleet One Lease as an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. As of December 31, 2023, the weighted average discount rate and remaining lease term was appro ximately 7.3 % and 3.0 years , respectively. +The second of the Electric Fleet Leases (the "Electric Fleet Two Lease") commenced on November 1, 2023 when we received some of the equipment associated with the second FORCE SM electric-powered hydraulic fracturing fleet. During the year ended December 31, 2023, the Company made lease payments of approxi mately $ 1.0 million, including variable lease payments of approximately $ 0.03 million. During the year ended December 31, 2023, the Company incurred initial direct costs of approximately $ 9.4 million to place the leased equipment into its intended use, which are included in the right-of-use asset cost related to the Electric Fleet Two Lease . The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. In management's judgment the exercise of neither the renewal option nor the purchase option is reasonably assured. In addition to fixed rent payments, the Electric Fleet Two Lease contains variable payments based on equipment usage. The Electric Fleet Two Lease does not include a residual value guarantee, covenants or financial restrictions. +81 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +17. LEASES (Continued) +We accounted for the Electric Fleet Two Lease as an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. As of December 31, 2023, the weighted average discount rate and remaining lease term was appro ximately 7.3 % and three years , respectively. As of December 31, 2023, we have not received some of the equipment contracted under the Electric Fleet Two Lease. Since we have not taken possession of these assets and do not control them, we have not accounted for the associated right-of-use asset and lease obligation on our balance sheet as of December 31, 2023. +The third of the Electric Fleet Leases (the "Electric Fleet Three Lease", and collectively with the Electric Fleet One Lease and the Electric Fleet Two Lease, the “Electric Fleet Leases”) commenced on December 19, 2023, when we received some of the equipment associated with the third FORCE SM electric-powered hydraulic fracturing fleet. During the year ended December 31, 2023, the Company made lease payments of approximately $ 0.1 million and no variable lease payments. During the year ended December 31, 2023, the Company incurred initial direct costs of approximately $ 1.4 million to place the leased equipment into its intended use, which are included in the right-of-use asset cost related to the Electric Fleet Three Lease . The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. In management's judgment the exercise of neither the renewal option nor the purchase option is reasonably assured. In addition to fixed rent payments, the Electric Fleet Three Lease contains variable payments based on equipment usage. The Electric Fleet Three Lease does not include a residual value guarantee, covenants or financial restrictions. +We accounted for the Electric Fleet Three Lease as an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. As of December 31, 2023, the weighted average discount rate and remaining lease term was appro ximately 7.3 % and 3.0 years , respectively. As of December 31, 2023, we have not received some of the equipment contracted under the Electric Fleet Three Lease. Since we have not taken possession of these assets and do not control them, we have not accounted for the associated right-of-use asset and lease obligation on our balance sheet as of December 31, 2023. +The Electric Fleet Lease on the fourth FORCE SM electric-powered hydraulic fracturing fleet has not yet commenced. We currently do not control the assets under this lease because they are currently being manufactured by the vendor and we have not taken possession of the assets. The delivery of the FORCE SM electric-powered hydraulic fracturing fleets is as each fleet is manufactured . We currently expect to receive the remaining equipment associated with the second and third fleets and all equipment associated with the fourth fleet in the first half of 2024. Giv en that the Company has not yet taken possession of the assets under these leases, the Company has not accounted for the associated right-of-use asset and lease obligation on its balance sheet as of December 31, 2023. +In October 2022, we entered into a real estate lease contract for 5.3 years (the "Real Estate Two Lease") with a commencement date of March 1, 2023. During the year ended December 31, 2023 , the Company made lease payments of approxim ately $ 0.3 million. The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. In addition to the contractual lease period, the contract includ es two optional renewals of one year each, and in management's judgment the exercise of the renewal option is not reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Real Estate Two Lease does not contain variability in payments resulting from either an index change or rate change. +We accounted for our Real Estate Two Lease as an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Real Estate Two Lease because we concluded that the accounting effect was insignificant. As of December 31, 2023, the weighted average discount rate and remaining lease term was approximately 6.3 % and 4.3 years, respectively. +As part of the Silvertip Acquisition, we assumed two real estate lease contracts (the "Silvertip One Lease" and "Silvertip Two Lease," and collectively the "Silvertip Leases") with remaining terms of 4.8 years and 6.1 years, respectively, from the Silvertip Acquisition Date. During the year ended December 31, 2023, we extended the Silvertip One Lease for an additional 1.3 years. During the year ended December 31, 2023, the Company made lease payments of approximately $ 0.2 million and $ 0.3 million on the Silvertip One Lease and the Silvertip Two Lease, respectively. The assets and liabilities under these contracts are recorded in our wireline operating segment within our Wireline reportable segment. Th e Silvertip Leases do not have any renewal options, residual value guarantees, covenants or financial restrictions. Further, the Silvertip Leases do not contain variability in payments resulting from either an index change or rate change. +We accounted for the Silvertip One Lease and the Silvertip Two Lease as operating leases. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the real estate leases because we concluded that the accounting effect was insignificant. As of December 31, +82 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +17. LEASES (Continued) +2023, the weighted average discount rate and remaining lease term on the Silvertip One Lease was approximately 6.3 % and 4.9 years, respectively. As of December 31, 2023, the weighted average discount rate and remaining lease term for the Silvertip Two Lease was approximately 2.1 % and 4.9 years, re spectively. +In March 2023, we entered into a real estate lease contract for 5.7 years (the "Silvertip Three Lease"), with a commencement date of April 1, 20 23. During the year ended December 31, 2023, the Company made lease payments of approxim ately $ 0.1 million on the Silvertip Three Lease. The assets and liabilities under this contract are recorded in our wireline operating segment within our Wireline reportable segment. The cont ract does not include a residual value guarantee, covenants or financial restrictions. Further, the Silvertip Three Lease does not contain variability in payments resulting from either an index change or rate change. +We accounted for the Silvertip Three Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Silvertip Three Lease because we concluded that the accounting effect wa s insignificant. As of December 31, 2023, the weighted average discount rate and remaining lease term on the Silvertip Three Lease was approximately 6.3 % and 4.9 years, respectively. +On June 1, 2023, we commenced an office space lease contract for 5.0 years (the "Silvertip Office Lease"). During the year ended December 31, 2023, the Company made lease payments of approximately $ 0.1 million on the Silvertip Office Lease. The assets and liabilities under this contract are recorded in our wireline operating segment within our Wireline reportable segment. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Silv ertip Office Lease does not contain variability in payments resulting from either an index change or rate change. +We accounted for the Silvertip Office Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. As of December 31, 2023, the weighted average discount rate and remaining lease term was approximately 6.5 % and 4.4 years, respectively. +In August 2023, in connection with the relocation of our corporate office, we entered into an office space lease contract for 2.1 years (the "Corporate Office Lease"), with a commencement date of September 8, 2023. During the year ended December 31, 2023, the Company made lease payments of approximately $ 0.02 million on the Corporate Office Lease. The assets and liabilities under this contract are recorded in our corporate administrative function. I n addition to the contractual lease period, the contract includes an optional renewal for 0.8 years, and in management's judgment the exercise of the renewal option is not reasonably assured. The cont ract does not include a residual value guarantee, covenants or financial restrictions. Further, the Corporate Office Lease does not contain variability in payments resulting from either an index change or rate change. +We accounted for the Corporate Office Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. As of December 31, 2023, the weighted average discount rate and remaining lease term was approximately 7.1 % and 1.8 years, respectively. +As of December 31, 2023, our total operating lease right-of-use asset cost wa s $ 85.8 million, and accumulated amortization was $ 7.2 million. As of December 31, 2022, our total operating lease right-of-use ass et cost was $ 4.6 million, and accumulated amortization was $ 1.5 million. +Finance Leases +Description of Lease +In January 2023, we entered into a three-year equipment lease contract (the "Power Equipment Lease") for certain power generation equipmen t with a commencement date of August 23, 2023. During the year ended December 31, 2023, the Company made lease payments of approximately $ 5.7 million o n the Power Equipment Lease. The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. In addition t o the contractual lease period, the contract includes an optional renewal for one year , and in management's judgment the exercise of the renewal option is not reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Power Equipment Lease does not contain variability in payments resulting from either an index change or rate change. +We accounted for the Power Equipment Lease as a finance lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term, the present value of lease payments being equal to or in excess of substantially all of the fair value of the underlying assets and the lease term being the major part of the remaining economic life +83 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +17. LEASES (Continued) +of the underlying assets. As of December 31, 2023 , the weighted average discount rate and remaining lease term was approximately 7.3 % and 2.6 years , respectively. +As of December 31, 2023, the total finance lease right-of-use asset cost was approximat ely $ 52.6 million , and accumulated amortization was approximately $ 5.2 million . As of December 31, 2022, we had no finance lease right-of-use assets . +Maturity Analysis of Lease Liabilities +The maturity analysis of liabilities and reconciliation to undiscounted and discounted remaining future lease payments for operating leases as of December 31, 2023 are as follows: +(in thousands) Operating Leases Finance Leases +2024 $ 20,399 $ 19,872 +2025 20,322 19,872 +2026 19,194 12,790 +2027 1,225 — +2028 821 — +Total undiscounted future lease payments 61,961 52,534 +Amount representing interest ( 6,332 ) ( 4,585 ) +Present value of future lease payments (lease obligation) $ 55,629 $ 47,949 +The total cash paid for amounts included in the measurement of our operating lease liability during the year ended December 31, 2023, was approximately $ 4.6 million. The total cash paid for amounts included in the measurement of our finance lease liabilities during the year ended December 31, 2023, was approximate ly $ 4.7 million. During the year ended December 31, 2023 , we recorded non-cash operating lease obligations totaling approximately $ 56.1 million arising from obtaining right-of-use assets related to our execution of the Real Estate Two Lease, the Silvertip Three Lease, the Silvertip Office Lease, the Electric Fleet One Lease, the Electric Fleet Two Lease, the Electric Fleet Three Lease and the Corporate Office Lease, and our extension of the Silvertip One Lease. During the year ended December 31, 2023 , we recorded non-cash finance lease obligations totaling approximately $ 52.6 million arising from obtaining right-of-use assets related to the commencement of the Power Equipment Lease. During the year ended December 31, 2022, total cash paid for amounts included in the measurement of our operating lease liabilities was approximately $ 0.7 million . During the year ended December 31, 2022, we recorded a non-cash operating lease obligation of approximately $ 0.6 million as a result of our execution of the Maintenance Facility Lease . +Short-Term Leases +We elected the practical expedient option, consistent with ASC 842, to exclude leases with a term of twelve months or less ("short-term lease") from our balance sheet and continue to record short-term leases as a period expense. +Initial Direct Costs +We elected to analogize to the measurement guidance of ASC 360 to capitalize costs incurred to place a leased asset into its intended use and to present such capitalized costs as part of the related lease right-of-use asset cost as initial direct costs. +Lease Costs +For the years ended December 31, 2023, 2022 and 2021 , we recorded operating lease cost of approximatel y $ 6.6 million, $ 0.7 million and $ 0.3 million, respectively, in our consolidated statements of operations. For the year ended December 31, 2023, we recorded finance lease cost of approximately $ 6.2 million in our consolidated statements of operations comprising of amortization of finance right-of-use asset of approximately $ 5.2 million and interest on finance lease liabilities of approximately $ 1.0 million. For the years ended December 31, 2022 and 2021 , we had no finance lease costs. For the years ended December 31, 2023, 2022 and 2021 , we recorded variable lease cost of approximatel y $ 0.1 million , $ 0 and $ 0 , respectively, in our consolidated statements of operations. For the years ended December 31, 2023, 2022 and 2021 , we recorded short-term lease cost of approximatel y $ 0.8 million , $ 0.8 million and $ 0.6 million, respectively, in our consolidated statements of operations. +84 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +18. COMMITMENTS AND CONTINGENCIES +Commitments +We entered into certain commitments for fixed assets, consumables and services incidental to the ordinary conduct of our business, generally for quantities required for our operations and at competitive market prices. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. We entered into the Electric Fleet Leases, which contain options to extend the leases or purchase the equipment at the end of each lease or at the end of each subsequent renewal period. As of December 31, 2023, three of the Electric Fleet Leases commenced when the Company took possession of all equipment associated with the first FORCE SM electric-powered hydraulic fracturing fleet and some of the equipment associated with the second and third fleets. Lease payments pertaining to the remaining equipment under the second, third and fourth Electric Fleet Leases are expected to commence when the Company takes possession of the associated equipment . We currently expect to receive the remaining equipment associated with the second and third fleets and all equipment associated with the fourth fleet in the first half of 2024. The total estimated contractual commitment in connection with the Electric Fleet Leases excluding the cost associated with the option to purchase the equipment at the end of each lease is approximately $ 103.7 million . We also entered into the Power Equipment Lease. The total estimated contractual commitment in connection with the Power Equipment Lease is approximately $ 52.5 million . +The Company enters into purchase agreements with its sand suppliers (the " Sand Suppliers " ) to secure supply of sand as part of its normal course of business. The agreements with the Sand Suppliers require that the Company purchase a minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the mi nimum volumes or a fixed price per ton of unpurchased volumes. Our agreements with the Sand Suppliers expire at different times prior to December 31, 2025. Our sand agreement with one of our Sand Suppliers that will expire on December 31, 2024, has a take-or-pay commitment o f $ 17.7 million . During the years ended December 31, 2023, 2022 and 2021, no shortfall fee was recorded. +As of December 31, 2023 and 2022, the Company had issued le tters of credit of $ 6.0 million and $ 6.0 million, respectively, under the ABL Credit Facility in connection with the Company's casualty insurance policy. +Contingent Liabilities +Legal Matters +In September 2019, a complaint, captioned Richard Logan, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. ProPetro Holding Corp., et al., (the "Logan Lawsuit"), was filed against the Company and certain of its then current and former officers and directors in the U.S. District Court for the Western District of Texas. As amended by later complaints, the Logan Lawsuit asserted claims on behalf of a putative class of shareholders who purchased the Company’s common stock between March 17, 2017 and March 13, 2020 or purchased the Company's common stock pursuant to the Company's IPO in March 2017. Plaintiffs alleged violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and Sections 11 and 15 of the Securities Act against the Company, certain former officers and current and former directors, alleging that the defendants made allegedly inaccurate or misleading statements or omissions about the Company's business, operations and prospects. On August 11, 2022, the Company entered into a settlement of the Logan Lawsuit, pursuant to which the Company's insurers have paid a cash sum into a settlement fund to be distributed to members of the putative class. On May 11, 2023, the settlement was granted final court approval. +Environmental and Equipment Insurance +The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company's business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company's liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification. +85 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +18. COMMITMENTS AND CONTINGENCIES (Continued) +The Company is self-insured up to $ 10 million per occurrence for certain losses arising from or attributable to fire and/or explosion at the wellsites that do not have qualified fire suppression measures. No accrual was recorded in our financial statements in connection with this self-insurance strategy because the occurrence of fire and/or explosion cannot be reasonably estimated. +Regulatory Audits +In 2020, the Texas Comptroller of Public Accounts (the “Comptroller”) commenced a routine audit of the Company's motor vehicle and other related fuel taxes for the periods of July 2015 through December 2020. As of December 31, 2023, the audit was substantially compete and the Company accrued for an estimated settlement expense of $ 6.0 million . +In January 2022, we entered into a settlement agreement with the Comptroller for a $ 10.7 million tax refund, net of consulting fees, in connection with certain limited sales and use tax for the audit period July 1, 2015 through December 31, 2018. The net refund to the company of $ 10.7 million was recorded as part of other income in our statement of operations during the year December 31, 2022. During the year ended December 31, 2021, we recorded a net refund of approximately $ 2.1 million. +In May 2022, the Company received a notification from the Comptroller that it will commence a routine audit of the Company’s gross receipt taxes, which will routinely cover up to a four-year period. As of December 31, 2023, the audit is still ongoing and the final outcome cannot be reasonably estimated. +In June 2023, the Company received confirmation from the Comptroller that it will commence a routine audit of the Company's direct payment sales tax in August 2023 for the period February 1, 2020 to December 31, 2022. As of December 31, 2023, the audit is still ongoing and the final outcome cannot be reasonably estimated. +19. SUBSEQUENT EVENTS +Subsequent to year-end, we received some of the remaining equipment associated with our second, third and fourth FORCE SM electric-powered hydraulic fracturing fleets under the Electric Fleet Leases, resulting in the addition of non-cash operating lease obligations totaling approximately $ 16.3 million arising from obtaining right-of-use assets related to this equipment. Subsequent to year-end, we repurchased an additional 2.6 million shares under our share repurchase program amounting to $ 19.5 million, bringing the total repurchases since the inception of the program to 8.4 million shares. +86 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +The Company’s management, with the participation of its Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2023. The term "disclosure controls and procedures," as defined in Rule 13a-15(e) under the Exchange Act, means controls and other procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Principal Executive Officer and Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023, and have concluded that our disclosure controls and procedures were not effective due to the material weakness described below in “Management’s Report on Internal Control Over Financial Reporting.” +Notwithstanding the conclusion by our Principal Executive Officer and Principal Financial Officer that our disclosure controls and procedures as of December 31, 2023, were not effective, and notwithstanding the material weakness in our internal control over financial reporting described below, our management believes that our financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). +Management’s Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s Principal Executive Officer and Principal Financial Officer and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. +Management conducted the assessment of the effectiveness of the Company’s internal control over financial reporting based on criteria in the SEC guidance on conducting such assessments as of the end of the period covered by this report. Management conducted the assessment based on certain criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. As a result of this assessment, management concluded that, as of December 31, 2023, our internal control over financial reporting was not effective due to the material weakness described below. +Segregation of Duties and Management Review Control +A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis. +The material weakness is related to the Company’s information technology environment whereby the Company did not maintain adequate segregation of duties or sufficient compensating management review controls to effectively mitigate an inadequate system access control configuration in its accounting system in which manual journal entry approvers can modify the entries before posting. This deficiency is solely related to manual journal entries and has no impact on system-generated journal entries flowing through our accounting system and other feeder systems. Due to this control deficiency, other manual-dependent controls were deemed ineffective. Subsequent to the identification of this material weakness, the Company conducted additional procedures and determined that there was no material misstatement in its consolidated financial statements for the year ended December 31, 2023. +T he independent registered public accounting firm, RSM US LLP , Houston, Texas, United States , Auditor Firm ID # 49 , has audited the consolidated financial statements as of and for the year ended December 31, 2023, and has also issued their report +87 +on the effectiveness of the Company’s internal control over financial reporting, included in this Annual Report under Part II, Item 8 above. +Remediation Plan and Status +The Company has taken, among other items, the following measures to address the material weakness identified: +• Evaluated the potential impact of the identified material weakness and accordingly, performed additional testing of certain transactions and journal entries in 2023 to ensure completeness and accuracy of its financial statements, and no material exception was identified. +• Tested whether this access resulted in any inappropriate journal entries being recorded or revised and concluded that no such instances occurred. +• Implemented a segregation of duties conflict process by limiting the access of certain employees of the Company who are owners of management review controls. +• Implemented a technical solution to ensure that access to our system of records adequately limits incompatible duties and strengthened our monitoring and review controls over journal entry processing. +• Implemented control activities related to additional independent reviews of manual entries posted in the accounting system and are currently evaluating additional procedures to further strengthen the Company’s overall segregation of duties. +Although we have taken preliminary actions to eliminate the identified material weakness, we will continue to evaluate, test, and implement further actions that will further strengthen the Company’s overall internal controls over financial reporting. Remediation generally requires making changes to how controls are designed and implemented and then adhering to those changes for a sufficient period of time such that the effectiveness of those changes is demonstrated with an appropriate amount of consistency. The measures we are implementing are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. Management remains committed to the implementation of remediation efforts to address the material weakness. We will continue to implement measures to remedy our internal control deficiencies, though there can be no assurance that our efforts will ultimately have the intended effects. +Changes in Internal Control over Financial Reporting +Except as described above, there were no changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2023 , that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information +Trading Plans +During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +Part III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by Item 10 is incorporated by reference to the Company’s Proxy Statement for its 2024 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2024. +Item 11. Executive Compensation +88 +The information required by Item 11 is incorporated by reference to the Company’s Proxy Statement for its 2024 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2024. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by Item 12 is incorporated by reference to the Company’s Proxy Statement for its 2024 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2024. +Item 13. Certain Relationships and Related Party Transactions, and Director Independence. +The information required by Item 13 is incorporated by reference to the Company’s Proxy Statement for its 2024 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2024. +Item 14. Principal Accounting Fees and Services +The information required by Item 14 is incorporated by reference to the Company’s Proxy Statement for its 2024 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2024. +89 +Part IV +Item 15. Exhibits and Financial Statement Schedules. +(a)(1) Financial Statements +The Financial Statements in Item 8 are filed as part of this Annual Report. +(a)(2) Financial Statement Schedules +None. +(a)(3) Exhibits +The exhibits required to be filed by this Item 15(b) are set forth in the Exhibit Index included below. +(b) See Exhibit Index +(c) None +90 +EXHIBIT INDEX +Exhibit +Number Description +2.1 +Purchase and Sale Agreement, dated as of November 1, 2022, between ProPetro Holding Corp. and New Silvertip Holdco, LLC (incorporated by reference herein to Exhibit 2.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated October 31, 2022). +3.1 +Amended and Restated Certificate of Incorporation of ProPetro Holding Corp., dated as of June 19, 2019 (incorporated by reference herein to Exhibit 3.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated June 19, 2019). +3.2 +Amended and Restated Bylaws of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 3.2 to ProPetro Holding Corp.’s Current Report on Form 8-K dated June 19, 2019). +3.3 +Certificate of Designations of Series B Junior Participating Preferred Stock of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 3.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated April 14, 2020). +4.1 +Specimen Stock Certificate (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940). +4.2 +Investor Rights Agreement, dated as of December 31, 2018, by and between Pioneer Natural Resources Pumping Services LLC and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 31, 2018). +4.3 +Registration Rights Agreement, dated as of December 31, 2018, by and between Pioneer Natural Resources Pumping Services LLC and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 4.2 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 31, 2018). +4.4 +Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference herein to Exhibit 4.4 to ProPetro Holding Corp.'s Annual Report on Form 10-K for the year ended December 31, 2019). +4.5 +Registration Rights and Lock-Up Agreement, dated as of November 1, 2022 by and between ProPetro Holding Corp. and New Silvertip Holdco, LLC (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 31, 2022). +10.1# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan (incorporated by reference herein to Exhibit 10.18 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated March 7, 2017 (Registration No. 333-215940)). +10.2# +ProPetro Holding Corp. 2020 Long Term Incentive Plan (incorporated by reference herein to Exhibit 10.3 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 26, 2020) . +10.3# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement (incorporated by reference herein to Exhibit 10.22 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated February 23, 2017 (Registration No. 333-215940)). +10.4# +Form of ProPetro Holding Corp. Amendment to Non‑Qualified Stock Option Agreement (incorporated by reference herein to Exhibit 10.23 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated February 23, 2017 (Registration No. 333-215940)). +10.5# +2020 Form of ProPetro Holding Corp. 2020 Long Term Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Directors). (incorporated by reference herein to Exhibit 10.29 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2020). +10.6# +Amended and Restated ProPetro Holding Corp. Executive Incentive Bonus Plan (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated February 18, 2020). +10.7# +Form of Indemnification Agreement for Pioneer Designated Directors (incorporated by reference herein to Exhibit 10.32 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2018). +10.8# +Form of Indemnification Agreement for Officers and Directors of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 10.33 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2018). +10.9# +ProPetro Services, Inc. Second Amended and Restated Executive Severance Plan (incorporated by reference herein to Exhibit 10.4 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 26, 2020). +10.10# +Form of Participation Agreement pursuant to the ProPetro Services, Inc. Second Amended and Restated Executive Severance Plan (incorporated by reference herein to Exhibit 10.5 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 26, 2020). +10.11# +2020 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.54 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019) . +91 +10.12# +2021 Form of ProPetro Holding Corp. 2020 Long Term Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021). +10.13# +2021 Form of ProPetro Holding Corp. 2020 Long Term Incentive Plan Performance Share Unit Grant Notice and Performance Share Unit Agreement (incorporated by reference herein to Exhibit 10.2 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021). +10.14 +Restatement Agreement, dated as of April 13, 2022, by and among ProPetro Holding Corp., and ProPetro Services, Inc., Barclays Bank PLC, as the Administrative Agent, the Collateral Agent, a Letter of Credit Issuer and the Swingline Lender, and each of the Lenders and Letter of Credit Issuers from time to time party thereto (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated April 13, 2022). +10.15# +Amended and Restated ProPetro Holding Corp. 2020 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated May 11, 2023). +10.16 +Amendment No. 1 to Amended and Restated Credit Agreement, dated as of June 2, 2023, by and among ProPetro Holding Corp., and ProPetro Services, Inc., the Incremental Lenders and each existing Lender party thereto as a Consenting Lender and Barclays Bank PLC, as Agent (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K, dated June 2, 2023). +10.17# +Amended and Restated ProPetro Holding Corp. Non-Employee Director Compensation Policy (incorporated by reference herein to Exhibit 10.1 of ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023). +16.1 +Letter of Deloitte & Touche LLP dated March 1, 2023 (incorporated by reference herein to Exhibit 16.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 1, 2023). +21.1(a) +List of Subsidiaries of ProPetro Holding Corp. +23.1(a) +Consent of RSM US LLP, an Independent Registered Public Accounting Firm. +23.2(a) +Consent of Deloitte & Touche LLP, an I ndependent Registered Public Accounting Firm. +31.1(a) +Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +31.2(a) +Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1(b) +Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2(b) +Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +97.1(a)# +ProPetro Holding Corp. Incentive-Based Compensation Recovery (Clawback) Policy. +101.INS(a) XBRL Instance Document +101.SCH(a) XBRL Taxonomy Extension Schema Document +101.CAL(a) XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB(a) XBRL Taxonomy Extension Label Linkbase Document +101.PRE(a) XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF(a) XBRL Taxonomy Extension Definition Linkbase Document +104(a) Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document +(a) Filed herewith. +(b) Furnished herewith. +# Compensatory plan, contract or arrangement. +Item 16. Form 10-K Summary +None. +92 +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on March 13, 2024. +ProPetro Holding Corp. +/s/ Samuel D. Sledge +Samuel D. Sledge +Chief Executive Officer +93 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated on the date indicated. +Signature +Title +Date +/s/ Samuel D. Sledge +Chief Executive Officer and Director (Principal Executive Officer) +March 13, 2024 +Samuel D. Sledge +/s/ David S. Schorlemer +Chief Financial Officer (Principal Financial Officer) +March 13, 2024 +David S. Schorlemer +/s/ Celina A. Davila +Chief Accounting Officer (Principal Accounting Officer) March 13, 2024 +Celina A. Davila +/s/ Phillip A. Gobe +Chairman of the Board March 13, 2024 +Phillip A. Gobe +/s/ Spencer D. Armour, III +Director +March 13, 2024 +Spencer D. Armour, III +/s/ Mark Berg +Director +March 13, 2024 +Mark Berg +/s/ Anthony Best +Director +March 13, 2024 +Anthony Best +/s/ G. Larry Lawrence +Director +March 13, 2024 +G. Larry Lawrence +/s/ Michele Vion +Director +March 13, 2024 +Michele Vion +/s/ Jack Moore +Director +March 13, 2024 +Jack Moore +/s/ Mary Ricciardello +Director +March 13, 2024 +Mary Ricciardello +94 \ No newline at end of file diff --git a/raw/filings/0001680247/2023/0001680247-24-000051/filing_metadata.csv b/raw/filings/0001680247/2023/0001680247-24-000051/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..45014a3d6e86960ed5b1514a06b1821e62617f53 --- /dev/null +++ b/raw/filings/0001680247/2023/0001680247-24-000051/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001680247,PUMP,ProPetro Holding Corp.,10-K,2024-03-13,2023-12-31,2024-03-13T20:35:47.000Z,0001680247-24-000051,pump-20231231.htm,10-K,11265846,1,1,https://www.sec.gov/Archives/edgar/data/1680247/000168024724000051/pump-20231231.htm,https://www.sec.gov/Archives/edgar/data/1680247/000168024724000051/,2023,2023,1 diff --git a/raw/filings/0001680247/2023/0001680247-24-000051/item1.txt b/raw/filings/0001680247/2023/0001680247-24-000051/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..039b6e5e04f7adca4489eb942c8bb1c2ed9813c6 --- /dev/null +++ b/raw/filings/0001680247/2023/0001680247-24-000051/item1.txt @@ -0,0 +1,99 @@ +Item 1. Business. +Our Company +We are a leading integrated oilfield service company, located in Midland, Texas, focused on providing innovative hydraulic fracturing, wireline, and other complementary oilfield completion services to leading upstream oil and gas companies engaged in the E&P of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil‑producing areas in the United States, and we believe we are one of the leading providers of completion services in the region. +On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip Completion Services Operating, LLC (the "Silvertip Acquisition"), which provides wireline perforation and ancillary services solely in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed debt, and the payment of certain other closing and transaction costs. The Silvertip Acquisition positioned the Company as a more integrated and diversified completions-focused oilfield service provider headquartered in the Permian Basin. +On December 1, 2023, we consummated the purchase of the assets and operations of Par Five Energy Services LLC (“Par Five”), which provides cementing services in the Delaware Basin in exchange for $25.4 million of cash . Par Five’s business complements our existing cementing business and enables us to serve both the Midland and Delaware Basins of the Permian Basin. +Our competitors include many large and small oilfield service companies, including Halliburton Company, Liberty Energy Inc., Patterson-UTI Energy Inc., ProFrac Holding Corp., RPC, Inc., and a number of private and locally-oriented businesses. The markets in which we operate are highly competitive. To be successful, an oilfield service company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies' criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company's selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the service industry because of the capital requirements, lack of large scale deployment of certain new technology such as electric-powered equipment, and the pricing for our services and expected return on invested capital. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +Our substantial market presence in the Permian Basin positions us well to capitalize on drilling and completion activity in the region. Our operational focus has primarily been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have increased our operations in the Delaware sub-basin and are well-positioned to support further increases to our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending. +We primarily provide hydraulic fracturing, wireline, and cementing completion services to E&P companies in the Permian Basin. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region's increasingly high-intensity well completions (including simultaneous hydraulic fracturing (“Simul-Frac”), which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. +Effective September 1, 2022, we disposed of our coiled tubing assets to STEP Energy Services L td. ("STEP") and shut down our coiled tubing operations. We received approximately $2.8 million in cash and 2.6 million common shares of STEP, valued at $11.8 million, as consideration. Upon the sale of our coiled tubing assets, we recorded a loss on sale of $13.8 million . +1 +Commodity Price and Other Economic Conditions +The oil and gas industry has traditionally been volatile and is characterized by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, war and political instability in oil producing countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. +Since October 2023, an ongoing conflict between Israel and Palestinian militants in the Israel-Gaza region has led to significant armed hostilities. The geopolitical and macroeconomic consequences of this conflict remain uncertain, and such events, or any further hostilities in the Israel-Gaza region or elsewhere, could severely impact the world economy, the demand for and price of crude oil and the oil and gas industry generally and may adversely affect our financial condition. +Similarly, the geopolitical and macroeconomic consequences of the Russian invasion of Ukraine, including the associated sanctions, and the adverse impacts of the COVID-19 pandemic in recent years have resulted in volatility in supply and demand dynamics for crude oil and associated volatility in crude oil pricing. As the global response to the COVID-19 pandemic began to wane, the demand and prices for crude oil increased from the lows experienced in 2020, with the West Texas Intermediate (“WTI”) average crude oil price reaching approximately $94 per barrel in 2022, the highest average price in the prior nine years. However, in 2023, the WTI average crude oil price declined to approximately $78 per barrel. We believe that the volatility of crude oil prices in recent years has been partly driven by declines in crude oil supplies, concerns over sanctions resulting from Russia's invasion of Ukraine, concerns over a potential disruption of Middle Eastern oil supplies resulting from the ongoing conflict between Israel and Palestinian militants in the Israel-Gaza region, slower crude oil production growth due to the lack of reinvestment in the oil and gas industry in the last two years, recent OPEC+ production cuts of approximately 1.3 million barrels per day and concerns of a potential global recession resulting from high inflation and interest rates. +With the significant increase in global crude oil prices from 2021, including the WTI crude oil price, there was a significant increase in the Permian Basin rig count from approximately 179 at the beginning of 2021 to approximately 353 at the end of 2022, according to the Baker Hughes Company (“Baker Hughes”). Following the increase in rig count and the WTI crude oil price, the oilfield service industry has experienced increased demand for its completion services, and improved pricing. However, we have recently experienced a 13% decrease in the rig count in 2023 to 309 at the end of 2023 which resulted in a reduction in the demand for completion services and pressure on pricing of our services. +Sustained levels of high inflation have likewise caused the U.S. Federal Reserve and other central banks to increase interest rates, and to the extent elevated inflation remains, we may experience further cost increases for our operations, including interest rates, labor costs and equipment. We cannot predict any future trends in the rate of inflation and crude oil prices. A significant increase in or continued high levels of inflation, to the extent we are unable to timely pass-through the cost increases to our customers, or further declines in crude oil prices would negatively impact our business, financial condition and results of operations. See Part II, Item 1A. "Risk Factors—We may be adversely affected by the effects of inflation." +Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including upstream and oilfield service companies. As a result, we are working with our customers and equipment manufacturers to transition our equipment to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB dual-fuel , FORCE SM electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. We have transitioned our hydraulic fracturing available equipment portfolio from approximately 10% lower emissions equipment in 2021 to approximately 35% in 2022 and 60% in 2023, and expect to increase to approximately 65% by the end of the first half of 2024. To the extent any of our customers have certain expectations or requirements with respect to emissions reductions from their contractors, if we are unable to continue quickly transitioning to lower emissions equipment, the demand for our services could be adversely impacted. +If the Permian Basin rig count and market conditions improve, including improved pricing for our services and labor availability, and we are able to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also improve. If the rig count or market conditions do not improve or decline in the future, and we are +2 +unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows . +Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment. +Our Services +We have historically conducted our business through four operating segments: hydraulic fracturing, wireline, cementing and coiled tubing. Prior to the fourth quarter of fiscal year 2023, our operating segments met the aggregation criteria and were aggregated into the “Completion Services” reportable segment and our coiled tubing operations (which were divested in September 2022) were shown in the “All Other” category. Effective as of the fourth quarter of fiscal year 2023, we revised our segment reporting as we determined that our three operating segments no longer met the criteria to be aggregated. Our Hydraulic Fracturing and Wireline operating segments meet the criteria of a reportable segment. Our cementing and our divested coiled tubing segments do not meet the reportable segment criteria and are included within the “All Other” category. Prior period segment information has been revised to conform to our current presentation. For additional financial information on our reportable segments presentation, please see reportable segment information in Part II - Item 8, "Financial Statements and Supplementary Data." +Completion Services +Hydraulic Fracturing +We provide hydraulic fracturing services to E&P companies in the Permian Basin. These services are intended to optimize hydrocarbon flow paths during the completion phase of horizontal shale wellbores. We have significant expertise in multi‑stage fracturing of horizontal oil‑producing wells in unconventional geological formations. Our total available hydraulic horsepower ("HHP") at December 31, 2023 w as 1,461,500 HHP, which was comprised of 452,500 HHP of our Tier IV DGB dual-fuel equipment, 144,000 HHP of FORCE SM electric-powered equipment and 865,000 HHP of conventional Tier II equipment. An individual fleet could range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsite. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region’s increasingly high-intensity well completions (including Simul-Frac, which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. With the industry transition to lower emissions equipment and Simul-Frac, in addition to several other changes to our customers' job designs, we believe that our available fleet capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at wellsites. In addition, in 2021 and 2022, we committed to additional conversions of our Tier II equipment to Tier IV DGB dual-fuel equipment, and to purchase new Tier IV DGB dual-fuel equipment. As such, we entered into conversion and purchase agreements with our equipment manufacturers for a total of 452,500 HHP of Tier IV DGB du al-fuel equipment and as of December 31, 2023, we have received all of the converted and new Tier IV DGB dual-fuel equipment. In 2022, we entered into three-year electric fleet leases for a total of four FORCE SM electric-powered hydraulic fracturing fleets with 60,000 HHP per fleet. As of December 31, 2023, we have re ceived 144,000 HHP of FORC E SM electric-powered equipment. We currently expect to receive the remaining equipment associated with the second and third fleets and all equipment associated with the fourth fleet in the first half of 2024. We have entered into contracts with customers for the use of two of our FORCE SM electric-powered hydraulic fracturing fleets to provide committed services for a period of up to three years . +The hydraulic fracturing process consists of pumping fracturing fluid into a well at sufficient pressure to fracture the formation. Materials known as proppants, which in our business are comprised primarily of sand, are suspended in the fracturing fluid and are pumped into the fracture to prop it open. The fracturing fluid is designed to break, or loosen viscosity, and be forced out of the formation by its pressure, leaving the proppants suspended in the fractures created, thereby increasing the mobility of the hydrocarbons. As a result of the fracturing process, production rates are usually enhanced substantially, thus increasing the rate of return of hydrocarbons for the operator. +We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We also refer to all of our fracturing units, other equipment and vehicles necessary to perform a fracturing job as a "fleet" and the personnel assigned to each fleet as a "crew." Our hydraulic fracturing units consist primarily of a high pressure hydraulic pumps, diesel or dual gas engines, transmissions and various hoses, valves, tanks and other supporting equipment like blenders, irons, hoses and datavans. +3 +We provide dedicated equipment, personnel and services that are tailored to meet each of our customer’s needs. Each fleet has a designated team of personnel, which allows us to provide responsive and customized services, such as project design, proppant and other consumables procurement, real-time data provision and post‑completion analysis for each of our jobs. Many of our hydraulic fracturing fleets and associated personnel have worked continuously with the same customer for the past several years promoting deep relationships and a high degree of coordination and visibility into future customer activity levels. Furthermore, in light of our substantial market presence and historically high fleet utilization levels, we have established a variety of trusted relationships with key equipment, sand and other downhole consumable suppliers. We believe these strategic relationships position us to acquire equipment, parts and materials on a timely and economic basis and allow our dedicated procurement and logistics team to support consistently safe and reliable operations. +Wireline +We provide wireline and ancillary services on new oil well completions in the Permian Basin. Wireline utilizes equipment with a drum of wireline to deploy perforating guns in the well to perforate the casing, cement, and formation. Once the well is perforated, it is ready to be fractured. Pumpdown utilizes pressure pumping equipment to pump water into the well to deploy or push the perforating guns attached to the wireline through the lateral section of a well. +We own and operate a fleet of mobile wireline units and other auxiliary equipment to perform well completion services. We also refer to our wireline units, pressure control equipment, other equipment and vehicles necessary to perform a job as a "spread" and the personnel assigned to the spread as a "crew." On average, one wireline spread consists of a wireline tractor truck with a large cab functioning as a mobile office where the engineer controls the wireline spooled drum along with associated pressure control iron and equipment, trailers and vehicles. We currently have 23 wireline units. +Cementing +We provide cementing services for completion of new wells and remedial work on existing wells. Cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Cementing provides isolation between fluid zones behind the casing to minimize potential damage to hydrocarbon bearing formations or the integrity of freshwater aquifers, and provides structural integrity for the casing by securing it to the earth. Cementing is also done when re-completing wells, where one zone is plugged and another is opened. +We believe that our cementing segment provides an organic growth opportunity for us to expand our service offerings within our existing customer base. We currently have 40 cementing units. +Our Customers +Our customers consist primarily of oil and natural gas producers in North America. Our top five customers accounted for a pproximately 63.2%, 84.0% and 85.7% of our revenue, for the years ended December 31, 2023, 2022 and 2021, respectively. For the year ended December 31, 2023, Endeavor Energy Resources and XTO Energy accounted for 19.7% and 18.2%, respectively, of total revenue. No other customer accounted for more than 10% of our total revenue for the year ended December 31, 2023. There have been many recent mergers and acquisitions in the oil and gas industry. In October 2023, Pioneer Natural Resources USA, Inc. (“Pioneer”) entered into a merger agreement with Exxon Mobil Corporation. Mergers and acquisitions involving our customers could negatively impact our future business with them or positively impact our business by providing us access to potential new customers. +On March 31, 2022, we entered into an amended and restated pressure pumping services agreement (the "A&R Pressure Pumping Services Agreement") with Pioneer , which was initially entered into in connection with our purchase of certain pressure pumping assets and real property from Pioneer and Pioneer Pumping Services, LLC (the "Pioneer Pressure Pumping Acquisition") . The A&R Pressure Pumping Services Agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and the Fleet Two Agreement described below. +On October 31, 2022, we entered into two pressure pumping services agreements (the “Fleet One Agreement” and “Fleet Two Agreement”) with Pioneer, pursuant to which we provided hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and was terminated on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was terminated on May 12, 2023. +4 +Competition +The markets in which we operate are highly competitive. To be successful, an oilfield service company must provide services and equipment that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies’ criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company’s selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the oilfield service industry because of the capital requirements. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment portfolio and quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +We provide our services primarily in the Permian Basin, and we compete against different companies in each service and product line we offer. Our competition includes many large and small oilfield service companies, including the largest integrated oilfield service companies. Our major competitors include Halliburton Company, Liberty Energy Inc., Patterson‑UTI Energy Inc., ProFrac Holding Corp., RPC, Inc., and a number of private and locally-oriented businesses. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the fourth quarter, relating to the conclusion of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather during which we may experience declines in our operating and financial results. +Operating Risks and Insurance +Our operations are subject to hazards inherent in the oilfield service industry, such as accidents, blowouts, explosions, fires and spills and releases that can cause personal injury or loss of life, damage or destruction of property, equipment, natural resources and the environment and suspension of operations. +In addition, claims for loss of oil and natural gas production and damage to formations can occur in the oilfield service industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in us being named as a defendant in lawsuits asserting large claims. +Our business involves the transportation of heavy equipment and materials, and as a result, we may also experience traffic accidents which may result in spills, property damage and personal injury. +Despite our efforts to maintain safety standards, we have suffered accidents from time to time in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations. +We maintain commercial general liability, workers’ compensation, business automobile, commercial property, umbrella liability, excess liability, and directors and officers insurance policies providing coverages of risks and amounts that we believe to be customary in our industry. Further, we have pollution legal liability coverage for our business entities, which would cover, among other things, third party liability and costs of clean up relating to environmental contamination on our premises while our equipment is in transit and on our customers’ job site. With respect to our operations, coverage would be available under our pollution legal liability policy for any surface or subsurface environmental cleanup and liability to third parties arising from any surface or subsurface contamination. We also have certain specific coverages for some of our businesses, including our hydraulic fracturing and wireline services. +We maintain directors and officers insurance; however, our insurance coverage is subject to certain exclusions (including, for example, any required United States Securities and Exchange Commission (“SEC”) disgorgement or penalties) and we are +5 +responsible for meeting certain deductibles under the policies. Moreover, we cannot assure you that our insurance coverage will adequately protect us from all future claims. +Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of the high premium costs relative to perceived risk. Further, insurance rates have in the past been subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us. See " Risk Factors " for a description of certain risks associated with our insurance policies. +Environmental and Occupational Health and Safety Regulations +Our operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection, and occupational health and safety. Numerous federal, state and local governmental agencies issue regulations that often require difficult and costly compliance measures that could carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may, for example, restrict the types, quantities and concentrations of various substances that can be released into the environment, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas and other protected areas, or require action to prevent or remediate pollution from current or former operations. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental, health and safety laws and regulations occur frequently, and any changes that result in more stringent and costly requirements could materially adversely affect our operations and financial position. For example, following the passage of laws such as the IRA 2022, it is possible that our operations may be subject to greater environmental, health and safety restrictions, particularly with regards to hydraulic fracturing and wireline, permitting and greenhouse gases ( " GHG " ) emissions. We have not experienced any material adverse effect from compliance with current requirements; however, this trend may not continue in the future. +Below is an overview of some of the more significant environmental, health and safety requirements with which we must comply. Our customers’ operations are subject to similar laws and regulations. Any material adverse effect of these laws and regulations on our customers’ operations and financial position may also have an indirect material adverse effect on our operations and financial position. +Waste Handling. We handle, transport, store and dispose of wastes that are subject to the Resource Conservation and Recovery Act ( " RCRA " ) and comparable state laws and regulations, which affect our activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although certain petroleum production wastes are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. Moreover, the U.S. Environmental Protection Agency ( " EPA " ) or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or recategorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to recategorize certain oil and natural gas exploration, development and production wastes as hazardous wastes. Several environmental organizations have also petitioned the EPA to modify existing regulations to recategorize certain oil and natural gas exploration, development and production wastes as hazardous. Any such changes in these laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas E&P wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act ( " CERCLA " or " Superfund " ) and analogous state laws generally impose liability without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Liability for the costs of removing or remediating previously disposed wastes or contamination, damages to natural resources, the costs of conducting certain health studies, amongst other things, is strict and joint and several. In the course of +6 +our operations, we use materials that, if released, would be subject to CERCLA and comparable state laws. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such hazardous substances have been released. +NORM. In the course of our operations, some of our equipment may be exposed to naturally occurring radioactive materials ( " NORM " ) associated with oil and gas deposits and, accordingly, may result in the generation of wastes and other materials containing NORM. NORM exhibiting levels of radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. +Water Discharges. The Clean Water Act, Safe Drinking Water Act, Oil Pollution Act and analogous state laws and regulations impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into regulated waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Also, spill prevention, control and countermeasure plan requirements require appropriate containment berms and similar structures to help prevent the contamination of regulated waters. +Air Emissions. The Clean Air Act ( " CAA " ) and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other emissions control requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants from specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. These and other laws and regulations may increase the costs of compliance for some facilities where we operate. Obtaining or renewing permits also has the potential to delay the development of oil and natural gas projects. +Climate Change. In the United States, no comprehensive climate change legislation has been implemented at the federal level, though recently passed laws such as the IRA 2022 advance numerous climate-related objectives. Additionally, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, implement New Source Performance Standards directing the reduction of certain pollutants from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the Department of Transportation ("DOT"), implementing GHG emissions limits on vehicles manufactured for operation in the United States. Additionally, the EPA has recently finalized rules covering the standards of performance for methane and volatile organic compounds emissions for oil and gas facilities, including leak detection, monitoring and repair, and a "super-emitter" response program to timely mitigate emissions events as detected by governmental agencies or qualified third parties, triggering certain investigation and repair requirements. These requirements were finalized in 2023, but may be subject to legal challenge. +Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas such as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored " Paris Agreement, " requires member states to submit non-binding, individually-determined reduction goals known as Nationally Determined Contributions ( " NDCs " ) every five years after 2020. Following the president’s executive order in January 2021, the United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. Some countries, including the United States, have additionally made commitments to reduce global methane emissions through initiatives such as the Global Methane Pledge, and have been called upon to phase out inefficient fossil fuel subsidies. However, the impacts of these actions are unclear at this time. For more information, see our risk factors titled "Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide" and "The IRA 2022 could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations." +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, including climate-change-related pledges made by certain candidates for public office. On January 27, 2021, the president issued an executive order that commits to substantial action on climate change, calling for, among other things, the increased use of zero-emissions vehicles by the federal government, the elimination of subsidies provided to the fossil fuel industry and an increased emphasis on climate-related risk across government agencies and economic sectors. The executive order also suspended the issuance of new leases for oil and gas development on federal land for a time; for more information, see our regulatory disclosure titled "Regulation of Hydraulic Fracturing and Related +7 +Activities." Other actions that the current government may take include the imposition of more restrictive requirements for the development of pipeline infrastructure or liquefied natural gas export facilities or more restrictive GHG emissions limitations for oil and gas facilities. For example, in January 2024 the government announced a temporary pause on pending decisions on liquefied natural gas exports to certain countries. Litigation risks are also increasing as a number of parties have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. +The adoption and implementation of new or more stringent international, federal or state legislation, regulations or other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate GHG emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for, oil and natural gas, which could reduce demand for our services and products. +Moreover, climate change may result in various physical risks, such as the increased frequency or intensity of extreme weather events or changes in the meteorological and hydrological patterns, that could adversely impact us, our customers’ and our suppliers’ operations. Such physical risks may result in damage to our customers’ facilities or otherwise adversely impact our operations, such as if facilities are subject to water use curtailments in response to drought, or demand for our customers’ products, such as to the extent warmer winters reduce the demand for energy for heating purposes, which may ultimately reduce demand for the products and services we provide. Such physical risks may also impact our suppliers, which may adversely affect our ability to provide our products and services. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Endangered and Threatened Species. Environmental laws such as the Endangered Species Act ("ESA") and analogous state laws may impact exploration, development and production activities in areas where we operate. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and various state analogs. The U.S. Fish and Wildlife Service ("FWS") may identify previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species. For example, the dunes sagebrush lizard, which is found only in the active and semi-stable shinnery oak dunes of southeastern New Mexico and adjacent portions of Texas (including areas where our customers operate), was a candidate species for listing under the ESA by the FWS for many years. Most recently, the dunes sagebrush lizard has been proposed for listing as endangered in July 2023, FWS has also entered into voluntary conservation agreements that implement certain protective practices for the species and authorize incidental take of the species resulting from certain covered activities, including exploration and development of oil and gas fields. However, to the extent any protections are implemented for this or any other species, it could cause us or our customers to incur additional costs or become subject to operating restrictions or operating bans in the affected areas. +Regulation of Hydraulic Fracturing and Related Activities. Our hydraulic fracturing operations are a significant component of our business. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. Although several of these rulemakings have been rescinded, modified or subjected to legal challenges, new or more stringent regulations may be promulgated by the current government. For example, the Bureau of Land Management (“BLM”) recently proposed a rule that would limit flaring from well sites on federal lands, as well as allow the delay or denial of permits if BLM finds that an operator’s methane waste minimization plan is insufficient. The current government has also called for revisions and restrictions to the leasing and permitting programs for oil and gas development on federal lands and, for a time, suspended federal oil and gas leasing activities. The Department of the Interior ("DOI") has also issued a report recommending various changes to the federal leasing program, though many such changes would require congressional action. In July 2023, the BLM proposed a rule to update the fiscal terms of federal oil and gas leases, which would increase fees, rents, royalties, and bonding requirements. The rule would also add new criteria for BLM to consider when determining whether to lease nominated land, including the presence of important habitats or wetlands, the presence of historical properties or sacred sites, and recreational use of the land. BLM anticipates a final action on the proposal in Spring 2024. As a result, we cannot predict the final scope of regulations or restrictions that may apply to oil and gas operations on federal lands. However, any regulations that restrict, ban or effectively ban such operations may adversely impact demand for our products and services. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from +8 +the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have previously been proposed in Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +Federal and state governments have also investigated whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for wastewater disposal wells that impose permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission’s well completion seismicity guidelines for operators in the SCOOP and STACK require hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division has previously issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission ("TRRC") has adopted similar rules including the indefinite suspension of all deep oil and gas produced water injection wells in certain areas covered by the TRRC’s seismic response program. +Increased regulation of hydraulic fracturing and related activities could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and record keeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. For more information on each of these items, see our risk factor titled "Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays." +OSHA Matters. The Occupational Safety and Health Act ( " OSHA " ) and comparable state statutes regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. +Human Capital +Our employees are our key asset. Our primary human capital management objectives are to effectively engage, develop, retain and reward our employees. As of December 31, 2023, we emplo yed approximately 2,070 people, and n one of our employees are represented by a union. All of our employees work for or support our hydraulic fracturing, wireline and cementing operating segments. We believe that we have good relations with our employees. We believe that our employees are a key component of our ability to attract and retain customers as a result of their operational excellence in the field. +Some examples of significant programs and initiatives that support our objective of attracting, developing and retaining our diverse and inclusive workforce include: +• Opportunity and Engagement. We are an equal opportunity employer and prohibit discrimination against any employee and applicant on the basis of any legally protected characteristic. We believe that in order to attract and retain talent with the skill sets and expertise that can help to maximize our operational efficiencies across all levels in the Company, it is in our best interest to create a culture that is inclusive. We conducted an employee engagement survey in 2023 related to inclusion, belonging and other engagement efforts. Some examples of this effort to recruit and develop a diverse team and create an inclusive culture include: +◦ a commitment to conducting business in a manner that respects all human rights in compliance within the requirements of applicable laws; +◦ a commitment within our business operations to promoting and encouraging respect for human rights and fundamental freedoms for all without distinctions of any kind, such as race, color, sex, language, religion, political or other opinions; +◦ working with personnel, business partners and other parties directly linked to our operations that share our commitment to these same principles; +9 +◦ maintaining employment policies reflecting our commitments, including our code of conduct, our equal employment opportunity employer policy, and our anti-harassment and anti-discrimination policy; and +◦ providing an anonymous Ethics and Compliance hotline that is promoted internally and accessible from our intranet and website to make it possible for grievances regarding health and safety to be addressed early and remediated directly, in confidence and without fear of retaliation. +• Training and Safety. We offer in-depth, role-appropriate safety training upon hiring and as part of the continuous development of our employees. The safety of our employees, our customers, and the communities in which we operate is paramount. We track and evaluate safety incidents at wellsites and offices, and if an accident does occur, we aim to take actions to mitigate similar incidents from reoccurring in the future. The Company seeks to incentivize employees to focus on conducting operations in accordance with our strict safety standards and encourages employees to immediately report any breach of safety protocol. Ten percent of our executive officers’ annual target bonuses under the 2023 annual incentive program were based upon the Company’s achievement of certain safety goals, including a target total recordable incident rate. +• Professional Development. In 2023, the Company continued its focus on leadership development, targeting leadership positions including frontline supervisors and above. In addition, we sought to make improvements to our succession planning tools and process to enable greater consistency, talent identification and development planning. We also introduced behavioral optimization tools to aid individual and team performance and talent acquisition efforts. +• Compensation, Health, Wellness and Benefits. Our employee benefit offerings are designed to meet the varied and evolving needs of a diverse workforce across the Company and we believe are consistent with those provided by our peer companies with which we compete for talent. The Company provides employees with the ability to participate in health and welfare plans, including medical, dental, life, accidental death and dismemberment and short-term and long-term disability insurance plans. +In 2023, as part of our 401(k) plan, we introduced opportunities for holistic financial wellness education and group and individual consultations for employees. The program opportunities included many crucial topics ranging from budgeting and debt management to understanding plan options and investment strategy. Concerning health benefits, in 2023 we added additional services focused on emotional and mental health, as well as certain preventative health services related to the early detection of concerns including breast cancer, diabetes and cardiovascular disease. +We also strive to give back to the areas in which we conduct business operations, and in which our employees live and work. Our employees give generously and receive up to 8 hours per year of paid time off to participate in community service. Our employee-led P.U.M.P. Committee also organizes or sponsors events in which employees can choose to participate in addition to our paid community service time benefit. +Availability of Filings +Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are made available free of charge on our internet website at www.propetroservices.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the SEC. The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that website is www.sec.gov. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Annual Report or the documents incorporated by reference in this Annual Report. +10 \ No newline at end of file diff --git a/raw/filings/0001680247/2023/0001680247-24-000051/item13.txt b/raw/filings/0001680247/2023/0001680247-24-000051/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..e5dbbc582a1216cd0e81d406e458d3d16a213be9 --- /dev/null +++ b/raw/filings/0001680247/2023/0001680247-24-000051/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Party Transactions, and Director Independence. +The information required by Item 13 is incorporated by reference to the Company’s Proxy Statement for its 2024 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2024. \ No newline at end of file diff --git a/raw/filings/0001680247/2023/0001680247-24-000051/item9a.txt b/raw/filings/0001680247/2023/0001680247-24-000051/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..f7f1db4a28889d5fa0b13c4ecdeb6d945d3d474a --- /dev/null +++ b/raw/filings/0001680247/2023/0001680247-24-000051/item9a.txt @@ -0,0 +1,23 @@ +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +The Company’s management, with the participation of its Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2023. The term "disclosure controls and procedures," as defined in Rule 13a-15(e) under the Exchange Act, means controls and other procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Principal Executive Officer and Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023, and have concluded that our disclosure controls and procedures were not effective due to the material weakness described below in “Management’s Report on Internal Control Over Financial Reporting.” +Notwithstanding the conclusion by our Principal Executive Officer and Principal Financial Officer that our disclosure controls and procedures as of December 31, 2023, were not effective, and notwithstanding the material weakness in our internal control over financial reporting described below, our management believes that our financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). +Management’s Report on Internal Control over Financial Reporting +The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s Principal Executive Officer and Principal Financial Officer and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. +Management conducted the assessment of the effectiveness of the Company’s internal control over financial reporting based on criteria in the SEC guidance on conducting such assessments as of the end of the period covered by this report. Management conducted the assessment based on certain criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. As a result of this assessment, management concluded that, as of December 31, 2023, our internal control over financial reporting was not effective due to the material weakness described below. +Segregation of Duties and Management Review Control +A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis. +The material weakness is related to the Company’s information technology environment whereby the Company did not maintain adequate segregation of duties or sufficient compensating management review controls to effectively mitigate an inadequate system access control configuration in its accounting system in which manual journal entry approvers can modify the entries before posting. This deficiency is solely related to manual journal entries and has no impact on system-generated journal entries flowing through our accounting system and other feeder systems. Due to this control deficiency, other manual-dependent controls were deemed ineffective. Subsequent to the identification of this material weakness, the Company conducted additional procedures and determined that there was no material misstatement in its consolidated financial statements for the year ended December 31, 2023. +T he independent registered public accounting firm, RSM US LLP , Houston, Texas, United States , Auditor Firm ID # 49 , has audited the consolidated financial statements as of and for the year ended December 31, 2023, and has also issued their report +87 +on the effectiveness of the Company’s internal control over financial reporting, included in this Annual Report under Part II, Item 8 above. +Remediation Plan and Status +The Company has taken, among other items, the following measures to address the material weakness identified: +• Evaluated the potential impact of the identified material weakness and accordingly, performed additional testing of certain transactions and journal entries in 2023 to ensure completeness and accuracy of its financial statements, and no material exception was identified. +• Tested whether this access resulted in any inappropriate journal entries being recorded or revised and concluded that no such instances occurred. +• Implemented a segregation of duties conflict process by limiting the access of certain employees of the Company who are owners of management review controls. +• Implemented a technical solution to ensure that access to our system of records adequately limits incompatible duties and strengthened our monitoring and review controls over journal entry processing. +• Implemented control activities related to additional independent reviews of manual entries posted in the accounting system and are currently evaluating additional procedures to further strengthen the Company’s overall segregation of duties. +Although we have taken preliminary actions to eliminate the identified material weakness, we will continue to evaluate, test, and implement further actions that will further strengthen the Company’s overall internal controls over financial reporting. Remediation generally requires making changes to how controls are designed and implemented and then adhering to those changes for a sufficient period of time such that the effectiveness of those changes is demonstrated with an appropriate amount of consistency. The measures we are implementing are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. Management remains committed to the implementation of remediation efforts to address the material weakness. We will continue to implement measures to remedy our internal control deficiencies, though there can be no assurance that our efforts will ultimately have the intended effects. +Changes in Internal Control over Financial Reporting +Except as described above, there were no changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2023 , that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0001680247/2023/0001680247-24-000051/rp_note.txt b/raw/filings/0001680247/2023/0001680247-24-000051/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..2c30c2fe3d65cf02661cca33c6955fdfb270b091 --- /dev/null +++ b/raw/filings/0001680247/2023/0001680247-24-000051/rp_note.txt @@ -0,0 +1,8 @@ +16. RELATED-PARTY TRANSACTIONS +Operations and Maintenance Yards +The Company rents three yards from an entity in which a director of the Company has an equity interest, and the total annual rent expense for each of the three yards was approximately $ 0.03 million, $ 0.1 million and $ 0.1 million, respectively. The Company previously rented two additional yards from this entity and incurred rent expense of $ 0.02 million and $ 0.1 million, respectively during the year ended December 31, 2023. +Pioneer +On December 31, 2018, we consummated the Pioneer Pressure Pumping Acquisition with Pioneer and Pioneer Pumping Services. In connection with the Pioneer Pressure Pumping Acquisition, Pioneer received 16.6 million shares of our common stock and approximately $ 110.0 million in cash. In October 2023, Pioneer entered into a merger agreement with Exxon Mobil Corporation. On March 31, 2022, we entered into the A&R Pressure Pumping Services Agreement, which was initially entered into in connection with the Pioneer Pressure Pumping Acquisition. The A&R Pressure Pumping Services Agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and Fleet Two Agreement described below. +On October 31, 2022, we entered into two pressure pumping services agreements (the "Fleet One Agreement" and "Fleet Two Agreement") with Pioneer, pursuant to which we provided hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and was terminated on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was terminated on May 12, 2023. In October 2023, Pioneer entered into a merger agreement with Exxon Mobil Corporation. +Revenue from services provided to Pioneer (including reservation fees) accounted for approximately $ 125.1 million, $ 423.7 million and $ 473.8 million of our total revenue during the years ended December 31, 2023, 2022 and 2021, respectively. +As of December 31, 2023, the total accounts receivable due from Pioneer, including estimated unbilled receivable for services we provided, amounted to $ 2.4 million a nd the amount due to Pioneer was $ 0 . As of December 31, 2022, the balance due from Pioneer for services (including reservation fees) we provided amo unted to approximately $ 46.2 million and the amount due to Pioneer was $ 0 . \ No newline at end of file diff --git a/raw/filings/0001680247/2023/0001680247-24-000051/rpt_disclosure.txt b/raw/filings/0001680247/2023/0001680247-24-000051/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e3d3049cfa9ee5930085237768c1cab0abe8b9fa --- /dev/null +++ b/raw/filings/0001680247/2023/0001680247-24-000051/rpt_disclosure.txt @@ -0,0 +1,12 @@ +Certain Relationships and Related Party Transactions +RELATED PARTY TRANSACTIONS +Operations and Maintenance Yards +The Company rents three yards from South Midkiff Partners, LLC, an entity partially owned by Spencer D. Armour III, a director, and David Sledge, the father of Sam Sledge, our Chief Executive Officer. Total annual rent expense in 2023 for each of the three yards was approximately $0.03 million, $0.1 million, and $0.1 million, respectively. The Company previously rented two yards from this entity and incurred rent expense of  $0.02 million and $0.1 million, respectively during the year ended December 31, 2023; these leases were terminated in June 2023. +Transportation and Equipment Rental +Adam Muñoz, our President and Chief Operating Officer, has a family relationship with an employee of J&M Burns Transportation, an entity that provides transportation services to the Company. The employee receives a portion of his compensation from J&M Burns Transportation based on the amount of services sold by him to customers, including the Company. The Company incurred approximately $38.6 million in expense for the year ended December 31, 2023 for services provided to the Company by J&M Burns Transportation. +Executive Officer Family Members +Oscar M. Dominguez is our Vice President of Hydraulic Fracturing Operations and the brother-in-law of Adam Muñoz. Mr. Dominguez received total compensation of approximately $1.3 million for his services for the year ended December 31, 2023 (including $959,000 cash compensation and $298,000 non-cash equity compensation). +Roger Dominguez is our Supply Chain Logistics Manager and the brother-in-law of Adam Muñoz. Mr. Dominguez received total compensation of approximately $294,000 for his services for the year ended December 31, 2023 (including $231,000 cash compensation and $63,000 non-cash equity compensation). +Pioneer +On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property in connection with the Pioneer Pressure Pumping Acquisition. In connection with the consummation of the Pioneer Pressure Pumping Acquisition and effective January 1, 2019, we became a long-term service provider to Pioneer, providing pressure pumping and related services. In March, 2022, we amended and restated our agreement to provide pressure pumping and related services to Pioneer, which reduced the number of contracted fleets to six fleets from eight fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, replaced the idle fees arrangement with equipment reservation fees and provided for an initial term from January 1, 2022 through December 31, 2022, subject to extension and termination as described therein. On October 31, 2022, we entered into (i) a certain Pressure Pumping Services Agreement—Fleet One Simulfrac (the “Fleet One Pressure Pumping Agreement”) and (ii) a certain Pressure Pumping Services Agreement—Fleet Two (the “Fleet Two Pressure Pumping Agreement”), which replaced all previous agreements with Pioneer and reduced the number of contracted fleets to two fleets. The Fleet One Pressure Pumping Agreement was effective as of January 1, 2023 and terminated in August 2023. The Fleet Two Pressure Pumping Agreement was effective as of January 1, 2023. In February 2023, we mutually agreed with Pioneer to terminate the Fleet Two Pressure Pumping Agreement, effective on or about May 12, 2023. Revenue from services provided to Pioneer (including reservation fees) accounted for approximately $125.1 million during the year ended December 31, 2023. +20  |   ir.propetroservices.com \ No newline at end of file diff --git a/raw/filings/0001680247/2024/0001680247-25-000030/filing.txt b/raw/filings/0001680247/2024/0001680247-25-000030/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..6f272e912c7f972ef022f23869ee9f6c4240ab06 --- /dev/null +++ b/raw/filings/0001680247/2024/0001680247-25-000030/filing.txt @@ -0,0 +1,2341 @@ +pump-20241231 +0001680247 false FY 2024 http://fasb.org/us-gaap/2024#ServiceMember http://fasb.org/us-gaap/2024#ServiceMember http://fasb.org/us-gaap/2024#ServiceMember http://fasb.org/us-gaap/2024#TangibleAssetImpairmentCharges http://fasb.org/us-gaap/2024#TangibleAssetImpairmentCharges http://fasb.org/us-gaap/2024#TangibleAssetImpairmentCharges P1Y0M0D http://fasb.org/us-gaap/2024#OtherNonoperatingIncomeExpense P10Y P6Y 0.3333 0.6667 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+______________________________ +ProPetro Holding Corp. +(Exact name of registrant as specified in its charter) +______________________________ +Delaware 26-3685382 +(State or other jurisdiction of +incorporation or organization) (I.R.S. Employer +Identification No.) +303 W. Wall Street, Suite 102 , Midland , Texas 79701 +(Address of principal executive offices) (Zip Code) +Registrant’s telephone number, including area code: ( 432 ) 688-0012 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class Trading Symbol(s) Name of each exchange on which registered +Common Stock ($0.001 par value) PUMP New York Stock Exchange +Securities registered pursuant to Section 12(g) of the Act: +None +______________________________________________________ +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities A ct. Yes ý No ¨ +Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý +Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ +Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨ +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. +Large accelerated filer +ý +Accelerated filer ☐ +Non-accelerated filer +☐ (Do not check if a smaller reporting company) +Smaller reporting company ☐ +Emerging growth company ☐ +If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ +Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ +If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ +Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ +Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý +The aggregate market value of the Company’s Common Stock held by nonaffiliates on June 30, 2024, determined using the per share closing price on the New York Stock Exchange Composite tape of $8.67 on that date, was approximately $ 753.4 million. +The number of the registrant’s common shares, par value $0.001 per share, outstanding at February 14, 2025 , was 103,168,656 . +TABLE OF CONTENTS +FORWARD-LOOKING STATEMENTS +i +SUMMARY OF RISK FACTORS +iii +PART I +BUSINESS +1 +RISK FACTORS +15 +UNRESOLVED STAFF COMMENTS +33 +CYBERSECURITY +33 +PROPERTIES +34 +LEGAL PROCEEDINGS +34 +MINE SAFETY DISCLOSURES +34 +PART II +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +34 +SELECTED FINANCIAL DATA +36 +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +37 +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +52 +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +53 +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +102 +CONTROLS AND PROCEDURES +102 +OTHER INFORMATION +103 +DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS +103 +PART III +DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE +103 +EXECUTIVE COMPENSATION +103 +SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS +103 +CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE +103 +PRINCIPAL ACCOUNTING FEES AND SERVICES +103 +PART IV +EXHIBITS AND FINANCIAL SCHEDULES +104 +FORM 10-K SUMMARY +106 +SIGNATURES +107 +i +FORWARD‑LOOKING STATEMENTS +This Annual Report on Form 10-K (the “Annual Report”) contains forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Form 10-K are forward-looking statements. Forward-looking statements are all statements other than statements of historical fact, and given our expectations or forecasts of future events as of the effective date of this Form 10-K. Words such as “may,” “could,” “plan,” “project,” “budget,” “predict,” “pursue,” “target,” “seek,” “objective,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “will,” “should,” “continue” and similar expressions are generally used to identify forward-looking statements. These statements include, but are not limited to, statements about our business strategy, industry, future profitabilit y, future capital expenditu res, our fleet conversion strategy, our new power generation business and our share repurchase program. Such statements are subject to risks and uncertainties. Many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those implied or projected by the forward-looking statements. Factors that could cause our actual results to differ materially from those contemplated by such forward‑looking statements include: +• changes in general economic and geopolitical conditions, including the result of the 2024 presidential election, higher interest rates, the rate of inflation, a potential economic recession and potential changes in U.S trade policy, including the imposition of tariffs and the resulting consequences; +• central bank policy actions, bank failures and associated liquidity risks and other factors; +• the severity and duration of any world events and armed conflict, including the Russian-Ukraine war, conflicts in the Israel-Gaza region and continued hostilities in the Middle East, including rising tensions with Iran, and associated repercussions to supply and demand for oil and gas and the economy generally; +• the actions taken by the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (together with OPEC and other allied producing countries, “OPEC+”) with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations; +• governmental actions, such as executive orders or new regulations, including climate-related regulations, that may negatively impact the future production of oil and natural gas in the United States and may adversely affect our future operations; +• the level of production and resulting market prices for crude oil, natural gas and other hydrocarbons; +• the effects of existing and future laws and governmental regulations (or the interpretation thereof) on us, our suppliers and our customers; +• cost increases and supply chain constraints related to our services, including any delays and/or supply chain disruptions due to increased hostilities in the Middle East; +• competitive conditions in our industry; +• our ability to attract and retain employees; +• changes in the long-term supply of, and demand for, oil and natural gas; +• actions taken by our customers, suppliers, competitors and third-party operators and the possible loss of customers or work to our competitors; +• technological changes, including lower emissions energy service equipment and similar advancements; +• changes in the availability and cost of capital; +• our ability to successfully implement our business plan, including execution of potential mergers and acquisitions; +• large or multiple customer defaults, including defaults resulting from actual or potential insolvencies; +• the effects of consolidation on our customers or competitors; +• the price and availability of debt and equity financing (including higher interest rates) for us and our customers; +• our ability to complete growth projects on time and on budget; +• increases in tax rates or types of taxes enacted that specifically impact exploration and production (“E&P”) and related operations resulting in changes in the amount of taxes owed by us; +i +• regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our services; +• new or expanded regulations that materially limit our customers’ access to federal and state lands for oil and gas development, thereby reducing demand for our services in the affected areas; +• growing demand for electric vehicles that result in reduced demand for gasoline and therefore the demand for our services; +• our ability to successfully implement technological developments and enhancements, including our new Tier IV Dynamic Gas Blending (“DGB”) dual-fuel and FORCE ® electric-powered hydraulic fracturing equipment, power generation equipment, and other lower-emissions equipment we may acquire or that may be sought by our customers; +• our ability to successfully launch and grow our new power generation business; +• the development of alternative power generation technologies or increased grid capacity that could reduce the demand for our services; +• the projected timing, purchase price and number of shares purchased under our share repurchase program, the sources of funds under the share repurchase program and the impacts of the share repurchase program; +• operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control, such as fires, which risks may be self-insured, or may not be fully covered under our insurance programs; +• exposure to cyber-security events which could cause operational disruptions or reputational harm; +• acts of terrorism, war or political or civil unrest in the United States or elsewhere; and +• the effects of current and future litigation. +Readers are cautioned not to place undue reliance on our forward‑looking statements. Although forward‑looking statements reflect our good faith beliefs at the time they are made, forward‑looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under "Item 1A. Risk Factors" of this Annual Report, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward‑looking statements. We do not undertake, and expressly disclaim, any duty to update or revise any forward‑looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except as required by applicable securities laws. +Unless the context indicates otherwise, all references to “ProPetro Holding Corp.,” “the Company,” “we,” “our” or “us” or like terms refer to ProPetro Holding Corp. and its co nsolidated subsidiaries, ProPetro Services, Inc., Silvertip Completion Services Operating, LLC, Aqua Prop, LLC and ProPetro Energy Solutions, LLC. +ii +SUMMARY RISK FACTORS +Our business is subject to varying degrees of risk and uncertainty. Investors should consider the risks and uncertainties summarized below, as well as the risks and uncertainties discussed in Part I, “Item 1A. Risk Factors” of this Annual Report. Additional risks not presently known to us or that we currently deem immaterial may also affect us. If any of these risks occur, our business, financial condition or results of operations could be materially and adversely affected. +Our business is subject to the following principal risks and uncertainties: +Risks Inherent in Our Business and Industry +• Our business and financial performance depends on the historically cyclical oil and natural gas industry and particularly on the level of capital spending of exploration and production (“E&P”) companies within the United States and in the Permian Basin, and a decline in prices for oil and natural gas may cause fluctuation in operating results or otherwise have an adverse effect on our revenue, cash flows, profitability and growth. +• The cyclical nature of the oil and natural gas industry may cause our operating results to fluctuate. +• The majority of our operations are located in the Permian Basin, making us vulnerable to risks associated with operating in one major geographic area. +• The Inflation Reduction Act of 2022 (“IRA 2022”) could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations. +• Our business may be adversely affected by a deterioration in general economic conditions or a weakening of the broader energy industry. +• Our operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms, or at all, which could limit our ability to grow. +• Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition. +• Our indebtedness and liquidity needs could restrict our operations and adversely affect our financial condition. +• Restrictions in our ABL Credit Facility (as defined herein) and any future financing agreements may limit our ability to finance future operations or capital needs or capitalize on potential acquisitions and other business opportunities. +• We may record losses or impairment charges related to goodwill and long-lived assets, including intangible assets. +• Our operations are subject to unforeseen interruptions and hazards inherent in the oil and natural gas industry, for which we may not be adequately insured and which could cause us to lose customers and substantial revenue. +• A terrorist attack, armed conflict or political or civil unrest could harm our business. +• We may be subject to claims for personal injury and property damage, which could materially affect our financial condition and results of operations. +• We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +• We may grow through acquisitions and/or internal expansion, and our failure to properly plan and manage such growth may adversely affect our performance. +• We may be adversely affected by the effects of inflation. +Risks Related to Customers, Suppliers and Competition +• Reliance upon a few large customers may adversely affect our revenue and operating results. +iii +• We face significant competition that may cause us to lose market share, and competition in our industry has intensified as a result of customer consolidation and industry downturns. +• We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our business, results of operations and financial conditions. +• Our business depends upon the ability to obtain specialized equipment, parts and key raw materials, including sand and chemicals, from third‑party suppliers, and we may be vulnerable to delayed deliveries and future price increases. +• We may be required to pay fees to certain of our sand suppliers (the “Sand Suppliers”) based on minimum volumes under long-term contracts regardless of actual volumes received. +Risks Related to Employees +• We rely on a few key employees whose absence or loss could adversely affect our business. +• If we are unable to employ a sufficient number of skilled and qualified workers, our capacity and profitability could be diminished and our growth potential could be impaired. +Risks Related to Regulatory Matters +• We are subject to environmental laws and regulations, and future compliance, claims, and liabilities relating to such matters may have a material adverse effect on our results of operations, financial position or cash flows. +• Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide. +• Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +• Increased attention to environmental, social and governance (“ESG”) matters, conservation measures, commercial development and technological advances could reduce demand for oil and natural gas and our services. +• Certain of our completion services, particularly our hydraulic fracturing services, are substantially dependent on the availability of water. Restrictions on our or our customers’ ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows. +Risks Related to our Tax Matters +• Our ability to use our net operating loss carryforwards (“NOLs”) may be limited. +• Changes to applicable tax laws and regulations or exposure to additional tax liabilities could adversely affect our operating results and cash flows. +Risks Inherent to an Investment in our Common Stock +• We are subject to certain requirements of Section 404 of the Sarbanes-Oxley Act (“Section 404”). If we or our auditors identify and report material weaknesses in internal controls over financial reporting, our investors may lose confidence in our reported information, and our stock price may be negatively affected. +• Certain provisions of our certificate of incorporation, and bylaws, as well as Delaware law, may discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock. +• Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to pursue actions in another judicial forum for disputes with us or our directors, officers, employees or agents. +• There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock. +iv +PART I +Item 1. Business. +Our Company +We are a leading integrated energy service company, located in Midland, Texas, focused on providing innovative hydraulic fracturing, wireline, and other complementary energy and power generation services to leading upstream oil and gas companies engaged in the E&P of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil and natural gas producing areas in the United States, and we believe we are one of the leading providers of energy services in the region. +In the fourth quarter of 2024, we formed a new subsidiary, ProPetro Energy Solutions, LLC, doing business as PROPWR SM , to provide power generation services to oil and gas producers and for general industrial projects and data centers. PROPWR has ordered equipment, but has not yet begun revenue-generating activities. +On November 1, 2024, we sold our cementing business located in Vernal, Utah, to a business owned by a former employee as part of a strategic repositioning. We received a promissory note for $13.0 million as consideration. The note receivable is secured by substantially all assets of the divested operations and the former employee’s ownership interests in and distributions from the business. The note receivable is to be paid to the Company in quarterly installments with interest of 10% per annum from March 31, 2025, to December 31, 2029. We recorded a gain on disposal of $8.2 million related to the sale of the business. The former employee was part of our cementing operations until November 1, 2024, and is no longer affiliated with the Company. +On May 31, 2024, we consummated the acquisition of all of the outstanding equity interests in Aqua Prop, LLC (“AquaProp SM ”), which provides wet sand solutions for hydraulic fracturing at well sites (the “AquaProp Acquisition”). The consideration for the AquaProp Acquisition included $13.7 million of cash paid to the seller, $3.7 million of deferred cash consideration payable to the seller by May 31, 2025, the payoff of $7.2 million of the seller’s outstanding debt , the payment of $0.3 million of certain transaction costs and estimated contingent consideration of $10.9 million . As a result of the AquaProp Acquisition, we expanded our business to include wet sand services. +On December 1, 2023, we consummated the purchase of the assets and operations of Par Five Energy Services LLC (“Par Five”), which provides cementing services in the Delaware Basin in exchange for $25.4 million of cash, including deferred cash consideration of $3.1 million which is payable to Par Five or its beneficiary on June 1, 2025, with interest at 4.0% per annum. (the “Par Five Acquisition”). The Par Five Acquisition complemented our existing cementing business and enabled us to serve both the Midland and Delaware sub-basins of the Permian Basin. +On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip Completion Services Operating, LLC (the “Silvertip Acquisition”), which provides wireline perforation and ancillary services in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed debt, and the payment of certain other closing and transaction costs. Collectively, the AquaProp Acquisition, the Par Five Acquisition and the Silvertip Acquisition have positioned the Company as a more integrated and diversified completions-focused energy service provider. See Note 4. Business Acquisitions in the financial statements for additional disclosures. +Effective September 1, 2022, we disposed of our coiled tubing assets to STEP Energy Services L td. (“STEP”) and shut down our coiled tubing operations. We received approximately $2.8 million in cash and 2.6 million common shares of STEP, valued at $11.8 million, as consideration. Upon the sale of our coiled tubing assets, we recorded a loss on sale of $13.8 million . +Our competitors include many large and small energy service companies, including Halliburton Company, Liberty Energy Inc., Patterson-UTI Energy Inc., ProFrac Holding Corp., Solaris Energy Infrastructure, Inc., RPC, Inc., and a number of private and locally-oriented businesses. The markets in which we operate are highly competitive. To be successful, an energy service company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, technology, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies' criteria in choosing a service provider. However, we have recently observed the energy industry and our customers’ shift to new technologies and lower emissions equipment, which we believe will be an increasingly important factor in an E&P company's selection of a service provider. The transition to lower +1 +emissions equipment has been challenging for companies in the service industry because of the capital requirements, lack of large-scale deployment of certain new technology such as electric-powered equipment, and the pricing for our services and expected return on invested capital. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment quality and technology, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions and power generation challenges. +We believe that our substantial market presence in the Permian Basin positions us well to capitalize on drilling, and completion activity and power demand in the region. Our operational focus has primarily been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have increased our operations in the Delaware sub-basin and are well-positioned to support further increases in our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending. +Additionally, we believe the significant natural gas production in the Permian Basin will become a natural market for power-intensive businesses including data centers and other industrial businesses seeking alternative solutions for reliable and available electricity requirements which are not dependent on grid or public utility limitations. +We primarily provide hydraulic fracturing, wireline, and cementing completion services to E&P companies in the Permian Basin. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region's increasingly high-intensity well completions (including simultaneous hydraulic fracturing (“Simul-Frac”), which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. We also launched a new power generation business, PROPWR, that will provide power generation services to oil and gas producers and other industrial companies and data centers. +Commodity Price and Other Economic Conditions +The oil and gas industry has traditionally been volatile and is characterized by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, war and political instability in oil producing countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. +The geopolitical and macroeconomic consequences of military action in the Middle East, the Russian invasion of Ukraine, including the associated sanctions, and the adverse impacts of the COVID-19 pandemic have resulted in volatility in supply and demand dynamics for crude oil and associated volatility in crude oil pricing. As the global response to the COVID-19 pandemic began to wane, the demand and prices for crude oil increased from the lows experienced in 2020, with the West Texas Intermediate (“WTI”) average crude oil price reaching approximately $94 per barrel in 2022, the highest average price in the prior ten years. However, the WTI average crude oil price declined to approximately $78 per barrel in 2023 and approximately $76 per barrel in 2024. We believe that the volatility of crude oil prices in recent years has been partly driven by declines in crude oil supplies, concerns over sanctions resulting from Russia's invasion of Ukraine, concerns over a potential disruption of Middle Eastern oil supplies resulting from the conflict in the Middle East, slower crude oil production growth due to the lack of reinvestment in the oil and gas industry in the last three years, the extension of OPEC+ production cuts of approximately 3.9 million barrels per day originally announced in 2023 and concerns of a potential global recession resulting from high inflation and interest rates. +With the significant increase in global crude oil prices from 2021, including the WTI crude oil price, there was a significant increase in the Permian Basin rig count from approximately 179 at the beginning of 2021 to approximately 353 at the end of 2022, according to the Baker Hughes Company (“Baker Hughes”). Following the increase in rig count and the WTI crude oil price, the energy service industry has experienced increased demand for its completion services, and improved pricing. However, the Permian Basin rig count experienced a 13% decrease to 309 at the end of 2023 and further decreased to 304 at the end of 2024 which resulted in a reduction in the demand for completion services and pressure on pricing of our services. +Sustained levels of high inflation likewise caused the U.S. Federal Reserve and other central banks to increase interest rates, and to the extent elevated inflation remains, we may experience further cost increases for our operations, including interest rates, labor costs and equipment. We cannot predict any future trends in the rate of inflation and crude oil prices. A significant increase in or continued high levels of inflation, to the extent we are unable to timely pass-through the cost increases to our +2 +customers, further declines in crude oil prices, or potential changes in U.S trade policy, including the imposition of tariffs and the resulting consequences, would negatively impact our business, financial condition and results of operations. See Part II, Item 1A. “Risk Factors—We may be adversely affected by the effects of inflation.” +Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including upstream and energy service companies. As a result, we are working with our customers and equipment manufacturers to transition our equipment into a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB dual-fuel , FORCE ® electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. We have transitioned our hydraulic fracturing available equipment portfolio from approximately 10% lower emissions equipment in 2021 to approximately 35% in 2022, 60% in 2023 and 70% in 2024, and expect to increase to approximately 75% by the end of the first quarter of 2025. To the extent any of our customers have certain expectations or requirements with respect to emissions reductions from their contractors, if we are unable to continue quickly transitioning to lower emissions equipment, the demand for our services could be adversely impacted. +If the Permian Basin rig count and market conditions improve, including improved pricing for our services and labor availability, and we are able to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also improve. If the rig count or market conditions do not improve or decline in the future, and we are unable to increase our pricing or pass-through future cost increases for our customers, there could be a material adverse impact on our business, results of operations and cash flows . +Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and the exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment. +Our Services +We have historically conducted our business through four operating segments: hydraulic fracturing, wireline, cementing and coiled tubing. Prior to the fourth quarter of fiscal year 2023, our operating segments met the aggregation criteria and were aggregated into the “Completion Services” reportable segment and our coiled tubing operations (which were divested in September 2022) were shown in the “All Other” category. Effective in the fourth quarter of fiscal year 2023, we revised our segment reporting as we determined that our operating segments no longer met the criteria to be aggregated. In the fourth quarter of fiscal year 2024, we formed PROPWR to provide power generation services to oil and gas producers and non-oil and gas applications such as general industrial projects and data centers. This new subsidiary has ordered equipment, but it has not yet begun any revenue-generating activities. Our hydraulic fracturing, wireline and cementing operating segments meet the criteria of a reportable segment. Our divested coiled tubing and our newly formed power generation services segments do not meet the reportable segment criteria and are included within the “All Other” category. Additionally, our corporate administrative activities do not involve business activities from which it may earn revenues and its results are not regularly reviewed by the Company’s Chief Operating Decision Maker (the “CODM”) when making key operating and resource decisions. As a result, corporate administrative expenses have been included under “Reconciling Items.” For additional financial information on our reportable segment presentation, please see reportable segment information in Part II - Item 8, “Financial Statements and Supplementary Data.” +Hydraulic Fracturing +We provide hydraulic fracturing services to E&P companies in the Permian Basin. These services are intended to optimize hydrocarbon flow paths during the completion phase of horizontal shale wellbores. We have significant expertise in multi‑stage fracturing of horizontal oil‑producing wells in unconventional geological formations. Our total available hydraulic horsepower (“HHP”) at December 31, 2024, w as 1,556,500 HHP, which was comprised of 450,000 HHP of our Tier IV DGB dual-fuel equipment, 294,000 HHP of FORCE ® electric-powered equipment and 812,500 HHP of conventional Tier II equipment. Our hydraulic fracturing fleets range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsite. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region’s increasingly high-intensity well completions, including (“Simul-Frac”), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. With the industry transition to +3 +lower emissions equipment and Simul-Frac, in addition to several other changes to our customers' job designs, we believe that our available fleet capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at wellsites. In addition, in 2021 and 2022, we committed to additional conversions of some of our Tier II equipment to Tier IV DGB, and to purchase new Ti er IV DGB dual-fuel equipment. As such, we entered into conversion and purchase agreements with our equipment manufacturers and received all of the converted and new Tier IV DGB dual-fuel equipment by the end of 2023, representing 450,000 HHP of our Tier IV DGB dual-fuel equipment as of December 31, 2024. In 2022, we entered into three-year electric fleet leases for four FORCE ® electric-powered hydraulic fracturing fleets with 60,000 HHP per fleet (the “Electric Fleet Leases”) and in June 2024, we entered into an additional three-year lease for a fifth FORCE ® electric-powered hydraulic fracturing fleet with 72,000 HHP. As of December 31, 2024, we have re ceived 294,000 HHP of FORC E ® electric-powered equipment representing four fleets and a portion of the fifth fleet. We currently expect to receive the remaining equipment associated with the fifth fleet in the first half of 2025. +The hydraulic fracturing process consists of pumping fracturing fluid into a well at sufficient pressure to fracture the formation. Materials known as proppants, which in our business are comprised primarily of sand, are suspended in the fracturing fluid and are pumped into the fracture to prop it open. The fracturing fluid is designed to break, or loosen viscosity, and be forced out of the formation by its pressure, leaving the proppants suspended in the fractures created, thereby increasing the mobility of the hydrocarbons. As a result of the fracturing process, production rates are usually enhanced substantially, thus increasing the rate of return of hydrocarbons for the operator. +We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We also refer to all of our fracturing units, other equipment and vehicles necessary to perform a fracturing job as a “fleet” and the personnel assigned to each fleet as a “crew.” Our hydraulic fracturing units consist primarily of high pressure hydraulic pumps, diesel or dual gas engines, gas turbine generators, transmissions and various hoses, valves, tanks and other supporting equipment like blenders, irons, hoses and data vans. We also own and operate a fleet of trucks, trailers and other equipment that provide onsite storage and handling of wet sand used in the completion phase of shale wellbores. +We provide dedicated equipment, personnel and services that are tailored to meet each of our customer’s needs. Each fleet has a designated team of personnel, which allows us to provide responsive and customized services, such as project design, proppant and other consumables procurement, real-time data provision and post‑completion analysis for each of our jobs. Many of our hydraulic fracturing fleets and associated personnel have worked continuously with the same customer for the past several years promoting deep relationships and a high degree of coordination and visibility into future customer activity levels. Furthermore, in light of our substantial market presence and historically high fleet utilization levels, we have established a variety of trusted relationships with key equipment, sand and other downhole consumable suppliers. We believe these strategic relationships position us to acquire equipment, parts and materials on a timely and economic basis and allow our dedicated procurement and logistics team to support consistently safe and reliable operations. +Wireline +We provide wireline and ancillary services on new oil well completions in the Permian Basin. Wireline utilizes equipment with a drum of wireline to deploy perforating guns in the well to perforate the casing, cement, and formation. Once the well is perforated, it is ready to be fractured. Pumpdown utilizes pressure pumping equipment to pump water into the well to deploy or push the perforating guns attached to the wireline through the lateral section of a well. +We own and operate a fleet of mobile wireline units and other auxiliary equipment to perform well completion services. We also refer to our wireline units, pressure control equipment, other equipment and vehicles necessary to perform a job as a "spread" and the personnel assigned to the spread as a "crew." On average, one wireline spread consists of a wireline tractor truck with a large cab functioning as a mobile office where the engineer controls the wireline spooled drum along with associated pressure control iron and equipment, trailers and vehicles. We currently have 26 wireline units. +Cementing +We provide cementing services for completion of new wells and remedial work on existing wells. Cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Cementing provides isolation between fluid zones behind the casing to minimize potential damage to hydrocarbon bearing formations or the integrity of freshwater aquifers, and provides structural integrity for the casing by securing it to the earth. Cementing is also done when re-completing wells, where one zone is plugged and another is opened. +4 +We believe that our cementing segment provides an organic growth opportunity for us to expand our service offerings within our existing customer base. We currently have 29 cementing units. +Power Generation Services +In December 2024, we formed PROPWR to provide power generation services to oil and gas producers and non-oil and gas applications such as general industrial projects and data centers. This subsidiary has ordered equipment, but has not yet begun revenue-generating activities. +Our Customers +Our customers consist primarily of oil and natural gas producers in North America. Our top five customers accounted for a pproxim ately 58.8%, 63.2% and 84.0% of our revenue, for the years ended December 31, 2024, 2023, and 2022, respectively. For the year ended December 31, 2024, XTO Energy Inc. (“XTO”), a wholly owned subsidiary of Exxon Mobil Corporation (“ExxonMobil”), Permian Resources and EOG Resources accounted for 19.7%, 14.9%, and 10.6%, respectively, of total revenue. No other customer accounted for more than 10% of our total revenue for the year ended December 31, 2024. There have been many recent mergers and acquisitions in the oil and gas industry. In May 2024, Pioneer Natural Resources USA, Inc. (“Pioneer”) merged with and into a wholly owned subsidiary of Exxon Mobil. We currently provide pressure pumping, wireline and other services to ExxonMobil and previously provided such services to Pioneer. Mergers and acquisitions involving our customers could negatively impact our future business with them or positively impact our business by providing us access to potential new customers. +On April 22, 2024, we entered into a sub-agreement for hydraulic fracturing services with XTO, pursuant to which we agreed to provide hydraulic fracturing, wireline and pumpdown services with two committed FORCE ® electric-powered hydraulic fracturing fleets with the option to add a third FORCE ® fleet (also with wireline and pumpdown services) for a period of three years or for contracted hours, whichever occurs last, with respect to each fleet, subject to certain termination and release rights. +Competition +The markets in which we operate are highly competitive. To be successful, an energy service company must provide services and equipment that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies’ criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company’s selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the energy service industry because of the capital requirements. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment portfolio and quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +We provide our services primarily in the Permian Basin, and we compete against different companies in each service and product line we offer. Our competition includes many large and small energy service companies, including the largest integrated energy service companies. Our major competitors include Halliburton Company, Liberty Energy Inc., Patterson‑UTI Energy Inc., ProFrac Holding Corp., Solaris Energy Infrastructure, Inc., RPC, Inc., and a number of private and locally-oriented businesses. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the fourth quarter, relating to the conclusion of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather during which we may experience declines in our operating and financial results. +Operating Risks and Insurance +Our operations are subject to hazards inherent in the energy service industry, such as accidents, blowouts, explosions, fires and spills and releases that can cause personal injury or loss of life, damage or destruction of property, equipment, natural resources and the environment and suspension of operations. +5 +In addition, claims for loss of oil and natural gas production and damage to formations can occur in the energy service industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in us being named as a defendant in lawsuits asserting large claims. +Our business involves the transportation of heavy equipment and materials, and as a result, we may also experience traffic accidents which may result in spills, property damage and personal injury. +Despite our efforts to maintain safety standards, we have suffered accidents from time to time in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations. +We maintain commercial general liability, workers’ compensation, business automobile, commercial property, umbrella liability, excess liability, and directors and officers insurance policies providing coverages of risks and amounts that we believe to be customary in our industry. Further, we have pollution legal liability coverage for our business entities, which would cover, among other things, third party liability and costs of clean up relating to environmental contamination on our premises while our equipment is in transit and on our customers’ job site. With respect to our operations, coverage would be available under our pollution legal liability policy for any surface or subsurface environmental cleanup and liability to third parties arising from any surface or subsurface contamination. We also have certain specific coverages for some of our businesses, including our hydraulic fracturing and wireline services. +We maintain directors and officers insurance; however, our insurance coverage is subject to certain exclusions (including, for example, any required United States Securities and Exchange Commission (“SEC”) disgorgement or penalties) and we are responsible for meeting certain deductibles under the policies. Moreover, we cannot assure you that our insurance coverage will adequately protect us from all future claims. +Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of the high premium costs relative to perceived risk. Further, insurance rates have in the past been subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us. See “Risk Factors” for a description of certain risks associated with our insurance policies. +Environmental and Occupational Health and Safety Regulations +Our operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection, and occupational health and safety. Numerous federal, state and local governmental agencies issue regulations that often require difficult and costly compliance measures that could carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may, for example, restrict the types, quantities and concentrations of various substances that can be released into the environment, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas and other protected areas, or require action to prevent or remediate pollution from current or former operations. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental, health and safety laws and regulations occur frequently, and any changes that result in more stringent and costly requirements could materially adversely affect our operations and financial position. We have not experienced any material adverse effect from compliance with current requirements; however, this trend may not continue in the future. +Below is an overview of some of the more significant environmental, health and safety requirements with which we must comply. Our customers’ operations are subject to similar laws and regulations. Any material adverse effect of these laws and regulations on our customers’ operations and financial position may also have an indirect material adverse effect on our operations and financial position. +Waste Handling. We handle, transport, store and dispose of wastes that are subject to the Resource Conservation and Recovery Act ( " RCRA " ) and comparable state laws and regulations, which affect our activities by imposing requirements regarding the +6 +generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although certain petroleum production wastes are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. Moreover, the U.S. Environmental Protection Agency (“EPA”) or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or recategorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to recategorize certain oil and natural gas exploration, development and production wastes as hazardous wastes. Several environmental organizations have also petitioned the EPA to modify existing regulations to recategorize certain oil and natural gas exploration, development and production wastes as hazardous. Any such changes in these laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas E&P wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and analogous state laws generally impose liability without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Liability for the costs of removing or remediating previously disposed wastes or contamination, damages to natural resources, the costs of conducting certain health studies, amongst other things, is strict and joint and several. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state laws. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such hazardous substances have been released. +NORM. In the course of our operations, some of our equipment may be exposed to naturally occurring radioactive materials (“NORM”) associated with oil and gas deposits and, accordingly, may result in the generation of wastes and other materials containing NORM. NORM exhibiting levels of radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. +Water Discharges. The Clean Water Act, Safe Drinking Water Act, Oil Pollution Act and analogous state laws and regulations impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into regulated waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Also, spill prevention, control and countermeasure plan requirements require appropriate containment berms and similar structures to help prevent the contamination of regulated waters. +Air Emissions. The Clean Air Act (“CAA”) and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other emissions control requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants from specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. These and other laws and regulations may increase the costs of compliance for some facilities where we operate. Obtaining or renewing permits also has the potential to delay the development of oil and natural gas projects. +Climate Change. In the United States, no comprehensive climate change legislation has been implemented at the federal level, though recently passed laws such as the IRA 2022 advance numerous climate-related objectives. Additionally, following the U.S. Supreme Court finding that greenhouse gas (“GHG”) emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, implement New Source Performance Standards directing the reduction of certain pollutants from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the Department of Transportation (“DOT”), implementing GHG emissions limits on vehicles manufactured for operation in the United States. Additionally, the EPA has recently finalized rules covering the standards of performance for methane and volatile organic compounds emissions for oil and gas facilities, including leak detection, monitoring and repair, and a “super- +7 +emitter” response program to timely mitigate emissions events as detected by governmental agencies or qualified third parties, triggering certain investigation and repair requirements. These requirements were finalized in 2023, but are currently subject to legal challenge. At this time, it remains uncertain as to whether the current administration will repeal or modify this rule and the timing with respect to the same. +Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas such as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored “Paris Agreement,” requires member states to submit non-binding, individually-determined reduction goals known as Nationally Determined Contributions (“NDCs”) every five years after 2020. The United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. However, in January 2025, the current president signed an Executive Order once again withdrawing the United States from the Paris Agreement and from any other commitments made under the United Nations Framework Convention on Climate Change. The full impact of these recent developments is uncertain at this time. For more information, see our risk factors titled “Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide” and “The IRA 2022 could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations.” +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, for example, in January 2024 the government announced a temporary pause on pending decisions on liquefied natural gas exports to certain countries. However, upon taking office, the current president signed an Executive Order resuming the processing of permit applications for such projects. Litigation risks are also increasing as a number of parties have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. +Moreover, climate change may result in various physical risks, such as the increased frequency or intensity of extreme weather events or changes in the meteorological and hydrological patterns, that could adversely impact us, our customers’ and our suppliers’ operations. Such physical risks may result in damage to our customers’ facilities or otherwise adversely impact our operations, such as if facilities are subject to water use curtailments in response to drought, or demand for our customers’ products, such as to the extent warmer winters reduce the demand for energy for heating purposes, which may ultimately reduce demand for the products and services we provide. Such physical risks may also impact our suppliers, which may adversely affect our ability to provide our products and services. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Endangered and Threatened Species. Environmental laws such as the Endangered Species Act (“ESA”) and analogous state laws may impact exploration, development and production activities in areas where we operate. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and various state analogs. The U.S. Fish and Wildlife Service (“FWS”) may identify previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species. For example, the dunes sagebrush lizard, which is found only in the active and semi-stable shinnery oak dunes of southeastern New Mexico and adjacent portions of Texas (including areas where our customers operate), has, since May 2024, been listed as endangered under the ESA. To the extent any protections are implemented for this or any other species, it could cause us or our customers to incur additional costs or become subject to operating restrictions or operating bans in the affected areas. +Regulation of Hydraulic Fracturing and Related Activities. Our hydraulic fracturing operations are a significant component of our business. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. Although several of these rulemakings have been rescinded, modified or subjected to legal challenges, new or more stringent regulations may be promulgated by the current government. For example, in March 2024, the Bureau of Land Management (“BLM”) finalized a rule that requires operators to limit flaring from well sites on federal lands, and allows the delay or denial of permits if BLM finds that an operator’s methane waste minimization plan is insufficient. The rule was challenged by various states in the District Court for the District of North Dakota, and, in September 2024, that court ordered +8 +that the rule cannot be enforced within the plaintiff states pending the outcome of the litigation. Although the rule is currently being implemented in areas not covered by the order, the future of the rule is uncertain. The previous administration also called for revisions and restrictions to the leasing and permitting programs for oil and gas development on federal lands and, for a time, suspended federal oil and gas leasing activities. The Department of the Interior (“DOI”) issued a report recommending various changes to the federal leasing program, though many such changes would require congressional action. In July 2023, the BLM finalized a rule to update the fiscal terms of federal oil and gas leases, which increases fees, rents, royalties, and bonding requirements. The rule also adds new criteria for BLM to consider when determining whether to lease nominated land, including the presence of important habitats or wetlands, the presence of historical properties or sacred sites, and recreational use of the land. Any regulations that restrict, ban or effectively ban such operations may adversely impact demand for our products and services. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have previously been proposed in Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +Federal and state governments have also investigated whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for wastewater disposal wells that impose permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission’s well completion seismicity guidelines for operators in the SCOOP and STACK require hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division has previously issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission (“TRRC”) has adopted similar rules including the indefinite suspension of all deep oil and gas produced water injection wells in certain areas covered by the TRRC’s seismic response program. +Increased regulation of hydraulic fracturing and related activities could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and record keeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. For more information on each of these items, see our risk factor titled “Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.” +OSHA Matters. The Occupational Safety and Health Act (“OSHA”) and comparable state statutes regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. +Human Capital +Our employees are our key asset. Our primary human capital management objectives are to effectively engage, develop, retain and reward our employees. As of December 31, 2024, we emplo yed approxim ately 1,900 people , and n one of our employees are represented by a union. All of our employees work for or support our hydraulic fracturing, wireline, cementing and power generation services operating segments. We believe that we have good relations with our employees. We believe that our employees are a key component of our ability to attract and retain customers as a result of their operational excellence in the field. +Some examples of significant programs and initiatives that support our objective of attracting, developing and retaining our diverse and inclusive workforce include: +• Opportunity and Engagement. We are an equal opportunity employer and prohibit discrimination against any employee and applicant on the basis of any legally protected characteristic. We believe that in order to attract and retain talent with the skill sets and expertise that can help to maximize our operational efficiencies across all levels in +9 +the Company, it is in our best interest to create a culture that is inclusive. We conducted our second annual employee engagement survey in 2024. The results show improvement in our overall employee engagement score over the 2023 survey and above industry benchmarks. The survey focuses on engagement, manager effectiveness, training and tools to ensure that employees are well equipped to do their jobs effectively and workplace culture. Attracting the right people to ProPetro remains top priority. Some examples of this effort to recruit and develop our team and culture include: +◦ a commitment to conducting business in a manner that respects all human rights in compliance within the requirements of applicable laws; +◦ a commitment within our business operations to promoting and encouraging respect for human rights and fundamental freedoms for all without distinctions of any kind, such as race, color, sex, language, religion, political or other opinions; +◦ working with personnel, business partners and other parties directly linked to our operations that share our commitment to these same legal compliance principles; +◦ maintaining employment policies reflecting our commitments, including our code of conduct, our equal employment opportunity employer policy, and our anti-harassment and anti-discrimination policy; and +◦ providing an anonymous Ethics and Compliance hotline that is promoted internally and accessible from our intranet and website to make it possible for grievances regarding health and safety to be addressed early and remediated directly, in confidence and without fear of retaliation. +• Training and Safety. We offer in-depth, role-appropriate safety training upon hiring and as part of the continuous development of our employees. The safety of our employees, our customers, and the communities in which we operate is paramount. We track and evaluate safety incidents at wellsites and offices, and if an accident does occur, we aim to take actions to mitigate similar incidents from reoccurring in the future. The Company seeks to incentivize employees to focus on conducting operations in accordance with our strict safety standards and encourages employees to immediately report any breach of safety protocol. Ten percent of our executive officers’ annual target bonuses under the 2024 annual incentive program were based upon the Company’s achievement of certain safety goals, including a target total recordable incident rate. +• Professional Development. In 2024, the Company continued its focus on leadership development, targeting leadership positions including frontline supervisors and above. Internal facilitators were trained and certified to deliver content to drive program efficiency and better associate the topics and importance of the training to the business. The Company also transitioned the Human Resources Information System (HRIS) from PayCom to Workday to gain greater talent related functionality and efficiency in the areas of performance management, succession planning, learning and development and compensation planning. Responsibility for Human Capital Management (HCM) in Workday was designed to ensure the direct supervisor working closest with the employee is at the center of the conversation driving engagement, providing feedback, rewarding performance and supporting development. +• Compensation, Health, Wellness and Benefits. Our employee benefit offerings are designed to meet the varied and evolving needs of our entire workforce across the Company and we believe are consistent with those provided by our peer companies with which we compete for talent. The Company provides employees with the ability to participate in health and welfare plans, including medical, dental, life, accidental death and dismemberment and short-term and long-term disability insurance plans. +In 2024, as part of our 401(k) plan, we continued to focus on financial wellness education and group and individual consultations for employees as well as encouraging participation in the program. The program opportunities included many crucial topics ranging from budgeting and debt management to understanding plan options and investment strategy. Concerning health benefits, in 2024 we added additional services focused on emotional and mental health, as well as certain preventative health services related to the early detection of concerns including breast cancer, diabetes and cardiovascular disease. +We also strive to give back to the areas in which we conduct business operations, and in which our employees live and work. Our employees give generously and receive up to eight hours per year of paid time off to participate in community service. Our employee-led P.U.M.P. Committee also organizes or sponsors events in which employees can choose to participate in addition to our paid community service time benefit. +10 +Availability of Filings +Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are made available free of charge on our internet website at www.propetroservices.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the SEC. The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that website is www.sec.gov. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Annual Report or the documents incorporated by reference in this Annual Report. +Board of Directors and Executive Officers +Set forth below are the names, age and business experience of the Board of Directors of the company as of February 20, 2025. +Phillip A. Gobe, 72, began serving as our Chairman of the Board in July of 2019 and as Executive Chairman in October 2019. Mr. Gobe was appointed as our Chief Executive Officer on March 13, 2020 and served in that role until August 31, 2021, at which point he was re-appointed as Executive Chairman. Mr. Gobe stepped down as Executive Chairman on March 31, 2022, and continues serving the Company as Chairman of the Board. Mr. Gobe has served as a director of Pioneer since July 2014. Mr. Gobe previously served as Chairman of the Board for Pantheon Resources PLC until his June 2023 retirement. He also previously served as a director of Scientific Drilling International and Pioneer Southwest Energy Partners L.P. Mr. Gobe joined Energy Partners, Ltd as Chief Operating Officer in December 2004 and became president in May 2005, and served in those capacities until his retirement in September 2007. Mr. Gobe also served as a director of Energy Partners, Ltd. from November 2005 until May 2008. Prior to that, Mr. Gobe served as Chief Operating Officer for Nuevo Energy Company from February 2001 until its acquisition by Plains Exploration & Production Company in May 2004. Prior to that time, he held numerous operations and human resources positions with Vastar Resources, Inc. and Atlantic Richfield Company (“ARCO”) and its subsidiaries. Mr. Gobe has a Bachelors of Arts degree from the University of Texas and a Master of Business Administration degree from the University of Louisiana in Lafayette. Mr. Gobe’s extensive experience in the energy industry, including service as a director to public corporations in the industry, makes him well suited to serve as Chairman of the Board. +Samuel D. Sledge, 38 , has served as our Chief Executive Officer and as a member of our Board since August 31, 2021. Mr. Sledge previously served as the Company’s President from April 2021 to August 2021, and prior to that, he served as Chief Strategy and Administrative Officer beginning in March 2020. Mr. Sledge has significant experience with ProPetro having joined the Company in 2011. Mr. Sledge has served in various capacities throughout his tenure such as a Frac Technical Specialist and Technical Operations Manager where his duties included quality control, planning and logistics, and the development of the engineering program. Mr. Sledge has also served as ProPetro’s Vice President of Finance, Corporate Development, and Investor Relations where his responsibilities included financial planning and analysis, strategic initiatives, and investor relations. Mr. Sledge received a Bachelor of Business Administration and a Masters of Business Administration from Baylor University. We believe Mr. Sledge’s experience in the energy industry and his significant experience in management roles at the Company make him well suited to serve as a director. +Spencer D. Armour III, 71 , has served as a member of our Board since February 2013. Mr. Armour has over 30 years of executive and entrepreneurial experience in the energy services industry. Mr. Armour served as President of PT Petroleum LLC in Midland, Texas from 2011 to 2018. He was the Vice President of Corporate Development for Basic Energy Services, Inc. from 2007 to 2008, which acquired Sledge Drilling Corp., a company Mr. Armour co-founded and served as Chief Executive Officer from 2005 to 2006. From 1998 through 2005, he served as Executive Vice President of Patterson-UTI Energy, Inc., which acquired Lone Star Mud, Inc., a company Mr. Armour founded and served as President from 1986 to 1997. Mr. Armour also served on the board of Patterson-UTI Energy, Inc. from 1999 to 2001. He currently serves on the boards of Viper Energy, Inc. and CES Energy Solutions Corp and is a partner at Geneses Investments. Mr. Armour received a B.S. in Economics from the University of Houston in 1977 and served on the University of Houston System Board of Regents from 2011 until 2018. We believe that Mr. Armour’s extensive experience in the energy services industry and his deep knowledge of industry dynamics within the Permian Basin make him well suited to serve as a director. +Mark S. Berg, 66 , has served as a member of our Board since 2019. Mr. Berg is a senior energy industry executive with extensive commercial and operational experience, including leadership of strategic planning, business development, land, water management, completion and well services, environmental, sustainability, legal, government relations and communications. During his 20-year career with Pioneer Natural Resources (“Pioneer”), then an NYSE-listed independent oil and gas exploration and production company, first as Executive Vice President & General Counsel from 2005 to 2014 and then as Executive Vice President, Corporate Operations from 2014 until its merger with ExxonMobil in 2024, he played a key role in transforming the company into a major U.S. shale resource developer. He led the negotiating team for the $65 billion merger +11 +with ExxonMobil as well as multiple multibillion-dollar mergers, global divestitures, and cross-border joint ventures. Prior to joining Pioneer, Mr. Berg served from 2002 to 2004 as Senior Vice President, General Counsel & Secretary of Hanover Compressor Company, then an NYSE-listed company specializing in natural gas compression and processing, where he instituted disciplined internal controls, resolved an SEC investigation, and settled securities class action litigation. From 1997 to 2002 he served as Executive Vice President & General Counsel of American General Corporation, a Fortune 200 diversified financial services company, and oversaw its $27 billion merger with American International Group (“AIG”). Mr. Berg began his career with the Houston based law firm Vinson & Elkins L.L.P. and served as a partner from 1990 through 1997, focused on mergers, acquisitions and international project development. From 2018 to 2020, he served on the board of directors of HighPoint Resources, an exploration and production company then listed on the NYSE. Effective March 2025, Mr. Berg has been appointed to serve on the boards of Oncor Electric Delivery Holdings Company LLC and Oncor Electric Delivery Company LLC, a regulated electricity transmission and distribution company. Mr. Berg also serves as the founding Vice Chairman of the Permian Strategic Partnership, a coalition of Permian Basin energy companies and higher education institutions focused on supporting public education, healthcare, road safety and workforce development in the Permian Basin region. +Anthony J. Best, 75, has served as a member of our Board since January 2018 and was elected to serve as Lead Independent Director in October 2019. Mr. Best has over 40 years of experience in the energy industry. Mr. Best retired as the Chairman of the board of Newpark Resources in May 2023. He was previously a director with Quantum Energy Partners’ (“Quantum”) portfolio companies, ExL Petroleum and Middle Fork Energy Partners, and also served as Senior Advisor for Quantum. Prior to joining Quantum, Mr. Best served in various roles with SM Energy Company, an oil and gas exploration company, commencing in 2006 as its President and Chief Operating Officer, and as its Chief Executive Officer from February 2007 through January 2015. From 2003 to 2005, Mr. Best served as President and Chief Executive Officer of Pure Resources, Inc., a Unocal development and exploration company. From 2000 to 2003, Mr. Best served as an independent consultant offering leadership and oil and gas consultation to energy companies and volunteer organizations, and from 1979 through 2000, Mr. Best served in various roles of increasing responsibility at ARCO, culminating in the position of President, ARCO Latin America. Mr. Best holds a Master of Science in Engineering Management degree from the University of Alaska and a Bachelor of Science degree in Mechanical Engineering from Texas A&M University. Prior to beginning his business career, Mr. Best served five years as an engineering officer in the United States Air Force. We believe that Mr. Best’s experience in significant management roles with companies operating in the Permian Basin and his broad experience in the energy industry make him well suited to serve as a director. +G. Larry Lawrence, 73 , was appointed to our Board in December 2020. Mr. Lawrence previously served as Audit Committee Chair of Legacy Reserves, LP’s Board of Directors, a role he held from 2006 to 2019. From January 2021 until June 2021, Mr. Lawrence served as the interim Chief Financial Officer of Natural Gas Services Group, a natural gas compression equipment provider, where he previously served as Chief Financial Officer for nine years. Prior to Natural Gas Services Group, Mr. Lawrence served as Chief Financial Officer for Lynx Operating Co. Inc., an oil and gas exploration company, for three years and as Chief Financial Officer for Pure Resources, Inc., an oil and gas E&P company, for two years. He has also held finance and management consulting positions for Parson Group, ARCO and Crescent Consulting. Mr. Lawrence earned his bachelor’s degree with an accounting major from Dillard University in New Orleans. We believe that Mr. Lawrence’s broad experience in the energy industry, including his service as a director and executive officer with various companies, makes him well suited to serve as a director. +Jack B. Moore, 71 , has served as a member of our Board since March 2017. Mr. Moore most recently served as President and Chief Executive Officer of Cameron International Corporation (“Cameron”), an oil and gas industry equipment manufacturer and provider, from April 2008 to October 2015 and served as Chairman of the Board of Cameron from May 2011 until it was acquired by Schlumberger in April 2016. Prior to his employment with Cameron, Mr. Moore held various management positions at Baker Hughes Incorporated, where he was employed for 23 years. Mr. Moore currently serves on the Board of Directors of Occidental Petroleum Corporation, KBR Inc., and the University of Houston System Board of Regents. Mr. Moore previously served on the board of the American Petroleum Institute, the National Ocean Industries Association, Rowan Companies plc, and the Petroleum Equipment Suppliers Association. Mr. Moore received a Bachelor of Business Administration from the University of Houston and attended the Advanced Management Program at Harvard Business School. We believe that Mr. Moore’s wealth of experience in the oilfield service sector, including service as a director and executive officer to various public corporations in the sector, makes him well suited to serve as a director. +Mary P. Ricciardello, 69 , has served as a member of our Board since January 2023. Ms. Ricciardello currently serves as a director, Audit Committee member and Corporate Governance, Nominating and Sustainability Committee member at Eagle Materials Inc. Ms. Ricciardello previously served as a director at Devon Energy from 2008 to 2021, Noble Corporation from 2003 to 2020, Enlink Midstream from 2014 to 2018, Midstates Petroleum from 2010 to 2013 and U.S. Concrete from 2003 to +12 +2010. Beginning in 1982, Ms. Ricciardello enjoyed a distinguished, two-decade career at Reliant Energy Inc. (“Reliant”) and its predecessor, Houston Lighting & Power Company, an electricity generation and retail services company, where she held several roles of increasing responsibility in the financial services and treasury functions. In 1996, Ms. Ricciardello was appointed as Reliant’s Vice President and Comptroller and she served as its Senior Vice President and Chief Accounting Officer from 1999 until her retirement in 2002. Ms. Ricciardello earned a Bachelor of Science degree in Business Administration from the University of South Dakota and an MBA from the University of Houston. She is also a Texas licensed Certified Public Accountant and earned a CERT Certificate in Cybersecurity from Carnegie Mellon University. We believe that Ms. Ricciardello is well suited to serve as a director based on her accounting and financial expertise and public company board and committee experience. +Michele Vion, 65, was appointed to our Board in February 2020. Ms. Vion previously served as Vice President, Human Resources at HighPoint Resources Corporation, a successor to the Bill Barrett Corporation, an oil and gas E&P company, from August 2010 to September 2019. Ms. Vion was previously employed at Level 3 Communications, Inc., an international communications company, starting in 2006 and ultimately as Group Vice President of Human Resources up to January 2010. Ms. Vion also previously served as Vice President of Human Resources for Sun Microsystems, Inc., a computer networking company, for seven years. She also previously held senior human resource and client account management positions at Prudential Financial, Inc., an insurance and investment management company and JP Morgan, a global financial services firm. Prior to joining JP Morgan, Ms. Vion served in an accounting position as a Regional Controller for the Eastern Region at Sony Corporation of America. Ms. Vion previously served as Compensation Committee Chair and as a member of the Audit Committee of Boingo Wireless, Inc.’s Board of Directors, roles she held from 2018 until Boingo’s acquisition by Digital Colony Management, LLC in June 2021. Ms. Vion also served on the board and as Chair of the Compensation Committee and as member of the Audit Committee and Nominating and Corporate Governance Committee of Callidus Software Inc., a publicly-traded, cloud-based software company, from 2005 to 2016. Ms. Vion holds a Bachelor of Arts in East Asian Studies and Economics from Wesleyan University, has attended Stanford University’s Director’s College, and participated in the Financial Times’ Director Exchange. We believe that Ms. Vion is well suited to serve as a director based on her executive leadership experience in human resources and accounting and public company board and committee experience. +Alex V. Volkov, 52 , has served as a member of our Board since May 2024. Mr. Volkov is currently Vice President - Commercial & Integration, for ExxonMobil Upstream Unconventional business. Alex joined ExxonMobil in 1997 in Houston, Texas. During his early tenure with the company he has held diverse assignments in the areas of marketing, business development, supply chain logistics, and business strategy development. From 2014 to 2016, Alex was based in Moscow, Russia where he served as Vice President of Exxon Neftegas Limited responsible for ExxonMobil commercial activities in Russia, including natural gas sales and marketing of Sakhalin-1 gas resources. Alex moved to the United Kingdom in 2016 and he was appointed Vice President, International Gas, ExxonMobil Gas & Power Marketing and Chairman, ExxonMobil Gas Marketing Europe in 2018. In this capacity, he was responsible for ExxonMobil’s natural gas marketing and trading activities in Europe, Russia, Caspian, Malaysia, Thailand, and Australia. In 2019 Alex moved to Houston and was named Vice President, Global LNG Marketing. In this role, he had global responsibility for ExxonMobil’s Liquefied Natural Gas (LNG) portfolio and marketing of LNG for ExxonMobil’s projects and joint ventures. Between 2021 and 2023 Alex served first as Vice President, Commercial & Power and then as Vice President, Strategy and Business Development which included Upstream Acquisitions & Divestment team that was responsible for evaluation and negotiation of ExxonMobil / Pioneer merger announced in October 2023 and after the announcement he served as Transition Executive overseeing the integration of two companies . He assumed his current position in July of 2024. Alex graduated from the University of Nizhni Novgorod, Russia in 1994 and he also holds an MBA from the University of Alabama. +Set forth below are the name, age, position and description of the business experience of our executive officers (other than those who are also Directors and included above) as of February 20, 2025. +David S. Schorlemer, 57 , began serving as a Special Advisor to the Chief Financial Officer on October 12, 2020 until his appointment as Chief Financial Officer on October 23, 2020. Mr. Schorlemer has two decades of experience in senior level positions in public and private companies and has focused on building integrated business systems and support organizations. He most recently served as Executive Vice President, Chief Financial Officer, Treasurer and Secretary of Basic Energy Services, Inc., a Fort Worth, Texas based oilfield services company, from September 2018 until joining the Company. Prior to that, he served as the Chief Financial Officer of Gulf Island Fabrication, Inc. from January 2017 to August 2018. His work history also includes serving as Chief Financial Officer for three oilfield services companies: GR Energy Services Management, LP from January 2016 to December 2016, Stallion Oilfield Holdings, Inc., September 2004 to December 2015 and Q Services, Inc. from July 1997 until its merger with Key Energy Services, Inc. in July 2002. He also held the role of vice president, marketing and strategic planning for Key Energy Services, Inc. from July 2002 to September 2004. Prior to entering the energy services industry, Mr. Schorlemer was a technology consultant and project manager with Accenture’s Technology Practice +13 +where he worked on various domestic and international projects with Fortune 500 Companies in industries including: telecommunications, transportation, automotive and manufacturing and oil and gas. Mr. Schorlemer earned his Bachelor of Business Administration degree in finance from The University of Texas, and his Master of Business Administration from Texas A&M University. +Adam Muñoz, 42, has served as our President and Chief Operating Officer since August 2021, and prior to that, he served as Chief Operating Officer since January 2021 and served as Senior Vice President of Operations since March 2020. Mr. Muñoz joined the Company in 2010 to initiate ProPetro’s Permian pressure pumping operation. Prior to joining ProPetro, Mr. Muñoz held sales and operations roles at Frac Tech Services and Weatherford International. Since joining ProPetro, Mr. Muñoz has served as the Director of Business Development and Technical Services where he was responsible for overseeing the growth of the hydraulic fracturing operations as well as managing the department’s day-to-day technical services. Mr. Muñoz has most recently served as the Vice President of Frac Services where his duties included leading the hydraulic fracturing division through specific efforts to increase operational efficiencies and maximize financial productivity. Mr. Muñoz received a Bachelor of Business Marketing from The University of Texas at the Permian Basin. +John J. “Jody” Mitchell, 42 , has served as our General Counsel and Corporate Secretary of the Company since January 2023. Prior to his appointment as General Counsel, Mr. Mitchell served as the Company’s Vice President and Deputy General Counsel since April 2021. Before joining the Company, Mr. Mitchell served in various roles at Concho Resources Inc., a hydrocarbon exploration company acquired by ConocoPhillips in 2021 (“Concho”), from 2014 to 2021, including Director of Marketing and Midstream and, prior to that, Associate General Counsel. Before joining Concho, Mr. Mitchell served as counsel supporting the upstream and midstream businesses at Petrohawk Energy Corporation (“Petrohawk”) and at BHP Billiton following BHP Billiton’s acquisition of Petrohawk. Mr. Mitchell began his career as an associate at Locke Lord Bissell & Liddell LLP, where he concentrated on oil, gas and energy litigation and construction litigation. Mr. Mitchell holds a Bachelor of Arts from the University of Texas and a Juris Doctor from the University of Houston Law Center. +Shelby K. Fietz, 43 , has served as our Chief Commercial Officer of the Company since November 2023. Mr. Fietz joined ProPetro in 2012, and prior to his appointment as Chief Commercial Officer, Mr. Fietz served as the Company’s Vice President of Commercial, leading the business development, sales, supply chain, and marketing functions. He also previously held the position of Vice President of Business Development, Sales and Marketing, while also leading our supply chain organization. Prior to his appointment as an officer, Mr. Fietz held roles of increasing responsibility within ProPetro in both operations and business development. Mr. Fietz also serves in a leadership capacity with the Permian Basin Chapter of the Energy Workforce and Technology Council. Mr. Fietz holds a Bachelor of Science from Angelo State University. +Celina M. Davila, 44 , has served as our Chief Accounting Officer since November 2023. Prior to her appointment as Chief Accounting Officer, Ms. Davila served as the Company’s Director of Accounting and Corporate Controller since August 2022 and as Corporate Controller since October 2019. Ms. Davila joined the Company in January 2019 as Hydraulic Fracturing Controller. Prior to joining the Company, Ms. Davila served in various roles at Pioneer, a leading independent natural resources company, from 2012 to 2018, including Accounting Manager and, prior to that, Accounting Supervisor. Ms. Davila began her career as a Senior Auditor at Johnson, Miller, and Co. Ms. Davila is a Certified Public Accountant and holds a Bachelor of Arts in Accounting and a Master in Business Administration degree from Texas Tech University. +14 +Item 1A. Risk Factors. +The following is a description of significant factors that could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report and presented elsewhere by management from time to time. Such factors may have a material adverse effect on our business, financial condition and results of operations. It is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete statement of all our potential risks or uncertainties. Due to these, and other factors, past performance should not be considered an indication of future performance. +Risks Inherent in Our Business and Industry +Our business and financial performance depends on the historically cyclical oil and natural gas industry and particularly on the level of capital spending and E&P activity within the United States and in the Permian Basin, and a decline in prices for oil and natural gas may cause fluctuation in operating results or otherwise have an adverse effect on our revenue, cash flows, profitability and growth. +Demand for most of our services depends substantially on the level of capital expenditures in the Permian Basin by companies in the oil and natural gas industry. As a result, our operations are dependent on the levels of capital spending and activity in oil and gas exploration, development and production. Demand for our services is largely dependent on oil and natural gas prices, and our customers’ well completion budgets and rig count. Prolonged low oil and gas prices would generally depress the level of oil and natural gas exploration, development, production, and well completion activity and would result in a corresponding decline in the demand for the completion services that we provide. Historically, oil prices and markets have been extremely volatile. Prices are affected by many factors beyond our control. The average WTI oil price per barrel was approximately $76 , $78 and $94 for the years ended December 31, 2024, 2023, and 2022, respectively. In 2023, the volatility and overall decline in oil and natural gas prices caused a reduction in our customers’ spending and associated drilling and completion activities, which has had and may continue to have an adverse effect on our revenue and cash flows, if the WTI oil price remains highly volatile or declines in the future. +Many factors over which we have no control affect the supply of, and demand for our services, and our customers’ willingness to explore, develop and produce oil and natural gas, and therefore, influence prices for our services, including: +• the actions by the members of OPEC+ with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations; +• the domestic and foreign supply of, and demand for, oil and natural gas; +• the level of prices, and expectations about future prices, of oil and natural gas; +• the level of global oil and natural gas E&P; +• the cost of exploring for, developing, producing and delivering oil and natural gas; +• the supply of and demand for drilling and hydraulic fracturing and wireline equipment, including the supply and demand for lower emissions hydraulic fracturing and wireline equipment; +• cost increases and supply chain constraints related to our services; +• the expected decline in rates of current production; +• the price and quantity of foreign imports; +• political and economic conditions in oil and natural gas producing countries and regions, including the United States, the Middle East, Africa, South America and Russia; +• the actions taken by the United States and other countries on climate change or to transition away from fossil fuels; +• the severity and duration of world health events and related economic repercussions; +• speculative trading in crude oil and natural gas derivative contracts; +• the level of consumer product demand; +15 +• the discovery rates of new oil and natural gas reserves; +• contractions in the credit market; +• the strength or weakness of the U.S. dollar; +• available pipeline and other transportation capacity; +• the levels of oil and natural gas storage; +• weather conditions and other natural disasters; +• domestic and foreign tax policy; +• domestic and foreign governmental approvals and regulatory requirements and conditions, including tighter emissions standards in the energy industry and proposed tariffs; +• the result of the U.S presidential election; +• the continued threat of terrorism and the impact of military and other action, including military action in the Middle East; +• political or civil unrest in the United States or elsewhere, including the Russia-Ukraine war and the conflict in the Israel-Gaza region and related instability in the Middle East, including from Houthi rebels in Yemen, and tensions with Iran; +• technical advances affecting energy consumption; +• the proximity and capacity of oil and natural gas pipelines and other transportation facilities; +• the price and availability of alternative fuels; +• the ability of oil and natural gas producers to raise equity capital and debt financing; +• merger and divestiture activity among oil and natural gas producers; and +• overall domestic and global economic conditions. +These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. In 2022, Russia launched a large-scale invasion of Ukraine, leading to armed hostilities and imposition of sanctions on Russian economic trades. Since October 2023, an ongoing conflict between Israel and Palestinian militants in the Israel-Gaza region has led to armed hostilities. These events, which have impacted economic activity and disrupted global supply chain dynamics, have contributed to the unpredictable nature of crude oil prices. +The cyclical nature of the oil and natural gas industry may cause our operating results to fluctuate. +We derive our revenues from companies in the oil and natural gas E&P industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices. We have experienced, and may in the future experience, significant fluctuations in operating results as a result of the reactions of our customers to changes in oil and natural gas prices. For example, a decline in oil and gas prices, combined with adverse changes in the capital and credit markets, could cause many E&P companies to significantly reduce their 2020 and 2021 capital budgets and drilling activity. This could result in a significant decline in demand for energy services and could adversely impact the prices energy service companies can charge for their services. These factors have materially and adversely affected our business, results of operations and financial condition. In addition, a majority of the service revenue we earn is based upon a charge for a relatively short period of time (for example, a day, a week or a month) for the actual period of time the service is provided to our customers. By contracting services on a short‑term basis, we are exposed to the risks of a rapid reduction in market prices and utilization and resulting volatility in our revenues. +16 +The majority of our operations are located in the Permian Basin, making us vulnerable to risks associated with operating in one major geographic area. +Our operations are geographically concentrated in the Permian Basin. For the years ended December 31, 2024, 2023 and 2022, approximately 98.5%, 98.1% and 98.3%, respectively, of our revenues were attributable to our operations in the Permian Basin. As a result of this concentration, we may be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in the Permian Basin caused by significant governmental regulation, processing or transportation capacity constraints, market limitations, curtailment of production or interruption of the processing or transportation of oil and natural gas produced from the wells in these areas. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil and natural gas producing areas such as the Permian Basin, which may cause these conditions to occur with greater frequency or magnify the effects of these conditions. Due to the concentrated nature of our operations, we could experience any of the same conditions at the same time, resulting in a relatively greater impact on our revenue than they might have on other companies that have more geographically diverse operations. +The IRA 2022 could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations. +The IRA 2022, signed into law in August 2022, provides for hundreds of billions of dollars in incentives for the development of renewable energy, clean hydrogen, clean fuels, electric vehicles and supporting infrastructure and carbon capture and sequestration, amongst other provisions. If not modified, repealed or revoked by the current administration, these incentives could further accelerate the transition of the economy away from the use of fossil fuels towards lower- or zero-carbon emissions alternatives, which could decrease demand for oil and gas and consequently adversely affect the business of our customers, thereby reducing demand for our services. In addition, the IRA 2022 imposes the first ever federal fee on the emission of GHG through a methane emissions charge. The IRA 2022 amends the federal CAA to impose a fee on the emission of methane from sources required to report their GHG emissions to the EPA, including those sources in the offshore and onshore petroleum and natural gas production and gathering and boosting source categories. The methane emissions charge began in calendar year 2024 at $900 per ton of methane, increased to $1,200 in 2025, and will be set at $1,500 for 2026 and each year after. Calculation of the fee is based on certain thresholds established in the IRA 2022. We cannot predict whether how or when the current administration might take action to revise or repeal the methane emissions charge. Additionally, Congress may take actions to repeal or revise the IRA 2022, including with respect to the methane emissions charge, which timing or outcome similarly cannot be predicted. To the extent that the methane emissions charge is implemented as originally promulgated, it could increase our customers’ operating costs and adversely affect their businesses, thereby reducing demand for our services. +Our business may be adversely affected by a deterioration in general economic conditions or a weakening of the broader energy industry. +A prolonged economic slowdown or recession in the United States, adverse events relating to the energy industry or regional, national and global economic conditions and factors, particularly a further slowdown in the E&P industry, could negatively impact our operations and therefore adversely affect our results. The risks associated with our business are more acute during periods of economic slowdown or recession because such periods may be accompanied by decreased exploration and development spending by our customers, decreased demand for oil and natural gas and decreased prices for oil and natural gas. +New technology may cause us to become less competitive. +The energy service industry is subject to the introduction of new drilling and completion techniques and services using new technologies including artificial intelligence, some of which may be subject to patent or other intellectual property protections. As competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. The transition to lower emissions equipment is capital intensive and could require us to convert all our conventional Tier II equipment to lower emissions equipment. If we are unable to quickly transition to lower emissions equipment, the demand for our services could be adversely impacted. For example, many E&P companies, including our customers, are transitioning to a lower emissions operating environment and may require us to invest in equipment with lower emissions profiles. Further, we may face competitive pressure to develop, implement or acquire and deploy certain technology improvements at a substantial cost, such as our FORCE ® electric-powered hydraulic fracturing fleets deployed in 2023, or the cost of implementing or purchasing a technology like FORCE ® may be substantially higher than anticipated, and we may not be able to successfully implement the technologies we may purchase. In 2024, we recorded a property and equipment impairment charge of $188.6 million on our conventional Tier II diesel-only hydraulic fracturing pumping units and associated conventional assets, (the "Tier II Units") because we determined that the marketability of our Tier II Units had declined due to decreasing customer demand for and related pricing pressures on such equipment, among other factors. In 2022, we recorded a property and equipment impairment charge of $57.5 million on our DuraStim ® electric-powered equipment because they did +17 +not meet our expectations. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, effectively use and implement new and emerging technologies could have a material adverse effect on our business, financial condition, prospects or results of operations. +Our operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms, or at all, which could limit our ability to grow. +The energy service industry is capital intensive. In conducting our business and operations, we have made, and expect to continue to make, substantial capital expenditures. Our total capital expenditures incurred were approximately $133.4 million, $310.0 million and $365.3 million during the years ended December 31, 2024, 2023, and 2022. We have historically financed capital expenditures primarily with funding from cash on hand, cash flow from operations, equipment and vendor financing and borrowings under our credit facility. We may be unable to generate sufficient cash from operations and other capital resources to maintain planned or future levels of capital expenditures which, among other things, may prevent us from acquiring new equipment (including equipment with a lower emissions profile) or properly maintaining our existing equipment. Any disruptions or volatility in the global financial markets may lead to an increase in interest rates or a contraction in credit availabil ity impacting our ability to finance our operations. Our Borrowing Base (as defined below) was $164.1 million as of December 31, 2024 . If our customer activity levels decline in the future resulting in a decrease in our eligible accounts receivable, our Borrowing Base could decline. This could put us at a competitive disadvantage or interfere with our growth plans. Further, our actual capital expenditures could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of liquidity we have available, we could be required to seek additional sources of capital, which may include debt financing, joint venture partnerships, sales of assets, offerings of debt or equity securities or other means. We may not be able to obtain any such alternative source of capital. We may be required to curtail or eliminate contemplated activities. If we can obtain alternative sources of capital, the terms of such alternative may not be favorable to us. In particular, the terms of any debt financing may include covenants that significantly restrict our operations. Our inability to grow as planned may reduce our chances of maintaining and improving profitability. +Concerns over general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition. +Concerns over global economic conditions, geopolitical issues (including the Russia-Ukraine war and conflicts in the Middle East, including tensions with Iran), public health crises, interest rates, inflation, the availability and cost of credit in the United States, foreign financial markets and potential changes in U.S trade policy, including the imposition of tariffs and the resulting consequences have contributed to increased economic uncertainty and diminished expectations for the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, could precipitate an economic slowdown. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. In addition, there is currently significant uncertainty about the future relationship between the United States and various other countries, including changes arising as a result of the current presidential administration, with respect to trade policies, treaties, tariffs, taxes, and other limitations on cross-border operations. T he historically unpredictable nature of oil and natural gas prices, and particularly the volatility over the past two years have caused a reduction in our customers’ spending and associated drilling and completion activities, which had and may continue to have an adverse effect on our revenue and cash flows. If the economic climate in the United States or abroad deteriorates or remains uncertain, worldwide demand for petroleum products could diminish, which could impact the price at which oil, natural gas and natural gas liquids can be sold, which could affect the ability of our customers to continue operations and adversely impact our results of operations, liquidity and financial condition. +Our indebtedness and liquidity needs could restrict our operations and adversely affect our financial condition. +Our business is capital intensive and our existing and future indebtedness, whether incurred in connection with acquisitions, operations or otherwise, may adversely affect our operations and limit our growth, and we may have difficulty making debt service payments on such indebtedness as payments become due. Our level of indebtedness may affect our operations in several ways, including the following: +• increasing our vulnerability to general adverse economic and industry conditions; +• the covenants that are contained in the agreements governing our indebtedness could limit our ability to borrow funds, dispose of assets, pay dividends and make certain investments; +18 +• our debt covenants could also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry; +• any failure to comply with the financial or other debt covenants, including covenants that impose requirements to maintain certain financial ratios, could result in an event of default, which could result in some or all of our indebtedness becoming immediately due and payable; +• our level of debt could impair our ability to obtain additional financing, or obtain additional financing on favorable terms in the future for working capital, capital expenditures, research and development efforts, potential strategic acquisitions or other general corporate purposes; +• placing us at a competitive disadvantage relative to competitors that have less debt; and +• our business may not generate sufficient cash flow from operations to enable us to meet our obligations under our indebtedness. +Furthermore, interest rates on future indebtedness could be higher than current levels, causing our financing costs to increase accordingly. Changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our shares, and a rising interest rate environment could have an adverse impact on the price of our shares, our ability to issue equity or incur debt. +Restrictions in our ABL Credit Facility and any future financing agreements may limit our ability to finance future operations or capital needs or capitalize on potential acquisitions and other business opportunities. +The operating and financial restrictions and covenants in our credit facility and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities. For example, our ABL Credit Facility restricts or limits our ability to: +• grant liens; +• incur additional indebtedness; +• engage in a merger, consolidation or dissolution; +• enter into transactions with affiliates; +• sell or otherwise dispose of assets, businesses and operations; +• materially alter the character of our business as currently conducted; and +• make acquisitions, investments and capital expenditures. +Furthermore, our ABL Credit Facility contains certain other operating and financial covenants. Our ability to comply with the covenants and restrictions contained in the ABL Credit Facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in our ABL Credit Facility, a significant portion of our indebtedness may become immediately due and payable and our lenders’ commitment to make further loans to us may terminate. Further, our borrowing base, as redetermined monthly, has a borrowing base of the sum of 85.0% to 90.0% of eligible accounts receivable and 80% of eligible unbilled accounts (up to a maximum of 25% of the borrowing base), in each case, depending on the credit ratings of our accounts receivable counterparties, less customary reserves (the “Borrowing Base”). Changes to our operational activity levels or customer concentration levels have an impact on our total eligible accounts receivable, which could result in significant changes to our borrowing base and therefore our availability under our ABL Credit Facility. If our customer activity declines in the future, our borrowing base could decline. If our borrowing base is reduced below the amount of our outstanding borrowings, we will be required to re pay the excess borrowings immediately on demand by the lenders. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Any subsequent replacement of our ABL Credit Facility or any new indebtedness could have similar or greater restrictions. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facility and Other Financing Arrangements.” +We may record losses or impairment charges related to goodwill and long-lived assets including intangible assets. +19 +Changes in future market conditions and prolonged periods of low utilization, changes in technology or the sale of assets below their carrying value may cause us to experience losses in our results of operations. These events could result in the recognition of impairment charges or losses from asset sales that negatively impact our financial results. Significant impairment charges or losses from asset sales as a result of a decline in market conditions or otherwise could have a material adverse effect on our results of operations in future periods. For example, in 2024, we recorded property and equipment impairment charges of $188.6 million in connection with our Tier II Units and $23.6 million in connection with the goodwill in our wireline operating segment. In 2022, we recorded property and equipment impairment charges of $57.5 million in connection with our DuraStim ® electric powered hydraulic fracturing equipment . If oil and natural gas prices trade at depressed price levels, and our equipment remains idle or under-utilized, the estimated fair value of such equipment may decline, which will result in additional impairment expense in the future. +Our operations are subject to unforeseen interruptions and hazards inherent in the oil and natural gas industry, for which we may not be adequately insured and which could cause us to lose customers and substantial revenue. +Our operations are exposed to the risks inherent to our industry, such as equipment defects, vehicle accidents, worksite injuries to our or third-party personnel, fires, explosions, blowouts, surface cratering, uncontrollable flows of gas or well fluids, pipe or pipeline failures, abnormally pressured formations and various environmental hazards, such as oil spills and releases of, and exposure to, hazardous substances. For example, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including hydrochloric acid and other chemical additives. In addition, our operations are exposed to potential natural disasters, including blizzards, tornadoes, storms, floods, other adverse weather conditions and earthquakes. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigations and penalties or other damage resulting in curtailment or suspension of our operations or the loss of customers. For example, in January 2025, we experienced an accident at a customer site that resulted in one fatality and injured two others, which temporarily halted operations and is subject to routine investigation by OSHA. The cost of managing such risks may be significant. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our environmental or safety record as unacceptable, which could cause us to lose customers and substantial revenues. +Our insurance may not be adequate to cover all losses or liabilities we may suffer. We are also self-insured up to $10 million per occurrence for certain losses arising from or attributable to fire and/or explosion at wellsites that do not have qualified fire suppression measures. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased and could escalate further. In addition, sub‑limits have been imposed for certain risks. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our business, results of operations and financial condition. In addition, we may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. +Since hydraulic fracturing activities are part of our operations, they are covered by our insurance against claims made for bodily injury, property damage and cleanup costs stemming from a sudden and accidental pollution event. However, we may not have coverage if we are unaware of the pollution event and unable to report the " occurrence " to our insurance company within the time frame required under our insurance policy. In addition, these policies do not provide coverage for all liabilities, and the insurance coverage may not be adequate to cover claims that may arise, or we may not be able to maintain adequate insurance at rates we consider reasonable. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows. +A terrorist attack, armed conflict or political or civil unrest could harm our business. +Terrorist activities, anti‑terrorist efforts, other armed conflicts and political or civil unrest, including the Russia-Ukraine war and conflicts in the Middle East, could adversely affect the U.S. and global economies and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants, refineries or transportation facilities are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas, which, in turn, could also reduce the demand for our services. Terrorist activities, the threat of potential terrorist activities, political or civil unrest and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies. +20 +We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition and results of operations. +We operate with most of our customers under master service agreements (“MSAs”). We endeavor to allocate potential liabilities and risks between the parties in the MSAs. Generally, under our MSAs, including those relating to our hydraulic fracturing services, we assume responsibility for, including control and removal of, pollution or contamination which originates above surface and originates from our equipment or services. Our customer assumes responsibility for, including control and removal of, all other pollution or contamination which may occur during operations, including that which may result from seepage or any other uncontrolled flow of drilling fluids. We may have liability in such cases if we are negligent or commit willful acts. Generally, our customers also agree to indemnify us against claims arising from their employees’ personal injury or death to the extent that, in the case of our hydraulic fracturing operations, their employees are injured or their properties are damaged by such operations, unless resulting from our gross negligence or willful misconduct. Similarly, we generally agree to indemnify our customers for liabilities arising from personal injury to or death of any of our employees, unless resulting from gross negligence or willful misconduct of the customer. In addition, our customers generally agree to indemnify us for loss or destruction of customer‑owned property or equipment and in turn, we agree to indemnify our customers for loss or destruction of property or equipment we own. Losses due to catastrophic events, such as blowouts, are generally the responsibility of the customer. However, despite this general allocation of risk, we might not succeed in enforcing such contractual allocation, might incur an unforeseen liability falling outside the scope of such allocation or may be required to enter into an MSA with terms that vary from the above allocations of risk. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in us being named as a defendant in lawsuits asserting large claims. As a result, we may incur substantial losses which could materially and adversely affect our financial condition and results of operation. +We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss. +The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. For example, we depend on digital technologies to perform many of our services and process and record operational and accounting data. At the same time, cyber incidents, including deliberate attacks or unintentional events, have increased. +The frequency and magnitude of cybersecurity attacks is increasing and attackers have become more sophisticated. Cybersecurity attacks are similarly evolving and include without limitation use of malicious software, surveillance, credential stuffing, spear phishing, social engineering, use of deepfakes (i.e., highly realistic synthetic media generated by artificial intelligence), attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. We may be unable to anticipate, detect or prevent future attacks, particularly as the methodologies used by attackers change frequently or are not identifiable until deployed. We may also be unable to investigate or remediate incidents as attackers are increasingly using techniques and tools designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence. +The U.S. government has issued public warnings indicating that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary information, personal information and other data, or other disruption of our business operations. In addition, certain cyber incidents, such as unauthorized surveillance, may remain undetected for an extended period. Our systems and insurance coverage (if any) for protecting against cyber security risks, including cyberattacks, may not be sufficient and may not protect against or cover all of the losses (including potential reputational loss) we may experience as a result of the realization of such risks. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate the effects of cyber incidents. +We utilize technologies, controls and procedures, as well as internal staff and external service providers to protect our systems and data, to identify and remediate vulnerabilities and to monitor and respond to threats. However, there can be no assurance that such measures will be sufficient to prevent security breaches from occurring. No security measure is infallible. If we or the third parties with whom we interact were to experience a successful attack, the potential consequences to our business, workforce and the communities in which we operate could be significant, including financial losses, regulatory fines, loss of business, an inability to settle transactions or maintain operations, litigation costs, remediation costs, disruptions related to investigation, and significant damage to our reputation. +We may grow through acquisitions and/or internal expansions, and our failure to properly plan and manage such growth may adversely affect our performance. +21 +We have completed and may in the future pursue, asset acquisitions or acquisitions of businesses. We have internally expanded and may in the future expand into new lines of business. Any acquisition of assets or businesses, or expansion into new lines of business involves potential risks, including the failure to realize expected profitability, growth or accretion; environmental or regulatory compliance matters or liability; title or permit issues; the incurrence of significant charges, such as impairment of goodwill, property and equipment or intangible assets or restructuring charges; and the incurrence of unanticipated liabilities and costs for which indemnification is unavailable or inadequate. The process of upgrading acquired assets to our specifications and integrating acquired assets or businesses may also involve unforeseen costs and delays or other operational, technical and financial difficulties and may require a significant amount of time and resources and may divert management’s attention from existing operations or other priorities. For example, in 2024, we acquired the assets and operations of AquaProp, and we are in the process of fully integrating all parts of the acquired business into our operations. In late 2024, we also started a new line of business to provide power generation services to oil and gas producers and non-oil and gas applications such as general industrial projects and data centers. This new line of business has not begun any revenue-generating activities yet. +We must plan and manage any acquisitions and expansions effectively to achieve revenue growth and maintain profitability in our evolving market. Any failure to manage acquisitions and expansions effectively or integrate acquired assets or businesses into our existing operations successfully, or to realize the expected benefits from an acquisition or minimize any unforeseen operational difficulties, could have a material adverse effect on our business, financial condition, prospects or results of operations. +We may be adversely affected by the effects of inflation. +The U.S. inflation rate steadily increased in 2021 and 2022 before decreasing to a moderate level in 2023 through 2024. Inflation in wages, materials, parts, equipment and other costs has the potential to adversely affect our results of operations, cash flows and financial position by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers for our products and services. In addition, the existence of inflation in the economy has the potential to result in higher interest rates, which could result in higher borrowing costs, supply shortages, increased costs of labor, weakening exchange rates and other similar effects. Sustained levels of high inflation have likewise caused the U.S. Federal Reserve and other central banks to increase interest rates in 2023 followed by decreases in 2024, and the U.S. Federal Reserve may maintain high benchmark interest rates into 2025 in an effort to curb inflationary pressure on the costs of goods and services across the U.S., which could have the effects of raising the cost of capital and depressing economic growth, either of which—or the combination thereof—could hurt the financial and operating results of our business. To the extent elevated inflation remains, and as a result potential changes in U.S trade policy, including the imposition of tariffs and the resulting consequences, we may experience further cost increases for our operations, including labor costs and equipment. We cannot predict any future trends in the rate of inflation and a significant increase in inflation, to the extent we are unable to timely pass-through the cost increases to our customers, would negatively impact our business, financial condition and results of operations. +Risks Related to Customers, Suppliers and Competition +Reliance upon a few large customers may adversely affect our revenue and operating results. +The majority of our revenue is generated from our hydraulic fracturing services. Due to the large percentage of our revenue historically derived from our hydraulic fracturing services with recurring customers and the limited availability of our fracturing units, we have had some degree of customer concentration. Our top ten customers represented approximately 75.3%, 85.5% and 91.2% of our consolidated revenue for the years ended December 31, 2024, 2023 and 2022, respectively. It is likely that we will depend on a relatively small number of customers for a significant portion of our revenue in the future. If a major customer fails to pay us, revenue would be impacted and our operating results and financial condition could be harmed. Additionally, if we were to lose any material customer, we may not be able to redeploy our equipment at similar utilization or pricing levels and such loss could have an adverse effect on our business until the equipment is redeployed at similar utilization or pricing levels. +XTO Energy, Permian Resources and EOG Resources accounted for 19.7%, 14.9% and 10.6%, respectively, of our revenue for the year ended December 31, 2024. If either of these customers were to significantly reduce or discontinue our services, it could have a material adverse effect on our financial condition, results of operations and cash flows. There have been many recent mergers and acquisitions in the oil and gas industry. In May 2024, Pioneer merged with and into a wholly owned subsidiary of ExxonMobil. The Company currently provides pressure pumping, wireline and other services to ExxonMobil and previously provided such services to Pioneer. Mergers and acquisitions involving our customers could negatively impact our future business with them or positively impact our business by providing us access to potential new customers. +22 +We face significant competition that may cause us to lose market share, and competition in our industry has intensified as a result of customer consolidation and industry downturns. +The energy service industry is highly competitive and has relatively few barriers to entry. The principal competitive factors impacting sales of our services are price, reputation and technical expertise, equipment and service quality and health and safety standards. The market is also fragmented and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial and other resources than we do. Our larger competitors’ greater resources could allow those competitors to compete more effectively than we can. For instance, our larger competitors may offer services at below‑market prices or bundle ancillary services at no additional cost to our customers. We compete with large national and multi‑national companies that have longer operating histories, greater financial, technical and other resources and greater name recognition than we do. Several of our competitors provide a broader array of services and have a stronger presence in more geographic markets. In addition, we compete with several smaller companies capable of competing effectively on a regional or local basis. +Some jobs are awarded on a bid basis, which further increases competition based on price. Pricing is often the primary factor in determining which qualified contractor is awarded a job. The competitive environment may be further intensified by tighter emissions standards in the energy industry and mergers and acquisitions among oil and natural gas companies or other events that have the effect of reducing the number of available customers. As a result of competition, we may lose customers or customer work and lose market share or be unable to maintain or increase prices for our present services or to acquire additional business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. +Our competitors may be able to respond more quickly to new or emerging technologies and services and changes in customer requirements. The amount of equipment available may exceed demand, which could result in active price competition. In addition, some E&P companies have commenced completing their wells using their own hydraulic fracturing equipment and personnel. Any increase in the development and utilization of in‑house fracturing capabilities by our customers could decrease the demand for our services and have a material adverse impact on our business. +Pressure on pricing for our services resulting from the industry downturn has impacted, and may continue to impact, our ability to maintain utilization and pricing for our services or implement price increases. During periods of declining pricing for our services, we may not be able to reduce our costs accordingly, which could further adversely affect our results of operations. Also, we may not be able to successfully increase prices without adversely affecting our utilization levels. The inability to maintain our utilization and pricing levels, or to increase our prices as costs increase, could have a material adverse effect on our business, financial condition and results of operations. +Furthermore, competition among energy service and equipment providers is affected by each provider’s reputation for safety and quality. We cannot assure that we will be able to maintain our competitive position. +We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our business, results of operations and financial condition. +We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we fail to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re‑market or otherwise use the production could have a material adverse effect on our business, results of operations and financial condition. In weak economic environments, we may experience increased delays and failures to pay due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets or other sources of capital. The unpredictable nature of oil and gas prices in recent years and other factors may have negatively impacted the financial condition and liquidity of some of our customers, and future declines or continued volatility could impact their ability to meet their financial obligations to us. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, results of operations, and financial condition. +Our business depends upon the ability to obtain specialized equipment, parts and key raw materials, including sand and chemicals, from third‑party suppliers, and we may be vulnerable to delayed deliveries and future price increases. +We purchase specialized equipment, parts and raw materials (including, for example, power generation equipment, frac sand, chemicals and fluid ends) from third party suppliers and affiliates. In some cases, our customers are responsible for supplying necessary raw materials (including frac sand), parts and/or equipment. At times during the business cycle, there is a high +23 +demand for hydraulic fracturing and other energy services and extended lead times to obtain equipment and raw materials needed to provide these services. For example, in 2021 and 2022, there was significant disruption in supply chains around the world caused by the COVID-19 pandemic that impacted our operations. Should our current suppliers (or our customers’ suppliers where applicable) be unable or unwilling to provide the necessary equipment, parts or raw materials or otherwise fail to deliver the products timely and/or in the quantities required, any resulting delays in the provision of our services could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, future price increases for this type of equipment, parts and raw materials could negatively impact our ability to purchase new equipment, to update or expand our existing fleets, to timely repair equipment in our existing fleets or meet the current demands of our customers. +We may be required to pay fees to certain of our Sand Suppliers based on minimum volumes under long-term contracts regardless of actual volumes received. +We enter into purchase agreements with the Sand Suppliers to secure supply of sand in the normal course of our business. The agreements with the Sand Suppliers require that we purchase minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the mi nimum volumes or a fixed price per ton of unpurchased volumes. Our current agreements with Sand Suppliers expire at different times prior to December 31, 2025 . +Disruption of our supply chain could adversely impact our ability to provide our services. +Our suppliers use multiple forms of transportation to bring their products to market, including truck, ocean and air-cargo shipments. Disruption to the timely supply of raw materials, parts and finished goods or increases in the cost of transportation services, including due to general inflationary pressures, cost of fuel and labor, labor disputes, governmental regulation or governmental restrictions limiting specific forms of transportation, could have an adverse effect on our ability to provide our services, which would adversely affect our results of operations, cash flows and financial position. +Risks Related to Employees +We rely on a few key employees whose absence or loss could adversely affect our business. +Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services could adversely affect our business. In particular, the loss of the services of one or more members of our executive team, such as our Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer, Chief Accounting Officer, Chief Commercial Officer and General Counsel could disrupt our operations. We do not maintain “key person” life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees. +If we are unable to employ a sufficient number of skilled and qualified workers, our capacity and profitability could be diminished and our growth potential could be impaired. +The delivery of our services requires skilled and qualified workers with specialized skills and experience who can perform physically demanding work. As a result of the volatility of the energy service industry and the demanding nature of the work, workers may choose to pursue employment in fields that offer a less challenging work environment at wage rates that are competitive. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled workers. As a result of the physical nature of our operations, we have experienced difficulties in attracting and retaining skilled workers. If demand for our services increases, we may experience difficulty in hiring or re-hiring skilled and unskilled workers in the future to meet that demand. At times, the demand for skilled workers in our geographic areas of operations is high, and the supply is limited. As a result, competition for experienced energy service personnel is intense, and we face significant challenges in competing for crews and management with large and well‑established competitors. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Furthermore, if we are unable to adjust wages to account for rapidly rising inflationary cost, there could be a reduction in the available skilled labor force we could attract or retain. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired. +Risks Related to Regulatory Matters +24 +We are subject to environmental laws and regulations, and future compliance, claims, and liabilities relating to such matters may have a material adverse effect on our results of operations, financial position or cash flows. +The nature of our operations, including the handling, storing, transporting and disposing of a variety of fluids and substances, including hydraulic fracturing fluids, which can contain substances such as hydrochloric acid, and other regulated substances, air emissions and wastewater discharges exposes us to some risks of environmental liability, including the release of pollutants from oil and natural gas wells and associated equipment to the environment. The cost of compliance with these laws can be significant. Failure to properly handle, transport or dispose of these materials or otherwise conduct our operations in accordance with these and other environmental laws could expose us to substantial liability for administrative, civil and criminal penalties, cleanup and site restoration costs and liability associated with releases of such materials, damages to natural resources and other damages, as well as potentially impair our ability to conduct our operations. Such liability is commonly on a strict, joint and several liability basis, without regard to fault. Liability may be imposed as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Neighboring landowners and other third parties may file claims against us for personal injury or property damage allegedly caused by the release of pollutants into the environment. Environmental laws and regulations have changed in the past, and they may change in the future and become more stringent. For example, the prior administration made climate change a focus of its administration. For more information, see our risk factor titled, “Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide.” Separately, current and future claims and liabilities may have a material adverse effect on us because of potential adverse outcomes, defense costs, diversion of management resources, unavailability of insurance coverage and other factors. The ultimate costs of these liabilities are difficult to determine and may exceed any reserves we may have established. If existing environmental requirements or enforcement policies change, we may be required to make significant unanticipated capital and operating expenditures. +Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide. +Numerous proposals regarding climate change have been made and could continue to be made at the international, national, regional and state levels of government to monitor and limit existing emissions of GHGs as well as to restrict or eliminate future GHG emissions. As a result, our operations as well as the operations of our oil and natural gas E&P customers are subject to a series of regulatory, political, litigation, and financial risks associated with the production and processing of fossil fuels and emission of GHGs. +In the United States, no comprehensive climate change legislation has been implemented at the federal level, though recently passed laws such as the IRA 2022 advance numerous climate-related objectives. Additionally, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, implement New Source Performance Standards directing the reduction of certain pollutants from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the DOT, implementing GHG emissions limits on vehicles manufactured for operation in the United States. In December 2023, the EPA finalized a rule that established OOOOb more stringent new source and OOOOc first-time existing source standards of performance for methane and volatile organic compound emissions for oil and gas facilities. Under the final rule, states will have two years to prepare and submit their plans to impose methane emissions controls on existing sources. The presumptive standards under the final rule are generally the same for both new and existing sources, including enhanced leak detection using optical gas imaging and subsequent repair equipment, and reduction of emissions by 95% through capture and control systems. The rule also revises requirements for fugitive emissions monitoring and repair as well as equipment leaks and the frequency of monitoring surveys, establishes a " super-emitter " response program to timely mitigate emissions events as detected by governmental agencies or qualified third parties, triggering certain investigation and repair requirements, and provides additional options for the use of advanced monitoring to encourage the deployment of innovative technologies to detect and reduce methane emissions. However the EPA’s final rule is currently being challenged by 23 states and a coalition of industry groups in the U.S Circuit Court of Appeals for the D.C. Circuit. Additionally, at this time, it remains uncertain as to whether the current administration will repeal or modify this rule and the timing with respect to the same. Notwithstanding this, failure to comply with these new methane rules may result in substantial fines and penalties for non-compliance, as well as injunctive relief. Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas such as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored Paris Agreement, requires member states to submit non- +25 +binding, individually-determined reduction goals known as NDCs every five years after 2020. The United States rejoined the Paris Agreement in January 2021 and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. However, in January 2025, the current President signed an Executive Order once again withdrawing the United States from the Paris Agreement and from any other commitments made under the United Nations Framework Convention on Climate Change. The full impact of these recent developments is uncertain at this time. +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States. For example, in January 2024 the government announced a temporary pause on pending decisions on liquefied natural gas exports to certain countries. However, upon taking office, the current President signed an Executive Order resuming the processing of permit applications for such projects. Litigation risks are also increasing as a number of parties have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. Additionally on January 26, 2024, the former president announced a temporary pause on pending decisions on new exports of LNG to countries that the United States does not have free trade agreements with, pending Department of Energy review of the underlying analyses for authorizations. The pause was intended to provide time to integrate certain considerations, including potential energy cost increases for consumers and manufacturers and the latest assessment of the impact of GHG emissions, to ensure adequate guards against health risks. The Department of Energy finalized its study in December 2024. However, upon taking office, the current President signed an Executive Order resuming the processing of permit applications for such projects. At this time, it is unclear what actions the Presidential Administration may take, if at all, with respect to the Department of Energy’s study. Litigation risks are also increasing as a number of parties have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. +There have also recent been increasing financial risks for companies in the fossil fuel sector as certain shareholders currently invested in fossil-fuel energy companies concerned about the potential effects of climate change may elect in the future to shift some or all of their investments into non-fossil fuel related sectors. Institutional lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable lending practices and some of them may elect not to provide funding for fossil fuel energy companies although this trend has waned recently and several high-profile banks and institutional investors have withdrawn from various associations that aim to limit financing of industries that emit significant GHG emissions. Any limitation of investments in and financings for fossil fuel energy companies could result in the restriction, delay or cancellation of drilling programs or development or production activities. Separately, the SEC released a final rule on climate-related disclosures on March 6, 2024, requiring the disclosure of certain climate-related risks and financial impacts, as well as GHG emissions, which was subsequently stayed by the U.S. Court of Appeals for the Fifth Circuit. The future of the rule remains uncertain at this time given the litigation; however, on February 11, 2025, SEC Acting Chairman Mark T. Uyeda released a public statement and notified the U.S. Court of Appeals for the Eighth Circuit (where the challenges are consolidated) to hold off scheduling argument in the case to provide time for the SEC to further deliberate the final rule and determine next steps. Relatedly, certain states have enacted or are otherwise considering disclosure requirements for certain climate-related risks. Enhanced climate-related disclosure requirements could increase our operating costs and lead to reputational or other harm with customers, regulators, or other stakeholders to the extent our disclosures do not meet their own standards or expectations. Consequently, we are also exposed to increased litigation risks relating to alleged climate-related damages resulting from our operations, statements alleged to have been made by us or others in our industry regarding climate change risks, or in connection with any future disclosures we may make regarding reported emissions, particularly given the inherent uncertainties and estimation required with respect to calculating and reporting GHG emissions. We also cannot predict how financial institutions and investors might consider any information disclosed under any such requirements when making investment decisions, and as a result it is possible that we could face increases with respect to the costs of, or restrictions imposed on, our access to capital. +Climate change may result in various physical risks, such as the increased frequency or intensity of extreme weather events or changes in the meteorological and hydrological patterns, that could adversely impact us, our customers’ and our suppliers’ operations. Such physical risks may result in damage to our customers’ facilities or otherwise adversely impact our operations, such as if facilities are subject to water use curtailments in response to drought, or demand for our customers’ products, such as to the extent warmer winters reduce the demand for energy for heating purposes, which may ultimately reduce demand for the products and services we provide. Such physical risks may also impact our suppliers, which may adversely affect our ability to provide our products and services. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +26 +Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. +Our hydraulic fracturing operations are a significant component of our business, and it is an important and common practice that is used to stimulate production of hydrocarbons, particularly oil and natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has previously issued a series of rules under the CAA that establish new emission control requirements for emissions of volatile organic compounds and methane from certain oil and natural gas production and natural gas processing operations and equipment. Separately, the BLM finalized a rule governing hydraulic fracturing on federal lands but this rule was subsequently rescinded. Although several of these rulemakings have been rescinded, modified or subjected to legal challenges, new or more stringent regulations may be promulgated by the government. For example, in March 2024 the BLM finalized a rule that requires operators to limit flaring from well sites on federal lands, and allows the delay or denial of permits if BLM finds that an operator’s methane waste minimization plan is insufficient. The rule was challenged by various states in the District Court of North Dakota and, in September 2024, the court ordered that the rule cannot be enforced within the plaintiff states pending the outcome of the litigation. Although the rule is currently being implemented in areas not covered by the order, the future of the rule is uncertain. Additionally in January 2021, the president issued an executive order suspending new leasing activities, but not operations under existing leases, for oil and gas E&P on non-Native American federal lands pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices that take into consideration potential climate and other impacts associated with oil and gas activities on such lands and waters. Although the leasing pause was effectively halted by a permanent injunction in August 2022, in response to the executive order, the DOI issued a report recommending various changes to the federal leasing program, though many such changes would require Congressional action. In April 2024, the BLM finalized a rule updating the fiscal terms of federal oil and gas leases, increasing fees, rents, royalties, and bonding requirements. The rule also adds new criteria for BLM to consider when determining whether to lease nominated land, including the presence of important habitats or wetlands, the presence of historical properties or sacred sites, and recreational use of the land. Any regulations that ban or effectively ban such operations may adversely impact demand for our products and services. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in previous sessions of Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +Federal and state governments have also investigated whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for wastewater disposal wells in 2014 that imposed certain permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission released well completion seismicity guidelines for operators in the SCOOP and STACK require hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division has previously issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The TRRC has adopted similar rules and, in September 2021, issued a notice to disposal well operators in the Gardendale Seismic Response Area near Midland, Texas to reduce daily injection volumes following multiple earthquakes above a 3.5 magnitude over an 18 month period. The notice also required disposal well operators to provide injection data to TRRC staff to further analyze seismicity in the area. Subsequently, the TRRC ordered the indefinite suspension of all deep oil and gas produced water injection wells in the area, effective December 31, 2021. The Gardendale Seismic Response area has since been expanded in response to an additional earthquake in December 2022, covering 17 additional wells. In December 2023, a further 23 deep disposal well permits were suspended in the Northern Culberson-Reeves Seismic Response Area. While we cannot predict the ultimate outcome of these actions, any action that temporarily or permanently restricts the availability of disposal capacity for produced water or other oilfield fluids may increase our customers’ costs or require them to suspend operations, which may adversely impact demand for our products and services. +27 +Increased regulation of hydraulic fracturing and related activities could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. +Increasing trucking regulations may increase our costs and negatively impact our results of operations. +In connection with our business operations, including the transportation and relocation of our hydraulic fracturing equipment and shipment of frac sand, we operate trucks and other heavy equipment. As such, we operate as a motor carrier in providing certain of our services and therefore are subject to regulation by the DOT and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations, driver licensing, insurance requirements, financial reporting and review of certain mergers, consolidations and acquisitions, and transportation of hazardous materials. Our trucking operations are subject to possible regulatory and legislative changes that may increase our costs. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive or work in any specific period, onboard black box recorder device requirements or limits on vehicle weight and size. +Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Matters such as the weight and dimensions of equipment are also subject to federal and state regulations. From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted. +Certain motor vehicle operators require registration with the DOT. This registration requires an acceptable operating record. The DOT periodically conducts compliance reviews and may revoke registration privileges based on certain safety performance criteria that could result in a suspension of operations. +Increased attention to ESG matters, conservation measures, commercial development and technological advances could reduce demand for oil and natural gas and our services. +Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, increased attention to climate change and other ESG-related matters, and technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas, resulting in reduced demand for energy services. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows. +The commercial development of economically‑viable alternative energy sources and related products (such as electric vehicles, wind, solar, geothermal, tidal, fuel cells and biofuels) could have a similar effect. The IRA 2022 appropriates significant federal funding for renewable energy initiatives, which could accelerate the use and commercial viability of alternative energy sources and decrease demand for oil and natural gas. The IRA 2022 has incentivized the further development of and investment in clean energy through the use of tax credits, and future legislation could expand these benefits for alternative energy sources. In addition, legislation has been previously proposed that would make changes to certain U.S. federal income tax provisions currently applicable with respect to oil and natural gas exploration and development companies, including by eliminating the percentage depletion allowance for oil and natural gas properties. While it remains to be seen if the current administration would modify or repeal some or all of the IRA 2022, any future decreases in the rate at which oil and natural gas reserves are discovered or developed, whether due to the passage of legislation, increased governmental regulation leading to limitations, or prohibitions on exploration and drilling activity, including hydraulic fracturing, or other factors, could have a material adverse effect on our business and financial condition, even in a stronger oil and natural gas price and regulatory environment. +Moreover, while we may create and publish voluntary disclosures regarding ESG-related matters from time to time, certain statements in those voluntary disclosures may be based on expectations and assumptions or hypothetical scenarios that may or may not be representative of current or actual risks or events or forecasts of expected risks or events, including the costs associated therewith. Such expectations and assumptions or hypothetical scenarios are necessarily uncertain and may be prone to error or subject to misinterpretation given the long timelines involved and the lack of an established approach to identifying, measuring and reporting on many ESG matters. Additionally, we may announce various targets or product and service offerings in an attempt to improve our ESG profile. However, such targets are often aspirational and we cannot guarantee that we will be able to meet any such targets or that such targets or offerings will have the intended results on our ESG profile, including but not limited to as a result of unforeseen costs, consequences or technical difficulties associated with such targets or offerings. +28 +Also, despite any voluntary actions, we may receive pressure from certain investors, lenders or other groups to adopt more aggressive climate or other ESG-related goals or policies, but we cannot guarantee that we will be able to pursue or implement such goals because of potential costs or technical or operational obstacles. +Additionally, certain statements or initiatives with respect to ESG-related matters that we may pursue or assert are increasingly subject to heightened scrutiny from the public and governmental authorities, as well as other parties. For example, the SEC has recently taken enforcement action against companies for ESG-related misconduct, including alleged “greenwashing,” (i.e., the process of conveying misleading information or making false claims that overstate potential ESG benefits). Certain regulators, such as the SEC and various state agencies, as well as nongovernmental organizations and other private actors have filed lawsuits under various securities and consumer protection laws alleging that certain ESG statements, goals or standards were misleading, false or otherwise deceptive. Additionally, certain employment practices and social initiatives are the subject of scrutiny by both those calling for the continued advancement of such policies, as well as those who believe they should be curbed, including government actors, and the complex regulatory and legal frameworks applicable to such initiatives continue to evolve. More recent political developments could mean that we face increasing criticism or litigation risks from certain “anti-ESG” parties, including various governmental agencies. Such sentiment may focus on our environmental commitments (such as reducing GHG emissions) or our pursuit of certain employment practices or social initiatives that are alleged to be political or polarizing in nature or are alleged to violate laws based, in part, on changing priorities of, or interpretations by, federal agencies or state governments. As a result, we may be subject to pressure in the media or through other means, such as governmental investigations, enforcement actions, or other proceedings, all of which could adversely affect our reputation, business, financial performance, market access and growth. Accordingly, there may be increased costs related to reviewing, implementing and managing such policies, as well as compliance and litigation risks based both on positions we do or do not take, or work we do or do not perform. +In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. While such ratings do not impact all investors’ investment or voting decisions, unfavorable ESG ratings and recent activism directed at shifting funding away from companies with energy-related assets could lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital. Additionally, to the extent ESG matters negatively impact our reputation, we may not be able to compete as effectively to recruit or retain employees, which may adversely affect our operations. +Furthermore, employment practices and social initiatives are also the subject of scrutiny by stakeholders, federal agencies, state governments, regulators and other third-parties. The complex regulatory and legal frameworks applicable to such initiatives continue to evolve. We cannot be certain of the impact of such regulatory, legal and other developments on our business. To the extent any enforcement actions or other litigation is brought against us as a result of emerging viewpoints and legal interpretations, our business, financial condition and access to financing may be materially and adversely affected. +Certain of our completion services, particularly our hydraulic fracturing services, are substantially dependent on the availability of water. Restrictions on our or our customers’ ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows. +Water is an essential component of unconventional shale oil and natural gas production during both the drilling and hydraulic fracturing processes. Over the past several years, certain of the areas in which we and our customers operate have experienced extreme drought conditions and competition for water in such areas is growing. In addition, some state and local governmental authorities have begun to monitor or restrict the use of water subject to their jurisdiction for hydraulic fracturing to ensure adequate local water supply. For instance, some states require E&P companies to report certain information regarding the water they use for hydraulic fracturing and to monitor the quality of groundwater surrounding some wells stimulated by hydraulic fracturing. Generally, our water requirements are met by our customers from sources on or near their sites, but there is no assurance that our customers will be able to obtain a sufficient supply of water from sources in these areas. Our or our customers’ inability to obtain water from local sources or to effectively utilize flowback water could have an adverse effect on our financial condition, results of operations and cash flows. +Risks Related to our Tax Matters +Our ability to use our NOLs may be limited. +29 +As of December 31, 2024, we had approximately $186.1 million of U.S. federal NOLs, all of which will have an unlimited carryforward. As of December 31, 2024, our state net operating losses were approximately $42.8 million and will begin to expire in 2030. +Utilization of these NOLs depends on many factors, including our future income, which cannot be assured. In addition, Section 382 (“Section 382”) of the Internal Revenue Code of 1986, as amended, generally imposes an annual limitation on the amount of taxable income that may be offset by NOLs when a corporation has undergone an “ownership change” (as determined under Section 382). Generally, a change of more than 50% in the ownership of a corporation’s stock, by value, over a three‑year period constitutes an ownership change for U.S. federal income tax purposes. Any unused annual limitation may, subject to certain limitations, be carried over to later years. We may experience future ownership changes, which may result in annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long‑term tax‑exempt rate as defined in Section 382, increased under certain circumstances as a result of recognizing built‑in gains in our assets existing at the time of the ownership change. The limitations arising from ownership changes may prevent utilization of our NOLs prior to their expiration. Future ownership changes or regulatory changes could further limit our ability to utilize our NOLs. To the extent we are not able to offset our future income with our NOLs, this could adversely affect our operating results and cash flows if we attain profitability. +Changes to applicable tax laws and regulations or exposure to additional tax liabilities could adversely affect our operating results and cash flows. +We are subject to various complex and evolving U.S. federal, state and local tax laws. U.S. federal, state and local tax laws, policies, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us, in each case, possibly with retroactive effect. Any significant variance in our interpretation of current tax laws or a successful challenge of one or more of our tax positions by the Internal Revenue Service or other tax authorities could increase our future tax liabilities and adversely affect our operating results and cash flows. +Risks Inherent to an Investment in our Common Stock +We are subject to certain requirements of Section 404. If we or our auditors identify and report material weaknesses in internal control over financial reporting, our investors may lose confidence in our reported information and our stock price may be negatively affected. +We are required to comply with certain provisions of Section 404, which requires that we document and test our internal control over financial reporting and issue our management’s assessment of our internal control over financial reporting. This section also requires that our independent registered public accounting firm issue an attestation report on such internal control. +Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we or our auditors identify and report material weaknesses in internal controls over financial reporting or if we fail to maintain an effective system of internal controls, such instances may result in material misstatements of our financial statements, cause us to fail to meet our reporting obligations, investors may lose confidence in our financial reporting, and our stock price may decline as a result. +Certain provisions of our certificate of incorporation, and bylaws, as well as Delaware law, may discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock. +Our certificate of incorporation authorizes our board of directors (the “Board”) to issue preferred stock without shareholder approval. If our Board elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our shareholders, including: +• limitations on the removal of directors; +• limitations on the ability of our shareholders to call special meetings; +• advance notice provisions for shareholder proposals and nominations for elections to the Board to be acted upon at meetings of shareholders; +• providing that the Board is expressly authorized to adopt, or to alter or repeal our bylaws; and +• establishing advance notice and certain information requirements for nominations for election to our Board or for proposing matters that can be acted upon by shareholders at shareholder meetings. +30 +Our business could be negatively affected as a result of the actions of activist shareholders. +Publicly traded companies have increasingly become subject to campaigns by investors seeking to increase shareholder value by advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases, sales of assets or even sale of the entire company. Given our shareholder composition and other factors, it is possible such shareholders or future activist shareholders may attempt to effect such changes or acquire control over us. Responding to proxy contests and other actions by such activist shareholders or others in the future would be costly and time-consuming, disrupt our operations and divert the attention of our Board and senior management from the pursuit of business strategies, which could adversely affect our results of operations and financial condition. Additionally, perceived uncertainties as to our future direction as a result of shareholder activism or changes to the composition of the Board may lead to the perception of a change in the direction of our business, instability or lack of continuity which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. If customers choose to delay, defer or reduce transactions with us or transact with our competitors instead of us because of any such issues, then our business, financial condition, revenues, results of operations and cash flows could be adversely affected. +Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to pursue actions in another judicial forum for disputes with us or our directors, officers, employees or agents. +Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our shareholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. +The exclusive forum provision would not apply to suits brought to enforce any liability or duty created by the Securities Act or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. +The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation or similar governing documents has been challenged in legal proceedings, and it is possible that a court could find the choice of forum provisions contained in our certificate of incorporation to be inapplicable or unenforceable, including with respect to claims arising under the U.S. federal securities laws. +Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our certificate of incorporation regarding exclusive forum. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations. +The market price of our common stock is subject to volatility. +The market price of our common stock could be subject to wide fluctuations in response to, and the level of trading of our common stock may be affected by, numerous factors, many of which are beyond our control. These factors include, among other things, our limited trading volume, the concentration of holdings or our common stock, actual or anticipated variations in our operating results and cash flow, the nature and content of our earnings releases, announcements or events that impact our products, customers, competitors or markets, business conditions in our markets and the general state of the securities markets, volatility in oil and gas prices and the market for energy-related stocks, as well as general economic and market conditions and other factors that may affect our future results, including those described in this report. Significant sales of our common stock, or the expectation of these sales, by significant shareholders, officers or directors could materially and adversely affect the market price of our common stock. +31 +There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock. +We are not restricted from issuing additional common stock, including securities that are convertible into or exchangeable for, or that represent a right to receive, common stock. In addition, we may issue common stock as consideration in future mergers and acquisitions, as we did in the Silvertip Acquisition. Any issuance of additional shares of our common stock or convertible securities will dilute the ownership interest of our common stockholders. Sales of a substantial number of shares of our common stock or other equity-related securities in the public market, or the perception that these sales could occur, could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our common stock or other equity-related securities would have on the market price of our common stock. +There can be no assurance that we will purchase all the shares authorized under our share repurchase program or that such program will enhance the long-term value of our share price. +On April 24, 2024, our Board approved an increase and extension to the share repurchase program previously authorized on May 17, 2023. The program permits the share repurchase of up to an additional $100.0 million of the Company’s common stock for a total of $200.0 million and extends the expiration date by one year to May 31, 2025. There is no obligation for us to continue to repurchase or to repurchase any specific dollar amount of stock and the program may be suspended, modified or discontinued at any time without prior notice. The timing, as well as the number and value of shares repurchased under the program, will be determined by the Company at its discretion and will depend on a variety of factors, including management's assessment of the intrinsic value of our common stock, the market price of the our common stock, general market and economic conditions, available liquidity, compliance with the Company's debt and other agreements, applicable legal requirements, and other considerations. The share repurchase program could affect the price of our stock and increase volatility in the market. We cannot guarantee that we will purchase all of the shares authorized under the share repurchase program or that such program will enhance the long-term value of our share price. In addition, repurchase regulations and taxes may add additional payment burden to the Company from our share repurchase program. In the past, there have been proposals to increase the amount of the U.S. federal stock repurchase excise tax from 1% to 4%, however, it is unclear whether such a change in the amount of the excise tax will be enacted and, if enacted, how soon any such change could take effect. +32 +Item 1B. Unresolved Staff Comments. +None. +Item 1C. Cybersecurity. +We have established an Information Security Management System (the “ISMS”), which is integrated into our overall risk management system, to help us achieve our business goals. The ISMS defines our information security risk management approach and specifies the requirements for establishing, implementing, operating, monitoring, reviewing, maintaining and improving a risk assessment framework within the context of our overall business risks. The ISMS also specifies the requirements for implementing security controls designed to meet the needs of individual departments or parts thereof. +Risk Management and Strategy +Our cybersecurity strategy focuses on implementing controls, technologies, and other processes to assess, identify, and manage material cybersecurity risks. We have processes in place designed to assess, identify, manage, and address material cybersecurity threats and incidents, including: annual security awareness training for employees, mechanisms designed to detect and monitor unusual network activity, and containment and incident response tools. Our ISMS is designed to help us identify and manage material risks from cybersecurity threats, and as part of our ISMS, we engage a range of third-party service providers , including assessors, consultants, and auditors, to assist us in these processes. Our risk assessment framework involves an information security risk assessment procedure that helps us identify potential cybersecurity threats and vulnerabilities (including relating to the use of third-party service providers) and then determine strategies to mitigate or counter the threats. As part of this process, we conduct annual penetration testing utilizing a third-party service provider. We have implemented controls designed to identify and mitigate cybersecurity threats associated with our use of third-party service providers. Such providers are subject to security risk assessments at the time of onboarding, contract renewal, and upon detection of an increase in risk profile. We use a variety of inputs in such risk assessments, including information supplied by providers and third parties. In addition, we require our providers to meet appropriate security requirements, controls and responsibilities and investigate security incidents that have impacted our third-party providers, as appropriate. Our Information Technology Director also works with third-party service providers to assess potential cybersecurity threats and determines risk scores based on the likelihood of threats and the potential impacts of the threats, prioritizes risk and determines and recommends to our management controls aimed to counter such threats. We assess third-party cybersecurity controls through a cybersecurity questionnaire and include security and privacy addenda to our contracts where applicable. +We also maintain procedures designed to protect the security of personally identifiable information, and our Privacy Policy provides details regarding the collection, storage, usage, and destruction of data. We require all employees to engage in data-security training upon hire and receive ongoing training thereafter. In the event of an incident, we intend to follow our incident response plan, which outlines the steps to be followed from incident detection to mitigation, recovery and notification, including notifying functional areas (e.g., legal), as well as senior leadership and the Board, as appropriate. +Governance +Management is responsible for assessing, identifying, and managing risks from cybersecurity threats. Our cybersecurity risk management efforts are led by our Information Technology Director , who oversees our cybersecurity activities and is informed about and monitors the prevention, detection, mitigation and remediation of cybersecurity incidents as part of our ISMS. The Information Technology Director reports to the audit committee of our Board with respect to emerging cybersecurity incidents deemed to have a moderate or higher business impact, even if immaterial to us. Our Information Technology Director and our Chief Financial Officer are ultimately responsible for the implementation of our cybersecurity risk management processes. To facilitate effective oversight, they hold discussions on cybersecurity risks, incident trends, and the effectiveness of cybersecurity measures as necessitated by emerging cybersecurity risks. They have experience managing enterprises relying on technology and business systems with cybersecurity risks and consults with trusted advisors where appropriate. +The audit committee of our Board is responsible for oversight of risks from cybersecurity threats. The Information Technology Director presents an update on cybersecurity risk management to the audit committee of our Board during quarterly meetings and the audit committee provides relevant updates to the Board. +Impact of Risks from Cybersecurity Threats +As of the date of this report, though the Company and our service providers have experienced certain cybersecurity incidents, we are not aware of any previous cybersecurity incidents that have materially affected or are reasonably likely to materially +33 +affect us, including our business strategy, results of operations and financial condition. We acknowledge that cybersecurity threats are continually evolving, and the possibility of future cybersecurity incidents remains. Despite the implementation of our cybersecurity processes, our security measures cannot guarantee that a significant cybersecurity attack will not occur. While we devote resources to our security measures designed to protect our systems and information, no security measure is infallible. See Part I, "Item 1A. Risk Factors" of this Annual Report for additional information about the risks to our business associated with a breach or other compromise to our information and operational technology systems. +Item 2. Properties. +Our corporate headquarters is located at 303 W. Wall Street, Suite 102, Midland, Texas 79701. In addition to our headquarters, we also own and lease other properties that are used for field offices, yards, or storage in the Permian Basin. We believe that our facilities are adequate for our current operations. +Item 3. Legal Proceedings. +Disclosure concerning legal proceedings is incorporated by reference to " Note 18. Commitments and Contingencies— Contingent Liabilities " o f our Consolidated Financial Statements contained in this Annual Report. +From time to time, we may be subject to various other legal proceedings and claims incidental to or arising in the ordinary course of our business. +Item 4. Mine and Safety Disclosures. +None. +PART II +Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Market Information +On March 22, 2017, we consummated our initial public offering of our common stock at a price of $14.00 per share. Our common stock is traded on the New York Stock Exchange under the symbol "PUMP." +Holders +As of December 31, 2024, there were 102,994,958 shares of common stock outstanding, held of record by five holders. The number of record holders of our common stock does not include Depository Trust Company participants or beneficial owners holding shares through nominee names. +Dividends +We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the growth of our business and repay borrowings under our ABL Credit Facility, if any. Our future dividend policy is within the discretion of our Board and will depend upon then‑existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory restrictions on our ability to pay dividends and other factors our Board may deem relevant. In addition, our ABL Credit Facility places certain restrictions on our ability to pay cash dividends. +34 +Share Repurchase Program +The following sets forth information with respect to our repurchases of shares of common stock during the three months ended December 31, 2024: +Period Total number of shares purchased +Average price paid per share (2) +Total number of shares purchased as part of publicly announced plans or programs (1) +Approximate dollar value of shares that may yet be purchased under the plans or programs (1) +October 1, 2024 to October 31, 2024 353,171 $ 8.15 353,171 $ 89,654,253 +November 1, 2024 to November 30, 2024 70,305 $ 7.13 70,305 $ 89,152,858 +December 1, 2024 to December 31, 2024 — $ — — $ 89,152,858 +Total 423,476 $ 7.98 423,476 $ 89,152,858 +(1) On April 24, 2024, the Board approved an increase and extension of the share purchase program previously authorized on May 17, 2023. The program permits the repurchase of up to an additional $100 million of the Company’s common stock for a total of $200 million and extends the expiration date by one year to May 31, 2025. The shares may be repurchased from time to time in open market transactions, block trades, accelerated share repurchases, privately negotiated transactions, derivative transactions or otherwise, certain of which may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act, as amended, in compliance with applicable state and federal securities laws. +(2) The average price paid per share includes commissions. +Performance Graph +The annual changes for the periods shown in the following graph are based on the assumption that $100 had been invested in our common stock, the Russell 2000 Index (“Russell 2000”) and a self-constructed peer group index of comparable companies (“Updated Peer Group”) on December 31, 2019, and that all dividends were reinvested at the closing prices of the dividend payment dates. The relevant companies included in our Updated Peer Group consists of Liberty Energy Inc., Patterson-UTI Energy, Inc., RPC, Inc., Calfrac Well Services Ltd., Mammoth Energy Services, Inc. and ProFrac Holding Corp. (added in 2024). We have also included our previous peer group (“Former Peer Group”) which did not include ProFrac Holding Corp. in the following graph. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on the last trading date of 2024. The calculations exclude trading commissions and taxes. The stock price performance on the following graph and table is not necessarily indicative of future stock price performance. +35 +Date Former Peer Group Updated Peer Group Russell 2000 ProPetro Holding Corp. +12/31/2019 $ 100.0 $ 100.0 $ 100.0 $ 100.0 +12/31/2020 $ 64.1 $ 64.1 $ 120.0 $ 65.7 +12/31/2021 $ 80.3 $ 80.3 $ 137.7 $ 72.0 +12/31/2022 $ 153.1 $ 153.1 $ 109.6 $ 92.2 +12/31/2023 $ 130.0 $ 106.4 $ 128.1 $ 74.5 +12/31/2024 $ 116.6 $ 95.7 $ 142.9 $ 82.9 +Item 6. [Reserved] +36 +Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. +You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward‑looking statements that involve risks and uncertainties. You should read the " Risk Factors " section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis. +Basis of Presentation +This discussion of our results omits our results of operations and cash flows for the year ended December 31, 2022, and the comparison of our results of operations for the years ended December 31, 2023, and 2022, which may be found in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 13, 2024. +Unless otherwise indicated, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “ProPetro Holding Corp.,” “the Company,” “we,” “our,” “us” or like terms refer to ProPetro Holding Corp. and its subsidiaries. +Overview +Our Business +We are a leading integrated energy service company, located in Midland, Texas, focused on providing innovative hydraulic fracturing, wireline and other complementary energy and power generation services to leading upstream oil and gas companies engaged in the exploration and production (“E&P”) of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil‑producing areas in the United States, and we believe we are one of the leading providers of completion services in the region. +Our completion services includes our operating segments comprised of hydraulic fracturing, wireline and cementing operations. Our hydraulic fracturing operations account for approximately 75.6% of our total revenues and operations. Our total available hydraulic horsepower (“HHP”) at December 31, 2024, w as 1,556,500 HHP, which was comprised of 450,000 HHP of our Tier IV Dynamic Gas Blending (“DGB”) dual-fuel equipment, 294,000 HHP of FORCE ® electric-powered equipment and 812,500 HHP of conventional Tier II equipment. Our hydraulic fracturing fleets range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsite. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region’s increasingly high-intensity well completions (including simultaneous hydraulic fracturing ("Simul-Frac"), which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. With the industry transition to lower emissions equipment and Simul-Frac, in addition to several other changes to our customers' job designs, we believe that our available fleet capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at wellsites. In addition, in 2021 and 2022, we committed to additional conversions of our Tier II equipment to Tier IV DGB, and to purchase new Tier IV DGB dual-fuel equipment. As such, we entered into conversion and purchase agreements with our equipment manufacturers and have received all of the converted and new Tier IV DGB dual-fuel equipment by the end of 2023, representing 450,000 HHP of our Tier IV DGB dual-fuel equipment as of December 31, 2024 . In 2022, we entered into three-year electric fleet leases for four FORCE ® electric-powered hydraulic fracturing fleets with 60,000 HHP per fleet and in June 2024, we entered into an additional three-year lease for a fifth FORCE ® electric-powered hydraulic fracturing fleet with 72,000 HHP. As of December 31, 2024, we have re ceived 294,000 HHP of FORC E ® electric-powered equipment representing four fleets and a portion of the fifth fleet. We currently expect to receive the remaining equipment associated with the fifth fleet in the first half of 2025. +In the fourth quarter of 2024, we formed a new subsidiary, ProPetro Energy Solutions, LLC, (“ PROPWR” ) to provide power generation services to oil and gas producers and non-oil and gas applications such as general industrial projects and data centers. This subsidiary has ordered equipment, but it has not yet begun revenue-generating activities. +On November 1, 2024, we sold our cementing business located in Vernal, Utah, to a business owned by a former employee as part of a strategic repositioning. We received a promissory note for $13.0 million as consideration. The note receivable is +37 +secured by substantially all assets of the former employee’s business and the former employee’s ownership interests in and distributions from the business. The note receivable is to be paid to the Company in quarterly installments with interest of 10% per annum from March 31, 2025, to December 31, 2029. We recorded a gain on disposal of $8.2 million related to the sale of the business. The former employee was part of our cementing operations until November 1, 2024, and is no longer affiliated with the Company. +On May 31, 2024, we consummated the acquisition of all of the outstanding equity interests in Aqua Prop, LLC (“AquaProp”), which provides wet sand solutions for hydraulic fracturing sand requirements at oil well sites (the “AquaProp Acquisition”). The cash consideration for the AquaProp Acquisition includes $13.7 million paid to the seller, $7.2 million paid to settle the seller’s outstanding debt, and $0.3 million paid for the seller’s transaction expenses . As a result of the AquaProp Acquisition, we expanded our operations into the wet sand service business unit. +On December 1, 2023, we consummated the purchase of the assets and operations of Par Five Energy Services LLC (“Par Five”), which provides cementing services in the Delaware Basin, in exchange for $25.4 million of cash, including deferred cash consideration of $3.1 million which is payable to Par Five or its beneficiary on June 1, 2025, with interest of 4.0% per annum (the “Par Five Acquisition”) . The Par Five Acquisition complemented our existing cementing business and enabled us to serve both the Midland and Delaware sub-basins of the Permian Basin. +On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip Completion Services Operating, LLC (the “Silvertip Acquisition”), which provides wireline perforation and ancillary services in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed debt, and the payment of certain other closing and transaction costs. At December 31, 2024, we had 26 wireline units available to provide wireline perforation and ancillary services. Collectively, the AquaProp Acquisition, the Par Five Acquisition and the Silvertip Acquisition have positioned the Company as a more integrated and diversified completions-focused energy service provider. See Note 4. Business Acquisitions in the financial statements for additional disclosures. +We believe that our substantial market presence in the Permian Basin positions us well to capitalize on drilling and completion activity in the region. Primarily, our operational focus has been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have increased our operations in the Delaware sub-basin and are well-positioned to support further increases to our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending. +We have historically conducted our business through four operating segments: hydraulic fracturing, wireline, cementing and coiled tubing. Prior to the fourth quarter of fiscal year 2023, our operating segments met the aggregation criteria and were aggregated into the “Completion Services” reportable segment and our coiled tubing operations (which were divested in September 2022) were shown in the “All Other” category. Effective in the the fourth quarter of fiscal year 2023, we revised our segment reporting as we determined that our three operating segments no longer met the criteria to be aggregated. In the fourth quarter of fiscal year 2024, we formed PROPWR to provide power generation services to oil and gas producers and non-oil and gas applications such as general industrial projects and data centers. This new subsidiary has ordered equipment, but it has not yet begun revenue-generating activities. Our hydraulic fracturing, wireline and cementing operating segments meet the criteria of a reportable segment. Our divested coiled tubing and our newly formed power generation services segments do not meet the reportable segment criteria and are included within the “All Other” category. Additionally, our corporate administrative activities do not involve business activities from which it may earn revenues and its results are not regularly reviewed by the Company’s Chief Operating Decision Maker (the “CODM”) when making key operating and resource decisions. As a result, corporate administrative expenses have been included under “Reconciling Items.” For additional financial information on our reportable segments presentation, please see reportable segment information in Part II - Item 8, “Financial Statements and Supplementary Data.” +Pioneer Pressure Pumping Acquisition +On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer Natural Resources USA, Inc. (“Pioneer”) and Pioneer Pumping Services, LLC in the Pioneer Pressure Pumping Acquisition in exchange for 16.6 million shares of our common stock and $110.0 million in cash. In May 2024, Pioneer merged with and into a wholly owned subsidiary of ExxonMobil after which ExxonMobil became the owner of these shares. The Company currently provides pressure pumping, wireline and other services to ExxonMobil and previously provided such services to Pioneer. +38 +On April 22, 2024, we entered into a sub-agreement for hydraulic fracturing services with XTO, a wholly owned subsidiary of ExxonMobil, pursuant to which we will provide hydraulic fracturing, wireline and pumpdown services with two committed FORCE ® electric-powered hydraulic fracturing fleets with the option to add a third FORCE ® fleet (also with wireline and pumpdown services) for a period of three years or for contracted hours, whichever occurs last with respect to each fleet, subject to certain termination and release rights. +Commodity Price and Other Economic Conditions +The oil and gas industry has traditionally been volatile and is characterized by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, war and political instability in oil producing countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. +The geopolitical and macroeconomic consequences of military action in the Middle East, the Russian invasion of Ukraine, including the associated sanctions, and the adverse impacts of the COVID-19 pandemic have resulted in volatility in supply and demand dynamics for crude oil and associated volatility in crude oil pricing. As the global response to the COVID-19 pandemic began to wane, the demand and prices for crude oil increased from the lows experienced in 2020, with the WTI average crude oil price reaching approximately $94 per barrel in 2022, the highest average price in the prior ten years. However, the WTI average crude oil price declined to approximately $78 per barrel in 2023 and approximately $76 per barrel in 2024. We believe that the volatility of crude oil prices in recent years has been partly driven by declines in crude oil supplies, concerns over sanctions resulting from Russia's invasion of Ukraine, concerns over a potential disruption of Middle Eastern oil supplies resulting from the conflict in the Middle East, slower crude oil production growth due to the lack of reinvestment in the oil and gas industry in the last three years, the extension of OPEC+ production cuts of approximately 3.9 million barrels per day originally announced in 2023, and concerns of a potential global recession resulting from high inflation and interest rates. +With the significant increase in global crude oil prices from 2021, including the WTI crude oil price, there was a significant increase in the Permian Basin rig count from approximately 179 at the beginning of 2021 to approximately 353 at the end of 2022, according to the Baker Hughes. Following the increase in rig count and the WTI crude oil price, the energy service industry has experienced increased demand for its completion services, and improved pricing. However, the Permian Basin rig count experienced a 13% decrease in 2023 to 309 at the end of 2023 and further decreased to 304 at the end of 2024 which resulted in a reduction in the demand for completion services and pressure on pricing of our services. +Sustained levels of high inflation likewise caused the U.S. Federal Reserve and other central banks to increase interest rates, and to the extent elevated inflation remains, we may experience further cost increases for our operations, including interest rates, labor costs and equipment. We cannot predict any future trends in the rate of inflation and crude oil prices. A significant increase in or continued high levels of inflation, to the extent we are unable to timely pass-through the cost increases to our customers, further declines in crude oil prices, or potential change in U.S trade policy, including the imposition of tariffs and the resulting consequences, would negatively impact our business, financial condition and results of operations. See Part II, Item 1A. “Risk Factors—We may be adversely affected by the effects of inflation.” +Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including upstream and energy service companies. As a result, we are working with our customers and equipment manufacturers to transition our equipment to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB dual-fuel , FORCE ® electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. We have transitioned our hydraulic fracturing available equipment portfolio from approximately 10% lower emissions equipment in 2021 to approximately 35% in 2022, 60% in 2023, 70% in 2024, and expect to increase to approximately 75% by the end of the first quarter of 2025. To the extent any of our customers have certain expectations or requirements with respect to emissions reductions from their contractors, if we are unable to continue quickly transitioning to lower emissions equipment, the demand for our services could be adversely impacted. +If the Permian Basin rig count and market conditions improve, including improved pricing for our services and labor availability, and we are able to meet our customers' lower emissions equipment demands, we believe our operational and +39 +financial results will also continue to improve. If the rig count or market conditions do not improve or decline in the future, and we are unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows . +Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment. +2024 Operational Highlights +Over the course of the year ended December 31, 2024: +• we deployed two FORCE ® electric-powered hydraulic fracturing fleets with a total capacity of 120,000 HHP. Four FORCE ® electric-powered hydraulic fracturing fleets are now operating under contract with leading customers; +• our available equipment portfolio is expected to be comprised of approximately 75% lower emissions (FORCE ® electric and Tier IV DGB dual-fuel), and 25% conventional diesel equipment by the end of 2025; +• despite market volatility, our average active hydraulic fracturing fleet count was approximately 14 fleets, a decrease from 15 active fleets in 2023; +• we published our second annual sustainability report, which describes our commitment to building a sustainable business that supports the safe, reliable production of the energy the world needs by offering competitive, value-driving services to customers, while benefitting our shareholders, communities, and other stakeholders; +• we consummated the purchase of all of the outstanding equity interests in AquaProp on May 31, 2024, which provides wet sand solutions for hydraulic fracturing sand requirements at oil well sites; and +• we formed PROPWR in the fourth quarter of 2024, to provide power generation services to oil and gas producers and non-oil and gas applications such as general industrial projects and data centers. This subsidiary has ordered equipment, but has not yet begun revenue-generating activities. +2024 Financial Highlights +Financial highlights for the year ended December 31, 2024: +• net loss was $137.9 million, compared to net income of $85.6 million for the year ended December 31, 2023. Diluted net loss per common share was $1.31, compared to diluted net income of $0.76 for the year ended December 31, 2023. Net loss for included property and equipment impairment expense of $188.6 million related to our conventional Tier II diesel-only hydraulic fracturing pumping units and associated conventional assets and goodwill impairment expense of $23.6 million related to the goodwill in our wireline operating segment. Adjusted EBITDA of approximately $283.2 million decreased 29.9%, compared to $404.0 million for the year ended December 31, 2023 (see reconciliation of Adjusted EBITDA to net income in the subsequent section “How We Evaluate Our Operations”); +• capital expenditures were reduced to $133.4 million or 57% as compared to 2023; +• net cash provided by operating activities less net cash used in investing activities improved by $106.6 million compared to 2023; +• our accounts receivable to accounts payable ratio increased to 2.1 from 1.5. Working capital (current assets less current liabilities) increased to $70.0 million from $39.7 million; +• our total liquidity was $160.9 million as of December 31, 2024. consisting of cash and cash equivalents of $50.4 million and remaining availability of $110.5 million under our ABL Credit Facility; we had $45.0 million of borrowings as of December 31, 2024, under our ABL Credit Facility; and +• the Company repurchased and retired 7.2 million shares of common stock for an aggregate of $59.1 million, an average price per share of $8.21 including commissions, under the share repurchase program. As of December 31, 2024, $89.2 million remained authorized for future repurchases of common stock under the share repurchase program. +40 +Our Assets and Operations +Completion services includes our hydraulic fracturing, wireline and cementing operations. We primarily provide these services to E&P comp anies in the Permian Basin. During the year ended December 31, 2024, our hydraulic fracturing, wireline and cementing operations accounted fo r 75.6%, 14.1%, and 10.3% of our total revenue, respectively. Our equipment has been designed to handle Permian Basin specific operating conditions a nd the region’s increasingly high‑intensity well completions, which are characterized by longer horizontal wellbores, more frac stages per lateral and increasing amounts of proppant per well. We plan to continually reinvest in our equipment to ensure optimal performance and reliability. +How We Generate Revenue +We generate revenue through our completion services, and more specifically, by providing hydraulic fracturing services to our customers. We operate a fleet of mobile hydraulic fracturing, wireline and cementing units and other auxiliary equipment to perform completion services to E&P companies. We also provide personnel and services that are tailored to meet each of our customers’ needs. +Hydraulic fracturing operations account for a significant portion of our total revenue. We charge our customers on a per‑job basis, in which we set pricing terms after receiving full specifications for the requested job, including the lateral length of the customer’s wellbore, the number of frac stages per well, the amount of proppant and chemicals to be used and other parameters of the job. +In addition to hydraulic fracturing services, we generate revenue through other completion services that we provide to our customers, including wireline, cementing and other related services. These completion services are complementary to each other and are undertaken in unison with hydraulic fracturing services. They are provided through various contractual arrangements, including on a turnkey contract basis, in which we set a price to perform a particular job, or a daywork contract basis, in which we are paid a set price per day for our services. We are also sometimes paid by the hour for these complementary services. +Demand for our services is largely dependent on oil and natural gas prices, and our customers’ well completion budgets and rig count. Our revenue, profitability and cash flows are highly dependent upon prevailing crude oil prices and expectations about future prices. For many years, oil prices and markets have been extremely volatile. Prices are affected by many factors beyond our control. The average WTI oil price per barrel was approximately $76 , $78, and $94 for the years ended December 31, 2024, 2023, and 2022, respectively. In January 2025, the WTI oil price was approximately $74 p er barrel. If the WTI oil price declines in the future or remains highly volatile, demand for our services may be negat ively impacted, which could result in a significant decrease in our future profitability and cash flows. We monitor oil and natural gas prices and the Permian Basin rig count to enable us to more effectively plan our business and forecast the demand for our services. +The historical weekly average Permian Basin rig count based on Baker Hughes rig count information was as follows: +Year Ended December 31, +Drilling Rig Type (Permian Basin) 2024 2023 2022 +Directional 3 3 3 +Horizontal 296 323 318 +Vertical 10 9 14 +Total 309 335 335 +Average Permian Basin rig count to U.S. rig count 51.6 % 48.7 % 46.3 % +Costs of Conducting our Business +The principal direct costs involved in operating our business are direct labor, expendables and other direct costs. +Direct Labor Costs. Payroll and benefit expenses related to our crews and other employees that are directly or indirectly attributable to the effective delivery of services are included in our operating costs. Direct lab or costs amounted to 30.2% and 28.7% of total costs of service for the years ended December 31, 2024, and 2023, respectively. The increase in our direct labor costs percentage is driven by wage adjustments and higher headcount resulting from business acquisitions. +Expendables. Expendables include the product and freight costs associated with proppant, chemicals and other consumables used in our completion services and other operations. These costs comprise a substantial variable component of our service costs, particularly with respect to the quantity and quality of sand and chemicals demanded when providing hydraulic fracturing services. Expendable product costs comprised approximately 25.7% and 32.9% of total costs of service for the years ended +41 +December 31, 2024, and 2023, respectively. The percentage decrease in our expendables was primarily attributable to certain customers electing to directly source sand and the associated logistics. +Other Direct Costs. We incur other direct expenses related to our service offerings, including the costs of fuel, repairs and maintenance, general supplies, equipment rental, lease costs on our FORCE ® electric-powered hydraulic fracturing fleets, and other miscellaneous operating expenses. Fuel is consumed both in the operation and movement of our equipment. Repairs and maintenance costs are expenses directly related to upkeep of equipment, which have been amplified by the demand for higher horsepower jobs. Capital expenditures to upgrade or extend the useful life of equipment are capitalized and are not included in other direct costs. Other direct costs were 44.1% and 38.4% of total costs of service for the years ended December 31, 2024, and 2023, respectively. The percentage increase in our other direct costs was primarily attributable to lease costs on our FORCE ® fleets. +How We Evaluate Our Operations +Our management uses Adjusted EBITDA or Adjusted EBITDA margin to evaluate and analyze the performance of our various operating segments. +Adjusted EBITDA and Adjusted EBITDA Margin +We view Adjusted EBITDA and Adjusted EBITDA margin as important indicators of performance. We define EBITDA as our earnings, before (i) interest expense, (ii) income taxes and (iii) depreciation and amortization. We define Adjusted EBITDA as EBITDA, plus (i) loss/(gain) on disposal of assets and businesses, (ii) stock-based compensation, (iii) business acquisition contingent consideration adjustments, (iv) other expense/(income), (v) other unusual or nonrecurring (income)/expenses, such as impairment expenses, costs related to asset acquisitions, insurance recoveries, one-time professional fees and legal settlements and (vi) retention bonuses and severance expense. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues. +Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures utilized by our management and other users of our financial statements such as investors, commercial banks, and research analysts, to assess our financial performance because it allows us and other users to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), nonrecurring (income) expenses and items outside the control of our management team (such as income taxes). Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income (loss), operating income (loss), cash flow from operating activities or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). +Note Regarding Non‑GAAP Financial Measures +Adjusted EBITDA and Adjusted EBITDA margin are not financial measures presented in accordance with GAAP (“non-GAAP”), except when specifically required to be disclosed by GAAP in the financial statements. We believe that the presentation of Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors in assessing our financial condition and results of operations because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure, asset base, nonrecurring expenses (income) and items outside the control of the Company. Net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA. Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some, but not all, items that affect the most directly comparable GAAP financial measures. You should not consider Adjusted EBITDA and Adjusted EBITDA margin in isolation or as a substitute for an analysis of our results as reported under GAAP. Because Adjusted EBITDA and Adjusted EBITDA margin may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. +The following tables set forth certain financial information with respect to the Company’s reportable segments; intersegment revenues are shown under “Reconciling Items” (in thousands): +42 +Hydraulic Fracturing Wireline Cementing All Other Reconciling Items Total +Year ended December 31, 2024 +Service revenue $ 1,092,000 $ 203,182 $ 149,411 $ — $ (307) $ 1,444,286 +Adjusted EBITDA $ 270,505 $ 43,857 $ 26,539 $ (370) $ (57,288) $ 283,243 +Depreciation and amortization $ 182,188 $ 20,633 $ 8,812 $ — $ 100 $ 211,733 +Property and equipment impairment expense (1) +$ 188,601 $ — $ — $ — $ — $ 188,601 +Goodwill impairment expense (2) +$ — $ 23,624 $ — $ — $ — $ 23,624 +Operating lease expense on FORCE ® fleets (3) +$ 47,141 $ — $ — $ — $ — $ 47,141 +Capital expenditures $ 116,257 $ 7,713 $ 9,376 $ — $ 42 $ 133,388 +Goodwill $ 920 $ — $ — $ — $ — $ 920 +Total assets $ 961,485 $ 156,349 $ 73,935 $ — $ 31,876 $ 1,223,645 +Hydraulic Fracturing Wireline Cementing All Other Reconciling Items Total +Year ended December 31, 2023 +Service revenue $ 1,280,523 $ 229,599 $ 120,277 $ — $ — $ 1,630,399 +Adjusted EBITDA $ 366,809 $ 61,930 $ 24,665 $ — $ (49,444) $ 403,960 +Depreciation and amortization $ 156,057 $ 18,762 $ 5,845 $ — $ 222 $ 180,886 +Operating lease expense on FORCE ® fleets (3) +$ 5,087 $ — $ — $ — $ — $ 5,087 +Capital expenditures $ 294,377 $ 12,203 $ 3,440 $ — $ — $ 310,020 +Goodwill $ — $ 23,624 $ — $ — $ — $ 23,624 +Total assets $ 1,189,526 $ 198,957 $ 78,475 $ — $ 13,354 $ 1,480,312 +Hydraulic Fracturing Wireline Cementing All Other Reconciling Items Total +Year ended December 31, 2022 +Service revenue $ 1,143,216 $ 31,188 $ 91,857 $ 13,440 $ — $ 1,279,701 +Adjusted EBITDA $ 339,186 $ 7,926 $ 14,897 $ (1,463) $ (43,956) $ 316,590 +Depreciation and amortization $ 117,753 $ 2,619 $ 5,089 $ 2,240 $ 407 $ 128,108 +Property and equipment impairment expense (1) +$ 57,454 $ — $ — $ — $ — $ 57,454 +Capital expenditures $ 347,757 $ 2,265 $ 7,769 $ 1,876 $ 5,649 $ 365,316 +Goodwill $ — $ 23,624 $ — $ — $ — $ 23,624 +Total assets $ 1,092,658 $ 173,489 $ 46,944 $ — $ 22,695 $ 1,335,786 +____________________ +(1) Represents noncash property and equipment impairment expense on our conventional Tier II diesel-only hydraulic fracturing pumps and associated conventional assets (“Tier II Units”) for the year ended December 31, 2024, and noncash impairment expense on our DuraStim ® electric-powered hydraulic fracturing equipment for the year ended December 31, 2022. There was no property and equipment impairment expense for the year ended December 31, 2023. +(2) Represents noncash impairment of goodwill in our wireline operating segment. +(3) Represents amortization of right-of-use assets and interest expense on lease liabilities related to operating leases on our FORCE ® electric-powered hydraulic fracturing fleets. This cost is recorded within cost of services in our consolidated statements of operations. We did not have this cost for the year ended December 31, 2022. +43 +A reconciliation of net (loss) income to Adjusted EBITDA is provided in the table below (in thousands): +Year Ended December 31, +2024 2023 2022 +Net (loss) income $ (137,859) $ 85,634 $ 2,030 +Depreciation and amortization 211,733 180,886 128,108 +Property and equipment impairment expense (1) +188,601 — 57,454 +Goodwill impairment expense (2) +23,624 — — +Interest expense 7,815 5,308 1,605 +Income tax (benefit) expense (31,385) 29,868 5,356 +Loss on disposal of assets and businesses, net 7,451 73,015 102,150 +Stock‑based compensation 17,288 14,450 21,881 +Business acquisition contingent consideration adjustments (2,600) — — +Other (income) expense, net (3) +(5,531) 9,533 (11,582) +Other general and administrative expense, net (4) +1,782 2,969 8,460 +Retention bonus and severance expense 2,324 2,297 1,128 +Adjusted EBITDA $ 283,243 $ 403,960 $ 316,590 +____________________ +(1) Represents noncash property and equipment impairment expense on our Tier II Units for the year ended December 31, 2024, and noncash impairment expense on our DuraStim ® electric-powered hydraulic fracturing equipment for the year ended December 31, 2022. These impairment expenses are included in our Hydraulic Fracturing reportable segment. +(2) Represents noncash impairment of goodwill in our wireline operating segment. +(3) Other income for the year ended December 31, 2024 is primarily comprised of tax refunds (net of advisory fees) totaling $5.0 million and insurance reimbursements of $2.0 million, partially offset by a $2.0 million loss to a customer related to an accidental cementing job failure. Other expense for the year ended December 31, 2023 is primarily comprised of settlement expenses resulting from routine audits and true-up health insurance costs totaling approximately $7.4 million and a $2.5 million unrealized loss on short-term investment. Other income for the year ended December 31, 2022 includes tax refunds (net of advisory fees) totaling $10.7 million, a $2.7 million noncash income from fixed asset inventory received as part of a settlement of warranty claims with an equipment manufacturer, and a $1.6 million unrealized loss on short-term investment. +(4) Other general and administrative expense for the years ended December 31, 2024 and 2023 primarily relates to nonrecurring professional fees paid to external consultants in connection with our business acquisitions and legal settlements, net of reimbursements from insurance carriers. Other general and administrative expense for the year ended December 31, 2022 primarily relates to nonrecurring professional fees paid to external consultants in connection with the Company's audit committee review, SEC investigation, shareholder litigation, legal settlements and other legal matters, net of reimbursements from insurance carriers. +44 +Results of Operations +In 2024, we conducted our business through four operating segments: hydraulic fracturing, wireline, cementing, and power generation services (started in the fourth quarter of fiscal year 2024 and has not begun any revenue-generating activities yet). Our power generation services operating segments are shown in the “All Other” category for segment reporting purposes. +Year Ended December 31, 2024 Compared to Year Ended December 31, 2023 +(in thousands, except percentages) +Year Ended December 31, Change +2024 2023 Variance % +Revenue +Hydraulic Fracturing $ 1,092,000 $ 1,280,523 $ (188,523) (14.7) % +Wireline 203,182 229,599 (26,417) (11.5) % +Cementing 149,411 120,277 29,134 24.2 % +Elimination of intersegment service revenue (307) — (307) 100.0 % +Total revenue 1,444,286 1,630,399 (186,113) (11.4) % +Cost of services (1) +Hydraulic Fracturing 800,202 886,157 (85,955) (9.7) % +Wireline 148,125 155,357 (7,232) (4.7) % +Cementing 117,490 90,287 27,203 30.1 % +All Other (2) +4 — 4 100.0 % +Elimination of intersegment cost of services (307) — (307) 100.0 % +Total cost of services 1,065,514 1,131,801 (66,287) (5.9) % +General and administrative expense (3) +114,323 114,354 (31) — % +Depreciation and amortization 211,733 180,886 30,847 17.1 % +Property and equipment impairment expense 188,601 — 188,601 100.0 % +Goodwill impairment expense 23,624 — 23,624 100.0 % +Loss on disposal of assets and business, net 7,451 73,015 (65,564) (89.8) % +Interest expense 7,815 5,308 2,507 47.2 % +Other (income) expense, net (5,531) 9,533 (15,064) (158.0) % +Income tax (benefit) expense (31,385) 29,868 (61,253) (205.1) % +Net (loss) income $ (137,859) $ 85,634 $ (223,493) (260.99) % +Adjusted EBITDA (4) +$ 283,243 $ 403,960 $ (120,717) (29.88) % +Adjusted EBITDA Margin (4) +19.6 % 24.8 % (5.2) % (20.97) % +Hydraulic Fracturing segment results of operations: +Revenue $ 1,092,000 $ 1,280,523 $ (188,523) (14.7) % +Cost of services $ 800,202 $ 886,157 $ (85,955) (9.7) % +Adjusted EBITDA $ 270,505 $ 366,809 $ (96,304) (26.3) % +Adjusted EBITDA Margin (5) +24.8 % 28.6 % (3.8) % (13.3) % +____________________ +(1) Exclusive of depreciation and amortization. +(2) Includes our newly formed power generation services business. +(3) Inclusive of stock‑based compensation. +45 +(4) For definitions of the non‑GAAP financial measures of Adjusted EBITDA and Adjusted EBITDA margin and reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to our most directly comparable financial measures calculated in accordance with GAAP, please read “How We Evaluate Our Operations.” +(5) The non‑GAAP financial measure of Adjusted EBITDA margin for the Hydraulic Fracturing segment is calculated by taking Adjusted EBITDA for the Hydraulic Fracturing segment as a percentage of our revenues for the Hydraulic Fracturing segment. +Revenue. Revenue decreased 11.4%, or $186.1 million, to $1,444.3 million for the year ended December 31, 2024, as compared to $1,630.4 million for the year ended December 31, 2023. Revenue by reportable segment was as follows: +Hydraulic Fracturing. Our hydraulic fracturing segment revenues decreased 14.7%, or $188.5 million for the year ended December 31, 2024, as compared to the year ended December 31, 2023. The decrease was primarily attributable to a decrease in our customers’ activity levels as a result of a decrease in drilling activity and decreased customer pricing, partially offset by the addition of AquaProp's operations in May 2024, which contributed $44.1 million in revenues during 2024. Our average active hydraulic fracturing fleet count was approximately 14 fleets for the year ended December 31, 2024, a decrease from 15 fleets for the year ended December 31, 2023. Intersegment revenues, consisting of revenues derived from our wireline segment, totaled $0.3 million and $0 for the years ended December 31, 2024 and 2023, respectively. +Wireline. Our wireline segment revenue decreased 11.5%, or $26.4 million for the year ended December 31, 2024, as compared to the year ended December 31, 2023. The decrease was primarily attributable to a decrease in our customers' activity levels as a result of a decrease in drilling activity and decreased customer pricing. +Cementing. Our cementing segment revenue increased 24.2%, or $29.1 million for the year ended December 31, 2024, as compared to the year ended December 31, 2023. The increase was primarily attributable to the addition of Par Five's operations in December 2023, which contributed to $35.3 million of the increase in revenues. +Cost of Services. Cost of services decreased 5.9%, or $66.3 million, to $1,065.5 million for the year ended December 31, 2024, from $1,131.8 million during the year ended December 31, 2023. Cost of services by reportable segment was as follows: +Hydraulic Fracturing. C ost of services for our hydraulic fracturing segment decreased $86.0 million during the year ended December 31, 2024, as compared to the year ended December 31, 2023. As a percentage of hydraulic fracturing segment revenues (including equipment reservation fees), hydraulic fracturing cost of services was 73.3% for the year ended December 31, 2024, as compared to 69.2% for the year ended December 31, 2023 driven by the decreased activity levels, customer price decreases and the impact of general cost inflation. The decrease in cost of services was partially offset by an increase of $7.6 million in insurance expense resulting from higher allocation of workers' compensation, general liability and automobile insurance costs to cost of services in 2024 compared to 2023 since these costs are primarily incurred for our operational workforce, and the addition of AquaProp's operations in May 2024, which added $42.5 million in cost of services during the year ended December 31, 2024. +Wireline. Our wireline segment cost of services decreased 4.7%, or $7.2 million for the year ended December 31, 2024, as compared to the year ended December 31, 2023 due to scaling back in response to decreased revenues. Intersegment cost of services, consisting of cost of services incurred to our hydraulic fracturing segment, totaled $0.3 million and $0 for the years ended December 31, 2024 and 2023, respectively. +Cementing. Our cementing cost of services increased 30.1%, or $27.2 million for the year ended December 31, 2024, as compared to the year ended December 31, 2023. The increase was primarily attributable to the addition of Par Five's operations in December 2023, which resulted in $27.9 million of the net increase in cost of services. +General and Administrative Expenses. General and administrative expen ses remained flat at $114.3 million for the y ear ended December 31, 2024, as compared to $114.4 million for the year ended December 31, 2023. +Excluding nonrecurring and noncash items ( i.e., stock-based compensation of $17.3 million, legal settlements (net of insurance reimbursements) of $0.2 million, transaction expenses of $1.6 million and retention bonuses and severance expenses of $2.3 million, partially offset by business acquisition contingent consideration adjustments of $2.6 million), general and administrative expenses were $95.5 million for the year ended December 31, 2024, as compared to $94.6 million for the year ended December 31, 2023. +Depreciation and Amortization. Depreciation and amortization increased 17.1%, or $30.8 million, to $211.7 million for the yea r ended December 31, 2024, as compared to $180.9 million for the year ended December 31, 2023. The increase was +46 +primarily attributable to (i) assets placed into service since December 31, 2023, (ii) the addition of a finance lease for certain power generation equipment in August 2023 which resulted in $19.0 million of amortization, (iii) the addition of Par Five's operations in December 2023 which resulted in a $3.5 million increase in depreciation and (iv) the addition of AquaProp's operations in May 2024 which included $3.5 million of depreciation and amortization. +Property and Equipment Impairment Expense. During the year ended December 31, 2024, we recorded noncash property and equipment impairment expense of $188.6 million in connection with the impairment of our Tier II Units, which is included in our Hydraulic Fracturing reportable segment. No property and equipment impairment expense was recorded during the year ended December 31, 2023. +Goodwill Impairment Expense. During the year ended December 31, 2024, we recorded goodwill impairment expense of $23.6 million in our Wireline reportable segment during the year ended December 31, 2024. No goodwill impairment expense was recorded during the year ended December 31, 2023. +Loss on Disposal of Assets and Business. Loss on the disposal of assets and business decreased 89.8%, or $65.5 million, to $7.5 million for the year ended December 31, 2024, as compared to $73.0 million for the year ended December 31, 2023. The decrease was primarily attributable to an $8.2 million gain related to the sale of our cementing business located in Vernal, Utah, during 2024, losses incurred during 2023 from the decommissioning of certain hydraulic fracturing equipment, replacement of certain major components in connection with our conversion of certain Tier II hydraulic fracturing equipment to Tier IV DGB, and the write-off of certain hydraulic fracturing equipment as a result of an accidental fire at a wellsite in March 2023. +Interest Expense. Interest expense increased to $7.8 million for the yea r ended December 31, 2024, as compared to $5.3 million for t he year ended December 31, 2023. The increase was primarily attributable to higher average outstanding borrowings under our ABL Credit Facility during the year ended December 31, 2024 and the addition of a finance lease for certain power generation equipment in August 2023. +Other (Income) Expense. Other income was approximately $5.5 million for the year ended December 31, 2024, as compared to other expense of $9.5 million for the year ended December 31, 2023. Other income during the year ended December 31, 2024 is primarily comprised of tax refunds (net of advisory fees) totaling $5.0 million, insurance reimbursements of $2.0 million and a $2.6 million decrease in estimated fair value of the contingent consideration payable on our acquisition of AquaProp, partially offset by a $2.0 million loss to a customer related to an accidental cementing job failure. Other expense for the year ended December 31, 2023 is comprised of settlement expenses resulting from routine audits and true-up health insurance costs totaling approximately $7.4 million and a $2.5 million unrealized loss on short-term investment. +Income Taxes. Total income tax benefit was $31.4 million resulting in an effective tax rate of 18.5% for the year ended December 31, 2024, as compared to income tax expense of $29.9 million resulting in an effective tax rate of 25.9% for the year ended December 31, 2023. The change in income tax benefit recorded during the year ended December 31, 2024, compared to the change in income tax expense recorded during the year ended December 31, 2023, is primarily attributable to the difference in the impact of nondeductible expenses and state taxes on the pre-tax loss for 2024, as compared to pre-tax income for 2023. +47 +Liquidity and Capital Resources +Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows and (iii) borrowings under our ABL Credit Facility (as defined below). Our cash is primarily used to fund our operations, support growth opportunities, fund share repurchases under our share repurchase program and satisfy future debt payments. Our Borrowing Base (as defined below), as redetermined monthly, is tied to the sum of 85% to 90% of monthly eligible accounts receivable and 80% of eligible unbilled accounts (up to a maximum of 25% of the Borrowing Base), in each case, depending on the credit ratings of our accounts receivable counterparties, less customary reserves. Changes to our operational activity levels and our customers’ credit ratings have an impact on our total eligible accounts receivable, which could result in significant changes to our Borrowing Base and, therefore, our availability under our ABL Credit Facility. +We received advance payments from a customer for our services, and the amount outstanding in connection with the advance payments was $11.8 million and $19.2 million as of December 31, 2024 an d 2023, respectively. There were no amounts of restricted cash as of December 31, 2024 an d 2023. +As of December 31, 2024, our borrowings under our ABL Credit Facility were $45.0 million and our total liquidity was $160.9 million, consisting of cash and cash equivalents of $50.4 million and $110.5 million of availability under our ABL Credit Facility. +On April 24, 2024, the Company's board of directors (the “Board”) approved an increase and extension to the share repurchase program previously authorized on May 17, 2023. The program permits the repurchase of up to an additional $100 million of the Company’s common stock for a total of $200 million and extends the expiration date by one year to May 31, 2025. The shares may be repurchased from time to time in open market transactions, block trades, accelerated share repurchases, privately negotiated transactions, derivative transactions or otherwise, certain of which may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act, as amended, in compliance with applicable state and federal securities laws. The timing, as well as the number and value of shares repurchased under the program, will be determined by the Company at its discretion and will depend on a variety of factors, including management's assessment of the intrinsic value of the Company's common stock, the market price of the Company's common stock, general market and economic conditions, available liquidity, compliance with the Company's debt and other agreements, applicable legal requirements, and other considerations. The Company is not obligated to purchase any shares under the share repurchase program, and the program may be suspended, modified, or discontinued at any time without prior notice. The Company expects to fund the repurchases using cash on hand and expected free cash flow to be generated through May 2025. During the year ended December 31, 2024 , the Company repurchased and retired 7.2 million shares of common stock for an aggregate of $59.1 million, an average price per share of $8.21 including commissions, under the share repurchase program. As of December 31, 2024 , $89.2 million remained authorized for future repurchases of common stock under the share repurchase program. +On May 31, 2024, the Company consummated the acquisition of all of the outstanding equity interests in AquaProp, which provides wet sand solutions for hydraulic fracturing sand requirements at oil well sites. The cash consideration for this acquisition includes $13.7 million paid to the seller, $7.2 million paid to settle the seller’s outstanding debt, and $0.3 million paid for the seller’s transaction expenses . +On November 1, 2024, we sold our cementing business located in Vernal, Utah, to a business owned by a former employee as part of a strategic repositioning. We received a promissory note for $13.0 million as consideration. The note receivable is secured by substantially all assets of the former employee’s business and the former employee’s ownership interests in and distributions from the business. The note receivable is to be paid to the Company in quarterly installments with interest of 10% per annum from March 31, 2025 to December 31, 2029. We recorded a gain on disposal of $8.2 million related to the sale of the business. The former employee was part of our cementing operations until November 1, 2024 and is no longer affiliated with the Company. +There can be no assurance that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures and to continue with our share repurchases under our share repurchase program or fund future business acquisitions. Future cash flows are subject to a number of variables, and are highly dependent on the drilling and completion, and production activity by our customers, which in turn is highly dependent on oil and natural gas prices. Depending upon market conditions and other factors, we may issue equity and debt securities or take other actions necessary to fund our business, strategy or meet our future long-term liquidity requirements. +Cash and Cash Flows +The following table sets forth our net cash provided by (used in) operating, investing and financing activities during the years ended December 31, 2024 and 2023, respectively. +Year Ended December 31, +(in thousands) +2024 2023 +Net cash provided by operating activities +$ 252,295 $ 374,742 +Net cash used in investing activities +$ (155,099) $ (384,127) +Net cash used in financing activities +$ (80,107) $ (46,123) +Operating Activities +Net cash provided by operating activities was $252.3 million for the year ended December 31, 2024, as compared to $374.7 million for the year ended December 31, 2023. The net decrease of $122.4 million was primarily due to lower net income adjusted for noncash expenses and the timing of our receivable collections from our customers and payments to our vendors. +Investing Activities +Net cash used in investing activities decreased to $155.1 million for the year ended December 31, 2024, from $384.1 million for the year ended December 31, 2023. The decrease was primarily attributable to our capital light strategy and the completion of our planned investments in Tier IV DGB equipment. +The following table summarizes our capital expenditures incurred by reportable segment for the periods indicated: +Year Ended December 31, +(in thousands) 2024 2023 +Reportable Segments: +Hydraulic Fracturing $ 116,257 $ 294,377 +Wireline 7,713 12,203 +Cementing 9,376 3,440 +Reconciling Items (1) +42 — +Total capital expenditures (2) +$ 133,388 $ 310,020 +_________________ +(1) Reconciling Items include our corporate facilities. +(2) See Note 3. Supplemental Cash Flows Information in the financial statements for noncash reconciling items. +Financing Activities +Net cash used in financing activities increased to $80.1 million for the year ended December 31, 2024, compared to $46.1 million for the year ended December 31, 2023. The net increase was primarily driven by net borrowings of $15.0 million under our ABL Credit Facility during the year ended December 31, 2023 , a $13.0 million increase in payments of finance lease obligation and a $7.4 million increase in share repurchases and repayments of insurance financing of $1.0 million during the year ended December 31, 2024 , partially offset by a $1.6 million decrease in tax withholdings paid for net settlement of equity awards and payment of debt issuance costs of $1.2 million during the year ended December 31, 2023 . +Credit Facility and Other Financing Arrangements +Our revolving credit facility, as amended and restated in April 2022, prior to giving effect to the amendment to the revolving credit facility in June 2023, had a total borrowing capacity of $150.0 million. The revolving credit facility had a borrowing base of 85% to 90%, depending on the credit ratings of our accounts receivable counterparties, of monthly eligible accounts receivable less customary reserves. The revolving credit facility included a springing fixed charge coverage ratio to apply when excess availability was less than the greater of (i) 10% of the lesser of the facility size or the borrowing base or (ii) $10.0 million. Under the revolving credit facility we were required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. +Effective June 2, 2023, the Company entered into an amendment to its amended and restated revolving credit facility. The amendment increased the borrowing capacity under the ABL Credit Facility to $225.0 million (subject to the Borrowing Base limit), and extended the maturity date to June 2, 2028. +Effective June 26, 2024, the company entered into an amendment to its amended and restated revolving credit facility (the revolving credit facility, as amended and restated in April 2022, as amended in June 2023, as amended in June 2024 and as may be amended further, the “ABL Credit Facility”). The amendment increased the amount of noncash consideration that may be considered cash pursuant to certain permitted dispositions. The ABL Credit Facility has a borrowing base of the sum of 85% to 90% of monthly eligible accounts receivable and 80% of eligible unbilled accounts (up to a maximum of 25% of the borrowing base), in each case, depending on the credit ratings of our accounts receivable counterparties, less customary reserves (the “Borrowing Base”) as redetermined monthly. The Borrowing Base as of December 31, 2024, was approximately $164.1 million. The ABL Credit Facility includes a springing fixed charge coverage ratio to apply when excess availability is less than the greater of (i) 10% of the lesser of the facility size or the Borrowing Base or (ii) $15.0 million. Under the ABL Credit Facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens or indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. +Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either the Secured Overnight Financing Rate (“SOFR”) or the base rate, plus the applicable margin, which ranges from 1.75% to 2.25% for SOFR loans and 0.75% to 1.25% for base rate loans. The weighted average annual interest rate for our ABL Credit Facility for the year ended December 31, 2024, was 7.12% . +The loan origination costs relating to the ABL Credit Facility are classified as an asset on our balance sheet. As of December 31, 2024, and 2023 , we had outstanding borrowings under our ABL Credit Facility of $45.0 million and $45.0 million, respectively. +We entered into a contractual arrangement with an equipment manufacturer to purchase mobile natural gas-fueled power generation equipment for our PROPWR business line, with a total cost of $122.0 million, of which approximately $103.7 million, representing progress payments beyond the initial down payment on this equipment, will be financed. We currently expect to start receiving this equipment from the end of the second quarter of 2025 through early 2026. +Off Balance Sheet Arrangements +We had no material off balance sheet arrangements as of December 31, 2024. +Capital Requirements, Future Sources and Use of Cash +Capital expenditures incurred were $133.4 million during the year ended December 31, 2024, as compared to $310.0 million during the year ended December 31, 2023. The significant portion of our total capital expenditures incurred during the year ended December 31, 2024, were maintenance capital expenditures and conversion of our hydraulic fracturing equipment to lower emissions equipment. +Our future material use of cash will be to fund our capital expenditures. Capital expenditures for 2025 are projected to be primarily related to capital expenditures to extend the useful life of our existing completion services assets, costs to convert some existing equipment to lower emissions equipment, purchase power generation equipment, strategic purchases and other ancillary equipment purchases, subject to market conditions and customer demand. Our future capital expenditures depend on our projected operational activity, emission requirements and planned conversions to lower emissions equipment, among other factors, which could vary significantly throughout the year. Based on our current plan and projected activity levels for 2025, we expect our capital expenditures to range between $300 million to $400 million which includes approximately $150 million to $200 million for our completion services business and approximately $150 million to $200 million for our PROPWR business. We entered into a contractual arrangement with an equipment manufacturer to purchase mobile natural gas-fueled power generation equipment for our PROPWR business line, with a total cost of $122.0 million, of which approximately $103.7 million will be financed, representing progress payments beyond the initial down payment on this equipment. We currently expect receive this equipment beginning with the end of the second quarter of 2025 through early 2026. We entered into a contractual arrangement with another related equipment manufacturer to purchase additional natural gas-fueled power generation equipment for our PROPWR business line, with a total cost of $25.0 million. We currently expect to receive this equipment in the first half of 2025. We could incur significant additional capital expenditures if our projected activity levels increase during the course of the year, inflation and supply chain tightness continues to adversely impact our operations or we invest in new or different lower emissions equipment. The Company will continue to evaluate the emissions profile of its equipment over the coming years and may, depending on market conditions, convert or retire additional conventional Tier II equipment in favor of lower emissions equipment. The Company’s decisions regarding the retirement or conversion of equipment or the addition of lower emissions equipment will be subject to a number of factors, including (among other factors) the availability of equipment, including parts and major components, supply chain disruptions, prevailing and expected commodity prices, customer demand and requirements and the Company’s evaluation of projected returns on conversion or other capital expenditures. Depending on the impact of these factors, the Company may decide to retain conventional equipment for a longer period of time or accelerate the retirement, replacement or conversion of that equipment. +We anticipate our capital expenditures will be funded by existing cash, cash flows from operations, and if needed, borrowings under our ABL Credit Facility. Our cash flows from operations will be generated from services we provide to our customers. +Contractual Obligations +The following table presents our contractual obligations and other commitments as of December 31, 2024: +(in thousands) +Period +Total 1 year or less More than 1 year +ABL Credit Facility (1) +$ 45,000 $ — $ 45,000 +Operating leases (2)(3) +126,550 51,238 75,312 +Finance lease (4) +34,377 20,915 13,462 +Sand commitments (5) +1,500 1,500 — +Equipment purchase commitments (6) +147,000 120,160 26,840 +Par Five deferred cash consideration (7) +3,109 3,109 — +AquaProp deferred cash consideration (8) +3,664 3,664 — +Total $ 361,200 $ 200,586 $ 160,614 +____________________ +(1) Exclusive of future commitment fees, amortization of deferred financing costs, interest expense or other fees on our ABL Credit Facility because obligations thereunder are floating rate instruments and we cannot determine with accuracy the timing of future loan advances, repayments of future interest rates to be changed. However, assuming a weighted average interest rate of 7.12% , and that our ABL Credit Facility debt balance remains the same, our estimated annual interest payment will be $3.2 million. +(2) Operating leases exclude short-term leases and other commitments (see Note 17. Leases and Note 18. Commitments and Contingencies in the financial statements for additional disclosures). +(3) Includes our leases for FORCE ® electric-powered hydraulic fracturing fleets (312,000 HHP). We expect to receive the remaining equipment under these leases in the first half of 2025. +(4) Finance lease for certain power generation equipment (70 MW) to support electric-powered hydraulic fracturing equipment . +(5) Relates to a take-or-pay sand commitment with one of our sand vendors. +(6) Represents contractual commitments with two equipment manufacturers to purchase 140 megawatts of mobile natural gas-fueled power generation equipment for our PROPWR business line (see Note 18. Commitments and Contingencies in the financial statements for additional disclosures). +(7) Represents the unpaid portion of the purchase consideration on our acquisition of Par Five to be used to cover (i) the amount by which the estimated purchase price exceeds the final purchase price, if any, and (ii) any indemnity obligations of the seller, if any. +(8) Represents the unpaid portion of the purchase consideration on our acquisition of AquaProp to be used to cover (i) the amount by which the estimated purchase price exceeds the final purchase price, if any, and (ii) any indemnity obligations of the seller, if any. +We enter into other purchase agreements with Sand Suppliers to secure the supply of sand in the normal course of our business. The agreements with the Sand Suppliers require that we purchase a minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the mi nimum volumes or a fixed price per ton of unpurchased volumes. Our current agreements with Sand Suppliers expire at different times prior to December 31, 2025 . Our agreed upon sand requirements or minimum volumes are based on certain future events such as our customer demand, which cannot be reasonably estimated. If the activity level of our customers declines and the future demand for our services is materially and adversely affected, we may be required to pay for more sand from one of our Sand Suppliers than we need in the performance of our services, regardless of whether we take physical delivery of such sand. In such an event, we may be required to pay shortfall fees or other penalties under the purchase agreement, which could have a material adverse effect on our business, financial condition, or results of operations. +Recent Accounting Pronouncements +Disclosure concerning recently issued accounting standards is incorporated by reference to " Note 2- Significant Accounting Policies " of our Consolidated Financial Statements contained in this Annual Report. +Critical Accounting Policies and Estimates +The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported revenues and expenses during the years. We evaluate these estimates and assumptions on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates. +Listed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved, and that we believe are critical to the understanding of our operations. +Business Combinations +Business combinations are accounted for under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed are recognized at their respective fair values as of the date of acquisition. The excess, if any, of the acquisition price over the fair values of the assets acquired and liabilities assumed is recorded as goodwill if the definition of a business is met. For significant acquisitions, we utilize third-party appraisal firms to assist us in determining the fair values for certain assets acquired and liabilities assumed using discounted cash flows and other applicable valuation techniques. We record any acquisition related costs as expenses when incurred. +Adjustments to the fair values of assets acquired and liabilities assumed are made until we obtain all relevant information regarding the facts and circumstances that existed as of the acquisition date (the “measurement period”), not to exceed one year from the date of the acquisition. We recognize measurement period adjustments in the period in which we determine the amounts, including the effect on earnings of any amounts we would have recorded in previous periods if the accounting had been completed at the acquisition date. +The estimation of the fair values of assets and liabilities acquired in business combinations requires significant judgment. Our fair value estimates require us to use significant observable and unobservable inputs. The estimates of fair value are also subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future. A significant change in the observable and unobservable inputs and determination of fair value of the assets and liabilities acquired could significantly impact our consolidated financial statements. +Property and Equipment +48 +Our property and equipment are recorded at cost, less accumulated depreciation. +Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in earnings. +We primarily retire certain components of equipment such as fluid ends and power ends, rather than the entire pieces of equipment. The associated loss is recorded in our statement of operations as part of net loss on disposal of assets and businesses, which was $7.5 million , $73.0 million, and $102.1 million for the years ended December 31, 2024, 2023, and 2022, respectively. +The estimated useful lives and salvage values of property and equipment are subject to key assumptions such as maintenance, utilization and job variation. Unanticipated future changes in these assumptions could negatively or positively impact our net income (loss). A 10% change in the useful lives of our property and equipment would have resulted in approximately $18.5 million impact on pre-tax loss during the year ended December 31, 2024. Depreciation of property and equipment is provided on the straight‑line method over estimated useful lives as shown in the table below. +Land +Indefinite +Buildings and property improvements +5 - 30 years +Vehicles +1 ‑ 5 years +Equipment +1 ‑ 22 years +Leasehold improvements +5 ‑ 20 years +Impairment of Long-Lived Assets +In accordance with the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 360 regarding Accounting for the Impairment or Disposal of Long‑Lived Assets , we review the long‑lived assets including intangible assets to be held and used whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future undiscounted cash flows attributable to the assets is less than the carrying amount of such assets. In this circumstance, we recognize an impairment loss for the amount by which the carrying amount of the assets exceeds the estimated fair value of the asset. Our cash flow forecasts require us to make certain judgments regarding long‑term forecasts of future revenue and costs and cash flows related to the assets subject to review. The significant assumption in our cash flow forecasts is our estimated equipment utilization and profitability. The significant assumption is uncertain in that it is driven by future demand for our services and utilization, which could be impacted by crude oil market prices, future market conditions and technological advancements. Our fair value estimates for certain long‑lived assets require us to use significant other observable inputs, including assumptions related to market based on recent auction sales or selling prices of comparable equipment. The estimates of fair value are also subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future. +If the crude oil market declines or the demand for our services does n ot recover, and if our equipment remains idle or underutilized, the estimated fair value of such equipment may decline, which could result in future impairment charges. Though the impacts of variations in any of these factors can have compounding or offsetting impacts, a 10% decline in the estimated future cash flows of our existing asset groups will not indicate an impairment. +During the year ended December 31, 2024 , we recorded property and equipment impairment expense of approximately $188.6 million in connection with our conventional Tier II diesel-only hydraulic fracturing pumping units and associated conventional assets. In 2022, we recorded property and equipment impairment expense of $57.5 million on our DuraStim ® electric-powered hydraulic fracturing equipment within the hydraulic fracturing operating segment . +Intangible assets consist of trade mark/trade name, customer relationships and favorable contracts. Trademark/trade names are amortized on a straight‑line basis over useful l ives of ten and fifteen years. Customer relationships are amortized on a straight‑line basis over useful lives of six and ten years. Favorable contracts are amortized on a straight‑line basis over useful lives of thirty months and five years. Internally developed software will be amortized on a straight‑line basis over a useful life of twenty-nine months. Our estimated useful life could be sensitive to changes in market conditions and management’s judgment, and are likely to change in the future if certain events occur. Presently, there are no events or circumstances that will cause us to believe that our estimated useful life for our intangible assets are likely to change. +49 +Goodwill +Goodwill is the excess of the consideration transferred over the fair value of the tangible and identifiable intangible assets and liabilities recognized. Goodwill is not amortized. We perform an annual impairment test of goodwill and intangible assets as of December 31, or more frequently if circumstances indicate that impairment may exist. +In connection with the AquaProp Acquisition, we added $0.9 million of goodwill in our hydraulic fracturing operating segment during the year ended December 31, 2024. We recorded goodwill impairment expense of $23.6 million in our wireline reporting unit during the year ended December 31, 2024. There were no additions to goodwill during the year ended December 31, 2023. The hydraulic fracturing operating segment was the only segment with goodwill at December 31, 2024. The wireline operating segment was the only segment with goodwill at December 31, 2023 . There were no goodwill impairment losses during the year ended December 31, 2023 . We performed our annual goodwill impairment test in accordance with ASC 350, Intangibles—Goodwill and Other , on December 31, 2024, at which time, we determined that the fair value of our wireline reporting unit was substantially in excess of its carrying value resulting in impairment. The quantitative impairment test we perform for goodwill utilizes certain assumptions, including forecasted equipment utilization, pricing and cost assumptions. Our discounted cash flow analysis includes significant assumptions regarding discount rates, utilization, expected profitability margin, forecasted maintenance capital expenditures, and the timing of expected cash flow. As such, our goodwill analysis incorporates inherent uncertainties that are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecast. As of December 31, 2024, and 2023, our goodwill carrying value w as $0.9 million and $23.6 million, respectively. +Leases +In accordance with ASC Topic 842, the Company determines if a contract is a lease at inception and evaluates identified leases for operating and finance lease accounting. Operating or finance lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses a discount rate based on its estimated incremental borrowing rate on a collateralized basis with similar terms and economic considerations as its lease payments at the lease commencement in determining the present value of lease payments. Lease terms may include options to renew the lease or purchase the underlying assets, however, the Company typically cannot determine its intent to renew the lease or purchase the assets with reasonable certainty at inception. The Company elected the short-term lease recognition practical expedient provided by ASC 842 in which leases with a term of twelve months or less will not be recognized on the balance sheet, and the practical expedient to not separate lease and non-lease components for real estate class of assets. We elected to analogize to the measurement guidance of ASC 360 to capitalize costs incurred to place a leased asset into its intended use and to present such capitalized costs as part of the related lease right-of-use asset cost as initial direct costs. +Income Taxes +Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. +We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and the results of recent operations. If we determine that we would not be able to fully realize our deferred tax assets in the future in excess of their net recorded amount, we would record a valuation allowance, which would increase our provision for income taxes. In determining our need for a valuation allowance as of December 31, 2024, we have considered and made judgments and estimates regarding estimated future taxable income. These estimates and judgments include some degree of uncertainty and changes in these estimates and assumptions could require us to record additional valuation allowances for our deferred tax assets and the ultimate realization of tax assets depends on the generation of sufficient taxable income. +Our methodology for recording income taxes requires a significant amount of judgment in the use of assumptions and estimates. Additionally, we forecast certain tax elements, such as future taxable income, as well as evaluate the feasibility of implementing tax planning strategies. Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results. Unforeseen events may significantly impact these variables, and changes to these variables could have a material impact on our income tax accounts. The final determination of our income tax +50 +liabilities involves the interpretation of local tax laws and related authorities in each jurisdiction. Changes in the operating environments, including changes in tax law, could impact the determination of our income tax liabilities for a tax year. +51 +Item 7A. Quantitative and Qualitative Disclosure of Market Risks +Foreign Currency Exchange Risk +Our operations are currently conducted entirely within the U.S.; therefore, we had no significant exposure to foreign currency exchange risk in 2024. +Commodity Price Risk +Our materials and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our completion services such as proppants, perforating guns, chemicals, guar, trucking and fluid supplies. Our fuel costs consist primarily of diesel and natural gas used by our various trucks and other motorized equipment. The prices for fuel and materials in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Historically, we have generally been able to pass along a significant portion of our commodity price risk to our customers; however, we may be unable to do so in the future. We do not engage in commodity price hedging activities. +Interest Rate Risk +We may be subject to interest rate risk on variable rate borrowings under our ABL Credit Facility. We do not currently engage in interest rate derivatives to hedge our interest rate risk. The impact of a 1% increase in interest rates on our variable rate debt would have resulted in an increase in interest expense and corresponding decrease/(increase) in pre‑tax income/(loss) of approximately $0.5 million , $0.5 million, and $0.1 million, for the years ended December 31, 2024, 2023, and 2022, respectively. +Credit Risk +Financial instruments that potentially subject us to concentrations of credit risk are trade receivables. We extend credit to customers and other parties in the normal course of business. We have established various procedures to manage our credit exposure, including maintaining an allowance for doubtful accounts. +52 +Item 8. Financial Statements and Supplementary Data. +FINANCIAL STATEMENTS +Reports of Independent Registered Public Accounting Firm (PCAOB ID : 49 ) +53 +Report of Independent Registered Public Accounting Firm (PCAOB ID : 34 ) +58 +Consolidated Balance Sheet s as of December 31, 2024 and 2023 +59 +Consolidated Statement s of Operations for the years ended December 31, 2024, 2023 and 2022 +60 +Consolidated Statement s of Changes in Shareholders’ Equity for th e years ended December 31, 2024, 2023 and 2022 +61 +Consolidated Statement s of Cash Flows for the years ended December 31, 2024, 2023 and 2022 +62 +Notes to Consolidated Financial Statements +64 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of ProPetro Holding Corp. +Opinion on the Financial Statements +We have audited the accompanying consolidated balance sheets of ProPetro Holding Corp. and its subsidiaries (the Company) as of December 31, 2024 and 2023, the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 2024, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated February 20, 2025, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. +As discussed in Notes 2 and 11 to the financial statements, the Company adopted ASU 2023-07, Segment Reporting (Topic 280) as of December 31, 2024, and changed the composition of its segment information in 2023. We also have audited the adjustments necessary to restate the 2022 segment information and to reflect the adoption of ASU 2023-07, Segment Reporting (Topic 280) to the 2022 segment information, as provided in Note 11. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review or apply any procedures to the 2022 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2022 financial statements taken as a whole. +Basis for Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. +53 +Critical Audit Matters +The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. +Business Combination—Aqua Prop, LLC +As discussed in Note 4 of the consolidated financial statements, the Company completed the acquisition of all of the outstanding equity interests in Aqua Prop LLC (AquaProp) on May 31, 2024, for total consideration transferred of $35.8 million, which included contingent consideration with an acquisition date fair value of $10.9 million. The Company accounted for this transaction under the acquisition method of accounting for business combinations whereby the fair value of the consideration transferred was allocated to the assets acquired, including a customer relationship intangible asset of $18.6 million, and liabilities assumed based upon their acquisition date fair values. Management estimated the fair value of the contingent consideration by applying a probability-weighted expected return method for the different scenarios that may occur based upon the amount of additional equipment delivered by the seller, at the request of the Company, and the amount of wet sand expected to be delivered by such equipment within a 30-month period. Management estimated the fair value of the customer relationship intangible asset using a discounted cash flow method whereby forecasted cash flows expected to be derived from the intangible asset over the economic life of the asset, adjusted for expected attrition, are discounted to present value. +We identified the valuation of the customer relationship intangible asset and the contingent consideration liability at the AquaProp acquisition date as a critical audit matter because of the significant assumptions management used in estimating the fair values, including forecasted cash flows and the selection of a discount rate for the customer relationship intangible asset and forecasted tonnage of wet sand expected to be delivered for the contingent consideration. Auditing management’s assumptions involved a high degree of auditor judgment and an increase in audit effort, including the use of valuation specialists, due to the impact these assumptions could have on the accounting estimates. +Our audit procedures related to the valuation of the customer relationship intangible asset and the contingent consideration liability included the following, among others: +• We obtained an understanding of the relevant controls related to management’s business combination fair value estimates and tested such controls for design and operating effectiveness, including controls over management’s review of significant assumptions used in the fair value estimates. +• We read the purchase and sale agreement to understand and evaluate the terms of the acquisition. +• We tested the reasonableness of management’s forecasts of cash flows in the valuation of the customer relationship intangible asset by comparing them to historical results and evaluating publicly available industry information. +• We tested the reasonableness of management’s forecasts of tonnage of wet sand to be delivered by comparing the estimated capacity of each piece of equipment to in-process contracts and considering the impact of the estimated timing of the delivery to the estimate of fair value. +• We utilized our valuation specialists to assist in the following procedures, among others: +◦ Evaluating the appropriateness of the valuation models used by management to estimate the fair values of the customer relationship intangible asset and contingent consideration and testing their mathematical accuracy. +◦ Evaluating the appropriateness of the methodology used by management to develop the attrition rate for the customer relationship. +◦ Comparing the source information underlying the determination of the discount rates to publicly available market data and verifying the accuracy of the calculations. +Impairment of Long-lived Assets—Fair Value of Conventional Tier II Diesel-only Hydraulic Fracturing Pumping Units and Associated Conventional Assets +54 +As discussed in Notes 2 and 5 to the consolidated financial statements, at September 30, 2024, the Company performed a recoverability assessment on the long-lived assets in its conventional Tier II diesel-only hydraulic fracturing pumping units and associated conventional assets asset group (the “Tier II Units”). In performing the recoverability assessment, the Company first compared the carrying value of the asset group to the estimated undiscounted cash flows to be generated over the remaining useful life of the asset group’s primary asset. Because the carrying value of the asset group exceeded the estimated undiscounted cash flows, the Company then estimated the fair value of the asset group, utilizing both a market approach and a cost approach, and recorded an impairment charge of $188.6 million. +We identified management’s estimated fair value of the Tier II Units as a critical audit matter because of the significant assumptions management used in estimating the fair value of the assets, including the selection of the valuation methods used to estimate fair value, the determination of the highest and best use of the assets, and consideration of the appropriateness of market data, among others. Auditing management’s assumptions involved a high degree of auditor judgment and an increase in audit effort, including the use of our valuation specialists, due to the impact these assumptions could have on the accounting estimate. +Our audit procedures related to the Company’s estimate of the fair value of the Tier II Units included the following, among others: +• We obtained an understanding of the relevant controls related to management’s estimate of fair value of the Tier II Units and tested such controls for design and operating effectiveness, including controls over management’s review of the significant assumptions used in estimating the fair value of the underlying assets. +• We tested the completeness and accuracy of the Tier II Units by agreeing the carrying values and other relevant information to the underlying support. +• We utilized our valuation specialists to assist in the following procedures, among others: +◦ Evaluating the appropriateness of the valuation models used by management to estimate the fair value of the Tier II Units and testing their mathematical accuracy. +◦ Evaluating management’s determination of the highest and best use of the Tier II Units. +◦ Corroborating managements estimates of fair value by comparing such estimates to publicly available market data. +Goodwill Impairment Testing—Wireline Reporting Unit +As discussed in Notes 2 and 5 to the consolidated financial statements, management tests the Company’s goodwill for impairment, at the reporting unit level, at December 31 of each fiscal year, or more frequently if events or changes in circumstances indicate the goodwill might be impaired. To test goodwill for impairment, management compares the estimated fair value of the reporting unit to the carrying amount, including the recorded goodwill. An impairment is recorded when the carrying value of the reporting unit exceeds its estimated fair value. The Company's estimated reporting unit fair value is based on a combination of income and market approaches. The income approach involves the use of a discounted cash flow method with the cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies’ market multiples in estimating the fair value. During the year ended December 31, 2024, the Company recorded a goodwill impairment charge of $23.6 million in its Wireline reporting unit, which represented a full impairment of the goodwill in that reporting unit. +We identified the valuation of the Wireline reporting unit as a critical audit matter because of the significant assumptions management used in estimating the fair value of the reporting unit, including revenue growth rates and margin percentages used in the projected cash flows, the determination of the discount rate applicable to the reporting unit, and the identification of comparable guideline public companies and market multiples. Auditing management’s assumptions involved a high degree of auditor judgment and an increase in audit effort, including the use of valuation specialists, due to the impact these assumptions could have on the estimate of fair value. +Our audit procedures related to the estimated fair value of the Wireline reporting unit included the following, among others: +• We obtained an understanding of the relevant controls related to management’s impairment assessment and tested such controls for design and operating effectiveness, including controls over management’s review of the significant assumptions utilized in the fair value measurement. +55 +• We tested the reasonableness of management’s forecasts of cash flows, including revenue and margins, by comparing them to historical results and evaluating publicly available industry information. +• We tested the underlying data used by management in the development of the forecasts of cash flows for accuracy and completeness by agreeing it to source data. +• We utilized our valuation specialists to assist in the following procedures, among others: +◦ Evaluating the appropriateness of the Company's valuation methodology and testing the mathematical accuracy. +◦ Testing the reasonableness of the discount rate using in the income approach by comparing the inputs used by management to publicly available market data. +◦ Evaluating the comparability of the guideline public companies identified by management based upon publicly available market data. +◦ Corroborating the market multiples selected by the Company in the market approach by comparing them publicly available market data. +/s/ RSM US LLP +RSM US LLP +We have served as the Company's auditor since 2023. +Houston, Texas +February 20, 2025 +56 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of ProPetro Holding Corp. +Opinion on Internal Control over Financial Reporting +We have audited ProPetro Holding Corp.'s (the Company) internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company and our report dated February 20, 2025 expressed an unqualified opinion. +As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Aqua Prop, LLC from its assessment of internal control over financial reporting as of December 31, 2024, because it was acquired by the Company in a purchase business combination in the second quarter of 2024. We have also excluded Aqua Prop, LLC from our audit of internal control over financial reporting. Aqua Prop, LLC is a wholly owned subsidiary whose total assets and revenue represent approximately 4.9% and 3.1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2024. +Basis for Opinion +The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +Definition and Limitations of Internal Control over Financial Reporting +A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. +/s/ RSM US LLP +RSM US LLP +Houston, Texas +February 20, 2025 +57 +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +To the Shareholders and the Board of Directors of +ProPetro Holding Corp. and Subsidiaries +Opinion on the Financial Statements +We have audited, before the effects of the retrospective adjustments to the disclosures for a change in the composition of reportable segments and the adoption of ASU No. 2023-07, Segment Reporting , discussed in Note 11 to the consolidated financial statements, the consolidated statements of operations, shareholders' equity, and cash flows of ProPetro Holding Corp. and Subsidiaries (the “Company”), for the year ended December 31, 2022, and the related notes (collectively, referred to as, the “financial statements”) (the 2022 financial statements before the effects of the retrospective adjustments discussed in Note 11 to the financial statements are not presented herein). In our opinion, the 2022 financial statements, before the effects of the retrospective adjustments to the disclosures for a change in the composition of reportable segments and the adoption of ASU No. 2023-07, Segment Reporting , discussed in Note 11 to the financial statements, present fairly, in all material respects, the results of the Company’s operations and cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. +We were not engaged to audit, review, or apply any procedures to the retrospective adjustments to the disclosures for a change in the composition of reportable segments and the adoption of ASU No. 2023-07, Segment Reporting discussed in Note 11 to the financial statements, and accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors. +Basis for Opinion +These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. +We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provided a reasonable basis for our opinion. +/s/ DELOITTE & TOUCHE LLP +Houston, Texas +February 23, 2023 +We began serving as the Company's auditor since 2013. In 2023, we became the predecessor auditor. +58 +PROPETRO HOLDING CORP. +CONSOLIDATED BALANCE SHEETS +AS OF DECEMBER 31, 2024 AND 2023 +(In thousands, except share data) +2024 2023 +ASSETS +CURRENT ASSETS: +Cash and cash equivalents $ 50,443 $ 33,354 +Accounts receivable - net of allowance for credit losses of $ 0 and $ 236 , respectively +195,994 237,012 +Inventories 16,162 17,705 +Prepaid expenses 17,719 14,640 +Short-term investment, net 7,849 7,745 +Other current assets +4,054 353 +Total current assets +292,221 310,809 +PROPERTY AND EQUIPMENT - net of accumulated depreciation +688,225 967,116 +OPERATING LEASE RIGHT-OF-USE ASSETS 132,294 78,583 +FINANCE LEASE RIGHT-OF-USE ASSETS 30,713 47,449 +OTHER NONCURRENT ASSETS: +Goodwill 920 23,624 +Intangible assets - net of amortization 64,905 50,615 +Other noncurrent assets +14,367 2,116 +Total other noncurrent assets +80,192 76,355 +TOTAL ASSETS +$ 1,223,645 $ 1,480,312 +LIABILITIES AND SHAREHOLDERS’ EQUITY +CURRENT LIABILITIES: +Accounts payable $ 92,963 $ 161,441 +Accrued and other current liabilities 70,923 75,616 +Operating lease liabilities 39,063 17,029 +Finance lease liabilities 19,317 17,063 +Total current liabilities 222,266 271,149 +DEFERRED INCOME TAXES 59,770 93,105 +LONG-TERM DEBT 45,000 45,000 +NONCURRENT OPERATING LEASE LIABILITIES +58,849 38,600 +NONCURRENT FINANCE LEASE LIABILITIES +13,187 30,886 +OTHER LONG-TERM LIABILITIES +8,300 3,180 +Total liabilities +407,372 481,920 +COMMITMENTS AND CONTINGENCIES (Note 18) +SHAREHOLDERS’ EQUITY: +Preferred stock, $ 0.001 par value, 30,000,000 shares authorized, none issued, respectively +— — +Common stock, $ 0.001 par value, 200,000,000 shares authorized, 102,994,958 and 109,483,281 shares issued and outstanding, respectively +103 109 +Additional paid-in capital 884,995 929,249 +Retained earnings (accumulated deficit) +( 68,825 ) 69,034 +Total shareholders’ equity +816,273 998,392 +TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY +$ 1,223,645 $ 1,480,312 +See notes to consolidated financial statements. +59 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF OPERATIONS +FOR THE YEARS ENDED DECEMBER 31, 2024 , 2023 AND 2022 +(In thousands, except per share data) +2024 2023 2022 +REVENUE - Service revenue +$ 1,444,286 $ 1,630,399 $ 1,279,701 +COSTS AND EXPENSES: +Cost of services (exclusive of depreciation and amortization) 1,065,514 1,131,801 882,820 +General and administrative expenses (inclusive of stock‑based compensation) 114,323 114,354 111,760 +Depreciation and amortization 211,733 180,886 128,108 +Property and equipment impairment expense 188,601 — 57,454 +Goodwill impairment expense 23,624 — — +Loss on disposal of assets and businesses, net +7,451 73,015 102,150 +Total costs and expenses +1,611,246 1,500,056 1,282,292 +OPERATING (LOSS) INCOME +( 166,960 ) 130,343 ( 2,591 ) +OTHER (EXPENSE) INCOME: +Interest expense ( 7,815 ) ( 5,308 ) ( 1,605 ) +Other income (expense), net +5,531 ( 9,533 ) 11,582 +Total other income (expense) +( 2,284 ) ( 14,841 ) 9,977 +INCOME (LOSS) BEFORE INCOME TAXES ( 169,244 ) 115,502 7,386 +INCOME TAX BENEFIT (EXPENSE) +31,385 ( 29,868 ) ( 5,356 ) +NET (LOSS) INCOME +$ ( 137,859 ) $ 85,634 $ 2,030 +NET (LOSS) INCOME PER COMMON SHARE: +Basic +$ ( 1.31 ) $ 0.76 $ 0.02 +Diluted +$ ( 1.31 ) $ 0.76 $ 0.02 +WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: +Basic +105,469 113,004 105,868 +Diluted +105,469 113,416 106,939 +See notes to consolidated financial statements. +60 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +FOR THE YEARS ENDED DECEMBER 31, 2024 , 2023 AND 2022 +(In thousands) +Common Stock +Shares Amount Additional +Paid‑In +Capital Retained Earnings (Accumulated +Deficit) Total +BALANCE - January 1, 2022 103,437 $ 104 $ 844,828 $ ( 18,630 ) $ 826,302 +Stock‑based compensation cost — — 21,881 — 21,881 +Issuance of equity award—net 11,078 10 107,689 — 107,699 +Tax withholdings paid for net settlement of equity awards — — ( 3,879 ) — ( 3,879 ) +Net income — — — 2,030 2,030 +BALANCE - December 31, 2022 114,515 $ 114 $ 970,519 $ ( 16,600 ) $ 954,033 +Stock‑based compensation cost — — 14,450 — 14,450 +Issuance of equity awards—net 763 1 ( 1 ) — — +Tax withholdings paid for net settlement of equity awards — — ( 3,543 ) — ( 3,543 ) +Share repurchases ( 5,795 ) ( 6 ) ( 51,732 ) — ( 51,738 ) +Excise tax on share repurchases — — ( 444 ) — ( 444 ) +Net income — — — 85,634 85,634 +BALANCE - December 31, 2023 109,483 $ 109 $ 929,249 $ 69,034 $ 998,392 +Stock‑based compensation cost — — 17,288 — 17,288 +Issuance of equity—net 707 1 ( 1 ) — — +Tax withholdings paid for net settlement of equity awards — — ( 1,909 ) — ( 1,909 ) +Share repurchases ( 7,195 ) ( 7 ) ( 59,101 ) — ( 59,108 ) +Excise tax on share repurchases — — ( 531 ) — ( 531 ) +Net loss — — — ( 137,859 ) ( 137,859 ) +BALANCE - December 31, 2024 102,995 $ 103 $ 884,995 $ ( 68,825 ) $ 816,273 +See notes to consolidated financial statements. +61 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF CASH FLOWS +FOR THE YEARS ENDED DECEMBER 31, 2024 , 2023 AND 2022 +(In thousands) +2024 2023 2022 +CASH FLOWS FROM OPERATING ACTIVITIES: +Net (loss) income $ ( 137,859 ) $ 85,634 $ 2,030 +Adjustments to reconcile net (loss) income to net cash provided by operating activities: +Depreciation and amortization 211,733 180,886 128,108 +Property and equipment impairment expense 188,601 — 57,454 +Goodwill impairment expense 23,624 — — +Deferred income tax (benefit) expense ( 33,336 ) 27,840 4,213 +Amortization of deferred debt issuance costs 438 359 785 +Stock‑based compensation 17,288 14,450 21,881 +Provision for credit losses — 34 202 +Loss on disposal of assets and businesses, net 7,451 73,015 102,150 +Unrealized (gain) loss on short-term investment ( 105 ) 2,538 1,570 +Business acquisition contingent consideration adjustments ( 2,600 ) — — +Noncash income from settlement with equipment manufacturer — — ( 2,668 ) +Changes in operating assets and liabilities: +Accounts receivable 51,498 ( 12,408 ) ( 66,900 ) +Other current assets ( 2,301 ) ( 831 ) 354 +Inventories 1,543 ( 6,017 ) 124 +Prepaid expenses 1,327 ( 6,143 ) 743 +Accounts payable ( 64,501 ) ( 11,429 ) 27,428 +Accrued and other current liabilities ( 10,506 ) 26,814 22,955 +Net cash provided by operating activities +252,295 374,742 300,429 +CASH FLOWS FROM INVESTING ACTIVITIES: +Capital expenditures ( 140,297 ) ( 370,869 ) ( 319,683 ) +Business acquisitions, net of cash acquired ( 21,038 ) ( 22,215 ) ( 38,639 ) +Proceeds from sale of assets +6,236 8,957 8,577 +Net cash used in investing activities +( 155,099 ) ( 384,127 ) ( 349,745 ) +CASH FLOWS FROM FINANCING ACTIVITIES: +Proceeds from borrowings — 30,000 30,000 +Repayments of borrowings — ( 15,000 ) — +Payments of finance lease obligation ( 17,676 ) ( 4,663 ) — +Repayments of insurance financing ( 970 ) — — +Payment of debt issuance costs — ( 1,179 ) ( 824 ) +Proceeds from exercise of equity awards — — 963 +Tax withholdings paid for net settlement of equity awards ( 1,909 ) ( 3,543 ) ( 3,879 ) +Share repurchases ( 59,108 ) ( 51,738 ) — +Payment of excise taxes on share repurchases ( 444 ) — — +Net cash used in financing activities +( 80,107 ) ( 46,123 ) 26,260 +NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 17,089 ( 55,508 ) ( 23,056 ) +CASH, CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of year +33,354 88,862 111,918 +CASH, CASH EQUIVALENTS AND RESTRICTED CASH — End of year +$ 50,443 $ 33,354 $ 88,862 +See notes to consolidated financial statements. +62 +PROPETRO HOLDING CORP. +CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) +FOR THE YEARS ENDED DECEMBER 31, 2024 , 2023 AND 2022 +(In thousands) +The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the consolidated balance sheets: +2024 2023 2022 +Summary of cash, cash equivalents and restricted cash +Cash and cash equivalents $ 50,443 $ 33,354 $ 78,862 +Restricted cash — — 10,000 +Total cash, cash equivalents and restricted cash — End of year $ 50,443 $ 33,354 $ 88,862 +See notes to consolidated financial statements. +63 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +1. ORGANIZATION AND HISTORY +ProPetro Holding Corp. (“Holding”), a Texas corporation was formed on April 14, 2007, and it is a holding company for its wholly owned subsidiaries ProPetro Services, Inc., a Texas corporation (“Services”), Silvertip Completion Services Operating, LLC, a Delaware limited liability company (“Silvertip”), Aqua Prop, LLC, a Texas limited liability company (“AquaProp”) and ProPetro Energy Solutions, LLC, a Texas limited liability company (“PROPWR”) . Services, Silvertip and AquaProp together offer hydraulic fracturing, wireline, cementing, wet sand solutions and other complementary services to oil and gas producers, located primarily in Texas and New Mexico. PROPWR has not begun any revenue-generating activities yet and was formed to provide power generation services to oil and gas producers and non-oil and gas applications such as general industrial projects and data centers, located primarily in Texas and New Mexico and will do business as PROPWR. Holding was converted and incorporated as a Delaware Corporation on March 8, 2017. +Unless otherwise indicated, references in these notes to consolidated financial statements to “ProPetro Holding Corp.,” “the Company,” “we,” “our,” “us,” or like terms refer to Holding, Servi ces, Silvertip, AquaProp, and PROPWR. +On November 1, 2024, we sold our cementing business located in Vernal, Utah, to Big 4 Services LLC, a Wyoming limited liability company (“Big 4”), solely owned by a former employee as part of a strategic repositioning. We received a promissory note for $ 13.0 million as consideration. The note receivable is secured by substantially all assets of Big 4 and the former employee’s ownership interests in and distributions from Big 4. The note receivable is to be paid to the Company in quarterly installments with interest of 10 % per annum from March 31, 2025 to December 31, 2029. We recorded a gain on disposal of $ 8.2 million related to the sale of the business within loss on disposal of assets and business within our consolidated statement of operations for the year ended December 31, 2024. The former employee was part of our cementing operations until November 1, 2024 and is no longer affiliated with the Company. The Company does not expect to have any significant continuing involvement with Big 4 other than collection of the note receivable. +On May 31, 2024, we consummated the acquisition of all of the outstanding equity interests in AquaProp, which provides wet sand solutions for hydraulic fracturing sand requirements at oil well sites (the “AquaProp Acquisition”). The cash consideration for the AquaProp Acquisition includes $ 13.7 million paid to the seller, $ 7.2 million paid to settle the seller’s outstanding debt, and $ 0.3 million paid for the seller’s transaction expenses . As a result of the acquisition, we expanded our operations into the wet sand service business unit. +On April 22, 2024, we entered into a sub-agreement for hydraulic fracturing services with XTO Energy Inc. ("XTO"), a wholly owned subsidiary of ExxonMobil, pursuant to which we will provide hydraulic fracturing, wireline and pumpdown services with two committed FORCE ® electric-powered hydraulic fracturing fleets with the option to add a third FORCE ® fleet (also with wireline and pumpdown services) for a period of three years or for contracted hours, whichever occurs last, with respect to each fleet, subject to certain termination and release rights. +On December 1, 2023, we consummated the purchase of the assets and operations of Par Five Energy Services LLC (“Par Five”), which provides cementing services in the Delaware Basin in exchange for $ 25.3 million of cash including deferred cash consideration of $ 3.1 million which is payable to Par Five or its beneficiary on June 1, 2025, with interest at 4.0 % per annum (the “Par Five Acquisition”) . Par Five’s business complements our existing cementing business and enables us to serve both the Midland and Delaware sub-basins of the Permian Basin. +On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip, which provides wireline perforation and ancillary services solely in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $ 106.7 million, $ 30.0 million of cash, the payoff of $ 7.2 million of assumed debt, and the payment of certain other closing and transaction costs (“the Silvertip Acquisition”). +On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer Natural Resources USA, Inc. (“Pioneer”) and Pioneer Pumping Services, LLC (“Pioneer Pumping Services”) (the “Pioneer Pressure Pumping Acquisition”). In connection with the Pioneer Pressure Pumping Acquisition, Pioneer received 16.6 million shares of our common stock and $ 110.0 million in cash. In May 2024, Pioneer merged with and into a wholly owned subsidiary of Exxon Mobil Corporation (“ExxonMobil”) after which ExxonMobil became the owner of these shares. The Company currently provides pressure pumping, wireline and other services to ExxonMobil and previously provided such services to Pioneer. +64 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES +A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements are as follows: +Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Holding and its wholly owned subsidiaries, Services, Silvertip, AquaProp, and PROPWR. All intercompany accounts and transactions have been eliminated in consolidation. +Basis of Presentation — The accompanying consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") and in conformity with accounting principles generally accepted in the United States of America ("GAAP"). +Use of Estimates — Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Such estimates include, but are not limited to, allowance for credit losses, useful lives for depreciation of property and equipment, estimates of fair value of property and equipment, estimates related to fair value of reporting units for purposes of assessing goodwill, intangible assets, discount rates underlying our lease right-of-use assets and liabilities, estimates related to deferred tax assets and liabilities, including any related valuation allowances, and estimates of fair value of stock‑based compensation. Actual results could differ from those estimates. +Revenue Recognition — The Company’s services are sold based upon contracts with customers. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. +Hydraulic fracturi ng is an oil well completion technique, which is part of the overall well completions process. It is a well-stimulation technique intended to optimize hydrocarbon flow paths during the completion phase of shale w ellbores. The process involves the injection of water, sand and chemicals under high pressure into shale formations. Our hydraulic fracturing contracts with our customers have one performance obligation, which is the contracted total stages, satisfied over time. We recognize revenue over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed faithfully depicts how our hydraulic fracturing services are transferred to our customers over time. +Acidizing, which is part of our hydraulic fracturing operating segment, involves a well-stimulation technique where acid or similar chemicals are injected under pressure into formations to form or expand fissures. Our acidizing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service or sale of acid or chemical when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize acidizing revenue at a point-in-time, upon completion of the performance obligation. +Wet sand solutions, which is part of our hydraulic fracturing operating segment, involve providing onsite storage and handling of wet sand used in the completion phase of shale wellbores. We recognize revenue from sale of wet sand, location services and transportation services over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price, fixed units per stage and actual stages completed. +Our cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Our cementing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize cementing revenue at a point-in-time, upon completion of the performance obligation. +Wireline services (including pumpdown) are oil well completion techniques, which are part of the well completion services. Our wireline services utilize equipment with a drum of wireline to deploy perforating guns in the well to perforate the casing, cement, and formation. Once the well is perforated, the well can be fractured. Pumpdown utilizes pressure pumping equipment to pump water into the well to deploy perforating guns attached to wireline through the lateral section of a well. Our wireline contracts with our customers have one performance obligation, which is the contracted total stages, satisfied over time. We recognize revenue over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that +65 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +recognizing revenue based on actual stages completed faithfully depicts how our wireline services are transferred to our customers over time. In addition, certain of our wireline equipment is entitled to daily equipment charges while the equipment is on the customer’s locations. The Company recognizes revenue related daily equipment charges on a daily basis as the performance obligations are met. +The transaction price for each performance obligation for all our completion services is fixed per our contracts with our customers. +Coiled tubing involves complementary downhole well completion/remedial services. The performance obligation for these services had a fixed transaction price which was satisfied at a point-in-time upon completion of the service when control was transferred to the customer. Accordingly, we recognized revenue at a point-in-time, upon completion of the service and transfer of control to the customer. Effective September 1, 2022, we shut down our coiled tubing operations, and disposed of all of our coiled tubing assets. +The Company assesses customers’ ability and intention to pay, which is based on a variety of factors including historical payment experience and financial condition. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. +Business Combinations — Business combinations are accounted for under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed are recognized at their respective fair values as of the date of acquisition. The excess, if any, of the acquisition price over the fair values of the assets acquired and liabilities assumed is recorded as goodwill if the definition of a business is met. For significant acquisitions, we utilize third-party appraisal firms to assist us in determining the fair values for certain assets acquired and liabilities assumed using discounted cash flows and other applicable valuation techniques. We record any acquisition related costs as expenses when incurred. +Adjustments to the fair values of assets acquired and liabilities assumed are made until we obtain all relevant information regarding the facts and circumstances that existed as of the acquisition date (the “measurement period”), not to exceed one year from the date of the acquisition. We recognize measurement period adjustments in the period in which we determine the amounts, including the effect on earnings of any amounts we would have recorded in previous periods if the accounting had been completed at the acquisition date. +The estimation of the fair values of assets and liabilities acquired in business combinations requires significant judgment. Our fair value estimates require us to use significant observable and unobservable inputs. The estimates of fair value are also subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future. A significant change in the observable and unobservable inputs and determination of fair value of the assets and liabilities acquired could significantly impact our consolidated financial statements. +Cash and Cash Equivalents — All highly liquid investments with an original maturity of three months or less. +Restricted Cash — Our restricted cash related to cash received from a customer in connection with our contract with the customer to provide FORCE ® electric-powered hydraulic fracturing equipment and services. The restricted cash was used to pay for contractually agreed upon expenditures. Our restricted cash balances at December 31, 2024 and 2023 were $ 0 and $ 0 , respectively. +Accounts Receivable — Accounts receivable are stated at the amount billed and billable to customers. At December 31, 2024, December 31, 2023 and January 1, 2023, amounts billed to customers (net of allowance for credit losses) included as part of our accounts receivable was $ 148.8 million , $ 181.6 million, and $ 164.0 million, respectively. At December 31, 2024, December 31, 2023, and January 1, 2023, accrued revenue (unbilled receivable) included as part of our accounts receivable was $ 47.2 million, $ 55.4 million and $ 51.9 million, respectively. At December 31, 2024, the transaction price allocated to the remaining performance obligation for our partially completed hydraulic fracturing and wireline operations was $ 38.7 million, which is expected to be completed and recognized within one month following the current period balance sheet date. At December 31, 2023, the transaction price allocated to the remaining performance obligation for our then partially completed hydraulic fracturing and wireline operations was $ 33.8 million, which was recorded as part of revenues for the year ended December 31, 2024. +As of December 31, 2024, the Company had no allowance for credit losses. Our allowance for credit losses is based on the evaluation of both our historic collection experience and economic outlook for the oil and gas industry. We evaluated the historic loss experience on our accounts receivable and also considered separately customers with receivable balances that may be negatively impacted by current or future economic developments and market conditions. While the Company has not +66 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +experienced significant credit losses in the past and has not yet seen material changes to the payment patterns of its customers, the Company cannot predict with any certainty the degree to which the impacts of depressed economic activities, including the potential impact of periodically adjusted borrowing base limits, level of hedged production, or unforeseen well shut-downs may affect the ability of its customers to timely pay receivables when due. Accordingly, in future periods, the Company may revise its estimates of expected credit losses. +The table below shows a summary of allowance for credit losses: +(in thousands) +Year Ended December 31, +2024 2023 2022 +Balance - January 1, $ 236 $ 419 $ 217 +Provision for credit losses during the period — 34 202 +Write-off during the period ( 236 ) ( 217 ) — +Balance - December 31, $ — $ 236 $ 419 +Contract Assets and Liabilities — We do not have any significant contract asset balances other than amounts billed to customers and accrued revenue discussed in the Accounts Receivable section above. Contract liabilities include cash advances from a customer in connection with our contract with the customer to provide FORCE ® electric-powered hydraulic fracturing equipment and services. These cash advances from the customer will be credited towards the customer’s invoice as our revenue performance obligations are met over the contract period. The cash advances received represent contract liabilities in connection with the performance of certain completion services. The cash advance (contract liability) balances, which are included in accrued and other current liabilities in our consolidated balance sheets, were $ 11.8 million, $ 19.2 million, and $ 10.0 million at December 31, 2024, December 31, 2023, and January 1, 2023, respectively. During the years ended December 31, 2024 an d 2023, we recognized revenue of $ 6.7 million, and $ 5.7 million, respectively, from the cash advance amount outstanding at the beginning of the period. +Inventories — Inventories, which consists only of raw materials and fluid ends, are stated at lower of average cost and net realizable value. +Note Receivable — Note receivable is stated at face value plus accrued interest and represents the consideration received for sale of our cementing business located in Vernal, Utah, to a business owned by a former employee and is secured by substantially all assets of the former employee’s business and the former employee’s ownership interests in and distributions from the business. The note receivable is to be paid to the Company in quarterly installments with interest of 10 % per annum from March 31, 2025, to December 31, 2029. At December 31, 2024, the note receivable had a carrying amount of $ 13.2 million including accrued interest, which the Company expects to be fully collectible. Of the carrying amount at December 31, 2024, the amount collectible within one year was $ 2.1 million and the amount collectible beyond one year was $ 11.1 million, which are included in our consolidated balance sheet under other current assets and other noncurrent assets, respectively. +Property and Equipment — The Company’s property and equipment are recorded at cost, less accumulated depreciation. +Depreciation — Depreciation of property and equipment is provided on the straight‑line method over the following estimated useful lives: +Land +Indefinite +Buildings and property improvements +5 - 30 years +Vehicles +1 ‑ 5 years +Equipment +1 ‑ 22 years +Leasehold improvements +5 ‑ 20 years +Upon sale or retirement of property and equipment, including certain major components of our completion services equipment that are replaced, the cost and related accumulated depreciation are removed from the balance sheet and the net amount, less proceeds from disposal, is recognized as a gain or loss in the statement of operations. A significant portion of our loss on disposal of assets and businesses relates to replacement of major components like fluid and power ends. The Company recorded a loss on disposal of assets and businesses of $ 7.5 million , $ 73.0 million, and $ 102.1 million for the years ended December 31, 2024, 2023, and 2022, respectively. +67 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +Impairment of Long‑Lived Assets — In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 360, Accounting for the Impairment or Disposal of Long‑Lived Assets , the Company reviews its long‑lived assets to be held and used whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. +An impairment loss is indicated if the sum of the expected future undiscounted cash flows attributable to the asset group is less than the carrying amount of such asset group. In this circumstance, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. During the year ended December 31, 2024 , we recorded property and equipment impairment expense of approximately $ 188.6 million in connection with our conventional Tier II diesel-only hydraulic fracturing pumping units and associated conventional assets, (the “Tier II Units”) . No property and equipment impairment expense were recorded during the year ended December 31, 2023. D uring the year ended December 31, 2022 , w e recorded property and equipment impairment expense of approximately $ 57.5 million in connection with our DuraStim® electric-powered hydraulic fracturing equipment. +The Company accounts for long‑lived assets to be disposed of at the lower of their carrying amount or fair value, less cost to sell once management has committed to a plan to dispose of the assets. +Goodwill — Goodwill is the excess of the consideration transferred over the fair value of the tangible and identifiable intangible assets and liabilities recognized in a business combination. Goodwill is not amortized. We perform an annual impairment test of goodwill as of December 31, or more frequently if circumstances indicate that impairment may exist. The determination of impairment is made by comparing the carrying amount of a reporting unit with its fair value, which is generally calculated using a combination of market and income approaches. If the fair value of the reporting unit exceeds the carrying value, no further testing is performed. If the fair value of the reporting unit is less than the carrying value, we consider goodwill to be impaired, and the amount of impairment loss is calculated and recorded in the statement of operations. +On May 31, 2024, we acquired AquaProp for $ 35.8 million. We accounted for the AquaProp Acquisition as a business combination using the acquisition method of accounting. Goodwill of $ 0.9 million was recorded within our hydraulic fracturing operating segment as of the AquaProp Acquisition Date (as defined below), which represents the excess of the purchase price over the fair value of the assets and liabilities assumed. +On November 1, 2022, we acquired Silvertip for $ 148.1 million. We accounted for the Silvertip Acquisition as a business combination using the acquisition method of accounting. Goodwill of $ 23.6 million was recorded within our wireline operating segment as of the Silvertip Acquisition Date (as defined below), which represents the excess of the purchase price over the fair value of the assets and liabilities assumed. +We conducted our annual impairment test of goodwill in accordance with ASC 350, Intangibles—Goodwill and Other , as of December 31, 2024, and determined that the goodwill in our wireline operating segment and reporting unit was fully impaired due to the Company updating its outlook for this reporting unit as a result of decreased revenue and profitability experienced during the year ended December 31, 2024. Accordingly, we recorded goodwill impairment expense of $ 23.6 million in our wireline reporting unit for the year ended December 31, 2024. No impairment to the carrying value of goodwill for our hydraulic fracturing reporting unit was required. +The following table summarizes goodwill by operating segment as of December 31, 2024, and 2023 and changes for the years then ended: +68 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +(in thousands) +Hydraulic Fracturing Wireline Total +Balance as of January 1, 2023 +Goodwill $ — $ 23,624 $ 23,624 +Accumulated impairment losses — — — +— 23,624 23,624 +Goodwill acquired during year — — — +Impairment losses — — — +Balance as of December 31, 2023 +Goodwill — 23,624 23,624 +Accumulated impairment losses — — — +— 23,624 23,624 +Goodwill acquired during year 3,130 — 3,130 +Measurement period adjustment ( 2,210 ) — ( 2,210 ) +Impairment losses — ( 23,624 ) ( 23,624 ) +Balance as of December 31, 2024 +Goodwill 920 23,624 24,544 +Accumulated impairment losses — ( 23,624 ) ( 23,624 ) +$ 920 $ — $ 920 +Intangible Assets — Intangible assets consist of customer relationships, trademark/trade name, favorable contracts acquired in connection with the acquisition of S ilvertip and AquaProp and internally developed software costs. In connection with the acquisition of Silvertip, we added intangible assets consisting of $ 46.5 million of customer relationships and $ 10.8 million of trademark/trade name. In connection with the acquisition of AquaProp, we added intangible assets consisting of $ 18.6 million of customer relationships, $ 1.3 million of trademark/trade name and $ 2.2 million of favorable contracts. Intangible assets are amortized on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized on a straight‑line basis over the asset’s estimated useful life. No significant residual value is estimated for intangible assets. +Leases — In accordance with ASC Topic 842, the Company determines if a contract is a lease at inception and evaluates identified leases for operating and finance lease accounting. Operating or finance lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses a discount rate based on its estimated incremental borrowing rate on a collateralized basis with similar terms and economic considerations as its lease payments at the lease commencement in determining the present value of lease payments. Lease terms may include options to renew the lease or purchase the underlying assets, however, the Company typically cannot determine its intent to renew the lease or purchase the assets with reasonable certainty at inception. The Company elected the short-term lease recognition practical expedient provided by ASC 842 in which leases with a term of twelve months or less will not be recognized on the balance sheet, and the practical expedient to not separate lease and non-lease components for real estate class of assets. We elected to analogize to the measurement guidance of ASC 360 to capitalize costs incurred to place a leased asset into its intended use and to present such capitalized costs as part of the related lease right-of-use asset cost as initial direct costs. +Income Taxes — Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. +We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary +69 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +differences, projected future taxable income, and the results of recent operations. If we determine that we would not be able to fully realize our deferred tax assets in the future, we would record a valuation allowance. +Deferred Loan Costs — The Company capitalized certain costs in connection with the amendment and restatement of its revolving credit facility, including lender, legal, and accounting fees. These costs are being amortized over the term of the related loan using the straight‑line method. Unamortized deferred loan costs associated with loans paid off or refinanced with different lenders are expensed in the period in which such an event occurs. Deferred loan costs are classified as a reduction of long‑term debt or in certain instances as an asset in the consolidated balance sheet. Amortization of deferred loan costs is recorded as interest expense in the statement of operations, and during the years ended December 31, 2024, 2023, and 2022, the amount of expense recorded was $ 0.4 million, $ 0.4 million, and $ 0.8 million, respectively. +Stock-Based Compensation — The Company recognizes the cost of stock-based awards on a straight‑line basis over the requisite service period of the award, which is usually the vesting period under the fair value method. Total compensation cost is measured on the grant date or modification date, as applicable, using fair value estimates. +Insurance Financing — The Company annually renews its commercial insurance policies, and may choose to either directly pay the insurance premium or finance a portion of the premium. If the Company finances a portion of the premium, a prepaid insurance asset is recorded and amortized monthly over the relevant period. +Concentration of Credit Risk — The Company’s assets that are potentially subject to concentrations of credit risk are cash and cash equivalents and trade accounts receivable. Cash balances are maintained in financial institutions, which at times exceed federally insured limits. The Company monitors the financial condition of the financial institutions in which accounts are maintained and has not experienced any losses in such accounts. The receivables of the Company are with credible operators in the oil and natural gas industries. The Company performs ongoing evaluations as to the financial condition of its customers with respect to trade receivables. +Share Repurchases — All shares of common stock repurchased through the Company's share repurchase program are retired upon repurchase. The Company accounts for the purchase price of repurchased common stock in excess of par value ($ 0.001 per share of common stock) as a reduction of additional paid-in capital, and will continue to do so until additional paid-in capital is reduced to zero. Thereafter, any excess purchase price will be recorded as a reduction of retained earnings. +Variable Interest Entities — The Company may enter into strategic investments or other arrangements that are considered variable interests and such entities are considered variable interest entities (“VIE”). If the Company is the primary beneficiary of a VIE, it is required to consolidate the entity. To determine if the Company is the primary beneficiary of a VIE, the Company evaluates, at the inception of the Company’s involvement with a VIE and on an ongoing basis, whether it has (i) the power to direct the activities that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The assessment of whether the Company is the primary beneficiary of its VIE investments requires significant assumptions and judgments. VIEs that are not consolidated are accounted for under the measurement alternative, equity method, amortized cost, or other appropriate methodology based on the nature of the interest held. +Change in Accounting Estimates — Current trends in hydraulic fracturing equipment operating conditions such as larger pads, changes to job design and increased pumping hours per day have resulted in shorter useful lives for certain critical components that are included in our property and equipment assets. These recent trends necessitated a review of useful lives of our critical components like fluid ends, power ends, hydraulic fracturing units and other components in the first quarter of 2023. We determined that the estimated useful life of fluid ends is now less than one year, resulting in our determination that costs associated with the replacement of these components will no longer be capitalized, but instead recorded in inventories and amortized to cost of services over their estimated useful life. We have also shortened the estimated useful lives of power ends to two years from five years and hydraulic fracturing units to ten years from fifteen years . This change in accounting estimates was made effective January 1, 2023, and accounted for prospectively. The net effect of this change for the year ended December 31, 2024, was a $ 15.6 million increase in net loss, or $ 0.15 per basic and diluted share, respectively. The net effect of this change for the year ended December 31, 2023, was a $ 19.1 million decrease in net income, or $ 0.17 per basic and diluted share, respectively. +The Company plans to phase out its Tier II Units earlier than the current weighted average remaining useful life of this asset group in response to decreasing customer demand for and related pricing pressures on this asset group. Accordingly we shortened the remaining useful lives of those Tier II Units that currently have useful lives beyond 2027 to no longer than the +70 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +2. SIGNIFICANT ACCOUNTING POLICIES (Continued) +end of 2027 to align with management's use and expected economic life. This change was made effective October 1, 2024. The net effect of this change for the year ended December 31, 2024, was a $ 1.7 million increase in net loss, or $ 0.02 per basic and diluted share, respectively. +Recently Issued Accounting Standards +In October 2023, the FASB issued Accounting Standards Update ("ASU") No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification (“Codification”). The amendments in the ASU represent changes to clarify or improve disclosure and presentation requirements of a variety of Codification topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. ASU 2023-06 will become effective for each amendment on the effective date of the SEC's corresponding disclosure rule changes. We do not expect ASU 2023-06 to have a material impact on our consolidated financial statements . +In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which requires public business entities to disclose on an annual and interim basis, 1) significant segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of segment profit or loss (collectively referred to as the “significant expense principle”) and 2) an amount for other segment items representing the difference between segment revenue less the segment expenses disclosed under the significant expense principle and each reported measure of segment profit or loss. This ASU also requires public entities to provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods, clarifies that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit or loss but at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles under GAAP. This ASU also requires disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources, and requires a public entity that has a single reportable segment to provide all the disclosures required by the amendments in this ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. We adopted this ASU 2023-07 for the fiscal year ended December 31, 2024, as required under this standard. See Note 11. Reportable Segment Information. +In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which requires disaggregation of certain components included in the Company’s effective tax rate and income taxes paid disclosures. The guidance is effective for annual periods beginning after December 15, 2024. We are currently assessing the impact of ASU 2023-09 on our consolidated financial statements but do not expect it will have a material impact. +In November 2024, the FASB issued ASU No. 2024-03, Income Statement: Reporting Comprehensive Income: Expense Disaggregation Disclosures (Subtopic 220-40) , which requires public business entities to disclose, in the notes to financial statements, additional information about specific expense categories in the notes to financial statements at interim and annual reporting periods. In January 2025, the FASB issued ASU No. 2025-01, Clarifying the Effective Date, which revised the effective date of ASU No. 2024-03 for interim periods . The guidance is effective for annual periods beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. We are currently assessing the impact of ASU 2024-03 and ASU 2025-01 on our consolidated financial statements. +71 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +3. SUPPLEMENTAL CASH FLOWS INFORMATION +(in thousands) +Year Ended December 31, +2024 2023 2022 +Supplemental cash flows disclosures +Interest paid +$ 7,305 $ 4,564 $ 467 +Income taxes paid +$ 1,792 $ 1,110 $ 129 +Supplemental disclosure of noncash investing and financing activities +Capital expenditures included in accounts payable and accrued liabilities +$ 14,695 $ 21,604 $ 82,452 +Insurance financing included in other current liabilities $ 5,479 $ — $ — +Business acquisition deferred cash consideration included in other current liabilities $ 3,664 $ — $ — +Business acquisition deferred cash consideration included in other long-term liabilities $ — $ 3,180 $ — +Business acquisition contingent consideration included in other long-term liabilities $ 10,900 $ — $ — +Common stock issued for business acquisition $ — $ — $ 106,736 +Noncash purchases of property and equipment $ — $ — $ 2,668 +Note receivable from sale of business $ 13,000 $ — $ — +Equity securities received in exchange for sale of assets $ — $ — $ 11,853 +4. BUSINESS ACQUISITIONS +AquaProp Acquisition +On May 31, 2024, the Company completed the acquisition of all of the outstanding equity interests in AquaProp, which provides wet sand solutions for hydraulic fracturing sand requirements at oil well sites. As a result of the acquisition, the Company expanded its operations into the wet sand service business unit. +The following table summarizes the consideration transferred to AquaProp at the acquisition date: +(in thousands) +Fair value of purchase consideration: +Cash $ 21,216 +Deferred cash consideration 3,664 +Contingent consideration 10,900 +Total consideration $ 35,780 +Cash consideration includes $ 13.7 million paid to the seller, $ 7.2 million paid to settle the seller’s outstanding debt, and $ 0.3 million paid for the seller’s transaction expenses. The deferred cash consideration of $ 3.7 million will be used to cover the amount by which the estimated purchase price exceeds the final purchase price, if any. The unused amount is payable to the seller on May 31, 2025. This obligation is shown within other current liabilities in our consolidated balance sheets. As of December 31, 2024, the outstanding amount for this obligation was $ 3.7 million. +Included in the deferred cash consideration is a liability incurred to the seller of $ 1.8 million. In the purchase agreement as a post-closing transaction, AquaProp's seller agreed to purchase and then sell to the Company, and the Company agreed to purchase from the seller, two additional equipment spreads within 90 days of the closing at a purchase price equal to cost plus a 50 % premium. The post-closing transaction was determined to be a transaction separate from the business combination, but the premium was determined to represent consideration transferred in the business combination as the above market terms of the arrangement would not have been agreed upon absent the business combination. Accordingly, the liability incurred to the seller was recognized as consideration in the business combination as cash was not paid at closing. The post-closing transaction for +72 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. BUSINESS ACQUISITIONS (Continued) +the Company’s purchase of the additional equipment occurred in July 2024 and the purchases were accounted for as additions to property and equipment in our consolidated balance sheet and capital expenditures in our consolidated statement of cash flows. +Also in the purchase agreement as an additional post-closing transaction, the seller agreed to purchase and then deliver to the Company up to five more additional equipment spreads at the request of the Company within a 30-month period following the delivery of the first additional spread at a purchase price equal to the lower of $ 4.8 million or cost. The additional post-closing transaction was determined to be a transaction separate from the business combination, but the Company recorded an intangible asset amounting to $ 0.3 million for the estimated fair value of the potential favorable pricing on such spreads as part of the consideration transferred in the business combination. This intangible asset is included within favorable contracts in the table below. The additional post-closing transaction for the Company’s purchase of the additional equipment will be accounted for as additions to property and equipment in our consolidated balance sheet and capital expenditures in our consolidated statement of cash flows. +The acquisition of AquaProp also included a contingent consideration arrangement that requires additional consideration to be paid by the Company to the seller based on the amount of wet sand delivered during a 30-month period following the delivery of the first additional spread, attributable to the five additional equipment spreads described above. Amounts are payable under the earnout arrangement if the Company reaches certain delivery thresholds (in tons) of wet sand using the specific equipment provided by the seller or by other parties. The range of the undiscounted amounts the Company could be obligated to pay under the contingent consideration agreement is between $ 0 and $ 12.5 million. The fair value of the contingent consideration for the business combination recognized at the acquisition date of $ 10.9 million was estimated by applying the probability-weighted expected return method for the different scenarios that may occur based on the amount of additional equipment delivered by the seller, at the request of the Company, and the amount of wet sand expected to be delivered by such equipment. The fair value measurement of the contingent consideration is based on significant inputs not observable in the market, and thus represent Level 3 measurements. The contingent consideration payable will be adjusted to estimated fair value at the end of each subsequent reporting period until the contingencies are resolved and consideration payments are made. The estimated fair value of the contingent consideration payable was $ 8.3 million at December 31, 2024, resulting in a $ 2.6 million decrease from May 31, 2024. The decrease in the estimated fair value of the contingent consideration payable was primarily driven by updated projections regarding the probability of different scenarios and the amount and timing of additional equipment to be delivered by the seller under those scenarios. The decrease in the estimated contingent consideration payable is included in general and administrative expenses in our consolidated statement of operations for the year ended December 31, 2024. +73 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. BUSINESS ACQUISITIONS (Continued) +The following table summarizes the recognized amounts of identified assets, and liabilities assumed at the acquisition date: +(in thousands) +Recognized amounts of assets acquired and liabilities assumed: +Cash $ 178 +Accounts receivable 10,551 +Property and equipment 13,468 +Intangible assets: +Trade name 1,300 +Customer relationships 18,600 +Favorable contracts 2,210 +Accounts payable ( 1,423 ) +Factored receivables ( 10,024 ) +Total net assets acquired 34,860 +Goodwill 920 +Total consideration $ 35,780 +The fair value of the assets acquired includes accounts receivable of $ 10.6 million. The gross amount due under contracts is $ 10.6 million, of which none is expected to be uncollectible. The Company did not acquire any other class of receivable as a result of the acquisition of AquaProp. +The assets acquired include three intangible assets, the trademark/trade name for AquaProp, customer relationships and favorable contracts. The trademark was assigned a fair value of $ 1.3 million with zero residual value and will be amortized on a straight‑line basis over fifteen years . The customer relationships were assigned a fair value of $ 18.6 million with zero residual value and will be amortized on a straight‑line basis over six years . The favorable contracts were assigned a fair value of $ 2.2 million with zero residual value out of which $ 0.3 million will be amortized over thirty months and $ 1.9 million will be amortized over five years . The fair value of the trademark was estimated using the relief-from-royalty method, which calculates the hypothetical royalty fees that would be saved by owning an intangible asset rather than licensing it from another owner. This method forecasts revenue over the estimated useful life of the asset and then applies the following: a royalty rate based on comparable royalty and/or licensing transactions, income tax rate and discount rate, to calculate the discounted cash flows to arrive at the value of the trademark. Key assumptions include revenue forecasted at historical trends with a 0 % long-term growth rate, 1.0 % royalty rate, 21.6 % income tax rate and a 40.5 % discount rate. The fair value of the customer relationships was estimated using the multi-period excess earnings method. This method is a specific application of the discounted cash flow method, in which revenue derived from the intangible asset is estimated using total business revenue as a proxy and subsequently adjusted for attrition. Then deductions are made for business expenses and required returns attributable to other assets in the business. The excess earnings after these deductions are discounted to present value at an appropriate rate of return to arrive at the intangible asset value. Key assumptions include revenue forecasted at historical trends with a 0 % long-term growth rate, 20.0 % attrition rate, 21.6 % income tax rate and a 40.5 % discount rate. The fair value of the favorable contracts was estimated using a discounted cash flow analysis. Key assumptions include forecasted revenue based on a probability-weighting of the number of spreads that will be active with a 0 % long-term growth rate, 21.6 % income tax rate and a 35.0 % discount rate. +The goodwill is attributable to the acquired workforce and significant synergies. Goodwill is assigned 100 % to the hydraulic fracturing operating segment of the Company. The goodwill recognized is deductible for income tax purposes. +During the period from May 31, 2024, to December 31, 2024, the Company made measurement period adjustments to recognize favorable contracts intangible assets of $ 2.2 million and decrease goodwill by $ 2.2 million and to increase accounts payable acquired as part of the acquisition of AquaProp by $ 0.5 million to reflect facts and circumstances in existence as of the acquisition date. The adjustment to accounts payable decreased the deferred cash consideration payable to the seller. +The acquired business generated revenues of $ 44.1 million and a net loss of $ 2.3 million for the period from May 31, 2024, to December 31, 2024. +The following combined supplemental unaudited pro forma information presents consolidated information of the Company as if the AquaProp Acquisition had occurred on January 1, 2023. The supplemental unaudited pro forma information presented +74 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. BUSINESS ACQUISITIONS (Continued) +below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2024, or any operating efficiencies or inefficiencies that may result from the AquaProp Acquisition. The information is not necessarily indicative of results that would have been achieved had the Company controlled AquaProp during the periods presented. The information presented below does not include the year ended December 31, 2022, as AquaProp was formed in 2023. +(unaudited, in thousands) +Year Ended December 31, +2024 2023 +Revenue $ 1,486,776 $ 1,653,010 +Net (loss) income ( 126,736 ) 91,508 +The Company had material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and net (loss) income. These adjustments included nonrecurring acquisition costs incurred in 2024 but have been adjusted to be reflected in 2023. +These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of AquaProp to reflect the additional depreciation that would have been charged assuming the fair value adjustments to property and equipment had been applied from January 1, 2023, with the consequential tax effects. +For the year ended December 31, 2024, the Company incurred acquisition-related costs of $ 1.5 million. These expenses are included in general and administrative expenses on the Company’s consolidated statement of operations for the year ended December 31, 2024, and are reflected in pro forma net income for the year ended December 31, 2023, in the table above . +The Company’s consolidated statement of operations for the year ended December 31, 2024, includes 215 days of AquaProp operations as the AquaProp Acquisition closed on May 31, 2024. +Par Five Acquisition +On December 1, 2023, the Company completed the acquisition of certain assets and certain liabilities of Par Five which provides cementing and remediation services across the Permian Basin in Texas and New Mexico. As a result of the acquisition, the Company expanded its operations in the cementing service business unit. +The following table summarizes the consideration transferred to Par Five and the recognized amounts of identified assets acquired and liabilities assumed at the acquisition date: +(in thousands) +Total purchase consideration: +Cash $ 22,215 +Deferred cash payment 3,109 +Total consideration $ 25,324 +(in thousands) +Recognized amounts of assets acquired and liabilities assumed: +Accounts receivable $ 8,641 +Inventory 321 +Property, plant and equipment 17,175 +Accrued liabilities ( 813 ) +Total net assets acquired $ 25,324 +75 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. BUSINESS ACQUISITIONS (Continued) +The deferred cash consideration of $ 3.1 million will be used to cover (i) the amount by which the estimated purchase price exceeds the final purchase price, if any and (ii) indemnity obligations of the seller. The unused amount is payable to Par Five or its beneficiary on June 1, 2025, and accrues interest at 4.0 % per annum. This obligation is shown within other current liabilities in our consolidated balance sheet as of December 31, 2024. As of December 31, 2024, the outstanding amount for this obligation was $ 3.1 million. +The fair value of the assets acquired includes account receivables of $ 8.6 million. The gross amount due under contracts is $ 8.6 million, of which none is expected to be uncollectible. The Company did not acquire any other class of receivable as a result of the acquisition of Par Five. The Company previously recognized a preliminary estimate of $ 8.7 million for accounts receivable acquired as part of the Par Five Acquisition. During the year ended December 31, 2024, the Company made measurement period adjustments to net decrease accounts receivable by $ 0.1 million. These measurement period adjustments reflect facts and circumstances in existence as of the acquisition date. The cumulative impact of these adjustments was a decrease in deferred cash consideration payable. +The acquired business contributed revenues of $ 4.9 million and net income of $ 1.2 million to the Company for the period from December 1, 2023, to December 31, 2023. +The following combined supplemental unaudited pro forma information presents consolidated information of the Company as if the business combination had occurred on January 1, 2022. The supplemental pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2023, or any operating efficiencies or inefficiencies that may result from the Par Five Acquisition. The information is not necessarily indicative of results that would have been achieved had the Company controlled Par Five during the periods presented. +(unaudited, in thousands) +Year Ended December 31, +2023 2022 +Revenue $ 1,672,350 $ 1,315,970 +Net income 99,536 4,823 +The Company had material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and net income. These adjustments included nonrecurring acquisition costs incurred in 2023 but have been adjusted to be reflected in 2022. +These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Par Five to reflect the additional depreciation that would have been charged assuming the fair value adjustments to property, plant, and equipment had been applied from January 1, 2022, with the consequential tax effects. +For the year ended December 31, 2023, the Company incurred $ 1.3 million of acquisition costs. These expenses are included in general and administrative expenses on the Company’s consolidated statement of operations for the year ended December 31, 2023, and are reflected in pro forma net income for the year ended December 31, 2022, in the table above. +The Company’s consolidated statement of operations for the year ended December 31, 2023, includes 31 days of Par Five operations as the Par Five Acquisition closed on December 1, 2023. +Silvertip Acquisition +On November 1, 2022 (the "Silvertip Acquisition Date"), the Company entered into a purchase and sale agreement with New Silvertip Holdco, LLC, pursuant to which the Company acquired 100 % of the outstanding limited liability company interests of Silvertip, a wireline services company in the Permian Basin, in exchange for total consideration of $ 148.1 million (the "Silvertip Purchase Price") consisting of 10.1 million shares of the Company’s common stock valued at $ 106.7 million, $ 30.0 million of cash, the payoff of $ 7.2 million of assumed debt, and the payment of $ 4.1 million of certain seller closing and transaction costs. +The Company accounted for the Silvertip Acquisition using the acquisition method of accounting. The Silvertip Purchase Price was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair value at the Silvertip Acquisition Date. The estimated fair values of certain assets and liabilities, including accounts receivable, require +76 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. BUSINESS ACQUISITIONS (Continued) +significant judgments and estimates. The measurements of assets acquired and liabilities assumed, are based on inputs that are not observable in the market and thus represent Level 3 inputs. +The following table summarizes the fair value of the consideration transferred in the Silvertip Acquisition and the Silvertip Purchase Price to the fair value of the assets acquired and liabilities assumed (which are included within the accompanying consolidated balance sheet as of December 31, 2022) as of the Silvertip Acquisition Date: +(in thousands) +Total purchase consideration: +Cash consideration $ 30,000 +Equity consideration 106,736 +Debt payments and closing costs 11,320 +Total consideration $ 148,056 +Cash and cash equivalents $ 2,681 +Accounts receivable and unbilled revenue 21,079 +Inventories 1,209 +Prepaid expenses 2,476 +Other current assets 1,059 +Property and equipment (1) +52,478 +Intangible assets: +Trademark/trade name (2) +10,800 +Customer relationships (2) +46,500 +Goodwill 23,624 +Operating lease right-of-use asset 2,783 +Total assets acquired 164,689 +Accounts payable 7,659 +Accrued and other current liabilities 6,178 +Operating lease liability 2,796 +Total liabilities assumed 16,633 +Total purchase consideration $ 148,056 +(1) Remaining useful lives ranging from less than one to 22 years. +(2) Definite lived intangibles with amortization period of 10 years. +The goodwill arising from the Silvertip Acquisition is attributable to the expected operational synergies resulting from our integrated service offerings. The goodwill arising from the Silvertip Acquisition has been allocated to our wireline operations, and are included in our wireline operating segment. +The Company’s transaction costs were recognized separately from the acquisition of assets and assumptions of liabilities in the Silvertip Acquisition, and were expensed as incurred. These costs are included within general and administrative expenses in our consolidated statements of operations. +The following combined pro forma information assumes the Silvertip Acquisition occurred on January 1, 2021. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2022, or any operating efficiencies or inefficiencies that may result from the Silvertip Acquisition. The information is not necessarily indicative of results that would have been achieved had the Company controlled Silvertip during the periods presented. +77 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +4. BUSINESS ACQUISITIONS (Continued) +(unaudited, in thousands) +Year Ended December 31, 2022 +Revenue $ 1,428,282 +Net income 26,716 +The Company’s consolidated statement of operations for the year ended December 31, 2022, includes 61 days of Silvertip operations as the Silvertip Acquisition closed on November 1, 2022. +5. FAIR VALUE MEASUREMENTS +Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. +In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used, when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions other market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows: +Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment. +Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. +Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. +A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. +78 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +5. FAIR VALUE MEASUREMENTS (Continued) +Assets and Liabilities Measured at Fair Value on a Recurring Basis +The fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued and other current liabilities, and long-term debt are estimated to be approximately equivalent to carrying amounts as of December 31, 2024, and 2023 and have been excluded from the table below. +Assets measured at fair value on a recurring basis as of December 31, 2024, are set forth below: +(in thousands) +Estimated fair value measurements +Balance +Quoted prices in +active market +(Level 1) +Significant other +observable inputs +(Level 2) +Significant other +unobservable inputs +(Level 3) +Total gains +(losses) +December 31, 2024: +Short-term investment $ 7,849 $ 7,849 $ — $ — $ 105 +Business acquisition contingent consideration payable $ 8,300 $ — $ — $ 8,300 $ 2,600 +December 31, 2023: +Short-term investment $ 7,745 $ 7,745 $ — $ — $ ( 2,538 ) +Short-term investment — On September 1, 2022, the Company received 2.6 million common shares of STEP Energy Services L td. (“STEP”) with an estimated fair value of $ 11.8 million as part of the consideration for the sale of our coiled tubing assets to STEP. The shares were treated as an investment in equity securities measured at fair value using Level 1 inputs based on observable prices on the Toronto Stock Exchange and are shown under current assets in our consolidated balance sheets. As of December 31, 2024, the fair value of the short-term investment was estimated at $ 7.8 million. The fluctuation in stock price resulted in an unrealized gain of $ 0.1 million for the year ended December 31, 2024, an unrealized loss of $ 2.5 million for the year ended December 31, 2023, and an unrealized loss of $ 1.6 million for the year ended December 31, 2022 . Included in the unrealized gain for the year ended December 31, 2024, was a loss of $ 0.7 million resulting from noncash foreign currency translation. Included in the unrealized loss for the year ended December 31, 2023, was a gain of $ 0.1 million resulting from noncash foreign currency translation. Included in the unrealized loss for the year ended December 31, 2022, was a loss of $ 0.3 million resulting from noncash foreign currency translation. The unrealized gains and losses resulting from stock price fluctuation and noncash foreign currency translation are included in other income (expense) in our consolidated statements of operations. The Company is restricted from selling, transferring or assigning more than 0.9 million shares in any one calendar month . +Business acquisition contingent consideration payable — On May 31, 2024, the Company completed the acquisition of all of the outstanding equity interests in AquaProp in exchange for $ 13.7 million of cash, $ 3.7 million of deferred cash consideration payable to AquaProp's seller by May 31, 2025, the payoff of $ 7.2 million of assumed debt, the payment of $ 0.3 million of certain transaction costs and estimated contingent consideration of $ 10.9 million. The contingent consideration payable was measured at fair value using Level 3 inputs based on the probability-weighted expected return method and is shown under other long-term liabilities in our condensed consolidated balance sheets. The fair value of the contingent consideration payable is remeasured at the end of each reporting period. As of December 31, 2024, the estimated fair value of the contingent consideration payable was $ 8.3 million resulting in a $ 2.6 million decrease from May 31, 2024. The decrease in the estimated fair value of the contingent consideration payable was primarily driven by updated projections regarding the probability of different scenarios and the amount and timing of additional equipment to be delivered by the seller under those scenarios. Increases or decreases in any valuation inputs in isolation may result in a significantly lower or higher fair value measurement in the future. +The following table presents a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3): +79 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +5. FAIR VALUE MEASUREMENTS (Continued) +(in thousands) +Year Ended December 31, 2024 +Business acquisition contingent consideration payable - opening balance $ — +Addition 10,900 +Decrease in estimated fair value (1) +( 2,600 ) +Business acquisition contingent consideration payable - closing balance $ 8,300 +(1) The decrease in the estimated fair value of the business acquisition contingent consideration payable is included in other income (expense) in our consolidated statement of operations for the year ended December 31, 2024. +Assets Measured at Fair Value on a Nonrecurring Basis +Assets measured at fair value on a nonrecurring basis are set forth below: +(in thousands) +Estimated fair value measurements +Balance +Quoted prices in +active market +(Level 1) +Significant other +observable inputs +(Level 2) +Significant other +unobservable inputs +(Level 3) +Total gains +(losses) +December 31, 2024: +Implied fair value of wireline reporting unit goodwill (1) +$ — $ — $ — $ — $ ( 23,624 ) +November 1, 2024: +Note receivable on sale of Vernal, Utah cementing business $ 13,000 $ — $ 13,000 $ — $ — +September 30, 2024: +Property and equipment, net $ 63,791 $ — $ — $ 63,791 $ ( 188,601 ) +(1) The implied fair value of our wireline reporting unit was determined using Level 3 inputs and was $ 0 at December 31, 2024 (the measurement date) after full impairment. +Certain assets and liabilities are measured at fair value on a nonrecurring basis. These items are not measured at fair value on an ongoing basis but may be subject to fair value adjustments in certain circumstances. These assets and liabilities include those acquired through the business combinations, which are required to be measured at fair value on the acquisition date according to ASC Topic 805, Business Combinations (see Note 4. Business Acquisitions). +The Company performed a fair value assessment of the $ 13.0 million promissory note obtained as consideration for the sale of its cementing business located in Vernal, Utah, to Big 4 on November 1, 2024 (the date of the transaction), and concluded that the fair value of the note receivable approximated its carrying value and no discount or premium adjustment was needed. The Company utilized market interest rates for business loans which represented inputs other than quoted prices within Level 1 that are observable for the asset, either directly or indirectly (Level 2) to determine the implied fair value of the note receivable. +Whenever events or circumstances indicate that the carrying value of long-lived assets may not be recoverable, the Company reviews the carrying values of long‑lived assets, such as property and equipment and other assets to determine if they are recoverable. If any long‑lived assets are determined to be unrecoverable, an impairment expense is recorded in the period. As part of the quarterly evaluation for the three months ended September 30, 2024, after evaluating the current market conditions and new information available, such as decreasing customer demand for and related pricing pressures on its Tier II Units, among other factors, the Company determined that the marketability of its Tier II Units had declined. As a result, the Company plans to strategically phase out its Tier II Units before the end of the original weighted average remaining useful life of this asset group. The Company performed an impairment analysis on its Tier II Units as of September 30, 2024, by comparing estimated future cash flows on an undiscounted basis to the carrying value of these assets. The Company determined that its +80 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +5. FAIR VALUE MEASUREMENTS (Continued) +Tier II Units were impaired, as their carrying value was greater than their estimated future cash flows on an undiscounted basis. Accordingly, we recorded property and equipment impairment expense of approximately $ 188.6 million within our hydraulic fracturing operating segment during the year ended December 31, 2024, in connection with our Tier II Units. As of September 30, 2024 (the impairment measurement date), the estimated fair value of our Tier II Units was $ 63.8 million which was determined using the market and cost approaches, which represent Level 3 inputs in the fair value measurement hierarchy. Our fair value estimates required us to use significant unobservable inputs, including assumptions related to replacement cost, among others. The fair value of approximately 95 % of our Tier II Units was estimated using the market approach and the remaining assets were valued using the cost approach. For assets valued using the market approach, we relied upon the direct match and comparable match methods of the market approach to value certain assets such as hydraulic fracturing pumps and their associated engines, transmissions, and power ends where significant market data was available and an active secondary market exists. Key assumptions include declining desirability for conventional diesel equipment due to emissions and fuel efficiency challenges based on research gathered from third party auctioneers. For assets valued using the cost approach, we estimated the current cost of reproducing a new replica of the asset being appraised using the same, or closely similar, materials for each asset or group of assets by using the indirect (trending) method of the cost approach. Allowances were made for physical deterioration as well as functional and economic obsolescence as appropriate. Key assumptions include forecasted use of Tier II Units. The carrying value of our Tier II Units as of September 30, 2024, prior to the impairment expense was approximately $ 252.4 million. No impairment of property and equipment was recorded during the year ended December 31, 2023 . We recorded property and equipment impairment expense of approximately $ 57.5 million during the year ended December 31, 2022 , in connection with our DuraStim ® electric-powered hydraulic fracturing pumps that did not meet the manufacturer's specifications or our expectations. +We generally apply fair value techniques to our reporting units on a nonrecurring basis associated with valuing potential impairment loss related to goodwill, if any. Our estimate of the reporting unit fair value is based on a combination of income and market approaches, Level 3 in the fair value hierarchy. The income approach involves the use of a discounted cash flow method, with the cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies’ market multiples in estimating the fair value. We used both the guideline public company method and the guideline transaction method under the market approach. Significant assumptions include projected revenue growth, capital expenditures, gross margins, discount rates, terminal growth rates, and weight allocation between income and market approaches. If the reporting unit’s carrying amount exceeds its fair value, we consider goodwill impaired, and the impairment loss is calculated and recorded in the period. We conducted our annual impairment test of goodwill as of December 31, 2024, and determined that the goodwill in our wireline operating segment and reporting unit with a carrying value of $ 23.6 million was fully impaired due to the Company updating its outlook for this reporting unit as a result of decreased revenue and profitability experienced during the year ended December 31, 2024. Accordingly, we recorded goodwill impairment expense of $ 23.6 million in our wireline reporting unit for the year ended December 31, 2024. We applied weightings of 75 %, 25 %, and 0 % to the fair values derived from the income approach, the guideline public company method and the guideline transaction method, respectively, to assess fair value. We used the Gordon Growth Model to determine the terminal value and applied a terminal growth rate of 3.0 %, a 23.0 % income tax rate and a 24.9 % discount rate for the wireline reporting unit . No impairment to the carrying value of goodwill for our hydraulic fracturing reporting unit was required . There were no goodwill impairment losses during the years ended December 31, 2023, and 2022 . See Note 2. Significant Accounting Policies for a summary of goodwill by operating segment. +81 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +6. PROPERTY AND EQUIPMENT +Property and equipment consisted of the following: +(in thousands) +December 31, +2024 2023 +Land +$ 14,076 $ 14,076 +Buildings +40,342 37,888 +Equipment and vehicles +1,040,242 1,551,261 +Leasehold improvements +6,949 8,011 +Subtotal +1,101,609 1,611,236 +Less accumulated depreciation +( 413,384 ) ( 644,120 ) +Property and equipment — net +$ 688,225 $ 967,116 +Depreciation consisted of the following: +(in thousands) +Year Ended December 31, +2024 2023 2022 +Depreciation related to cost of services $ 184,786 $ 169,771 $ 126,746 +Depreciation related to general and administrative expenses 100 222 407 +Total depreciation $ 184,886 $ 169,993 $ 127,153 +The Company incurred amortization expense of $ 19.0 million and $ 5.2 million on its finance lease right-of-use asset, which is related to cost of services for the years ended December 31, 2024, and 2023, respectively . There was no amortization expense related to finance leases for the year ended December 31, 2022. The Company also incurred amortization expense on its intangible assets (see Note 7. Intangible Assets). +7. INTANGIBLE ASSETS +Intangible assets consist of trade mark/trade name, customer relationships and favorable contracts. Trademark/trade names are amortized on a straight‑line basis over useful l ives of ten and fifteen years . Customer relationships are amortized on a straight‑line basis over useful lives of six and ten years . Favorable contracts are amortized on a straight‑line basis over useful lives of thirty months and five years . Internally developed software will be amortized on a straight‑line basis over a useful life of twenty-nine months . Amortization expense, all of which was related to general and administrative expenses, was $ 7.9 million, $ 5.7 million and $ 1.0 million for the years ended December 31, 2024, 2023, and 2022, respectively. The Company’s intangible assets subject to amortization consisted of the following: +82 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +7. INTANGIBLE ASSETS (Continued) +(in thousands) +December 31, +2024 2023 +Intangible assets acquired: +Trademark/trade name $ 12,100 $ 10,800 +Customer relationships 65,100 46,500 +Favorable contracts 2,210 — +Internally developed software 60 — +Total intangible assets 79,470 57,300 +Accumulated amortization: +Trademark/trade name ( 2,390 ) ( 1,260 ) +Customer relationships ( 11,883 ) ( 5,425 ) +Favorable contracts ( 292 ) — +Total accumulated amortization ( 14,565 ) ( 6,685 ) +Intangible assets — net +$ 64,905 $ 50,615 +Estimated remaining amortization expense for each of the subsequent fiscal years is expected to be as follows: +(in thousands) +Year Estimated future amortization expense +2025 $ 9,442 +2026 9,432 +2027 9,311 +2028 9,301 +2029 and beyond 27,419 +Total $ 64,905 +The average amortization period remaining is approximately 7.3 years. +8. LONG‑TERM DEBT +Asset-Based Loan Credit Facility +Our revolving credit facility, as amended and restated in April 2022, prior to giving effect to the amendment to the revolving credit facility in June 2023, had a total borrowing capacity of $ 150.0 million. The revolving credit facility had a borrowing base of 85 % to 90 %, depending on the credit ratings of our accounts receivable counterparties, of monthly eligible accounts receivable less customary reserves. The revolving credit facility included a springing fixed charge coverage ratio to apply when excess availability was less than the greater of (i) 10 % of the lesser of the facility size or the borrowing base or (ii) $ 10.0 million. Under the revolving credit facility, we were required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. +83 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Effective June 2, 2023, the Company entered into an amendment to its amended and restated revolving credit facility. The amendment increased the borrowing capacity under the revolving credit facility to $ 225.0 million (subject to the Borrowing Base (as defined below) limit), and extended the maturity date to June 2, 2028. +Effective June 26, 2024, the Company entered into an amendment to its amended and restated revolving credit facility (the revolving credit facility, as amended and restated in April 2022, as amended in June 2023, as amended in June 2024, and as may be amended further, "AB L Credit Facility"). The amendment increased the amount of noncash consideration that may be considered cash pursuant to certain permitted dispositions. The ABL Credit Facility has a borrowing base of the sum of 85 % to 90 % of monthly eligible accounts receivable and 80 % of eligible unbilled accounts (up to a maximum of 25 % of the borrowing base), in each case, depending on the credit ratings of our accounts receivable counterparties, less customary reserves (the "Borrowing Base"), as redetermined monthly. The Borrowing Base as of December 31, 2024, was approximately $ 164.1 million. The ABL Credit Facility includes a springing fixed charge coverage ratio to apply when excess availability is less than the greater of (i) 10 % of the lesser of the facility size or the Borrowing Base or (ii) $ 15.0 million. Under the ABL Credit Facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens or indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. +Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either the Secured Overnight Financing Rate (“SOFR”) or the base rate, plus the applicable margin, which ranges from 1.75 % to 2.25 % for SOFR loans and 0.75 % to 1.25 % for base rate loans. The weighted average annual interest rate for our ABL Credit Facility for the year ended December 31, 2024, was 7.12 % . +The loan origination costs relating to the ABL Credit Facility are classified as an asset in our balance sheet. As of December 31, 2024, and 2023 , we had outstanding borrowings under our ABL Credit Facility of $ 45.0 million and $ 45.0 million, respectively. After borrowings outstanding and letters of credit of appro ximately $ 8.6 million under the ABL Credit Facility , we had approximately $ 110.5 million available for borrowing under our ABL Credit Facility as of December 31, 2024. +9. ACCRUED AND OTHER CURRENT LIABILITIES +Accrued and other current liabilities consisted of the following: +(in thousands) +December 31, +2024 2023 +Financed and accrued insurance $ 5,140 $ 1,222 +Accrued payroll and related expenses +19,562 14,284 +Deferred revenue (advance from customer) 11,823 19,190 +Capital expenditure, taxes and other accruals +34,398 40,920 +Total +$ 70,923 $ 75,616 +10. EMPLOYEE BENEFIT PLAN +The Company has a 401(k) plan, modified effective January 1, 2019, and further modified effective April 1, 2022. The Company matches 100 % of the employee contributions up to 6 % of gross salary, up to the annual limit. The employees are fully vested in their contributions when made. Prior to the April 1, 2022, modification, the employees vested in the Company’s contributions to the 401(k) plan 25 % per year, beginning in the employee’s first year of service, with full vesting occurring after four years of service. Effective April 1, 2022, the Company allows for immediate vesting of the Company’s contributions. During the years ended December 31, 2024, 2023, and 2022, the recorded expense under the plan was $ 6.8 million, $ 5.9 million, and $ 4.6 million, respectively. +11. REPORTABLE SEGMENT INFORMATION +The Company currently has four operating segments for which discrete financial information is readily available: hydraulic fracturing (inclusive of acidizing and wet sand solutions), wireline, ce menting and our newly formed power generation services +84 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION (Continued) +which has not begun any revenue-generating activities yet . T hese operating segments represent how the CODM evaluates performance and allocates resources. Our CODM is a group comprised of our Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Chief Commercial Officer. +On November 1, 2024, the Company sold its cementing business located in Vernal, Utah, to a business owned by a former employee as part of a strategic repositioning. We recorded a gain on disposal of $ 8.2 million related to the sale of the business within loss on disposal of assets and business within our consolidated statement of operations for the year ended December 31, 2024. The sale of these assets did not qualify for presentation and disclosure as a discontinued operation, and accordingly, we have recorded the resulting gain from the sale as part of our loss on disposal of assets and business in our consolidated statement of operations. The former employee was part of the Company’s cementing operations until November 1, 2024 and is no longer affiliated with the Company. +On September 1, 2022, the Company shut down its coiled tubing operations and disposed of its coiled tubing assets to STEP as part of a strategic repositioning, and recorded a loss on disposal of $ 13.8 million. The divestiture of our coiled tubing assets did not qualify for presentation and disclosure as a discontinued operation, and accordingly, we have recorded the resulting loss from the disposal as part of our loss (gain) on disposal of assets in our consolidated statement of operations. +We have historically conducted our business through four operating segments: hydraulic fracturing, wireline, cementing and coiled tubing. Prior to the fourth quarter of fiscal year 2023, our operating segments met the aggregation criteria and were aggregated into the “Completion Services” reportable segment and our coiled tubing operations (which were divested in September 2022) were shown in the “All Other” category. Effective in the fourth quarter of fiscal year 2023, we revised our segment reporting as we determined that our operating segments no longer met the criteria to be aggregated. In the fourth quarter of fiscal year 2024, we formed a new subsidiary to provide power generation services. This new subsidiary has not begun any revenue-generating activities yet. Our hydraulic fracturing, wireline and cementing operating segments meet the criteria of a reportable segment. Our divested coiled tubing and our newly formed power generation services segments do not meet the reportable segment criteria and are included within the “All Other” category. Additionally, our corporate administrative activities do not involve business activities from which it may earn revenues and its results are not regularly reviewed by the Company’s CODM when making key operating and resource decisions. As a result, corporate administrative expenses have been included under “Reconciling Items.” +Our hydraulic fracturing operating segment revenue approximated 75.6 %, 78.5 % and 89.3 % of our revenue for the years ended December 31, 2024, 2023, and 2022, respectively. Revenue from our wireline operating segment (resulting from the acquisition of Silvertip in 2022) approximated 14.1 %, 14.1 % and 2.4 % of our revenue for the years ended December 31, 2024, 2023 and 2022, respectively. Our cementing operating segment revenue approximated 10.3 %, 7.4 % and 7.2 % of our revenue for the years ended December 31, 2024, 2023 and 2022, respectively. Our newly formed power generation services operating segment has not begun any revenue-generating activities yet. Revenue from our coiled tubing operating segment which was divested in 2022 approximated 1.1 % of our revenue for the year ended December 31, 2022. Our operating segments are subject to inherent uncertainties which may influence our prospective activities. Inter-segment revenues are not material and are not shown separately in the tables below. +The Company manages and assesses the performance of its reportable segments by their adjusted EBITDA (earnings before interest expense, income taxes, depreciation and amortization, stock-based compensation expense, other income or expense, gain or loss on disposal of assets and businesses and other unusual or nonrecurring expenses or income such as impairment charges, retention bonuses, severance, costs related to asset acquisitions, insurance recoveries, one-time professional fees and legal settlements). As part of the CODM’s review of segment-level performance, each member of the CODM group reviews the adjusted EBITDA of the Company’s reportable segments and provides expertise and analyses from their respective areas which drive the evaluation of the performance of the Company’s reportable segments and allocation of resources to those segments. Even though the CEO has the authority to override the other members for strategic or other reasons, key decisions are made jointly by the CODM group. +The following tables set forth certain financial information with respect to the Company’s reportable segments; intersegment revenues and cost of services are shown under “Reconciling Items” (in thousands): +85 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION (Continued) +Hydraulic Fracturing Wireline Cementing All Other Reconciling Items Total +Year ended December 31, 2024 +Service revenue (1) +$ 1,092,000 $ 203,182 $ 149,411 $ — $ ( 307 ) $ 1,444,286 +Cost of service - labor $ 233,156 $ 53,609 $ 35,353 $ ( 6 ) $ — $ 322,112 +Cost of service - expendables $ 149,809 $ 56,533 $ 67,986 $ — $ ( 307 ) $ 274,021 +Cost of service - other direct costs $ 417,237 $ 37,983 $ 14,151 $ 10 $ — $ 469,381 +General and administrative expenses excluding nonrecurring and non cash items for reportable segments $ 21,294 $ 11,200 $ 5,381 $ 366 $ — $ 38,241 +Adjusted EBITDA for reportable segments $ 270,505 $ 43,857 $ 26,539 $ ( 370 ) $ — $ 340,531 +Depreciation and amortization $ 182,188 $ 20,633 $ 8,812 $ — $ 100 $ 211,733 +Property and equipment impairment expense (2) +$ 188,601 $ — $ — $ — $ — $ 188,601 +Goodwill impairment expense (3) +$ — $ 23,624 $ — $ — $ — $ 23,624 +Capital expenditures $ 116,257 $ 7,713 $ 9,376 $ — $ 42 $ 133,388 +Goodwill $ 920 $ — $ — $ — $ — $ 920 +Total assets $ 961,485 $ 156,349 $ 73,935 $ — $ 31,876 $ 1,223,645 +Hydraulic Fracturing Wireline Cementing All Other Reconciling Items Total +Year ended December 31, 2023 +Service revenue (1) +$ 1,280,523 $ 229,599 $ 120,277 $ — $ — $ 1,630,399 +Cost of service - labor $ 239,037 $ 58,212 $ 27,871 $ — $ — $ 325,120 +Cost of service - expendables $ 258,004 $ 61,883 $ 52,008 $ — $ — $ 371,895 +Cost of service - other direct costs $ 389,115 $ 35,262 $ 10,409 $ — $ — $ 434,786 +General and administrative expenses excluding nonrecurring and non cash items for reportable segments $ 27,559 $ 12,311 $ 5,324 $ — $ — $ 45,194 +Adjusted EBITDA for reportable segments $ 366,809 $ 61,930 $ 24,665 $ — $ — $ 453,404 +Depreciation and amortization $ 156,057 $ 18,762 $ 5,845 $ — $ 222 $ 180,886 +Capital expenditures $ 294,377 $ 12,203 $ 3,440 $ — $ — $ 310,020 +Goodwill $ — $ 23,624 $ — $ — $ — $ 23,624 +Total assets $ 1,189,526 $ 198,957 $ 78,475 $ — $ 13,354 $ 1,480,312 +86 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION (Continued) +Hydraulic Fracturing Wireline Cementing All Other Reconciling Items Total +Year ended December 31, 2022 +Service revenue (1) +$ 1,143,216 $ 31,188 $ 91,857 $ 13,440 $ — $ 1,279,701 +Cost of service - labor $ 208,011 $ 8,046 $ 22,450 $ 6,007 $ — $ 244,514 +Cost of service - expendables $ 246,558 $ 8,514 $ 41,427 $ 265 $ — $ 296,764 +Cost of service - other direct costs $ 321,452 $ 4,582 $ 8,011 $ 7,497 $ — $ 341,542 +General and administrative expenses excluding nonrecurring and non cash items for reportable segments $ 28,009 $ 2,120 $ 5,071 $ 1,135 $ — $ 36,335 +Adjusted EBITDA for reportable segments $ 339,186 $ 7,926 $ 14,897 $ ( 1,463 ) $ — $ 360,546 +Depreciation and amortization $ 117,753 $ 2,619 $ 5,089 $ 2,240 $ 407 $ 128,108 +Property and equipment impairment expense (2) +$ 57,454 $ — $ — $ — $ — $ 57,454 +Capital expenditures $ 347,757 $ 2,265 $ 7,769 $ 1,876 $ 5,649 $ 365,316 +Goodwill $ — $ 23,624 $ — $ — $ — $ 23,624 +Total assets $ 1,092,658 $ 173,489 $ 46,944 $ — $ 22,695 $ 1,335,786 +____________________ +(1) Revenue recognized over time under our Hydraulic Fracturing reportable segment was $ 1,077.2 million, $ 1,263.7 million and $ 1,133.2 million for the years ended December 31, 2024, 2023, and 2022, respectively. Revenue recognized at a point in time under our Hydraulic Fracturing reportable segment was $ 14.8 million, $ 16.8 million and $ 10.0 million for the years ended December 31, 2024, 2023, and 2022, respectively. All revenue under our Wireline reportable segment is recognized over time. All revenue under our All Other category is recognized at a point in time. +(2) Represents noncash property and equipment impairment expense on our Tier II Units for the year ended December 31, 2024 and noncash property and equipment impairment expense on our DuraStim ® electric-powered hydraulic fracturing equipment for the year ended December 31, 2022. There was no impairment expense for the year ended December 31, 2023. +(3) Represents noncash impairment of goodwill in our wireline operating segment. +A reconciliation from reportable segment level financial information to the consolidated statements of operations is provided in the table below (in thousands): +87 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION (Continued) +Year Ended December 31, +2024 2023 2022 +Service Revenue +Hydraulic Fracturing $ 1,092,000 $ 1,280,523 $ 1,143,216 +Wireline 203,182 229,599 31,188 +Cementing 149,411 120,277 91,857 +All Other — — 13,440 +Total service revenue for reportable segments 1,444,593 1,630,399 1,279,701 +Elimination of intersegment service revenue ( 307 ) — — +Total consolidated service revenue $ 1,444,286 $ 1,630,399 $ 1,279,701 +Cost of Services +Hydraulic Fracturing - labor $ 233,156 $ 239,037 $ 208,011 +Hydraulic Fracturing - expendables 149,809 258,004 246,558 +Hydraulic Fracturing - other direct costs 417,237 389,115 321,452 +Wireline - labor 53,609 58,212 8,046 +Wireline - expendables 56,533 61,883 8,514 +Wireline - other direct costs 37,983 35,262 4,582 +Cementing - labor 35,353 27,871 22,450 +Cementing - expendables 67,986 52,008 41,427 +Cementing - other direct costs 14,151 10,409 8,011 +All Other - labor ( 6 ) — 6,007 +All Other - expendables — — 265 +All Other - other direct costs 10 — 7,497 +Total cost of services for reportable segments 1,065,821 1,131,801 882,820 +Elimination of intersegment cost of services ( 307 ) — — +Total consolidated cost of services $ 1,065,514 $ 1,131,801 $ 882,820 +General and Administrative Expenses +Hydraulic Fracturing $ 21,294 $ 27,559 $ 28,009 +Wireline 11,200 12,311 2,120 +Cementing 5,381 5,324 5,071 +All Other 366 — 1,135 +Total general and administrative expenses excluding nonrecurring and noncash items for reportable segments 38,241 45,194 36,335 +Unallocated corporate administrative expenses 57,288 49,444 43,956 +Stock-based compensation 17,288 14,450 21,881 +Business acquisition contingent consideration adjustments ( 2,600 ) — — +Other general and administrative expense 1,782 2,969 8,460 +Retention bonus and severance expense 2,324 2,297 1,128 +Total consolidated general and administrative expenses $ 114,323 $ 114,354 $ 111,760 +88 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION (Continued) +Year Ended December 31, +2024 2023 2022 +Adjusted EBITDA +Hydraulic Fracturing $ 270,505 $ 366,809 $ 339,186 +Wireline 43,857 61,930 7,926 +Cementing 26,539 24,665 14,897 +All Other ( 370 ) — ( 1,463 ) +Total Adjusted EBITDA for reportable segments 340,531 453,404 360,546 +Unallocated corporate administrative expenses ( 57,288 ) ( 49,444 ) ( 43,956 ) +Depreciation and amortization ( 211,733 ) ( 180,886 ) ( 128,108 ) +Property and equipment impairment expense (1) +( 188,601 ) — ( 57,454 ) +Goodwill impairment expense (2) +( 23,624 ) — — +Interest expense ( 7,815 ) ( 5,308 ) ( 1,605 ) +Income tax benefit (expense) 31,385 ( 29,868 ) ( 5,356 ) +Loss on disposal of assets and businesses, net ( 7,451 ) ( 73,015 ) ( 102,150 ) +Stock-based compensation ( 17,288 ) ( 14,450 ) ( 21,881 ) +Business acquisition contingent consideration adjustments 2,600 — — +Other income (expense), net (3) +5,531 ( 9,533 ) 11,582 +Other general and administrative expense (4) +( 1,782 ) ( 2,969 ) ( 8,460 ) +Retention bonus and severance expense ( 2,324 ) ( 2,297 ) ( 1,128 ) +Net (loss) income $ ( 137,859 ) $ 85,634 $ 2,030 +Assets +Hydraulic Fracturing $ 961,485 $ 1,189,526 $ 1,092,658 +Wireline 156,349 198,957 173,489 +Cementing 73,935 78,475 46,944 +All Other — — — +Total assets for reportable segments 1,191,769 1,466,958 1,313,091 +Unallocated corporate assets 31,876 13,354 22,695 +Total assets $ 1,223,645 $ 1,480,312 $ 1,335,786 +(1) Represents the noncash property and equipment impairment expense of our Tier II Units for the year ended December 31, 2024, and the noncash property and equipment impairment expense of our DuraStim® electric-powered hydraulic fracturing equipment for the year ended December 31, 2022 . +(2) Represents noncash impairment of goodwill in our wireline operating segment. +(3) Other income for the year ended December 31, 2024, is primarily comprised of tax refunds totaling (net of advisory fees) totaling $ 5.0 million and insurance reimbursements of $ 2.0 million, partially offset by a $ 2.0 million loss to a customer related to an accidental cementing job failure. Other expense for the year ended December 31, 2023, is primarily comprised of settlement expenses resulting from routine audits and one-time health insurance costs totaling approximately $ 7.4 million, and a $ 2.5 million unrealized loss on short-term investment. Other income for the year ended December 31, 2022 is primarily comprised of a $ 10.7 million net tax refund (net of advisory fees) received in March 2022 from the Texas Comptroller of Public Accounts in connection with limited sales, excise and use tax audit of the period from July 1, 2015, through December 31, 2018, $ 2.7 million of noncash income from fixed asset inventory received as part of a settlement of warranty claims with an equipment manufacturer, partially offset by and a $ 1.6 million unrealized loss on short-term investment. +(4) Other general and administrative expense for the year ended December 31, 2024, primarily relates to nonrecurring professional fees paid to external consultants in connection with our business acquisitions and legal settlements, net of reimbursement from insurance carriers. Other general and administrative expense for the year ended December 31, 2023, primarily relates to nonrecurring professional fees paid to external consultants in connection with our business acquisitions and legal settlements, net of reimbursement from insurance carriers. Other general and administrative expense for the year ended December 31, 2022, primarily relates to nonrecurring professional fees paid to external consultants in connection with our audit committee review, SEC investigation, shareholder litigation, legal settlement to a vendor and other legal matters, net of reimbursement from insurance carriers. During the years ended December 31, 2024, 2023, and 2022, we received reimbursement of approxim ately $ 0.2 million , $ 0.4 million, and $ 10.4 million, respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. +89 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +11. REPORTABLE SEGMENT INFORMATION (Continued) +Major Customers +The Company had revenue from the following significant customers that accounted for the following percentages of the Company’s total revenue: +Year Ended December 31, +2024 2023 2022 +Customer A 19.7 % 18.2 % 15.0 % +Customer B 14.9 % 6.2 % 0.0 % +Customer C 10.6 % 9.6 % 2.9 % +Customer D 6.9 % 4.8 % 0.8 % +Customer E 6.6 % 19.7 % 28.3 % +Customer F 2.6 % 0.5 % 1.4 % +Customer G 1.6 % 7.7 % 33.1 % +Customer H 0.0 % 2.3 % 4.7 % +The above customers are third-party customers. Revenue from these customers was derived our Hydraulic Fracturing, Wireline and Cementing segments and our All Other category. +12. NET (LOSS) INCOME PER SHARE +Basic net (loss) income per common share is computed by dividing the net (loss) income relevant to the common stockholders by the weighted-average number of shares outstanding during the year. Diluted net (loss) income per common share uses the same net (loss) income divided by the sum of the weighted-average number of shares of common stock outstanding during the period, plus dilutive effects of options, performance stock units (“PSUs”) and restricted stock units (“RSUs”) outstanding during the period calculated using the treasury method and the potential dilutive effects of preferred stocks (if any) calculated using the if-converted method. +(In thousands, except for per share data) +Year Ended December 31, +2024 2023 2022 +Numerator (both basic and diluted) +Net (loss) income relevant to common stockholders $ ( 137,859 ) $ 85,634 $ 2,030 +Denominator +Denominator for basic net (loss) income per share 105,469 113,004 105,868 +Dilutive effect of stock options — — 80 +Dilutive effect of performance stock units — 42 506 +Dilutive effect of restricted stock units — 370 485 +Denominator for diluted net (loss) income per share 105,469 113,416 106,939 +Basic net (loss) income per common share ( 1.31 ) 0.76 0.02 +Diluted net (loss) income per common share ( 1.31 ) 0.76 0.02 +90 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +12. NET INCOME (LOSS) PER SHARE (Continued) +As shown in the table below, the following stock options, RSUs and PSUs outstanding as of December 31, 2024, 2023, and 2022 have not been included in the calculation of diluted (loss) income per common share for the years ended December 31, 2024, 2023, and 2022 because they would be anti-dilutive to the calculation of diluted net (loss) income per common share: +(In thousands) +2024 2023 2022 +Stock options 179 286 491 +Restricted stock units 1 82 12 +Performance stock units — 411 — +Total 180 779 503 +13. SHARE REPURCHASE PROGRAM +On April 24, 2024, the Company's board of directors (the "Board") approved an increase and extension to the share repurchase program previously authorized on May 17, 2023. The program permits the repurchase of up to an additional $ 100 million of the Company's common stock for a total of $ 200 million and extends the expiration date by one year to May 31, 2025. The shares may be repurchased from time to time in open market transactions, block trades, accelerated share repurchases, privately negotiated transactions, derivative transactions or otherwise, certain of which may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act, in compliance with applicable state and federal securities laws. The timing, as well as the number and value of shares repurchased under the program, will be determined by the Company at its discretion and will depend on a variety of factors, including management's assessment of the intrinsic value of the Company's common stock, the market price of the Company's common stock, general market and economic conditions, available liquidity, compliance with the Company's debt and other agreements, applicable legal requirements, and other considerations. The Company is not obligated to purchase any shares under the share repurchase program, and the program may be suspended, modified, or discontinued at any time without prior notice. The Company expects to fund the repurchases using cash on hand and expected free cash flow to be generated through May 2025. The 1% U.S. federal excise tax on certain repurchases of stock by publicly traded U.S. corporations applies to our share repurchase program. +All shares of common stock repurchased under the share repurchase program are canceled and retired upon repurchase. The Company accounts for the purchase price of repurchased shares of common stock in excess of par value ($ 0.001 per share of common stock) as a reduction of additional-paid-in capital, and will continue to do so until additional paid-in-capital is reduced to zero. Thereafter, any excess purchase price will be recorded as a reduction of retained earnings. During the year ended December 31, 2024, the Company paid an aggregate of $ 59.1 million, an average price per share of $ 8.21 including commissions, for share repurchases under the share repurchase program, thereby retiring 7.2 million shares. The Company has accrued $ 0.5 million in respect of the IRA 2022 repurchase excise tax as of December 31, 2024. As of December 31, 2024, $ 89.2 million remained authorized for future repurchases of common stock under the share repurchase program. +14. STOCK‑BASED COMPENSATION +Stock Option Plan +In March 2013, we approved the Stock Option Plan of ProPetro Holding Corp. (the "Stock Option Plan") pursuant to which our Board may grant stock options to our consultants, directors, executives and employees. No awards have been granted under the Stock Option Plan following our Initial Public Offering, and no further awards will be granted under the Stock Option Plan. As of December 31, 2024, there were no awards outstanding under the Stock Option Plan. +2017 Incentive Award Plan +In March 2017, our shareholders approved the ProPetro Holding Corp. 2017 Incentive Award Plan (the "2017 Incentive Plan") pursuant to which our Board was authorized to grant stock options, RSUs, PSUs, or other stock-based and cash awards to consultants, directors, executives and employees. The 2017 Incentive Plan originally authorized up to 5,800,000 shares of common stock to be issued with respect to awards granted pursuant to the plan. No awards have been granted under the 2017 Incentive Plan following approval of the 2020 Incentive Plan (as defined below), and no further awards will be granted under the 2017 Incentive Plan. +2020 Long Term Incentive Plan +91 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +14. STOCK‑BASED COMPENSATION (Continued) +In October 2020, our shareholders approved the ProPetro Holding Corp. 2020 Long Term Incentive Plan (the "2020 Incentive Plan") pursuant to which our Board may grant stock options, RSUs, PSUs, or other stock-based and cash awards to consultants, directors, executives and employees. The 2020 Incentive Plan authorized up to 4,650,000 shares of common stock to be issued under awards granted pursuant to the plan. The 2020 Incentive Plan became effective on October 22, 2020, and as of such date no further awards will be granted under the 2017 Incentive Plan. In May 2023, our stockholders approved the Amended and Restated ProPetro Holding Corp. 2020 Long Term Incentive Plan (the "A&R 2020 Incentive Plan"), which had been previously approved by the Board. The A&R 2020 Incentive Plan became effective on May 11, 2023, and replaced the 2020 Incentive Plan. The A&R 2020 Incentive Plan authorizes up to 8,050,000 shares of common stock to be issued under awards granted pursuant to the plan in lieu of the 4,650,000 shares of common stock available for issuance under the 2020 Incentive Plan. +The 2017 Incentive Plan and the A&R 2020 Incentive Plan are herein collectively referred to as the "Incentive Plans." +Stock Options +On March 16, 2017, we granted 793,738 stock option awards to certain key employees, officers and directors pursuant to the 2017 Incentive Plan which were scheduled to vest in four substantially equal annual installments, subject to a continuing service requirement. The contractual term for the options awarded is 10 years. The fair value of each stock option award granted was estimated on the date of grant using the Black-Scholes option-pricing model. There were no new stock option grants during the years ended December 31, 2024, 2023, and 2022. +As of December 31, 2024, there was no aggregate intrinsic value for our outstanding or exercisable stock options because the closing stock price as of December 31, 2024, was below the cost to exercise the options. No stock options were exercised during the year ended December 31, 2024. The weighted average remaining contractual term for the outstanding and exercisable stock options as of December 31, 2024, w as 2.0 years and 2.0 years, respec tively. +A summary of the stock option activity during the year ended December 31, 2024, is presented below (in thousands, except for exercise price): +Number +of Shares +Weighted +Average +Exercise +Price +Outstanding at January 1, 2024 180 $ 14.00 +Granted — $ — +Exercised — $ — +Forfeited — $ — +Expired +( 1 ) $ 14.00 +Outstanding at December 31, 2024 179 $ 14.00 +Exercisable at December 31, 2024 179 $ 14.00 +Restricted Stock Units +In 2024, we granted 1,806,956 RSUs to employees, officers and directors pursuant to the A&R 2020 Incentive Plan, which generally vest ratably over a three-year vesting period or a two-year period at one-third after first year anniversary and two-thirds after the second year anniversary, in the case of awards to employees and officers, and generally vest in full after one year , in the case of awards to directors. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases to be an employee or director of the Company prior to vesting of the award. Each RSU represents the right to receive one share of common stock. The grant date fair value of the RSUs is based on the closing share price of our common stock on the date of grant. For the years ended December 31, 2024, 2023, and 2022, the Company recognized stock compensation expense for RSUs of approximately $ 11.9 million, $ 7.8 million and $ 11.1 million, respectively. +On March 31, 2022, the Company modified the RSUs previously granted to a former officer in 2019, 2020, and 2021 to accelerate the vesting of such RSUs in connection with his separation agreement. On December 31, 2022, the Company modified the RSUs previously granted to a former officer in 2020, 2021, and 2022 to accelerate the vesting of such RSUs in connection with his separation agreement. As a result of these modifications, we recorded a net incremental stock expense of $ 1.2 million during the year ended December 31, 2022. +92 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +14. STOCK‑BASED COMPENSATION (Continued) +As of December 31, 2024, the total unrecognized compensation expense for all RSUs was approxima tely $ 15.9 million, and is expected to be recognized over a weighted-average period of approximately 1.6 years. +The following table summarizes the RSUs activity during the year December 31, 2024 (in thousands, except for fair value): +Number of +Shares Weighted +Average +Grant Date +Fair Value ("FV") +Outstanding at January 1, 2024 2,264 $ 9.81 +Granted 1,807 $ 7.44 +Vested ( 937 ) $ 9.51 +Forfeited ( 133 ) $ 8.35 +Canceled — $ — +Outstanding at December 31, 2024 3,001 $ 8.54 +Performance Stock Units +In 2024, we granted 637,266 P SUs to certain key employees and officers as new awards under the A&R 2020 Incentive Plan. Each PSU earned represents the right to receive either one share of common stock or, as determined by the administrator in its sole discretion, a cash amount equal to the fair market value of one share of common stock or amount of cash on the day immediately preceding the settlement date. The actual number of shares of common stock that may be issued under the PSUs ranges from 0 % up to a maximum of 200 % of the target number of PSUs granted to the participant, based on our total shareholder return ("TSR") relative to a designated peer group of comparable companies (“Peer Group”), generally at the end of a three-year period. In addition to the TSR conditions, vesting of the PSUs is generally subject to the recipient’s continued employment through the end of the applicable performance period. Compensation expense is recorded ratably over the corresponding requisite service period. The grant date fair value of PSUs is determined using a Monte Carlo simulation. Grant recipients do not have any shareholder rights until performance relative to the Peer Group has been determined following the completion of the performance period and shares have been issued. +In connection with a former officer’s separation agreement, on March 31, 2022, the Company modified the PSUs previously granted to such former officer in 2020 and 2021 to provide for deemed satisfaction of the service requirement applicable to such PSUs as of March 31, 2022, such that such PSUs shall remain outstanding and eligible to vest based on our TSR relative to the P eer Group over the applicable performance period. In connection with a former officer’s separation agreement, on December 31, 2022, the Company modified the PSUs previously granted to such former officer in 2021 and 2022 to provide for deemed satisfaction of the service requirement applicable to such PSUs as of December 31, 2022, such that such PSUs shall rem ain outstanding and eligible to vest based on our TSR relative to the Peer Group over the applicable performance period. As a result of these modifications, we recorded a net incremental stock expense of $ 2.6 million during the year ended December 31, 2022. +For the years ended December 31, 2024, 2023, and 2022, the Company recognized stock compensation expense for the PSUs of approximatel y $ 5.4 million, $ 6.6 million and $ 10.8 million, respectively. +93 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +14. STOCK‑BASED COMPENSATION (Continued) +The following table summarizes information about PSUs activity during the year ended December 31, 2024 (in thousands, except for fair value): +Period +Granted Target Shares Outstanding at January 1, 2024 Target +Shares +Granted Target Shares Vested Target +Shares +Forfeited Target Shares Outstanding at December 31, 2024 +2021 620 — — ( 620 ) — +2022 306 — — ( 5 ) 301 +2023 438 — — ( 7 ) 431 +2024 — 637 — ( 4 ) 633 +Total 1,364 637 — ( 636 ) 1,365 +Weighted Average Fair Value Per Share $ 15.80 $ 8.22 $ — $ 14.73 $ 12.77 +The total stock compensation expense for the years ended December 31, 2024, 2023 and 2022 for all stock awards was approximately $ 17.3 million , $ 14.5 million and $ 21.9 million, respectively, and the associated tax benefit related thereto was $ 3.6 million, $ 3.0 million and $ 4.6 million, respectively. The total unrecognized stock-based compensation expense as of December 31, 2024 was approximately $ 21.7 million, and is expected to be recognized over a weighted-average period of approximately 1.6 years. +15. INCOME TAXES +The components of the provision for income taxes are as follows: +(in thousands) +Year Ended December 31, +2024 2023 2022 +Federal: +Current +$ 836 $ — $ — +Deferred +( 33,756 ) 28,109 4,157 +( 32,920 ) 28,109 4,157 +State: +Current +1,115 2,028 1,143 +Deferred +420 ( 269 ) 56 +1,535 1,759 1,199 +Total income tax (benefit) expense +$ ( 31,385 ) $ 29,868 $ 5,356 +Reconciliation between the amounts determined by applying the federal statutory rate of 21% for years ended December 31, 2024, 2023 and 2022 to income tax (benefit) expense is as follows: +94 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +15. INCOME TAXES (Continued) +(in thousands) +December 31, +2024 2023 2022 +Taxes at federal statutory rate +$ ( 35,541 ) $ 24,256 $ 1,551 +State taxes, net of federal benefit +1,194 2,092 709 +Section 162(m) limitation 534 2,089 3,423 +Stock-based compensation +2,168 1,718 ( 767 ) +Valuation allowance +— ( 780 ) ( 336 ) +Other +260 493 776 +Total income tax (benefit) expense +$ ( 31,385 ) $ 29,868 $ 5,356 +Deferred tax assets and liabilities are recognized for estimated future tax effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. The significant items giving rise to deferred tax assets (liabilities) are as follows: +(in thousands) +December 31, +2024 2023 +Deferred Income Tax Assets +Accrued liabilities +$ 3,291 $ 1,410 +Allowance for credit losses 0 50 +Goodwill and other intangible assets +6,718 1,900 +Stock‑based compensation +2,083 1,979 +Net operating losses +40,546 63,983 +Lease liabilities +20,940 11,736 +Other +877 895 +Total deferred tax assets +74,455 81,953 +Valuation allowance +( 577 ) ( 577 ) +Total deferred tax assets — net +$ 73,878 $ 81,376 +Deferred Income Tax Liabilities +Property and equipment +( 110,856 ) ( 156,393 ) +Prepaid expenses +( 1,691 ) ( 1,509 ) +Right-of-use assets ( 21,101 ) ( 16,579 ) +Total deferred tax liabilities +( 133,648 ) ( 174,481 ) +Net deferred tax liabilities +$ ( 59,770 ) $ ( 93,105 ) +The Tax Cuts and Jobs Act included a reduction to the maximum deduction allowed for net operating losses generated after December 31, 2017, and the elimination of carryback of net operating losses. As of December 31, 2024, the Company had approximately $ 186.1 million of U.S. federal NOLs, all of which will have an unlimited carryforward. As of December 31, 2024, the Company’s state NOLs were approximately $ 42.8 million and will begin to expire in 2030. Utilization of NOLs may be limited under Section 382 of the Code due to future ownership changes. As of December 31, 2024, we determined that $ 0.6 million valuation allowance was necessary against our state deferred tax assets. +The Company’s U.S. federal income tax returns for the y ear end ed December 31, 2021, an d through the most recent filing remain open to examination by the Internal Revenue Service under the applicable U.S. federal statute of limitations provisions. The various states in which the Company is subject to income tax are generally open to examination for the tax years ended December 31, 2020, and through the most recent filing. +The Company records uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the +95 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +15. INCOME TAXES (Continued) +largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. As of December 31, 2024, 2023 and 2022, no uncertain tax positions were recorded. The Company will continue to evaluate its tax positions in accordance with ASC 740 and will recognize any future effect as either a benefit or charge to income in the applicable period. +Income tax penalties and interest assessments recognized under ASC 740 are accrued as a tax expense in the period that the Company’s taxes are in an uncertain tax position. Any accrued tax penalties or interest assessments will remain until the uncertain tax position is resolved with the taxing authorities or until the applicable statute of limitations has expired. +16. RELATED-PARTY TRANSACTIONS +Operations and Maintenance Yards +The Company rents three yards from an entity in which a director of the Company has an equity interest, and the total annual rent expense for each of the three yards was approximately $ 0.03 million, $ 0.1 million and $ 0.1 million, respectively. The Company previously rented two additional yards from this entity and incurred rent expense of $ 0.02 million and $ 0.1 million, respectively during the year ended December 31, 2023. +ExxonMobil and Pioneer +On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from the Pioneer Pressure Pumping Acquisition. In connection with the Pioneer Pressure Pumping Acquisition, Pioneer received 16.6 million shares of our common stock and approximately $ 110.0 million in cash. In May 2024, Pioneer merged with and into a wholly owned subsidiary of Exxon Mobil Corporation (”ExxonMobil”) after which ExxonMobil became the owner of these shares. The Company currently provides pressure pumping, wireline and other services to ExxonMobil and previously provided such services to Pioneer. +On April 22, 2024, we entered into a s ub-agreement for Hydraulic Fracturing Services with XTO Energy Inc. (“XTO), a wholly owned subsidiary of ExxonMobil, pursuant to which we will provide hydraulic fracturing, wireline and pumpdown services with two committed FORCE ® electric-powered hydraulic fracturing fleets with the option to add a third FORCE ® fleet (also with wireline and pumpdown services) for a period of three years or for contracted hours, whichever occurs last, with respect to each fleet, subject to certain termination and release rights. +Revenue from services provided to ExxonMobil (including Pioneer and XTO) subsequent to Pioneer's merger with ExxonMobil accounted for $ 187.7 million of our total revenue during the year ended December 31, 2024. Revenue from services provided to Pioneer (including equipment reservation fees) prior to its merger with ExxonMobil accounted f or approximately $ 6.8 million of our total revenue during the year ended December 31, 2024 . R evenue from services provided to Pioneer (including equipment reservation fees) prior to its merger with ExxonMobil accounted for approximate ly $ 125.1 million and $ 423.7 million of our total revenue durin g the years ended December 31, 2023 and 2022, respectively. +As of December 31, 2024, the total accounts receivable due from ExxonMobil (including Pioneer and XTO), including estimated unbilled receivable for services we provided, amounted to $ 70.8 million and the amount due to ExxonMobil (including Pioneer and XTO) was $ 0 . As of December 31, 2023, the balance due from Pioneer for services we provided amounted to approximately $ 2.4 million and the amount due to Pioneer was $ 0 . +Big 4 and Former Employee +On November 1, 2024, we sold our cementing business located in Vernal, Utah, to Big 4 which is solely owned by a former employee as part of a strategic repositioning. We received a promissory note for $ 13.0 million as consideration. The note receivable is secured by substantially all assets of Big 4 and the former employee’s ownership interests in and distributions from Big 4. The note receivable is to be paid to the Company in quarterly installments with interest of 10 % per annum from March 31, 2025 to December 31, 2029. The note receivable is considered subordinated financial support to Big 4 and represents a variable interest to the Company in Big 4. See Note 19. Variable Interest Entity for the carrying value of the note receivable as of December 31, 2024 . We recorded interest income of $ 0.2 million for the year ended December 31, 2024 which is included in our consolidated statement of operations under other income (expense). Cash inflows from collections on the note receivable will be included in our consolidated statement of cash flows under cash flows from investing activities. The fo rmer employee was part of our cementing operations until November 1, 2024, and is no longer affiliated with the Company. +17. LEASES +96 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +17. LEASES (Continued) +Operating Leases +Description of Leases +We have operating leases for five FORCE ® electric-powered hydraulic fracturing equipment fleets (the “Electric Fleet Leases”), facilities and office space. The terms and conditions of these leases vary by the type of the underlying asset. We did not account for land separately from buildings under our leases of facilities because we concluded that the accounting effect was insignificant. Our operating leases do not include residual value guarantees, covenants or financial restrictions. Further, our operating leases do not contain variability in payments resulting from either an index change or rate change. We assumed two leases for facilities as part of our acquisition of Silvertip Completion Services Operating, LLC on November 1, 2022. Our operating leases have remaining lease terms of approximately 0.8 years to 3.9 years as of December 31, 2024. Our operating leases have renewal options ranging from none to three renewal options of up to one year each at the end of their current contractual lease periods. Further, our Electric Fleet Leases have options to purchase the underlying equipment at the end of their initial term of approximately three years or at the end of each renewal period. However, in management's judgment the exercise of neither the renewal options nor the purchase options are reasonably assured for any lease. In addition to fixed rent payments, the Electric Fleet Leases contain variable payments based on equipment usage. The right-of-use assets and liabilities related to the Electric Fleet Leases are included in our Hydraulic Fracturing reportable segment, related to leases for facilities are included in our Hydraulic Fracturing and Wireline reportable segments, and related to office space are included in our Wireline reportable segment and our corporate administrative function. +Year Ended December 31, +(in thousands) 2024 2023 +Operating lease right of use cost $ 182,130 $ 85,775 +Operating lease amortization of right-of-use assets 49,836 7,192 +Net Book Value of Operating Leases $ 132,294 $ 78,583 +Finance Leases +Description of Lease +We have a three-year equipment lease contract (the "Power Equipment Lease") for certain power generation equipmen t. In addition t o the contractual lease period, the contract includes an optional renewal for one year , and in management's judgment the exercise of the renewal option is not reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Power Equipment Lease does not contain variability in payments resulting from either an index change or rate change. The right-of-use assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. +We accounted for the Power Equipment Lease as a finance lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term, the present value of lease payments being equal to or in excess of substantially all of the fair value of the underlying assets and the lease term being the major part of the remaining economic life of the underlying assets. +Year Ended December 31, +(in thousands) 2024 2023 +Finance lease right of use cost $ 54,842 $ 52,612 +Finance lease amortization of right-of-use assets 24,129 5,163 +Net Book Value of Finance Leases $ 30,713 $ 47,449 +Lease Costs +The components of lease costs are as follows: +97 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +17. LEASES (Continued) +Year Ended December 31, +(in thousands) 2024 2023 2022 +Operating lease cost $ 48,759 $ 6,636 $ 682 +Finance lease cost: +Amortization of right-of-use assets 24,129 5,163 — +Interest on lease liabilities 2,892 1,014 — +Total finance lease cost 27,021 6,177 — +Variable lease cost 3,950 144 — +Short-term lease cost 833 830 825 +Short-Term Leases +We elected the practical expedient option, consistent with ASC 842, to exclude leases with a term of twelve months or less ("short-term lease") from our balance sheet and continue to record short-term leases as a period expense. +Initial Direct Costs +We elected to analogize to the measurement guidance of ASC 360 to capitalize costs incurred to place a leased asset into its intended use and to present such capitalized costs as part of the related lease right-of-use asset cost as initial direct costs. The Company incurred initial direct costs of approximately $ 25.5 million , $ 25.0 million during the years ended December 31, 2024 and 2023, respectively , to place the leased equipment into its intended use, which are included in the right-of-use assets cost related to our Electric Fleet Leases. No initial direct costs were incurred during the year ended December 31, 2022. +Supplemental Cash Flow Information +Supplemental cash flow information related to leases are as follows: +Year Ended December 31, +(in thousands) 2024 2023 2022 +Cash paid for amounts included in the measurements of lease liabilities: +Operating cash flows from operating leases $ 34,688 $ 4,573 $ 748 +Operating cash flows from finance lease 2,892 1,014 — +Financing cash flows from finance lease 17,676 4,663 — +Noncash lease obligations arising from obtaining right-of-use assets related to: +Operating leases (1) +70,856 56,108 605 +Finance lease (2) +2,230 52,612 — +(1) D uring the year ended December 31, 2024, we recorded noncash operating lease obligations a rising from obtaining right-of-use assets related to the receipt of equipment under the Electric Fleet Leases. During the year ended December 31, 2023, we recorded noncash operating lease obligations a rising from obtaining right-of-use assets related to the receipt of equipment under the Electric Fleet Leases, our execution of facilities and office leases and our extension of a facilities lease . +(2) During the year ended December 31, 2024, we recorded noncash finance lease obligations related to additional rent on the Power Equipment Lease. During the year ended December 31, 2023 , we recorded noncash finance lease obligations arising from obtaining right-of-use assets related to the commencement of the Power Equipment Lease. +98 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +17. LEASES (Continued) +Lease Terms and Discount Rates +Lease terms and discount rates are as follows: +December 31, +2024 2023 +Weighted average remaining lease term: +Operating leases 2.4 years 3.1 years +Finance leases 1.6 years 2.6 years +Weighted average discount rate: +Operating leases 7.0 % 7.1 % +Finance leases 7.3 % 7.3 % +The discount rates used for our operating and finance leases are determined based on the weighted average annual interest rate on our ABL Credit Facility effective at the time of inception or modification of each lease. +Maturity Analysis of Lease Liabilities +The maturity analysis of liabilities and reconciliation to undiscounted and discounted remaining future lease payments for operating leases as of December 31, 2024 are as follows: +(in thousands) Operating Leases Finance Leases +2025 44,600 20,916 +2026 43,835 13,462 +2027 17,379 — +2028 820 — +2029 — — +2030 — — +Total undiscounted future lease payments $ 106,634 34,378 +Amount representing interest ( 8,722 ) ( 1,874 ) +Present value of future lease payments (lease obligation) 97,912 32,504 +18. COMMITMENTS AND CONTINGENCIES +Commitments +We entered into certain commitments for fixed assets, consumables and services incidental to the ordinary conduct of our business, generally for quantities required for our operations and at competitive market prices. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. We entered into a contractual arrangement with an equipment manufacturer to purchase mobile natural gas-fueled power generation equipment for our PROPWR business line, with a total cost of $ 122.0 million, of which approximately $ 103.7 million, representing progress payments beyond the initial down payment on this equipment, will be financed. We currently expect to start receiving this equipment from the end of the second quarter of 2025 through early 2026. We entered into a contractual arrangement with another related equipment manufacturer to purchase additional natural gas-fueled power generation equipment for our PROPWR business line, with a total cost of $ 25.0 million. We currently expect to receive these generators in the first half of 2025. The power generation equipment from these contractual arrangements represent total capacity of 140 megawatts. +99 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +18. COMMITMENTS AND CONTINGENCIES (Continued) +We entered into the Electric Fleet Leases, which contain options to extend the leases or purchase the equipment at the end of each lease or at the end of each subsequent renewal period. As of December 31, 2024, all five of the Electric Fleet Leases commenced when the Company took possession of all equipment associated with the first four FORCE ® electric-powered hydraulic fractu ring fleets and some of the equipment associated with the fifth fleet under these leases. Lease payments pertaining to the remaining equipment under the fifth Electric Fleet Lease is expected to commence when the Company takes possession of the remaining associated equipment . We currently expect to receive the remaining equipment associated with the fifth fleet in the first half of 2025. The total estimated contractual commitment in connection with the Electric Fleet Leases excluding the cost associated with the option to purchase the equipment at the end of each lease is approximately $ 121.8 million . We also entered into the Power Equipment Lease. The total estimated contractual commitment in connection with the Power Equipment Lease is approximately $ 34.4 million . +The Company enters into purchase agreements with its sand suppliers (the “Sand Suppliers”) to secure supply of sand as part of its normal course of business. The agreements with the Sand Suppliers require that the Company purchase a minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the mi nimum volumes or a fixed price per ton of unpurchased volumes. Our agreements with the Sand Suppliers expire a t December 31, 2025. Our sand agreement with one of our Sand Suppliers that will expire on December 31, 2025, has a take-or-pay commitment o f $ 1.5 million. During the years ended December 31, 2024, 2023, and 2022, no shortfall fee was recorded. +As of December 31, 2024 and 2023, the Company had issued le tters of credit of $ 8.6 million and $ 6.0 million, respectively, under the ABL Credit Facility in connection with the Company's casualty insurance policy. +Contingent Liabilities +Legal Matters +We have been named in various claims, lawsuits or threatened actions in the ordinary course of our business. We intend to defend these matters vigorously; however, litigation is inherently unpredictable, and the ultimate outcome or effect of any claim, lawsuit or action cannot be predicted with certainty. As a result, there can be no assurance as to the ultimate outcome of any litigation matter. Any claims against us, whether meritorious or not, could cause us to incur significant costs and expenses and require significant amounts of management and operational time and resources. With respect to each matter or exposure, we have made an assessment, in accordance with GAAP, of the probability that the resolution of the matter would ultimately result in a loss. When we determine that an unfavorable resolution of a matter is probable and such amount of loss can be estimated, we record a liability at the time that both of these criteria are met. Our management believes that we have recorded adequate accruals for any liabilities that may reasonably be expected to result from these matters. In the opinion of our management, no pending or known threatened claims, actions or proceedings against us are expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows. +Environmental and Equipment Insurance +The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company's business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company's liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification. +The Company is self-insured up to $ 10 million per occurrence for certain losses arising from or attributable to fire and/or explosion at the wellsites that do not have qualified fire suppression measures. No accrual was recorded in our financial statements in connection with this self-insurance strategy because the occurrence of fire and/or explosion cannot be reasonably estimated. +100 +PROPETRO HOLDING CORP. +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +18. COMMITMENTS AND CONTINGENCIES (Continued) +Regulatory Audits +In 2020, the Texas Comptroller of Public Accounts (the “Comptroller”) commenced a routine audit of the Company's motor vehicle and other related fuel taxes for the periods of July 2015 through December 2020. As of December 31, 2024, the audit was substantially complete and the Company accrued for an estimated settlement expense of $ 6.0 million . +In May 2022, the Company received a notification from the Comptroller that it will commence a routine audit of the Company’s gross receipt taxes, which will routinely cover up to a four-year period. As of December 31, 2024, the audit was nearing completion and the Company accrued for an estimated settlement expense of $ 0.8 million . +19. VARIABLE INTEREST ENTITY +A VIE is an entity with any of the following characteristics: (i) the entity does not have enough equity to finance its activities without additional financial support, (ii) the equity holders, as a group, lack the characteristics of a controlling financial interest or (iii) the entity is structured with non-substantive voting rights. Consolidation of a VIE is required for the party deemed to be the primary beneficiary, if any. The primary beneficiary is the party who has both (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. +On November 1, 2024, we sold our cementing business located in Vernal, Utah, to a Big 4, which is solely owned by a former employee as part of a strategic repositioning. We received a promissory note for $ 13.0 million as consideration. The note receivable is secured by substantially all assets of Big 4 and the former employee’s ownership interests in and distributions from the entity. The note receivable is to be paid to the Company in quarterly installments with interest of 10 % per annum from March 31, 2025 to December 31, 2029. We evaluated our note receivable from Big 4 for VIEs in accordance with ASC 810, Consolidation . The Company holds a variable interest in Big 4 and Big 4 is a VIE due to its lack of sufficient equity to finance its operations without additional subordinated financial support from the Company. The note receivable from Big 4 is considered subordinated financial support and represents a variable interest to the Company in Big 4. Assets and liabilities related to the Company’s variable interest in Big 4 included in the Company’s consolidated balance sheets are limited to the unpaid balance of the note receivable and any accrued interest. The Company’s maximum exposure to loss as a result of its involvement with Big 4 is also limited to the unpaid balance of the note receivable and any accrued interest. The consolidation of Big 4 is not required as the Company is not the primary beneficiary of this VIE as we do not have the power to direct the activities that most significantly impact Big 4’s economic performance. We consider such activities to include performing customer contract obligations, maintaining and establishing customer relationships, and managing costs, among other operational activities. We do not have any control over such activities. Such power is held by Big 4’s sole owner. We account for the note receivable (our variable interest) at amortized cost. As of December 31, 2024, the carrying value of the note receivable including interest was $ 13.2 million. Of the carrying value at December 31, 2024 the amount collectible within one year was $ 2.1 million and the amount collectible beyond one year was $ 11.1 million , which are included in our consolidated balance sheet under other current assets and other non current assets, respectively. +101 +Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +None. +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-K. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2024. As noted in Management’s Report on Internal Control over Financial Reporting, management’s evaluation of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of AquaProp , which was acquired on May 31, 2024. Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company. We are in the process of integrating AquaProp’s internal controls with our internal controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. +Management’s Report on Internal Control over Financial Reporting +The management of ProPetro Holding Corp. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. ProPetro Holding Corp. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with GAAP. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any control system. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company will be detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our internal control over financial reporting as of December 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management believes that ProPetro Holding Corp. maintained effective internal control over financial reporting as of December 31, 2024. Management’s evaluation of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of AquaProp, which was acquired on May 31, 2024, and whose financial statements constitute 4.9% and 3.1% of total assets and revenue, respectively of the consolidated financial statement amounts as of and for the year ended December 31, 2024. The inde pendent registered public accounting firm, RSM US LLP, Houston, Texas, United States, has audited the consolidated financial statements as of and for the year ended December 31, 2024, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this Annual Report under Part II, Item 8 above. +Changes in Internal Control over Financial Reporting +There were no changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2024 , that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. +102 +Item 9B. Other Information +Trading Plans +During the three months ended December 31, 2024 , no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K. +Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections +Not applicable. +Part III +Item 10. Directors, Executive Officers and Corporate Governance +The information required by Item 10 is incorporated by reference to the Company’s Proxy Statement for its 2025 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2025. +Item 11. Executive Compensation +The information required by Item 11 is incorporated by reference to the Company’s Proxy Statement for its 2025 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2025. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +The information required by Item 12 is incorporated by reference to the Company’s Proxy Statement for its 2025 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2025. +Item 13. Certain Relationships and Related Party Transactions, and Director Independence. +The information required by Item 13 is incorporated by reference to the Company’s Proxy Statement for its 2025 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2025. +Item 14. Principal Accounting Fees and Services +The information required by Item 14 is incorporated by reference to the Company’s Proxy Statement for its 2025 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2025. +103 +Part IV +Item 15. Exhibits and Financial Statement Schedules. +(a)(1) Financial Statements +The Financial Statements in Item 8 are filed as part of this Annual Report. +(a)(2) Financial Statement Schedules +None. +(a)(3) Exhibits +The exhibits required to be filed by this Item 15(b) are set forth in the Exhibit Index included below. +(b) See Exhibit Index +(c) None +104 +EXHIBIT INDEX +Exhibit +Number Description +2.1 +Purchase and Sale Agreement, dated as of November 1, 2022, between ProPetro Holding Corp. and New Silvertip Holdco, LLC (incorporated by reference herein to Exhibit 2.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated October 31, 2022). +3.1 +Amended and Restated Certificate of Incorporation of ProPetro Holding Corp., dated as of June 19, 2019 (incorporated by reference herein to Exhibit 3.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated June 19, 2019). +3.2 +Amended and Restated Bylaws of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 3.2 to ProPetro Holding Corp.’s Current Report on Form 8-K dated June 19, 2019). +3.3 +Certificate of Designations of Series B Junior Participating Preferred Stock of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 3.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated April 14, 2020). +4.1 +Specimen Stock Certificate (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Registration Statement on Form S-1, dated February 23, 2017 (Registration No. 333-215940). +4.2 +Investor Rights Agreement, dated as of December 31, 2018, by and between Pioneer Natural Resources Pumping Services LLC and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 4.1 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 31, 2018). +4.3 +Registration Rights Agreement, dated as of December 31, 2018, by and between Pioneer Natural Resources Pumping Services LLC and ProPetro Holding Corp. (incorporated by reference herein to Exhibit 4.2 to ProPetro Holding Corp.’s Current Report on Form 8-K dated December 31, 2018). +4.4 +Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference herein to Exhibit 4.4 to ProPetro Holding Corp.'s Annual Report on Form 10-K for the year ended December 31, 2019). +10.1# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan (incorporated by reference herein to Exhibit 10.18 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated March 7, 2017 (Registration No. 333-215940)). +10.2# +ProPetro Holding Corp. 2020 Long Term Incentive Plan (incorporated by reference herein to Exhibit 10.3 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 26, 2020) . +10.3# +Form of ProPetro Holding Corp. 2017 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement (incorporated by reference herein to Exhibit 10.22 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated February 23, 2017 (Registration No. 333-215940)). +10.4# +Form of ProPetro Holding Corp. Amendment to Non‑Qualified Stock Option Agreement (incorporated by reference herein to Exhibit 10.23 to ProPetro Holding Corp.’s Registration Statement on Form S-1/A, dated February 23, 2017 (Registration No. 333-215940)). +10.5# +2020 Form of ProPetro Holding Corp. 2020 Long Term Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Directors). (incorporated by reference herein to Exhibit 10.29 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2020). +10.6# +Amended and Restated ProPetro Holding Corp. Executive Incentive Bonus Plan (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated February 18, 2020). +10.7# +Form of Indemnification Agreement for Pioneer Designated Directors (incorporated by reference herein to Exhibit 10.32 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2018). +10.8# +Form of Indemnification Agreement for Officers and Directors of ProPetro Holding Corp. (incorporated by reference herein to Exhibit 10.33 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2018). +10.9# +ProPetro Services, Inc. Second Amended and Restated Executive Severance Plan (incorporated by reference herein to Exhibit 10.4 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 26, 2020). +10.10# +Form of Participation Agreement pursuant to the ProPetro Services, Inc. Second Amended and Restated Executive Severance Plan (incorporated by reference herein to Exhibit 10.5 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated October 26, 2020). +10.11# +2020 Form of ProPetro Holding Corp. 2017 Incentive Award Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.54 to ProPetro Holding Corp.’s Annual Report on Form 10-K for the year ended December 31, 2019) . +10.12# +2021 Form of ProPetro Holding Corp. 2020 Long Term Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (Employees) (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021). +105 +10.13# +2021 Form of ProPetro Holding Corp. 2020 Long Term Incentive Plan Performance Share Unit Grant Notice and Performance Share Unit Agreement (incorporated by reference herein to Exhibit 10.2 to ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021). +10.14 +Restatement Agreement, dated as of April 13, 2022, by and among ProPetro Holding Corp., and ProPetro Services, Inc., Barclays Bank PLC, as the Administrative Agent, the Collateral Agent, a Letter of Credit Issuer and the Swingline Lender, and each of the Lenders and Letter of Credit Issuers from time to time party thereto (incorporated by reference herein to Exhibit 10.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated April 13, 2022). +10.15# +Amended and Restated ProPetro Holding Corp. 2020 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated May 11, 2023). +10.16 +Amendment No. 1 to Amended and Restated Credit Agreement, dated as of June 2, 2023, by and among ProPetro Holding Corp., and ProPetro Services, Inc., the Incremental Lenders and each existing Lender party thereto as a Consenting Lender and Barclays Bank PLC, as Agent (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K, dated June 2, 2023). +10.17# +Amended and Restated ProPetro Holding Corp. Non-Employee Director Compensation Policy (incorporated by reference herein to Exhibit 10.1 of ProPetro Holding Corp.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023). +10.18# +Sub - agreement for Hy dra u lic Fracturing Services effective as of April 22, 2024, between XTO Energy Inc. (a wholly owned subsidiary of Exxon Mobil Corporation) and ProPetro Services, Inc. (incorporated by reference herein to Exhibit 10.1 of ProPetro Holding Corp’s Qua r terly Report on Form 10-Q for the quarter ended June 30, 2024). +10.19 +Amendment No. 2 to Amended and Restated Credit Agreement, dated as of June 26, 2024, by and among ProPetro Holding Corp., and ProPetro Services Inc. the Incremental Lenders and each existing Lender party thereto as a Consenting Lender and Barclays Bank PLC, as Agent (incorporated by referenced herein to Exhibi t 10.2 to ProPetro Holdin g Corp. ’ s Quarterly Financial Report on Form 10-Q for the quarter ended June 30, 2024 ). +16.1 +Letter of Deloitte & Touche LLP dated March 1, 2023 (incorporated by reference herein to Exhibit 16.1 to ProPetro Holding Corp.’s Current Report on Form 8-K, dated March 1, 2023). +19.1(a) +Insider Trading Policy +21.1(a) +List of Subsidiaries of ProPetro Holding Corp. +23.1(a) +Consent of RSM US LLP, an Independent Registered Public Accounting Firm. +23.2(a) +Consent of Deloitte & Touche LLP, an Independent Registered Public Accounting Firm. +31.1(a) +Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +31.2(a) +Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +32.1(b) +Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +32.2(b) +Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +97.1# +ProPetro Holding Corp. Incentive-Based Compensation Recovery (Clawback) Policy (incorporated by reference herein to Exhibit 9 7.1 to ProPetro Holding Corp. ’ s Annual Report on Form 10-K for the year ended December 31, 2023) . +101.INS(a) XBRL Instance Document +101.SCH(a) XBRL Taxonomy Extension Schema Document +101.CAL(a) XBRL Taxonomy Extension Calculation Linkbase Document +101.LAB(a) XBRL Taxonomy Extension Label Linkbase Document +101.PRE(a) XBRL Taxonomy Extension Presentation Linkbase Document +101.DEF(a) XBRL Taxonomy Extension Definition Linkbase Document +104(a) Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document +(a) Filed herewith. +(b) Furnished herewith. +# Compensatory plan, contract or arrangement. +Item 16. Form 10-K Summary +None. +106 +SIGNATURES +Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on February 20, 2025. +ProPetro Holding Corp. +/s/ Samuel D. Sledge +Samuel D. Sledge +Chief Executive Officer +107 +Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated on the date indicated. +Signature +Title +Date +/s/ Samuel D. Sledge +Chief Executive Officer and Director (Principal Executive Officer) +February 20, 2025 +Samuel D. Sledge +/s/ David S. Schorlemer +Chief Financial Officer (Principal Financial Officer) +February 20, 2025 +David S. Schorlemer +/s/ Celina A. Davila +Chief Accounting Officer (Principal Accounting Officer) February 20, 2025 +Celina A. Davila +/s/ Phillip A. Gobe +Chairman of the Board February 20, 2025 +Phillip A. Gobe +/s/ Spencer D. Armour, III +Director +February 20, 2025 +Spencer D. Armour, III +/s/ Mark Berg +Director +February 20, 2025 +Mark Berg +/s/ Anthony Best +Director +February 20, 2025 +Anthony Best +/s/ G. Larry Lawrence +Director +February 20, 2025 +G. Larry Lawrence +/s/ Michele Vion +Director +February 20, 2025 +Michele Vion +/s/ Jack Moore +Director +February 20, 2025 +Jack Moore +/s/ Mary Ricciardello +Director +February 20, 2025 +Mary Ricciardello +/s/ Alex V. Volkov +Director +February 20, 2025 +Alex V. Volkov +108 \ No newline at end of file diff --git a/raw/filings/0001680247/2024/0001680247-25-000030/filing_metadata.csv b/raw/filings/0001680247/2024/0001680247-25-000030/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..1cb7daa6db8af531d39ba611eceaa94a6290c09b --- /dev/null +++ b/raw/filings/0001680247/2024/0001680247-25-000030/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0001680247,PUMP,ProPetro Holding Corp.,10-K,2025-02-20,2024-12-31,2025-02-20T12:45:24.000Z,0001680247-25-000030,pump-20241231.htm,10-K,14965502,1,1,https://www.sec.gov/Archives/edgar/data/1680247/000168024725000030/pump-20241231.htm,https://www.sec.gov/Archives/edgar/data/1680247/000168024725000030/,2024,2024,1 diff --git a/raw/filings/0001680247/2024/0001680247-25-000030/item1.txt b/raw/filings/0001680247/2024/0001680247-25-000030/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..d99f1caba33792e0da09dcc01fda29a94e9ad150 --- /dev/null +++ b/raw/filings/0001680247/2024/0001680247-25-000030/item1.txt @@ -0,0 +1,128 @@ +Item 1. Business. +Our Company +We are a leading integrated energy service company, located in Midland, Texas, focused on providing innovative hydraulic fracturing, wireline, and other complementary energy and power generation services to leading upstream oil and gas companies engaged in the E&P of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region’s most active and well‑capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil and natural gas producing areas in the United States, and we believe we are one of the leading providers of energy services in the region. +In the fourth quarter of 2024, we formed a new subsidiary, ProPetro Energy Solutions, LLC, doing business as PROPWR SM , to provide power generation services to oil and gas producers and for general industrial projects and data centers. PROPWR has ordered equipment, but has not yet begun revenue-generating activities. +On November 1, 2024, we sold our cementing business located in Vernal, Utah, to a business owned by a former employee as part of a strategic repositioning. We received a promissory note for $13.0 million as consideration. The note receivable is secured by substantially all assets of the divested operations and the former employee’s ownership interests in and distributions from the business. The note receivable is to be paid to the Company in quarterly installments with interest of 10% per annum from March 31, 2025, to December 31, 2029. We recorded a gain on disposal of $8.2 million related to the sale of the business. The former employee was part of our cementing operations until November 1, 2024, and is no longer affiliated with the Company. +On May 31, 2024, we consummated the acquisition of all of the outstanding equity interests in Aqua Prop, LLC (“AquaProp SM ”), which provides wet sand solutions for hydraulic fracturing at well sites (the “AquaProp Acquisition”). The consideration for the AquaProp Acquisition included $13.7 million of cash paid to the seller, $3.7 million of deferred cash consideration payable to the seller by May 31, 2025, the payoff of $7.2 million of the seller’s outstanding debt , the payment of $0.3 million of certain transaction costs and estimated contingent consideration of $10.9 million . As a result of the AquaProp Acquisition, we expanded our business to include wet sand services. +On December 1, 2023, we consummated the purchase of the assets and operations of Par Five Energy Services LLC (“Par Five”), which provides cementing services in the Delaware Basin in exchange for $25.4 million of cash, including deferred cash consideration of $3.1 million which is payable to Par Five or its beneficiary on June 1, 2025, with interest at 4.0% per annum. (the “Par Five Acquisition”). The Par Five Acquisition complemented our existing cementing business and enabled us to serve both the Midland and Delaware sub-basins of the Permian Basin. +On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip Completion Services Operating, LLC (the “Silvertip Acquisition”), which provides wireline perforation and ancillary services in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed debt, and the payment of certain other closing and transaction costs. Collectively, the AquaProp Acquisition, the Par Five Acquisition and the Silvertip Acquisition have positioned the Company as a more integrated and diversified completions-focused energy service provider. See Note 4. Business Acquisitions in the financial statements for additional disclosures. +Effective September 1, 2022, we disposed of our coiled tubing assets to STEP Energy Services L td. (“STEP”) and shut down our coiled tubing operations. We received approximately $2.8 million in cash and 2.6 million common shares of STEP, valued at $11.8 million, as consideration. Upon the sale of our coiled tubing assets, we recorded a loss on sale of $13.8 million . +Our competitors include many large and small energy service companies, including Halliburton Company, Liberty Energy Inc., Patterson-UTI Energy Inc., ProFrac Holding Corp., Solaris Energy Infrastructure, Inc., RPC, Inc., and a number of private and locally-oriented businesses. The markets in which we operate are highly competitive. To be successful, an energy service company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, technology, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies' criteria in choosing a service provider. However, we have recently observed the energy industry and our customers’ shift to new technologies and lower emissions equipment, which we believe will be an increasingly important factor in an E&P company's selection of a service provider. The transition to lower +1 +emissions equipment has been challenging for companies in the service industry because of the capital requirements, lack of large-scale deployment of certain new technology such as electric-powered equipment, and the pricing for our services and expected return on invested capital. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment quality and technology, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions and power generation challenges. +We believe that our substantial market presence in the Permian Basin positions us well to capitalize on drilling, and completion activity and power demand in the region. Our operational focus has primarily been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have increased our operations in the Delaware sub-basin and are well-positioned to support further increases in our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending. +Additionally, we believe the significant natural gas production in the Permian Basin will become a natural market for power-intensive businesses including data centers and other industrial businesses seeking alternative solutions for reliable and available electricity requirements which are not dependent on grid or public utility limitations. +We primarily provide hydraulic fracturing, wireline, and cementing completion services to E&P companies in the Permian Basin. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region's increasingly high-intensity well completions (including simultaneous hydraulic fracturing (“Simul-Frac”), which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. We also launched a new power generation business, PROPWR, that will provide power generation services to oil and gas producers and other industrial companies and data centers. +Commodity Price and Other Economic Conditions +The oil and gas industry has traditionally been volatile and is characterized by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, war and political instability in oil producing countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. +The geopolitical and macroeconomic consequences of military action in the Middle East, the Russian invasion of Ukraine, including the associated sanctions, and the adverse impacts of the COVID-19 pandemic have resulted in volatility in supply and demand dynamics for crude oil and associated volatility in crude oil pricing. As the global response to the COVID-19 pandemic began to wane, the demand and prices for crude oil increased from the lows experienced in 2020, with the West Texas Intermediate (“WTI”) average crude oil price reaching approximately $94 per barrel in 2022, the highest average price in the prior ten years. However, the WTI average crude oil price declined to approximately $78 per barrel in 2023 and approximately $76 per barrel in 2024. We believe that the volatility of crude oil prices in recent years has been partly driven by declines in crude oil supplies, concerns over sanctions resulting from Russia's invasion of Ukraine, concerns over a potential disruption of Middle Eastern oil supplies resulting from the conflict in the Middle East, slower crude oil production growth due to the lack of reinvestment in the oil and gas industry in the last three years, the extension of OPEC+ production cuts of approximately 3.9 million barrels per day originally announced in 2023 and concerns of a potential global recession resulting from high inflation and interest rates. +With the significant increase in global crude oil prices from 2021, including the WTI crude oil price, there was a significant increase in the Permian Basin rig count from approximately 179 at the beginning of 2021 to approximately 353 at the end of 2022, according to the Baker Hughes Company (“Baker Hughes”). Following the increase in rig count and the WTI crude oil price, the energy service industry has experienced increased demand for its completion services, and improved pricing. However, the Permian Basin rig count experienced a 13% decrease to 309 at the end of 2023 and further decreased to 304 at the end of 2024 which resulted in a reduction in the demand for completion services and pressure on pricing of our services. +Sustained levels of high inflation likewise caused the U.S. Federal Reserve and other central banks to increase interest rates, and to the extent elevated inflation remains, we may experience further cost increases for our operations, including interest rates, labor costs and equipment. We cannot predict any future trends in the rate of inflation and crude oil prices. A significant increase in or continued high levels of inflation, to the extent we are unable to timely pass-through the cost increases to our +2 +customers, further declines in crude oil prices, or potential changes in U.S trade policy, including the imposition of tariffs and the resulting consequences, would negatively impact our business, financial condition and results of operations. See Part II, Item 1A. “Risk Factors—We may be adversely affected by the effects of inflation.” +Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including upstream and energy service companies. As a result, we are working with our customers and equipment manufacturers to transition our equipment into a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB dual-fuel , FORCE ® electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. We have transitioned our hydraulic fracturing available equipment portfolio from approximately 10% lower emissions equipment in 2021 to approximately 35% in 2022, 60% in 2023 and 70% in 2024, and expect to increase to approximately 75% by the end of the first quarter of 2025. To the extent any of our customers have certain expectations or requirements with respect to emissions reductions from their contractors, if we are unable to continue quickly transitioning to lower emissions equipment, the demand for our services could be adversely impacted. +If the Permian Basin rig count and market conditions improve, including improved pricing for our services and labor availability, and we are able to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also improve. If the rig count or market conditions do not improve or decline in the future, and we are unable to increase our pricing or pass-through future cost increases for our customers, there could be a material adverse impact on our business, results of operations and cash flows . +Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and the exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment. +Our Services +We have historically conducted our business through four operating segments: hydraulic fracturing, wireline, cementing and coiled tubing. Prior to the fourth quarter of fiscal year 2023, our operating segments met the aggregation criteria and were aggregated into the “Completion Services” reportable segment and our coiled tubing operations (which were divested in September 2022) were shown in the “All Other” category. Effective in the fourth quarter of fiscal year 2023, we revised our segment reporting as we determined that our operating segments no longer met the criteria to be aggregated. In the fourth quarter of fiscal year 2024, we formed PROPWR to provide power generation services to oil and gas producers and non-oil and gas applications such as general industrial projects and data centers. This new subsidiary has ordered equipment, but it has not yet begun any revenue-generating activities. Our hydraulic fracturing, wireline and cementing operating segments meet the criteria of a reportable segment. Our divested coiled tubing and our newly formed power generation services segments do not meet the reportable segment criteria and are included within the “All Other” category. Additionally, our corporate administrative activities do not involve business activities from which it may earn revenues and its results are not regularly reviewed by the Company’s Chief Operating Decision Maker (the “CODM”) when making key operating and resource decisions. As a result, corporate administrative expenses have been included under “Reconciling Items.” For additional financial information on our reportable segment presentation, please see reportable segment information in Part II - Item 8, “Financial Statements and Supplementary Data.” +Hydraulic Fracturing +We provide hydraulic fracturing services to E&P companies in the Permian Basin. These services are intended to optimize hydrocarbon flow paths during the completion phase of horizontal shale wellbores. We have significant expertise in multi‑stage fracturing of horizontal oil‑producing wells in unconventional geological formations. Our total available hydraulic horsepower (“HHP”) at December 31, 2024, w as 1,556,500 HHP, which was comprised of 450,000 HHP of our Tier IV DGB dual-fuel equipment, 294,000 HHP of FORCE ® electric-powered equipment and 812,500 HHP of conventional Tier II equipment. Our hydraulic fracturing fleets range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsite. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region’s increasingly high-intensity well completions, including (“Simul-Frac”), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. With the industry transition to +3 +lower emissions equipment and Simul-Frac, in addition to several other changes to our customers' job designs, we believe that our available fleet capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at wellsites. In addition, in 2021 and 2022, we committed to additional conversions of some of our Tier II equipment to Tier IV DGB, and to purchase new Ti er IV DGB dual-fuel equipment. As such, we entered into conversion and purchase agreements with our equipment manufacturers and received all of the converted and new Tier IV DGB dual-fuel equipment by the end of 2023, representing 450,000 HHP of our Tier IV DGB dual-fuel equipment as of December 31, 2024. In 2022, we entered into three-year electric fleet leases for four FORCE ® electric-powered hydraulic fracturing fleets with 60,000 HHP per fleet (the “Electric Fleet Leases”) and in June 2024, we entered into an additional three-year lease for a fifth FORCE ® electric-powered hydraulic fracturing fleet with 72,000 HHP. As of December 31, 2024, we have re ceived 294,000 HHP of FORC E ® electric-powered equipment representing four fleets and a portion of the fifth fleet. We currently expect to receive the remaining equipment associated with the fifth fleet in the first half of 2025. +The hydraulic fracturing process consists of pumping fracturing fluid into a well at sufficient pressure to fracture the formation. Materials known as proppants, which in our business are comprised primarily of sand, are suspended in the fracturing fluid and are pumped into the fracture to prop it open. The fracturing fluid is designed to break, or loosen viscosity, and be forced out of the formation by its pressure, leaving the proppants suspended in the fractures created, thereby increasing the mobility of the hydrocarbons. As a result of the fracturing process, production rates are usually enhanced substantially, thus increasing the rate of return of hydrocarbons for the operator. +We own and operate a fleet of mobile hydraulic fracturing units and other auxiliary equipment to perform fracturing services. We also refer to all of our fracturing units, other equipment and vehicles necessary to perform a fracturing job as a “fleet” and the personnel assigned to each fleet as a “crew.” Our hydraulic fracturing units consist primarily of high pressure hydraulic pumps, diesel or dual gas engines, gas turbine generators, transmissions and various hoses, valves, tanks and other supporting equipment like blenders, irons, hoses and data vans. We also own and operate a fleet of trucks, trailers and other equipment that provide onsite storage and handling of wet sand used in the completion phase of shale wellbores. +We provide dedicated equipment, personnel and services that are tailored to meet each of our customer’s needs. Each fleet has a designated team of personnel, which allows us to provide responsive and customized services, such as project design, proppant and other consumables procurement, real-time data provision and post‑completion analysis for each of our jobs. Many of our hydraulic fracturing fleets and associated personnel have worked continuously with the same customer for the past several years promoting deep relationships and a high degree of coordination and visibility into future customer activity levels. Furthermore, in light of our substantial market presence and historically high fleet utilization levels, we have established a variety of trusted relationships with key equipment, sand and other downhole consumable suppliers. We believe these strategic relationships position us to acquire equipment, parts and materials on a timely and economic basis and allow our dedicated procurement and logistics team to support consistently safe and reliable operations. +Wireline +We provide wireline and ancillary services on new oil well completions in the Permian Basin. Wireline utilizes equipment with a drum of wireline to deploy perforating guns in the well to perforate the casing, cement, and formation. Once the well is perforated, it is ready to be fractured. Pumpdown utilizes pressure pumping equipment to pump water into the well to deploy or push the perforating guns attached to the wireline through the lateral section of a well. +We own and operate a fleet of mobile wireline units and other auxiliary equipment to perform well completion services. We also refer to our wireline units, pressure control equipment, other equipment and vehicles necessary to perform a job as a "spread" and the personnel assigned to the spread as a "crew." On average, one wireline spread consists of a wireline tractor truck with a large cab functioning as a mobile office where the engineer controls the wireline spooled drum along with associated pressure control iron and equipment, trailers and vehicles. We currently have 26 wireline units. +Cementing +We provide cementing services for completion of new wells and remedial work on existing wells. Cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Cementing provides isolation between fluid zones behind the casing to minimize potential damage to hydrocarbon bearing formations or the integrity of freshwater aquifers, and provides structural integrity for the casing by securing it to the earth. Cementing is also done when re-completing wells, where one zone is plugged and another is opened. +4 +We believe that our cementing segment provides an organic growth opportunity for us to expand our service offerings within our existing customer base. We currently have 29 cementing units. +Power Generation Services +In December 2024, we formed PROPWR to provide power generation services to oil and gas producers and non-oil and gas applications such as general industrial projects and data centers. This subsidiary has ordered equipment, but has not yet begun revenue-generating activities. +Our Customers +Our customers consist primarily of oil and natural gas producers in North America. Our top five customers accounted for a pproxim ately 58.8%, 63.2% and 84.0% of our revenue, for the years ended December 31, 2024, 2023, and 2022, respectively. For the year ended December 31, 2024, XTO Energy Inc. (“XTO”), a wholly owned subsidiary of Exxon Mobil Corporation (“ExxonMobil”), Permian Resources and EOG Resources accounted for 19.7%, 14.9%, and 10.6%, respectively, of total revenue. No other customer accounted for more than 10% of our total revenue for the year ended December 31, 2024. There have been many recent mergers and acquisitions in the oil and gas industry. In May 2024, Pioneer Natural Resources USA, Inc. (“Pioneer”) merged with and into a wholly owned subsidiary of Exxon Mobil. We currently provide pressure pumping, wireline and other services to ExxonMobil and previously provided such services to Pioneer. Mergers and acquisitions involving our customers could negatively impact our future business with them or positively impact our business by providing us access to potential new customers. +On April 22, 2024, we entered into a sub-agreement for hydraulic fracturing services with XTO, pursuant to which we agreed to provide hydraulic fracturing, wireline and pumpdown services with two committed FORCE ® electric-powered hydraulic fracturing fleets with the option to add a third FORCE ® fleet (also with wireline and pumpdown services) for a period of three years or for contracted hours, whichever occurs last, with respect to each fleet, subject to certain termination and release rights. +Competition +The markets in which we operate are highly competitive. To be successful, an energy service company must provide services and equipment that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in E&P companies’ criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company’s selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the energy service industry because of the capital requirements. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment portfolio and quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions. +We provide our services primarily in the Permian Basin, and we compete against different companies in each service and product line we offer. Our competition includes many large and small energy service companies, including the largest integrated energy service companies. Our major competitors include Halliburton Company, Liberty Energy Inc., Patterson‑UTI Energy Inc., ProFrac Holding Corp., Solaris Energy Infrastructure, Inc., RPC, Inc., and a number of private and locally-oriented businesses. +Seasonality +Our results of operations have historically reflected seasonal tendencies, generally in the fourth quarter, relating to the conclusion of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather during which we may experience declines in our operating and financial results. +Operating Risks and Insurance +Our operations are subject to hazards inherent in the energy service industry, such as accidents, blowouts, explosions, fires and spills and releases that can cause personal injury or loss of life, damage or destruction of property, equipment, natural resources and the environment and suspension of operations. +5 +In addition, claims for loss of oil and natural gas production and damage to formations can occur in the energy service industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in us being named as a defendant in lawsuits asserting large claims. +Our business involves the transportation of heavy equipment and materials, and as a result, we may also experience traffic accidents which may result in spills, property damage and personal injury. +Despite our efforts to maintain safety standards, we have suffered accidents from time to time in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations. +We maintain commercial general liability, workers’ compensation, business automobile, commercial property, umbrella liability, excess liability, and directors and officers insurance policies providing coverages of risks and amounts that we believe to be customary in our industry. Further, we have pollution legal liability coverage for our business entities, which would cover, among other things, third party liability and costs of clean up relating to environmental contamination on our premises while our equipment is in transit and on our customers’ job site. With respect to our operations, coverage would be available under our pollution legal liability policy for any surface or subsurface environmental cleanup and liability to third parties arising from any surface or subsurface contamination. We also have certain specific coverages for some of our businesses, including our hydraulic fracturing and wireline services. +We maintain directors and officers insurance; however, our insurance coverage is subject to certain exclusions (including, for example, any required United States Securities and Exchange Commission (“SEC”) disgorgement or penalties) and we are responsible for meeting certain deductibles under the policies. Moreover, we cannot assure you that our insurance coverage will adequately protect us from all future claims. +Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of the high premium costs relative to perceived risk. Further, insurance rates have in the past been subject to wide fluctuation and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us. See “Risk Factors” for a description of certain risks associated with our insurance policies. +Environmental and Occupational Health and Safety Regulations +Our operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection, and occupational health and safety. Numerous federal, state and local governmental agencies issue regulations that often require difficult and costly compliance measures that could carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may, for example, restrict the types, quantities and concentrations of various substances that can be released into the environment, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas and other protected areas, or require action to prevent or remediate pollution from current or former operations. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes in environmental, health and safety laws and regulations occur frequently, and any changes that result in more stringent and costly requirements could materially adversely affect our operations and financial position. We have not experienced any material adverse effect from compliance with current requirements; however, this trend may not continue in the future. +Below is an overview of some of the more significant environmental, health and safety requirements with which we must comply. Our customers’ operations are subject to similar laws and regulations. Any material adverse effect of these laws and regulations on our customers’ operations and financial position may also have an indirect material adverse effect on our operations and financial position. +Waste Handling. We handle, transport, store and dispose of wastes that are subject to the Resource Conservation and Recovery Act ( " RCRA " ) and comparable state laws and regulations, which affect our activities by imposing requirements regarding the +6 +generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although certain petroleum production wastes are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. +Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. Moreover, the U.S. Environmental Protection Agency (“EPA”) or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or recategorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to recategorize certain oil and natural gas exploration, development and production wastes as hazardous wastes. Several environmental organizations have also petitioned the EPA to modify existing regulations to recategorize certain oil and natural gas exploration, development and production wastes as hazardous. Any such changes in these laws and regulations could have a material adverse effect on our capital expenditures and operating expenses. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas E&P wastes could increase our costs to manage and dispose of such wastes. +Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and analogous state laws generally impose liability without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Liability for the costs of removing or remediating previously disposed wastes or contamination, damages to natural resources, the costs of conducting certain health studies, amongst other things, is strict and joint and several. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state laws. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such hazardous substances have been released. +NORM. In the course of our operations, some of our equipment may be exposed to naturally occurring radioactive materials (“NORM”) associated with oil and gas deposits and, accordingly, may result in the generation of wastes and other materials containing NORM. NORM exhibiting levels of radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. +Water Discharges. The Clean Water Act, Safe Drinking Water Act, Oil Pollution Act and analogous state laws and regulations impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into regulated waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Also, spill prevention, control and countermeasure plan requirements require appropriate containment berms and similar structures to help prevent the contamination of regulated waters. +Air Emissions. The Clean Air Act (“CAA”) and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other emissions control requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants from specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. These and other laws and regulations may increase the costs of compliance for some facilities where we operate. Obtaining or renewing permits also has the potential to delay the development of oil and natural gas projects. +Climate Change. In the United States, no comprehensive climate change legislation has been implemented at the federal level, though recently passed laws such as the IRA 2022 advance numerous climate-related objectives. Additionally, following the U.S. Supreme Court finding that greenhouse gas (“GHG”) emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, implement New Source Performance Standards directing the reduction of certain pollutants from certain new, modified, or reconstructed facilities in the oil and natural gas sector, and together with the Department of Transportation (“DOT”), implementing GHG emissions limits on vehicles manufactured for operation in the United States. Additionally, the EPA has recently finalized rules covering the standards of performance for methane and volatile organic compounds emissions for oil and gas facilities, including leak detection, monitoring and repair, and a “super- +7 +emitter” response program to timely mitigate emissions events as detected by governmental agencies or qualified third parties, triggering certain investigation and repair requirements. These requirements were finalized in 2023, but are currently subject to legal challenge. At this time, it remains uncertain as to whether the current administration will repeal or modify this rule and the timing with respect to the same. +Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas such as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. At the international level, the United Nations-sponsored “Paris Agreement,” requires member states to submit non-binding, individually-determined reduction goals known as Nationally Determined Contributions (“NDCs”) every five years after 2020. The United States rejoined the Paris Agreement and, in April 2021, established a goal of reducing economy-wide net GHG emissions 50-52% below 2005 levels by 2030. However, in January 2025, the current president signed an Executive Order once again withdrawing the United States from the Paris Agreement and from any other commitments made under the United Nations Framework Convention on Climate Change. The full impact of these recent developments is uncertain at this time. For more information, see our risk factors titled “Our and our customers’ operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which oil and natural gas production may occur, and reduce demand for the products and services we provide” and “The IRA 2022 could accelerate the transition to a low carbon economy and could impose new costs on our customers’ operations.” +Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, for example, in January 2024 the government announced a temporary pause on pending decisions on liquefied natural gas exports to certain countries. However, upon taking office, the current president signed an Executive Order resuming the processing of permit applications for such projects. Litigation risks are also increasing as a number of parties have sought to bring suit against certain oil and natural gas companies operating in the United States in state or federal court, alleging among other things, that such companies created public nuisances by producing fuels that contributed to climate change or that such companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts to their investors or customers. +Moreover, climate change may result in various physical risks, such as the increased frequency or intensity of extreme weather events or changes in the meteorological and hydrological patterns, that could adversely impact us, our customers’ and our suppliers’ operations. Such physical risks may result in damage to our customers’ facilities or otherwise adversely impact our operations, such as if facilities are subject to water use curtailments in response to drought, or demand for our customers’ products, such as to the extent warmer winters reduce the demand for energy for heating purposes, which may ultimately reduce demand for the products and services we provide. Such physical risks may also impact our suppliers, which may adversely affect our ability to provide our products and services. Extreme weather conditions can interfere with our operations and increase our costs, and damage resulting from extreme weather may not be fully insured. +Endangered and Threatened Species. Environmental laws such as the Endangered Species Act (“ESA”) and analogous state laws may impact exploration, development and production activities in areas where we operate. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act and various state analogs. The U.S. Fish and Wildlife Service (“FWS”) may identify previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species. For example, the dunes sagebrush lizard, which is found only in the active and semi-stable shinnery oak dunes of southeastern New Mexico and adjacent portions of Texas (including areas where our customers operate), has, since May 2024, been listed as endangered under the ESA. To the extent any protections are implemented for this or any other species, it could cause us or our customers to incur additional costs or become subject to operating restrictions or operating bans in the affected areas. +Regulation of Hydraulic Fracturing and Related Activities. Our hydraulic fracturing operations are a significant component of our business. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process, which involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production, is typically regulated by state oil and natural gas commissions. However, federal agencies have asserted regulatory authority over certain aspects of the process. Although several of these rulemakings have been rescinded, modified or subjected to legal challenges, new or more stringent regulations may be promulgated by the current government. For example, in March 2024, the Bureau of Land Management (“BLM”) finalized a rule that requires operators to limit flaring from well sites on federal lands, and allows the delay or denial of permits if BLM finds that an operator’s methane waste minimization plan is insufficient. The rule was challenged by various states in the District Court for the District of North Dakota, and, in September 2024, that court ordered +8 +that the rule cannot be enforced within the plaintiff states pending the outcome of the litigation. Although the rule is currently being implemented in areas not covered by the order, the future of the rule is uncertain. The previous administration also called for revisions and restrictions to the leasing and permitting programs for oil and gas development on federal lands and, for a time, suspended federal oil and gas leasing activities. The Department of the Interior (“DOI”) issued a report recommending various changes to the federal leasing program, though many such changes would require congressional action. In July 2023, the BLM finalized a rule to update the fiscal terms of federal oil and gas leases, which increases fees, rents, royalties, and bonding requirements. The rule also adds new criteria for BLM to consider when determining whether to lease nominated land, including the presence of important habitats or wetlands, the presence of historical properties or sacred sites, and recreational use of the land. Any regulations that restrict, ban or effectively ban such operations may adversely impact demand for our products and services. Further, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing (except when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have previously been proposed in Congress. Several states and local jurisdictions in which we or our customers operate also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. +Federal and state governments have also investigated whether the disposal of produced water into underground injection wells has caused increased seismic activity in certain areas. In response to concerns regarding induced seismicity, regulators in some states have imposed, or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for wastewater disposal wells that impose permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. In particular, the Oklahoma Corporation Commission’s well completion seismicity guidelines for operators in the SCOOP and STACK require hydraulic fracturing operations to be suspended following earthquakes of certain magnitudes in the vicinity. In addition, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division has previously issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce the number of earthquakes in the state. The Texas Railroad Commission (“TRRC”) has adopted similar rules including the indefinite suspension of all deep oil and gas produced water injection wells in certain areas covered by the TRRC’s seismic response program. +Increased regulation of hydraulic fracturing and related activities could subject us and our customers to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and record keeping obligations, and plugging and abandonment requirements. New requirements could result in increased operational costs for us and our customers, and reduce the demand for our services. For more information on each of these items, see our risk factor titled “Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.” +OSHA Matters. The Occupational Safety and Health Act (“OSHA”) and comparable state statutes regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. +Human Capital +Our employees are our key asset. Our primary human capital management objectives are to effectively engage, develop, retain and reward our employees. As of December 31, 2024, we emplo yed approxim ately 1,900 people , and n one of our employees are represented by a union. All of our employees work for or support our hydraulic fracturing, wireline, cementing and power generation services operating segments. We believe that we have good relations with our employees. We believe that our employees are a key component of our ability to attract and retain customers as a result of their operational excellence in the field. +Some examples of significant programs and initiatives that support our objective of attracting, developing and retaining our diverse and inclusive workforce include: +• Opportunity and Engagement. We are an equal opportunity employer and prohibit discrimination against any employee and applicant on the basis of any legally protected characteristic. We believe that in order to attract and retain talent with the skill sets and expertise that can help to maximize our operational efficiencies across all levels in +9 +the Company, it is in our best interest to create a culture that is inclusive. We conducted our second annual employee engagement survey in 2024. The results show improvement in our overall employee engagement score over the 2023 survey and above industry benchmarks. The survey focuses on engagement, manager effectiveness, training and tools to ensure that employees are well equipped to do their jobs effectively and workplace culture. Attracting the right people to ProPetro remains top priority. Some examples of this effort to recruit and develop our team and culture include: +◦ a commitment to conducting business in a manner that respects all human rights in compliance within the requirements of applicable laws; +◦ a commitment within our business operations to promoting and encouraging respect for human rights and fundamental freedoms for all without distinctions of any kind, such as race, color, sex, language, religion, political or other opinions; +◦ working with personnel, business partners and other parties directly linked to our operations that share our commitment to these same legal compliance principles; +◦ maintaining employment policies reflecting our commitments, including our code of conduct, our equal employment opportunity employer policy, and our anti-harassment and anti-discrimination policy; and +◦ providing an anonymous Ethics and Compliance hotline that is promoted internally and accessible from our intranet and website to make it possible for grievances regarding health and safety to be addressed early and remediated directly, in confidence and without fear of retaliation. +• Training and Safety. We offer in-depth, role-appropriate safety training upon hiring and as part of the continuous development of our employees. The safety of our employees, our customers, and the communities in which we operate is paramount. We track and evaluate safety incidents at wellsites and offices, and if an accident does occur, we aim to take actions to mitigate similar incidents from reoccurring in the future. The Company seeks to incentivize employees to focus on conducting operations in accordance with our strict safety standards and encourages employees to immediately report any breach of safety protocol. Ten percent of our executive officers’ annual target bonuses under the 2024 annual incentive program were based upon the Company’s achievement of certain safety goals, including a target total recordable incident rate. +• Professional Development. In 2024, the Company continued its focus on leadership development, targeting leadership positions including frontline supervisors and above. Internal facilitators were trained and certified to deliver content to drive program efficiency and better associate the topics and importance of the training to the business. The Company also transitioned the Human Resources Information System (HRIS) from PayCom to Workday to gain greater talent related functionality and efficiency in the areas of performance management, succession planning, learning and development and compensation planning. Responsibility for Human Capital Management (HCM) in Workday was designed to ensure the direct supervisor working closest with the employee is at the center of the conversation driving engagement, providing feedback, rewarding performance and supporting development. +• Compensation, Health, Wellness and Benefits. Our employee benefit offerings are designed to meet the varied and evolving needs of our entire workforce across the Company and we believe are consistent with those provided by our peer companies with which we compete for talent. The Company provides employees with the ability to participate in health and welfare plans, including medical, dental, life, accidental death and dismemberment and short-term and long-term disability insurance plans. +In 2024, as part of our 401(k) plan, we continued to focus on financial wellness education and group and individual consultations for employees as well as encouraging participation in the program. The program opportunities included many crucial topics ranging from budgeting and debt management to understanding plan options and investment strategy. Concerning health benefits, in 2024 we added additional services focused on emotional and mental health, as well as certain preventative health services related to the early detection of concerns including breast cancer, diabetes and cardiovascular disease. +We also strive to give back to the areas in which we conduct business operations, and in which our employees live and work. Our employees give generously and receive up to eight hours per year of paid time off to participate in community service. Our employee-led P.U.M.P. Committee also organizes or sponsors events in which employees can choose to participate in addition to our paid community service time benefit. +10 +Availability of Filings +Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are made available free of charge on our internet website at www.propetroservices.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the SEC. The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that website is www.sec.gov. Please note that information contained on our website, whether currently posted or posted in the future, is not a part of this Annual Report or the documents incorporated by reference in this Annual Report. +Board of Directors and Executive Officers +Set forth below are the names, age and business experience of the Board of Directors of the company as of February 20, 2025. +Phillip A. Gobe, 72, began serving as our Chairman of the Board in July of 2019 and as Executive Chairman in October 2019. Mr. Gobe was appointed as our Chief Executive Officer on March 13, 2020 and served in that role until August 31, 2021, at which point he was re-appointed as Executive Chairman. Mr. Gobe stepped down as Executive Chairman on March 31, 2022, and continues serving the Company as Chairman of the Board. Mr. Gobe has served as a director of Pioneer since July 2014. Mr. Gobe previously served as Chairman of the Board for Pantheon Resources PLC until his June 2023 retirement. He also previously served as a director of Scientific Drilling International and Pioneer Southwest Energy Partners L.P. Mr. Gobe joined Energy Partners, Ltd as Chief Operating Officer in December 2004 and became president in May 2005, and served in those capacities until his retirement in September 2007. Mr. Gobe also served as a director of Energy Partners, Ltd. from November 2005 until May 2008. Prior to that, Mr. Gobe served as Chief Operating Officer for Nuevo Energy Company from February 2001 until its acquisition by Plains Exploration & Production Company in May 2004. Prior to that time, he held numerous operations and human resources positions with Vastar Resources, Inc. and Atlantic Richfield Company (“ARCO”) and its subsidiaries. Mr. Gobe has a Bachelors of Arts degree from the University of Texas and a Master of Business Administration degree from the University of Louisiana in Lafayette. Mr. Gobe’s extensive experience in the energy industry, including service as a director to public corporations in the industry, makes him well suited to serve as Chairman of the Board. +Samuel D. Sledge, 38 , has served as our Chief Executive Officer and as a member of our Board since August 31, 2021. Mr. Sledge previously served as the Company’s President from April 2021 to August 2021, and prior to that, he served as Chief Strategy and Administrative Officer beginning in March 2020. Mr. Sledge has significant experience with ProPetro having joined the Company in 2011. Mr. Sledge has served in various capacities throughout his tenure such as a Frac Technical Specialist and Technical Operations Manager where his duties included quality control, planning and logistics, and the development of the engineering program. Mr. Sledge has also served as ProPetro’s Vice President of Finance, Corporate Development, and Investor Relations where his responsibilities included financial planning and analysis, strategic initiatives, and investor relations. Mr. Sledge received a Bachelor of Business Administration and a Masters of Business Administration from Baylor University. We believe Mr. Sledge’s experience in the energy industry and his significant experience in management roles at the Company make him well suited to serve as a director. +Spencer D. Armour III, 71 , has served as a member of our Board since February 2013. Mr. Armour has over 30 years of executive and entrepreneurial experience in the energy services industry. Mr. Armour served as President of PT Petroleum LLC in Midland, Texas from 2011 to 2018. He was the Vice President of Corporate Development for Basic Energy Services, Inc. from 2007 to 2008, which acquired Sledge Drilling Corp., a company Mr. Armour co-founded and served as Chief Executive Officer from 2005 to 2006. From 1998 through 2005, he served as Executive Vice President of Patterson-UTI Energy, Inc., which acquired Lone Star Mud, Inc., a company Mr. Armour founded and served as President from 1986 to 1997. Mr. Armour also served on the board of Patterson-UTI Energy, Inc. from 1999 to 2001. He currently serves on the boards of Viper Energy, Inc. and CES Energy Solutions Corp and is a partner at Geneses Investments. Mr. Armour received a B.S. in Economics from the University of Houston in 1977 and served on the University of Houston System Board of Regents from 2011 until 2018. We believe that Mr. Armour’s extensive experience in the energy services industry and his deep knowledge of industry dynamics within the Permian Basin make him well suited to serve as a director. +Mark S. Berg, 66 , has served as a member of our Board since 2019. Mr. Berg is a senior energy industry executive with extensive commercial and operational experience, including leadership of strategic planning, business development, land, water management, completion and well services, environmental, sustainability, legal, government relations and communications. During his 20-year career with Pioneer Natural Resources (“Pioneer”), then an NYSE-listed independent oil and gas exploration and production company, first as Executive Vice President & General Counsel from 2005 to 2014 and then as Executive Vice President, Corporate Operations from 2014 until its merger with ExxonMobil in 2024, he played a key role in transforming the company into a major U.S. shale resource developer. He led the negotiating team for the $65 billion merger +11 +with ExxonMobil as well as multiple multibillion-dollar mergers, global divestitures, and cross-border joint ventures. Prior to joining Pioneer, Mr. Berg served from 2002 to 2004 as Senior Vice President, General Counsel & Secretary of Hanover Compressor Company, then an NYSE-listed company specializing in natural gas compression and processing, where he instituted disciplined internal controls, resolved an SEC investigation, and settled securities class action litigation. From 1997 to 2002 he served as Executive Vice President & General Counsel of American General Corporation, a Fortune 200 diversified financial services company, and oversaw its $27 billion merger with American International Group (“AIG”). Mr. Berg began his career with the Houston based law firm Vinson & Elkins L.L.P. and served as a partner from 1990 through 1997, focused on mergers, acquisitions and international project development. From 2018 to 2020, he served on the board of directors of HighPoint Resources, an exploration and production company then listed on the NYSE. Effective March 2025, Mr. Berg has been appointed to serve on the boards of Oncor Electric Delivery Holdings Company LLC and Oncor Electric Delivery Company LLC, a regulated electricity transmission and distribution company. Mr. Berg also serves as the founding Vice Chairman of the Permian Strategic Partnership, a coalition of Permian Basin energy companies and higher education institutions focused on supporting public education, healthcare, road safety and workforce development in the Permian Basin region. +Anthony J. Best, 75, has served as a member of our Board since January 2018 and was elected to serve as Lead Independent Director in October 2019. Mr. Best has over 40 years of experience in the energy industry. Mr. Best retired as the Chairman of the board of Newpark Resources in May 2023. He was previously a director with Quantum Energy Partners’ (“Quantum”) portfolio companies, ExL Petroleum and Middle Fork Energy Partners, and also served as Senior Advisor for Quantum. Prior to joining Quantum, Mr. Best served in various roles with SM Energy Company, an oil and gas exploration company, commencing in 2006 as its President and Chief Operating Officer, and as its Chief Executive Officer from February 2007 through January 2015. From 2003 to 2005, Mr. Best served as President and Chief Executive Officer of Pure Resources, Inc., a Unocal development and exploration company. From 2000 to 2003, Mr. Best served as an independent consultant offering leadership and oil and gas consultation to energy companies and volunteer organizations, and from 1979 through 2000, Mr. Best served in various roles of increasing responsibility at ARCO, culminating in the position of President, ARCO Latin America. Mr. Best holds a Master of Science in Engineering Management degree from the University of Alaska and a Bachelor of Science degree in Mechanical Engineering from Texas A&M University. Prior to beginning his business career, Mr. Best served five years as an engineering officer in the United States Air Force. We believe that Mr. Best’s experience in significant management roles with companies operating in the Permian Basin and his broad experience in the energy industry make him well suited to serve as a director. +G. Larry Lawrence, 73 , was appointed to our Board in December 2020. Mr. Lawrence previously served as Audit Committee Chair of Legacy Reserves, LP’s Board of Directors, a role he held from 2006 to 2019. From January 2021 until June 2021, Mr. Lawrence served as the interim Chief Financial Officer of Natural Gas Services Group, a natural gas compression equipment provider, where he previously served as Chief Financial Officer for nine years. Prior to Natural Gas Services Group, Mr. Lawrence served as Chief Financial Officer for Lynx Operating Co. Inc., an oil and gas exploration company, for three years and as Chief Financial Officer for Pure Resources, Inc., an oil and gas E&P company, for two years. He has also held finance and management consulting positions for Parson Group, ARCO and Crescent Consulting. Mr. Lawrence earned his bachelor’s degree with an accounting major from Dillard University in New Orleans. We believe that Mr. Lawrence’s broad experience in the energy industry, including his service as a director and executive officer with various companies, makes him well suited to serve as a director. +Jack B. Moore, 71 , has served as a member of our Board since March 2017. Mr. Moore most recently served as President and Chief Executive Officer of Cameron International Corporation (“Cameron”), an oil and gas industry equipment manufacturer and provider, from April 2008 to October 2015 and served as Chairman of the Board of Cameron from May 2011 until it was acquired by Schlumberger in April 2016. Prior to his employment with Cameron, Mr. Moore held various management positions at Baker Hughes Incorporated, where he was employed for 23 years. Mr. Moore currently serves on the Board of Directors of Occidental Petroleum Corporation, KBR Inc., and the University of Houston System Board of Regents. Mr. Moore previously served on the board of the American Petroleum Institute, the National Ocean Industries Association, Rowan Companies plc, and the Petroleum Equipment Suppliers Association. Mr. Moore received a Bachelor of Business Administration from the University of Houston and attended the Advanced Management Program at Harvard Business School. We believe that Mr. Moore’s wealth of experience in the oilfield service sector, including service as a director and executive officer to various public corporations in the sector, makes him well suited to serve as a director. +Mary P. Ricciardello, 69 , has served as a member of our Board since January 2023. Ms. Ricciardello currently serves as a director, Audit Committee member and Corporate Governance, Nominating and Sustainability Committee member at Eagle Materials Inc. Ms. Ricciardello previously served as a director at Devon Energy from 2008 to 2021, Noble Corporation from 2003 to 2020, Enlink Midstream from 2014 to 2018, Midstates Petroleum from 2010 to 2013 and U.S. Concrete from 2003 to +12 +2010. Beginning in 1982, Ms. Ricciardello enjoyed a distinguished, two-decade career at Reliant Energy Inc. (“Reliant”) and its predecessor, Houston Lighting & Power Company, an electricity generation and retail services company, where she held several roles of increasing responsibility in the financial services and treasury functions. In 1996, Ms. Ricciardello was appointed as Reliant’s Vice President and Comptroller and she served as its Senior Vice President and Chief Accounting Officer from 1999 until her retirement in 2002. Ms. Ricciardello earned a Bachelor of Science degree in Business Administration from the University of South Dakota and an MBA from the University of Houston. She is also a Texas licensed Certified Public Accountant and earned a CERT Certificate in Cybersecurity from Carnegie Mellon University. We believe that Ms. Ricciardello is well suited to serve as a director based on her accounting and financial expertise and public company board and committee experience. +Michele Vion, 65, was appointed to our Board in February 2020. Ms. Vion previously served as Vice President, Human Resources at HighPoint Resources Corporation, a successor to the Bill Barrett Corporation, an oil and gas E&P company, from August 2010 to September 2019. Ms. Vion was previously employed at Level 3 Communications, Inc., an international communications company, starting in 2006 and ultimately as Group Vice President of Human Resources up to January 2010. Ms. Vion also previously served as Vice President of Human Resources for Sun Microsystems, Inc., a computer networking company, for seven years. She also previously held senior human resource and client account management positions at Prudential Financial, Inc., an insurance and investment management company and JP Morgan, a global financial services firm. Prior to joining JP Morgan, Ms. Vion served in an accounting position as a Regional Controller for the Eastern Region at Sony Corporation of America. Ms. Vion previously served as Compensation Committee Chair and as a member of the Audit Committee of Boingo Wireless, Inc.’s Board of Directors, roles she held from 2018 until Boingo’s acquisition by Digital Colony Management, LLC in June 2021. Ms. Vion also served on the board and as Chair of the Compensation Committee and as member of the Audit Committee and Nominating and Corporate Governance Committee of Callidus Software Inc., a publicly-traded, cloud-based software company, from 2005 to 2016. Ms. Vion holds a Bachelor of Arts in East Asian Studies and Economics from Wesleyan University, has attended Stanford University’s Director’s College, and participated in the Financial Times’ Director Exchange. We believe that Ms. Vion is well suited to serve as a director based on her executive leadership experience in human resources and accounting and public company board and committee experience. +Alex V. Volkov, 52 , has served as a member of our Board since May 2024. Mr. Volkov is currently Vice President - Commercial & Integration, for ExxonMobil Upstream Unconventional business. Alex joined ExxonMobil in 1997 in Houston, Texas. During his early tenure with the company he has held diverse assignments in the areas of marketing, business development, supply chain logistics, and business strategy development. From 2014 to 2016, Alex was based in Moscow, Russia where he served as Vice President of Exxon Neftegas Limited responsible for ExxonMobil commercial activities in Russia, including natural gas sales and marketing of Sakhalin-1 gas resources. Alex moved to the United Kingdom in 2016 and he was appointed Vice President, International Gas, ExxonMobil Gas & Power Marketing and Chairman, ExxonMobil Gas Marketing Europe in 2018. In this capacity, he was responsible for ExxonMobil’s natural gas marketing and trading activities in Europe, Russia, Caspian, Malaysia, Thailand, and Australia. In 2019 Alex moved to Houston and was named Vice President, Global LNG Marketing. In this role, he had global responsibility for ExxonMobil’s Liquefied Natural Gas (LNG) portfolio and marketing of LNG for ExxonMobil’s projects and joint ventures. Between 2021 and 2023 Alex served first as Vice President, Commercial & Power and then as Vice President, Strategy and Business Development which included Upstream Acquisitions & Divestment team that was responsible for evaluation and negotiation of ExxonMobil / Pioneer merger announced in October 2023 and after the announcement he served as Transition Executive overseeing the integration of two companies . He assumed his current position in July of 2024. Alex graduated from the University of Nizhni Novgorod, Russia in 1994 and he also holds an MBA from the University of Alabama. +Set forth below are the name, age, position and description of the business experience of our executive officers (other than those who are also Directors and included above) as of February 20, 2025. +David S. Schorlemer, 57 , began serving as a Special Advisor to the Chief Financial Officer on October 12, 2020 until his appointment as Chief Financial Officer on October 23, 2020. Mr. Schorlemer has two decades of experience in senior level positions in public and private companies and has focused on building integrated business systems and support organizations. He most recently served as Executive Vice President, Chief Financial Officer, Treasurer and Secretary of Basic Energy Services, Inc., a Fort Worth, Texas based oilfield services company, from September 2018 until joining the Company. Prior to that, he served as the Chief Financial Officer of Gulf Island Fabrication, Inc. from January 2017 to August 2018. His work history also includes serving as Chief Financial Officer for three oilfield services companies: GR Energy Services Management, LP from January 2016 to December 2016, Stallion Oilfield Holdings, Inc., September 2004 to December 2015 and Q Services, Inc. from July 1997 until its merger with Key Energy Services, Inc. in July 2002. He also held the role of vice president, marketing and strategic planning for Key Energy Services, Inc. from July 2002 to September 2004. Prior to entering the energy services industry, Mr. Schorlemer was a technology consultant and project manager with Accenture’s Technology Practice +13 +where he worked on various domestic and international projects with Fortune 500 Companies in industries including: telecommunications, transportation, automotive and manufacturing and oil and gas. Mr. Schorlemer earned his Bachelor of Business Administration degree in finance from The University of Texas, and his Master of Business Administration from Texas A&M University. +Adam Muñoz, 42, has served as our President and Chief Operating Officer since August 2021, and prior to that, he served as Chief Operating Officer since January 2021 and served as Senior Vice President of Operations since March 2020. Mr. Muñoz joined the Company in 2010 to initiate ProPetro’s Permian pressure pumping operation. Prior to joining ProPetro, Mr. Muñoz held sales and operations roles at Frac Tech Services and Weatherford International. Since joining ProPetro, Mr. Muñoz has served as the Director of Business Development and Technical Services where he was responsible for overseeing the growth of the hydraulic fracturing operations as well as managing the department’s day-to-day technical services. Mr. Muñoz has most recently served as the Vice President of Frac Services where his duties included leading the hydraulic fracturing division through specific efforts to increase operational efficiencies and maximize financial productivity. Mr. Muñoz received a Bachelor of Business Marketing from The University of Texas at the Permian Basin. +John J. “Jody” Mitchell, 42 , has served as our General Counsel and Corporate Secretary of the Company since January 2023. Prior to his appointment as General Counsel, Mr. Mitchell served as the Company’s Vice President and Deputy General Counsel since April 2021. Before joining the Company, Mr. Mitchell served in various roles at Concho Resources Inc., a hydrocarbon exploration company acquired by ConocoPhillips in 2021 (“Concho”), from 2014 to 2021, including Director of Marketing and Midstream and, prior to that, Associate General Counsel. Before joining Concho, Mr. Mitchell served as counsel supporting the upstream and midstream businesses at Petrohawk Energy Corporation (“Petrohawk”) and at BHP Billiton following BHP Billiton’s acquisition of Petrohawk. Mr. Mitchell began his career as an associate at Locke Lord Bissell & Liddell LLP, where he concentrated on oil, gas and energy litigation and construction litigation. Mr. Mitchell holds a Bachelor of Arts from the University of Texas and a Juris Doctor from the University of Houston Law Center. +Shelby K. Fietz, 43 , has served as our Chief Commercial Officer of the Company since November 2023. Mr. Fietz joined ProPetro in 2012, and prior to his appointment as Chief Commercial Officer, Mr. Fietz served as the Company’s Vice President of Commercial, leading the business development, sales, supply chain, and marketing functions. He also previously held the position of Vice President of Business Development, Sales and Marketing, while also leading our supply chain organization. Prior to his appointment as an officer, Mr. Fietz held roles of increasing responsibility within ProPetro in both operations and business development. Mr. Fietz also serves in a leadership capacity with the Permian Basin Chapter of the Energy Workforce and Technology Council. Mr. Fietz holds a Bachelor of Science from Angelo State University. +Celina M. Davila, 44 , has served as our Chief Accounting Officer since November 2023. Prior to her appointment as Chief Accounting Officer, Ms. Davila served as the Company’s Director of Accounting and Corporate Controller since August 2022 and as Corporate Controller since October 2019. Ms. Davila joined the Company in January 2019 as Hydraulic Fracturing Controller. Prior to joining the Company, Ms. Davila served in various roles at Pioneer, a leading independent natural resources company, from 2012 to 2018, including Accounting Manager and, prior to that, Accounting Supervisor. Ms. Davila began her career as a Senior Auditor at Johnson, Miller, and Co. Ms. Davila is a Certified Public Accountant and holds a Bachelor of Arts in Accounting and a Master in Business Administration degree from Texas Tech University. +14 \ No newline at end of file diff --git a/raw/filings/0001680247/2024/0001680247-25-000030/item13.txt b/raw/filings/0001680247/2024/0001680247-25-000030/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..67cf8e5c30849ce56d23049078dff0335a288623 --- /dev/null +++ b/raw/filings/0001680247/2024/0001680247-25-000030/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Party Transactions, and Director Independence. +The information required by Item 13 is incorporated by reference to the Company’s Proxy Statement for its 2025 Annual Meeting of Stockholders, which is expected to be filed before the end of April 2025. \ No newline at end of file diff --git a/raw/filings/0001680247/2024/0001680247-25-000030/item9a.txt b/raw/filings/0001680247/2024/0001680247-25-000030/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..a90a04e19151b03a59da1f9693f215daf7ca3940 --- /dev/null +++ b/raw/filings/0001680247/2024/0001680247-25-000030/item9a.txt @@ -0,0 +1,11 @@ +Item 9A. Controls and Procedures +Evaluation of Disclosure Controls and Procedures +We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-K. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2024. As noted in Management’s Report on Internal Control over Financial Reporting, management’s evaluation of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of AquaProp , which was acquired on May 31, 2024. Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company. We are in the process of integrating AquaProp’s internal controls with our internal controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. +Management’s Report on Internal Control over Financial Reporting +The management of ProPetro Holding Corp. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. ProPetro Holding Corp. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with GAAP. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations. +There are inherent limitations to the effectiveness of any control system. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company will be detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The Company intends to continually improve and refine its internal controls. +Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our internal control over financial reporting as of December 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management believes that ProPetro Holding Corp. maintained effective internal control over financial reporting as of December 31, 2024. Management’s evaluation of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of AquaProp, which was acquired on May 31, 2024, and whose financial statements constitute 4.9% and 3.1% of total assets and revenue, respectively of the consolidated financial statement amounts as of and for the year ended December 31, 2024. The inde pendent registered public accounting firm, RSM US LLP, Houston, Texas, United States, has audited the consolidated financial statements as of and for the year ended December 31, 2024, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this Annual Report under Part II, Item 8 above. +Changes in Internal Control over Financial Reporting +There were no changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2024 , that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. +102 \ No newline at end of file diff --git a/raw/filings/0001680247/2024/0001680247-25-000030/rp_note.txt b/raw/filings/0001680247/2024/0001680247-25-000030/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..14049308f971c4303b6f9eea55bee4b9168fb90c --- /dev/null +++ b/raw/filings/0001680247/2024/0001680247-25-000030/rp_note.txt @@ -0,0 +1,10 @@ +16. RELATED-PARTY TRANSACTIONS +Operations and Maintenance Yards +The Company rents three yards from an entity in which a director of the Company has an equity interest, and the total annual rent expense for each of the three yards was approximately $ 0.03 million, $ 0.1 million and $ 0.1 million, respectively. The Company previously rented two additional yards from this entity and incurred rent expense of $ 0.02 million and $ 0.1 million, respectively during the year ended December 31, 2023. +ExxonMobil and Pioneer +On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from the Pioneer Pressure Pumping Acquisition. In connection with the Pioneer Pressure Pumping Acquisition, Pioneer received 16.6 million shares of our common stock and approximately $ 110.0 million in cash. In May 2024, Pioneer merged with and into a wholly owned subsidiary of Exxon Mobil Corporation (”ExxonMobil”) after which ExxonMobil became the owner of these shares. The Company currently provides pressure pumping, wireline and other services to ExxonMobil and previously provided such services to Pioneer. +On April 22, 2024, we entered into a s ub-agreement for Hydraulic Fracturing Services with XTO Energy Inc. (“XTO), a wholly owned subsidiary of ExxonMobil, pursuant to which we will provide hydraulic fracturing, wireline and pumpdown services with two committed FORCE ® electric-powered hydraulic fracturing fleets with the option to add a third FORCE ® fleet (also with wireline and pumpdown services) for a period of three years or for contracted hours, whichever occurs last, with respect to each fleet, subject to certain termination and release rights. +Revenue from services provided to ExxonMobil (including Pioneer and XTO) subsequent to Pioneer's merger with ExxonMobil accounted for $ 187.7 million of our total revenue during the year ended December 31, 2024. Revenue from services provided to Pioneer (including equipment reservation fees) prior to its merger with ExxonMobil accounted f or approximately $ 6.8 million of our total revenue during the year ended December 31, 2024 . R evenue from services provided to Pioneer (including equipment reservation fees) prior to its merger with ExxonMobil accounted for approximate ly $ 125.1 million and $ 423.7 million of our total revenue durin g the years ended December 31, 2023 and 2022, respectively. +As of December 31, 2024, the total accounts receivable due from ExxonMobil (including Pioneer and XTO), including estimated unbilled receivable for services we provided, amounted to $ 70.8 million and the amount due to ExxonMobil (including Pioneer and XTO) was $ 0 . As of December 31, 2023, the balance due from Pioneer for services we provided amounted to approximately $ 2.4 million and the amount due to Pioneer was $ 0 . +Big 4 and Former Employee +On November 1, 2024, we sold our cementing business located in Vernal, Utah, to Big 4 which is solely owned by a former employee as part of a strategic repositioning. We received a promissory note for $ 13.0 million as consideration. The note receivable is secured by substantially all assets of Big 4 and the former employee’s ownership interests in and distributions from Big 4. The note receivable is to be paid to the Company in quarterly installments with interest of 10 % per annum from March 31, 2025 to December 31, 2029. The note receivable is considered subordinated financial support to Big 4 and represents a variable interest to the Company in Big 4. See Note 19. Variable Interest Entity for the carrying value of the note receivable as of December 31, 2024 . We recorded interest income of $ 0.2 million for the year ended December 31, 2024 which is included in our consolidated statement of operations under other income (expense). Cash inflows from collections on the note receivable will be included in our consolidated statement of cash flows under cash flows from investing activities. The fo rmer employee was part of our cementing operations until November 1, 2024, and is no longer affiliated with the Company. \ No newline at end of file diff --git a/raw/filings/0001680247/2024/0001680247-25-000030/rpt_disclosure.txt b/raw/filings/0001680247/2024/0001680247-25-000030/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..b5585d2d5dd601887e6cc6e4a432f221b9814ac0 --- /dev/null +++ b/raw/filings/0001680247/2024/0001680247-25-000030/rpt_disclosure.txt @@ -0,0 +1,15 @@ +Certain Relationships and Related Party Transactions +RELATED PARTY TRANSACTIONS +Operations and Maintenance Yards +The Company rents three yards from South Midkiff Partners, LLC, an entity partially owned by Spencer D. Armour III, a director, and David Sledge, the father of Sam Sledge, our Chief Executive Officer. Total annual rent expense in 2024 for each of the three yards was approximately $0.03 million, $0.1 million, and $0.1 million, respectively. +Transportation and Equipment Rental +Adam Muñoz, our President and Chief Operating Officer, has a family relationship with an employee of J&M Burns Transportation, an entity that provides transportation services to the Company. The employee receives a portion of his compensation from J&M Burns Transportation based on the amount of services sold by him to customers, including the Company. The Company incurred approximately $14.2 million in expense for the year ended December 31, 2024 for services provided to the Company by J&M Burns Transportation. +Executive Officer Family Members +Oscar M. Dominguez is our Vice President of Hydraulic Fracturing Operations and the brother-in-law of Adam Muñoz. Mr. Dominguez received total compensation of approximately $983,000 for his services for the year ended December 31, 2024 (including approximately $841,000 cash compensation and approximately $142,000 non-cash equity compensation). +Roger Dominguez is our Supply Chain Logistics Manager and the brother-in-law of Adam Muñoz. Mr. Dominguez received total compensation of approximately $292,000 for his services for the year ended December 31, 2024 (including approximately $249,000 cash compensation and approximately $43,000 non-cash equity compensation). +Pioneer +On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer and Pioneer Pumping Services (the “Pioneer Pressure Pumping Acquisition”) in exchange for 16.6 million shares of our common stock and $110.0 million in cash. In May 2024, Pioneer merged with and into a wholly owned subsidiary of ExxonMobil after which ExxonMobil became the owner of these shares. We currently provide pressure pumping, wireline and other services to ExxonMobil and previously provided such services to Pioneer. +On April 22, 2024, we entered into a sub-agreement for Hydraulic Fracturing Services with XTO Energy Inc., (“XTO”) a wholly owned subsidiary of ExxonMobil, pursuant to which we provide hydraulic fracturing, wireline and pumpdown services with two committed FORCE® electric-powered hydraulic fracturing fleets with the option to add a third FORCE® fleet (also with wireline and pumpdown services) for a period of three years or for contracted hours, whichever occurs last with respect to each fleet, subject to certain termination and release rights. +Revenue from services provided to ExxonMobil (including Pioneer and XTO) subsequent to Pioneer’s merger with ExxonMobil was approximately $187.7 million during the year ended December 31, 2024. Revenue from services provided to Pioneer (including equipment reservation fees) prior to its merger with ExxonMobil was approximately $6.8 million during the year ended December 31, 2024. +As of December 31, 2024, the total accounts receivable due from ExxonMobil (including Pioneer and XTO), including estimated unbilled receivable for services we provided, amounted to $70.8 million and the amount due to ExxonMobil (including Pioneer and XTO) was $0. +PROPETRO  2025 Proxy Statement   |  21 \ No newline at end of file