They had a combination of non-working technology, and semi-working labs. They were using the labs partly to hide that their tech didn't work, and to tide them over until they could make it work.
They had to run their own labs in order to take advantage of the laboratory developed test (LDT) regulatory framework. Selling their devices for others to use would have required FDA clearance.
They could go to Europe or elsewhere like many do.
The EU strategy can solve regulatory problems seen in the US, but it introduces other problems to be solved: funding can become more difficult (although the normal rules wouldn't seem to apply to this group), import/export and taxes become complicated, management from a distance is hard, etc. Keeping in mind that Theranos was trying for a US government contract, their US focus makes sense and the LDT pathway was a good idea. It's a shame that their corporate culture and management were wholly inadequate.