Home Substantial portion PERSONALIS, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)

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

0
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes and other financial information included
elsewhere in this Annual Report on Form 10-K. In addition to historical
consolidated financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates, and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. You should review the sections titled "Special Note
Regarding Forward-Looking Statements" for a discussion of forward-looking
statements and in Part I, Item 1A, "Risk Factors" for a discussion of factors
that could cause actual results to differ materially from the results described
in or implied by the forward-looking statements contained in the following
discussion and analysis and elsewhere in this Annual Report on Form 10-K.

Overview

Personalis' strategy is to develop some of the world's most advanced genetic
tests for cancer. Today our tests are routinely used by many of the largest
oncology-focused pharmaceutical companies for analysis of patient samples from
their clinical trials. More recently, we have also begun to work with a growing
number of leading cancer centers for clinical diagnostic use of our tests. We
believe that adoption and publication by these key opinion leaders will develop
an advanced standard of care for cancer patients and eventual broad use in a
community hospital setting. We believe that our tests can meaningfully improve
outcomes for cancer patients, and we estimate that the market opportunity for
our tests for therapy selection and monitoring is approximately $30 billion in
the U.S.

In December 2021, we launched NeXT Personal, a next-generation, tumor-informed
liquid biopsy assay designed to detect and quantify MRD and recurrence in
patients previously diagnosed with cancer. NeXT Personal is designed to deliver
industry-leading MRD sensitivity down to the 1 part-per-million range, an
approximately 10- to 100-fold improvement over other available technologies.
NeXT Personal leverages whole genome sequencing of a patient's tumor to identify
up to 1,800 specially-selected somatic variants that are subsequently used to
create a personalized liquid biopsy panel for each patient. We believe this
enables earlier detection across a broader variety of cancers and stages,
including typically challenging early stage, low mutational burden, and
low-shedding cancers. NeXT Personal is also designed to simultaneously detect
and quantify clinically relevant mutations in ctDNA that may be used in the
future to help guide therapy, when cancer is detected. These include known
targetable cancer mutations, drug resistance mutations, and new variants which
can emerge and change over time, especially under therapeutic pressure. We
consider this approach not just "tumor-informed", but "comprehensively
tumor-informed". Our ultimate goal is not just to detect cancer, but to provide
key information over the entire course of the patient's disease. We believe this
can be better for patients, more informative for pharmaceutical customers, and a
larger business opportunity for us.

Our strategy is to work with world-class medical institutions. To that end, in
the fourth quarter of 2021, we announced a collaboration with the Mayo Clinic
and in the first quarter of 2022, we announced one with the Moores Cancer Center
at UC San Diego Health. In these collaborations, we provide clinical diagnostic
testing and research sequencing and analysis services using our tissue-based
NeXT Dx test. We have begun to test clinical patient samples and are excited
about the opportunity to work with these renowned cancer centers. If we achieve
a favorable reimbursement decision for our NeXT Dx test from MolDx, we may also
generate revenue in the future from some of these collaborations. Given the
advanced nature of our NeXT Dx test, we believe it is a good fit for high-end
cancer centers, which have a dual mandate for both clinical care and research.
If these key opinion leaders have a positive experience using our tests, we are
optimistic that this will also support broader use of our platform by other
clinicians in the future.

We have the capacity to sequence and analyze approximately 200 trillion bases of
DNA per week in our facility. We believe that capacity is already larger than
most cancer genomics companies, and we continue to build automation and other
infrastructure to scale further as demand increases and in support of our NeXT
Liquid Biopsy, NeXT Dx Test and NeXT Personal offerings. To date, we have
sequenced more than 235,000 human samples, of which more than 145,000 were whole
human genomes.

In parallel with the development of our platform technology, we have also
pursued business within the population sequencing market, and we have provided
whole genome sequencing services under contract with the VA MVP, which has
enabled us to innovate, scale our operational infrastructure, and achieve
greater efficiencies in our lab. The VA MVP is the largest population sequencing
effort in the United States and we have delivered over 140,000 whole human
genome sequence datasets to the VA MVP to date. The cumulative value of task
orders received from the VA MVP since inception is approximately $186 million,
$178.1 million of which we had recognized as revenue as of December 31, 2021. In
September 2021, we received a task order from the VA MVP with a value of up to
approximately $9.7 million, which was significantly less than in prior years. At
that time, we expected the reduced order amount was to be followed by a formal
RFP process and a potential new contract to be awarded sometime late in the
third quarter of 2022. However, recent discussions with our contacts at the VA
MVP indicate that there will be no RFP process in 2022. Accordingly, we do not
expect to receive any new orders from the VA MVP this year nor to recognize any
revenue from the VA MVP beyond the current order and contract. Unless we receive
an additional task order and/or enter into a new services agreement with the VA
MVP with a value comparable to that of our current contract and historical
contracted orders, our revenue from the VA MVP is expected to decline
significantly in 2022 and future periods. Given the strong growth we have
already experienced in our oncology business in 2021, and the large market
opportunity we see in this space, we plan to focus primarily on cancer as we go
forward.

In August 2021, we announced that we will relocate our corporate headquarters
from Menlo Park to a new facility in Fremont, California and we plan to
beginning moving into it in the third quarter of this year. We signed a
13.5-year lease for the 100,000 square foot facility, which is approximately
double the amount of space in our current Menlo Park location. The new facility
is intended to allow for expansion of our laboratory for clinical testing to
support biopharma customers and clinical diagnostic testing. In addition, the
new space is intended to support the expansion of research and development
efforts to bring leading edge products and services to the marketplace. The new
facility will also provide more office space for our selling, general and
administrative workforce.

                                       62
--------------------------------------------------------------------------------
Our operations have been impacted by the ongoing COVID-19 pandemic. For example,
the previous shelter-in-place order and health orders have negatively impacted
productivity, disrupted our business, and slowed research and development
activities due to us limiting access to our laboratory space that would
otherwise be used by our research and development group, and, to the extent such
orders return in similar or more stringent form, they may continue to cause such
effects on our operations. The COVID-19 pandemic has also disrupted, and may
continue to disrupt, the ability of our suppliers to fulfill our purchase orders
in a timely manner or at all. Additionally, we are aware of increased demand in
the market for certain consumables used in COVID-19 test kits and vaccines. We
use such consumables in our operations, and we have faced, and may face in the
future, difficulties in acquiring such consumables if our suppliers prioritize
orders related to COVID-19. Several of our customers, including the VA MVP, were
delayed in sending us samples in the prior year due to the inability to collect
or ship samples during the COVID-19 pandemic, and these and additional customers
may be disrupted from collecting samples or sending purchase orders and samples
to us in the future.

While authorities in many areas have lifted or relaxed pandemic-related
restrictions, in some cases they have subsequently re-imposed various
restrictions after observing an increased rate of COVID-19 cases as the global
COVID-19 pandemic continues to rapidly evolve and to present serious health
risks. There is no guarantee when or if all such restrictions and
recommendations will be eliminated, such that we and our customers,
manufacturers and suppliers will be able to safely resume operations consistent
with our pre-COVID-19 operations. The full extent of the impact of the COVID-19
pandemic on our business, operations and plans remains uncertain and will depend
on future developments that cannot be predicted at this time. Such developments
include the continued spread of the Omicron variant in the U.S. and other
countries and the potential emergence of other SARS-CoV-2 variants that may
prove especially contagious or virulent, the ultimate duration of the pandemic
and the resulting impact on our business and other third parties with whom we do
business, and the effectiveness of actions taken globally to contain and treat
the disease.

A continued and prolonged public health crisis such as the COVID-19 pandemic
could have a material negative impact on our business, financial condition, and
operating results.

Factors affecting our performance

We believe that several important factors have had and which we believe will continue to have an impact on our operating performance and results of operations, including:

• The continued development of the genomic testing market. Our

performance depends on the willingness of biopharmaceutical customers to

continue to seek more comprehensive molecular information to further develop

effective cancer therapies.

• Increased adoption of our products and solutions by existing customers.

Our performance depends on our ability to retain and expand adoption

with existing customers. Because our technology is new, some customers

start using our platform by launching pilot studies involving a small

number of samples to gain experience with our service. As a result,

historically, a significant portion of our revenue comes from

customers. We believe that our ability to convert initial pilots into

larger orders from existing customers have the potential to drive

substantial long-term income. We expect there to be variations in

         the number of samples they choose to test each quarter.


      •  Adoption of our products and solutions by new customers. While new
         customers initially may not account for significant revenue, we believe
         that they have the potential to grow substantially over the long term as

they gain confidence in our service. Our ability to attract new customers

         is critical to our long-term success. Our publications, posters and
         presentations at scientific conferences lead to engagement at the
         scientific level with potential customers who often make the initial
         decision to gain experience with our platform. Accessing these new
         customers through scientific engagement and marketing to gain initial
         buy-in is critical to our success and gives us the opportunity to
         demonstrate the utility of our platform.

• Our revenues and costs are affected by the volume of samples we receive

customers from period to period. Timing and sample size

shipments received after orders have been placed vary. Since

sample shipments can be large and are often received from a third party,

the time of arrival can be difficult to predict in the short term.

Although our long-term performance is not affected, we are seeing

quarter-to-quarter volatility due to these factors. Samples arriving

later than expected may not be processed in the proposed quarter and

generate revenue the following quarter. Since many of our customers

         request defined turnaround times, we employ project managers to
         coordinate and manage the complex process from sample receipt to
         sequencing and delivery of results.


      •  Investment in product innovation to support growth. Investment in

research and development, including the development of new products and

capabilities are essential to establishing and maintaining our leadership position.

We have invested heavily in our NeXT platform, introducing new

additional products and capabilities over the past two years, including

NeXT Liquid Biopsy (exome-wide liquid biopsy platform), NeXT Dx Test

(comprehensive cancer genomic profiling test enabling advanced composite

biomarkers for the treatment of cancer), NeXT SHERPA and NeXT NEOPS (neoantigen

prediction capabilities) and NeXT Personal (liquid biopsy offer for

personalized tumor follow-up for patients). We are currently investing in

the development of future new product offerings, including NeXT CDx

(diagnostic test) and NeXT database (comprehensive analysis of tumor immunogenomics

database). We also collaborate with key opinion leaders in the field of cancer

centers, such as Mayo Clinic and UC San Diego Moores Cancer Centerfor

support the clinical utility of our platform. We believe this work is

         critical to gaining customer adoption and expect our investments in these
         efforts to increase.


                                       63

————————————————– ——————————

• Leverage our operational infrastructure. We have invested a lot

         and will continue to invest, in our sample processing capabilities and
         commercial infrastructure. With our current operating model and
         infrastructure, we can increase our production and commercialize new

generations of our platform, but as our volumes continue to grow, we

will ultimately have to invest in additional production capacity. We

we expect to increase our revenues and spread our costs over a greater volume of

         services. In addition, we may invest significant amounts in
         infrastructure to support new products resulting from our research and
         development activities.

Components of operating results

Income

We derive our revenue primarily from sequencing and data analysis services to
support the development of next-generation cancer therapies and to support
large-scale genetic research programs. We support our customers by providing
high-accuracy, validated genomic sequencing and advanced analytics. Many of
these analytics are related to state-of-the-art biomarkers, including those
relevant to immuno-oncology therapeutics such as checkpoint inhibitors.

Our revenue is primarily generated through contracts with companies in the
pharmaceutical industry, healthcare organizations, and government entities. Our
ability to increase revenue will depend on our ability to further penetrate this
market. To do this, we are developing a growing set of state-of-the-art
products, advancing our operational infrastructure, expanding our international
presence, building our regulatory credentials, and expanding our targeted
marketing efforts. We sell through a small direct sales force.

Since 2018, we derived a substantial portion of our revenue from sales of our
DNA sequencing and data analysis services to the VA MVP. However, we do not
anticipate deriving such substantial portions of our revenue from the VA MVP in
future periods. Our contract with the VA MVP does not include specific testing
turnaround times. Therefore, we have the ability to modulate the volume of
samples processed for the VA MVP up or down to complement sample volumes from
all other customers, which can vary from period to period.

We have one reportable segment from the sale of sequencing and data analysis
services. Substantially all of our revenue to date has been derived from sales
in the United States.

Costs and Expenses

Cost of Revenue

Cost of revenue consists of raw materials costs, personnel costs (salaries,
bonuses, stock-based compensation, payroll taxes, and benefits), laboratory
supplies and consumables, depreciation and maintenance on equipment, and
allocated facilities and information technology ("IT") costs. We expect cost of
revenue to increase as our revenue grows, and in the short term cost of revenue
may outpace revenue growth as we invest in expanding our laboratory capacity,
including additional costs associated with our future laboratory in Fremont,
California. Over time the cost per sample processed is expected to decrease due
to economies of scale we may gain as volume increases, automation initiatives,
and other cost reductions.

Research and development costs

Research and development expenses consist of costs incurred for the research and
development of our products. These expenses consist primarily of personnel costs
(salaries, bonuses, stock-based compensation, payroll taxes, and benefits),
laboratory supplies and consumables, costs of processing samples for research
purposes, depreciation and maintenance on equipment, and allocated facilities
and IT costs. We include in research and development expenses the costs to
further develop software we use to operate our laboratory, analyze the data it
generates, and automate our operations. These expenses also include costs
associated with our collaborations, which we expect to increase over time.

We expense our research and development costs in the period in which they are
incurred. We expect to increase our research and development expenses as we
continue to develop new products and incur additional costs associated with our
future headquarters in Fremont, California.

Selling, general and administrative expenses

Selling expenses consist of personnel costs (salaries, commissions, bonuses,
stock-based compensation, payroll taxes, and benefits), customer support
expenses, direct marketing expenses, and market research. Our general and
administrative expenses include costs for our executive, accounting, finance,
legal, and human resources functions. These expenses consist of personnel costs
(salaries, bonuses, stock-based compensation, payroll taxes, and benefits),
corporate insurance, audit and legal expenses, consulting costs, and allocated
facilities and IT costs. We expense all selling, general and administrative
costs as incurred.

We expect our selling expenses will continue to increase in absolute dollars,
primarily driven by our efforts to expand our commercial capability and to
expand our brand awareness and customer base through targeted marketing
initiatives with an increased presence both within and outside the United
States. We expect general and administrative expenses to increase as we scale
our operations and incur additional costs associated with ramping up our new
headquarters facility in Fremont, California.

                                       64

————————————————– ——————————

Interest income and interest expense

Interest income consists primarily of interest earned on our cash and cash
equivalents and short-term investments. Interest income increased significantly
beginning in the second half of 2019 as a result of us investing proceeds from
the initial public offering of our common stock in June 2019 (our "IPO"). Since
the first quarter of 2020, our interest income has been adversely impacted by
declines in yields on debt securities. Interest expense in 2021 is the
recognition of imputed interest on noninterest bearing loans. Interest expense
in 2019 and prior years consisted of cash and non-cash interest costs related to
previously outstanding loans.

Loss on Debt Extinguishment

We incurred a loss on debt extinguishment in 2018 resulting from changes in the
maturity dates of convertible notes issued in 2017. We also incurred a loss on
debt extinguishment in 2019 upon the payoff of the Growth Capital Loan. See Note
6 to our consolidated financial statements included elsewhere in this annual
report.

Other Income (Expense), Net

Other income (expense), net consists primarily of foreign currency exchange
gains and losses, and realized gains or losses associated with sales of
marketable securities. In 2019, other income (expense), net also consisted of
changes in fair value of a convertible preferred stock warrant liability. We
expect our foreign currency gains and losses to continue to fluctuate in the
future due to changes in foreign currency exchange rates.

Trending Financial Information

The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto in Item 8 of
Part II, "Financial Statements and Supplementary Data". Historical results are
not necessarily indicative of future results.

                                                                 Year Ended December 31,
                                          2021             2020             2019            2018            2017
Consolidated Statements of
Operations:                                          (in thousands, except share and per share data)
Revenue                               $     85,494     $     78,648     $     65,207     $    37,774     $     9,393
Costs and expenses
Cost of revenue                             53,837           58,534           43,127          25,969          11,736
Research and development                    49,312           28,568           22,418          14,304           9,919
Selling, general and administrative         47,698           33,692           22,080          11,271           9,901
Total costs and expenses                   150,847          120,794           87,625          51,544          31,556
Loss from operations                       (65,353 )        (42,146 )        (22,418 )       (13,770 )       (22,163 )
Interest income                                367              949            1,620             293             100
Interest expense                              (184 )             (2 )         (1,133 )        (1,894 )        (1,303 )
Loss on debt extinguishment                      -                -           (1,704 )        (4,658 )             -
Other income (expense), net                    (42 )            (24 )         (1,440 )           150            (227 )
Loss before income taxes                   (65,212 )        (41,223 )        (25,075 )       (19,879 )       (23,593 )
Provision for income taxes                      14               57                9               7               5
Net loss                              $    (65,226 )   $    (41,280 )   $    (25,084 )   $   (19,886 )   $   (23,598 )
Net loss per share, basic and
diluted                               $      (1.49 )   $      (1.20 )   $      (1.39 )   $     (6.49 )   $     (7.78 )
Weighted-average shares
outstanding, basic and diluted          43,886,730       34,374,903       18,011,470       3,063,157       3,031,636



                                                                 December 31,
                                        2021          2020          2019           2018          2017
Consolidated Balance Sheet Data:                                (in 

thousands)

Cash and cash equivalents, and
short-term investments                $ 287,064     $ 203,290     $ 128,289     $   19,744     $  22,617
Working capital                         286,918       180,083        89,616        (28,291 )     (22,262 )
Total assets                            396,528       244,842       157,291         41,670        33,563
Total debt                                3,494             -             -          4,996        17,506
Long-term obligations                    54,914         9,261           639            804         1,183
Total liabilities                        86,227        49,897        50,601         58,654        50,171
Redeemable convertible preferred
stock                                         -             -             -         89,404        75,995
Total stockholders' equity
(deficit)                               310,301       194,945       106,690       (106,388 )     (92,603 )


                                       65
--------------------------------------------------------------------------------

Operating results

This section generally discusses 2021 and 2020 items and year-to-year
comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year
comparisons between 2020 and 2019 that are not included in this Form 10-K can be
found in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our Annual Report on Form 10-K for the year ended
December 31, 2020.

Income

The following table presents revenues by customer type (in thousands):

                           Years Ended December 31,                     Change
                        2021         2020         2019       2021 vs 2020     2020 vs 2019
VA MVP                $ 45,671     $ 56,154     $ 43,545         -19%             29%
All other customers     39,823       22,494       21,662         77%               4%
Total revenue         $ 85,494     $ 78,648     $ 65,207          9%              21%


The following table shows the revenue concentration by customer:

                                   Year Ended December 31,
                              2021            2020         2019
VA MVP                         53%             71%          67%
Natera, Inc.                   10%              *            *
Pfizer Inc.                     *               *           13%
* Less than 10% of revenue




VA MVP

The decrease of $10.5 million in revenue from the VA MVP in 2021 was primarily
due to a decrease in the volume of samples we tested in the period. As of
December 31, 2021, we had a remaining backlog of $7.6 million under our current
contract with the VA MVP, including the task order received in September 2021.
We expect to convert such amount into revenue during the first three quarters of
2022.

The recognition of significant revenue from the VA MVP in future periods after
the completion of our current backlog is contingent on receipt of a new
contract. The VA MVP may not award us a new contract. Further, the value of any
such potential new contract may be lower than our current contract and
historical contracted orders from the VA MVP, and/or the scope or nature of the
services required under any such new contract may change such that we are unable
to serve the VA MVP in the future. The task order received in September 2021 had
a value of up to approximately $9.7 million, which represents a substantial
decline compared to historical contracted orders. At that time, we expected the
reduced order amount was to be followed by a formal RFP process and a potential
new contract to be awarded sometime late in the third quarter of 2022. However,
recent discussions with our contacts at the VA MVP indicate that there will not
be an RFP process in 2022. Accordingly, we are not planning on receiving any new
orders from the VA MVP this year or expecting to recognize any revenue beyond
the current order and contract. Unless we receive an additional task order
and/or enter into a new services agreement with the VA MVP with a value
comparable to that of our current contract and historical contracted orders, our
revenue from the VA MVP will decline significantly in 2022 and future periods.

All other customers

The increase of $17.3 million in revenue from all other customers in 2021 was
driven primarily by strong demand from large pharmaceutical customers for our
NeXT Platform products, which resulted in an increase in the volume of samples
we tested during 2021. Revenue from Natera contributed $8.6 million of the
increase due to increased sample receipts under our agreement to provide
advanced tumor analysis for use in Natera's MRD testing offerings. Revenue
derived from our NeXT Platform products, which includes revenue from Natera, was
$27.9 million in 2021, compared to $8.2 million in 2020, an increase of $19.7
million.

Based on the relatively large dollar value of orders received from all other customers throughout fiscal 2021, we expect revenue from all other customers to make up the majority of our total revenue in fiscal year 2022.

Costs and Expenses

                                       Year Ended December 31,                         Change
                                  2021          2020          2019         2021 vs 2020       2020 vs 2019
                                           (in thousands)
Cost of revenue                 $  53,837     $  58,534     $  43,127          -8%                36%
Research and development           49,312        28,568        22,418          73%                27%
Selling, general and
administrative                     47,698        33,692        22,080          42%                53%
Total costs and expenses        $ 150,847     $ 120,794     $  87,625          25%                38%




                                       66
--------------------------------------------------------------------------------

Revenue cost

The decrease in cost of revenue in 2021, despite a revenue increase in the same
period, was primarily due to favorable customer mix and efficiencies within our
laboratory operations. Raw materials costs were lower, relative to revenue, for
non-VA MVP customer orders, resulting in favorable customer mix in 2021. We also
observed more efficient sample processing overall in 2021, including less labor
and overhead required per sample processed, which was favorable for both VA MVP
and non-VA MVP orders.

The cost components related to the $4.7 million decrease in cost of revenue in
2021 were a $3.2 million decrease in raw materials costs due to favorable
customer mix, a $3.1 million decrease in indirect costs due to a higher
utilization of our laboratory for research and development activities, and a
$0.3 million decrease in the cost of laboratory supplies and consumables,
partially offset by a $1.1 million increase in labor costs as a result of
increased headcount, and a $0.8 million increase in depreciation and maintenance
on lab equipment.

Research and development

The $20.7 million increase in research and development in 2021 was primarily due
to development of new products and lab automation efforts and consisted of a
$12.1 million increase in personnel-related costs primarily related to increased
headcount, a $5.1 million increase in sample processing costs incurred in our
laboratory for new product development, a $2.0 million increase in IT and fixed
facilities costs, a $1.0 million increase in depreciation and maintenance on
research and development equipment, and a $0.5 million increase in consulting
fees.

Selling, general and administrative expenses

The $14.0 million increase in selling, general and administrative in 2021 was
primarily due to a $8.6 million increase in personnel-related costs related to
increased headcount, a $2.6 million increase in professional services (including
corporate insurance, audit fees, and legal expenses), a $1.6 million increase in
rent expense primarily related to our new Fremont facility, and a $1.2 million
charge in connection with the modification of stock options held by two
non-employee board members.

Interest income, interest expense and other expenses, net

                                        Year Ended December 31,                          Change
                                   2021           2020          2019         2021 vs 2020       2020 vs 2019
                                            (in thousands)
Interest income                 $      367      $     949     $   1,620          -61%               -41%
Interest expense                      (184 )           (2 )      (1,133 )         NM               -100%
Loss on debt extinguishment              -              -        (1,704 )             -            -100%
Other expense, net                     (42 )          (24 )      (1,440 )        75%                -98%
Total                           $      141      $     923     $  (2,657 )



Interest income and interest expense

The decrease in interest income in 2021 was driven by declines in yields on debt
securities, partially offset by higher average cash and investment balances
subsequent to our follow-on equity offerings in August 2020 and January 2021.
Interest expense in 2021 is the recognition of imputed interest on noninterest
bearing loans.

Other expense, net

Other expenses, net in 2021 and 2020, included gains and losses on foreign exchange transactions and revaluations.

Cash and capital resources

The following tables present selected financial information and statistics at the dates and for the years ended December 31, 20212020 and 2019 (in thousands):

                                                              December 31,
                                                   2021           2020      

2019

Cash and cash equivalents, and short-term
investments                                     $  287,064     $  203,290     $  128,289
Property and equipment, net                         19,650         11,834         14,106
Contract liabilities                                 3,982         21,034         35,977
Working capital                                    286,918        180,083         89,616



                                                   Year Ended December 31,
                                              2021          2020          2019
Net cash used in operating activities       $ (70,828 )   $ (42,653 )   $ (18,069 )
Net cash used in investing activities         (60,069 )     (65,143 )     (81,579 )
Net cash provided by financing activities     169,700       121,268       134,948


                                       67
--------------------------------------------------------------------------------


From our inception through December 31, 2021, we have funded our operations
primarily from $279.0 million in net proceeds from our follow-on equity
offerings in August 2020 and January 2021, $144.0 million in net proceeds from
our IPO in June 2019, and $89.6 million from issuance of redeemable convertible
preferred stock, as well as cash from operations and debt financing. As of
December 31, 2021, we had cash and cash equivalents in the amount of $105.6
million and short-term investments in the amount of $181.5 million.

We have incurred net losses since our inception. We anticipate that our current
cash and cash equivalents and short-term investments, together with cash
provided by operating activities, are sufficient to fund our near-term capital
and operating needs for at least the next 12 months.
We have based these future funding requirements on assumptions that may prove to
be wrong, and we could utilize our available capital resources sooner than we
expect. If our available cash balances, net proceeds from the offerings and
anticipated cash flow from operations are insufficient to satisfy our liquidity
requirements, including because of lower demand for our services or other risks
described in this Annual Report on Form 10-K, such as the COVID-19 pandemic, we
may seek to sell additional common or preferred equity or convertible debt
securities, enter into an additional credit facility or another form of
third-party funding or seek other debt financing. We filed a prospectus
supplement in January 2022 pursuant to which we could offer and sell additional
shares of our common stock up to an aggregate amount of $100.0 million through
an at-the-market offering program. The sale of equity and convertible debt
securities may result in dilution to our stockholders and, in the case of
preferred equity securities or convertible debt, those securities could provide
for rights, preferences or privileges senior to those of our common stock. The
terms of debt securities issued or borrowings pursuant to a credit agreement
could impose significant restrictions on our operations. Additional capital may
not be available on reasonable terms, or at all.

Our short-term investment portfolio is primarily invested in highly rated securities, with the primary aim of minimizing the potential risk of loss of capital. Our investment policy generally requires securities to be of high quality and limits the degree of credit exposure to any given issuer.

As of December 31, 2021, cash and cash equivalents held by foreign subsidiaries
was $2.1 million. Our intent is to indefinitely reinvest funds held outside the
United States and our current plans do not demonstrate a need to repatriate them
to fund our domestic operations. However, if in the future, we encounter a
significant need for liquidity domestically or at a particular location that we
cannot fulfill through borrowings, equity offerings, or other internal or
external sources, or the cost to bring back the money is not significant from a
tax perspective, we may determine that cash repatriations are necessary or
desirable. Repatriation could result in additional material taxes. These factors
may cause us to have an overall tax rate higher than other companies or higher
than our tax rates have been in the past.

During 2021, cash used in operating activities of $70.8 million was a result of
$65.2 million of net loss and a net negative change in operating assets and
liabilities of $31.1 million (of which $17.1 million was related to reductions
in outstanding customer prepayments as we fulfilled the related revenue
contracts and $12.1 million due to an increase in accounts receivable),
partially offset by non-cash adjustments to net income of $25.5 million (the
most significant non-cash expenses were $14.4 million of stock-based
compensation and $6.0 million of depreciation and amortization).

During 2020, cash used in operating activities of $42.7 million was a result of
$41.3 million of net loss and a net negative change in operating assets and
liabilities of $17.2 million (of which $14.9 million was related to reductions
in outstanding customer prepayments as we fulfilled the related revenue
contracts), partially offset by non-cash negative adjustments to net income of
$15.8 million (the most significant non-cash expenses were $8.2 million of
stock-based compensation and $5.8 million of depreciation and amortization).

During 2021, cash used in investing activities was $60.1 million due to net
purchases of short-term investments of $49.0 million and $11.1 million in
payments for property and equipment. Cash provided by financing activities of
$169.7 million during the same period consisted of $162.3 million net proceeds
from our January 2021 follow-on offering, $5.2 million proceeds from loans, and
$4.4 million proceeds from stock option exercises and purchases under our
Employee Stock Purchase Plan ("ESPP"), partially offset by $1.9 million
repayments of loans and $0.3 million of offering costs.

During 2020, cash used in investing activities was $65.1 million due to net
purchases of short-term investments of $61.9 million and $3.2 million in
payments for property and equipment. Cash provided by financing activities of
$121.3 million during the same period consisted of $117.5 million net proceeds
from our August 2020 follow-on offering, $4.2 million proceeds from stock option
exercises and purchases under our ESPP, partially offset by $0.4 million of
offering costs.

Material cash needs

Our material cash requirements in the short- and long-term consist primarily of
capital expenditures, variable costs of revenue, operating expenditures,
property leases, and other. We plan to fund our material cash requirements with
our existing cash and cash equivalents and short-term investments, which
amounted to $287.1 million as of December 31, 2021, as well as anticipated cash
receipts from customers.

Capital expenditures. We expect to increase capital expenditures in future
periods to support our global growth initiatives. Such expenditures are expected
to consist primarily of facility renovations and improvements, laboratory
equipment, and computer equipment. We currently expect capital expenditures to
be between $55 and $65 million in 2022 and between $10 and $15 million in each
of the next two fiscal years. In connection with our new headquarters and
laboratory facility in Fremont, California, we expect to

                                       68
--------------------------------------------------------------------------------
spend between $45 and $50 million (net of expected landlord reimbursements) in
combined leasehold improvements, renovations, administrative, and other costs
through the end of 2022. This is the reason for greater expected capital
expenditures in 2022 as compared to the following two years.

Variable costs of revenue. From time to time in the ordinary course of business,
we enter into agreements with vendors for the purchase of raw materials,
laboratory supplies and consumables to be used in the sequencing of customer
samples. However, we generally do not have binding and enforceable purchase
orders beyond the short term, and the timing and magnitude of purchase orders
beyond such period is difficult to accurately project. Another primary use of
cash within variable costs of revenue relates to paying our workforce. We
currently expect spend to decrease in 2022 but increase in years thereafter to
support revenue growth.

Operating expenditures. Our primary use of cash relates to paying employees,
spend on professional services, spend related to research and development
projects, and other costs related to our research and development, selling,
general and administrative functions. We currently expect to increase our spend
in these areas to support our business growth in 2022. On a long-term basis, we
manage future cash requirements relative to our long-term business plans.

Property leases. Our noncancelable operating lease payments were $84.6 million
as of December 31, 2021. The timing of these future payments, by year, can be
found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated
Financial Statements in Note 7, "Leases."

Other. During the second quarter of 2021, we entered into two noninterest
bearing loans to finance the purchase of $5.6 million of computer hardware,
internal use software licenses, and related ongoing support. We made payments of
$1.86 million in 2021. We are required to make payments of $1.86 million in each
of 2022 and 2023. Further discussion of this transaction can be found in Part
II, Item 1 of this Form 10-K in the Notes to Consolidated Financial Statements
in Note 6, "Loans."

Certain of our customers prepay us for a portion of the services that they
expect to order from us before they place purchase orders and we deliver those
services. In some cases, this prepayment can be substantial and may be paid
months or a year or more in advance of these customers providing samples to us
and before our delivery of the services to which some or all of the deposit
relates. As of December 31, 2021, we had approximately $3.8 million in customer
deposits, including $3.3 million from one customer. We are generally not
required by our contracts to retain these deposits in cash or otherwise and we
have generally used these deposits to make capital expenditures and fund our
operations. When a customer that has prepaid us for future services cancels its
contract with us, reduces the level of services that it expects to receive, or
we determine that a prepayment is no longer necessary, we will repay that
customer's deposit. We do not expect such repayments to require material amounts
of cash.

Significant Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP.
The preparation of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, costs and expenses, and related disclosures. Our estimates
are based on our historical experience and on various other factors that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, if different estimates reasonably could have
been used, or if changes in the estimate that are reasonably possible could
materially impact the financial statements. We believe that the assumptions and
estimates associated with revenue recognition, stock-based compensation, and
leases have the greatest potential impact on our consolidated financial
statements. Therefore, we consider these to be our critical accounting policies
and estimates.

Revenue Recognition

We generate our revenue from selling sequencing and data analysis services. We
agree to provide services to our customers through a contract, which may be in
the form of a combination of a signed agreement, statement of work and/or a
purchase order.

We have evaluated the performance obligations contained in contracts with
customers to determine whether any of the performance obligations are distinct,
such that the customers can benefit from the obligations on their own, and
whether the obligations can be separately identifiable from other obligations in
the contract. For the significant majority of our contracts to date, the
customer orders a specified quantity of a sequencing; therefore, the delivery of
the ordered quantity per the purchase order is accounted for as one performance
obligation. Our contracts include only one performance obligation-the delivery
of the sequencing and data analysis services to the customer.

Fees for our sequencing and data analysis services are predominantly based on a
fixed price per sample. The fixed prices identified in the arrangements only
change if a pricing amendment is agreed with a customer. In limited cases we
provide our customers a discount if samples received above a certain volume are
purchased. In such cases, the discount applies prospectively. We have analyzed
such discounts if they represent a material right provided to a customer. We
have concluded that such discounts generally do not represent a material right
provided to a customer since they are not deemed to be incremental to the
pricing offered to the customer or are not enforceable options to acquire
additional goods. As a result, these discounts do not constitute a material
right and do not meet the definition of a separate performance obligation,
except in limited instances. We do not offer retrospective discounts

                                       69

————————————————– ——————————

or discounts. Thus, the entire transaction price, net of any discount, is allocated to a single performance obligation. Therefore, upon delivery of the services, no performance obligation remains.

Contracts that contain multiple distinct performance obligations would require
an allocation of the transaction price to each performance obligation based on a
relative stand-alone selling price basis. Sometimes we deliver sequencing
results in two or more batches; however, since the quantity delivered per batch
of each individual test per sales order in these instances is in the same ratio
as in the original sales order, allocating the transaction price on a relative
stand-alone selling price basis would have no impact on the revenue recognized
in any period presented.

We recognize revenue when control of the promised services is transferred to our
customers. Management has determined that customers obtain control when the
sequencing and data analysis service results are delivered to customers. Revenue
is recorded net of sales or other transaction taxes collected from clients and
remitted to taxing authorities.

A customer contract liability will arise when we have received payments from its
customers in advance, but has not yet provided genome and exome sequencing and
data analysis services to a customer and satisfied its performance obligations.
We record a customer contract liability for performance obligations outstanding
related to payments received in advance for customer deposits. We expect to
satisfy these remaining performance obligations and recognize the related
revenue upon providing sequencing and data analysis services.

All of our revenue and trade receivables are generated by contracts with customers and substantially all of our revenue is from we domestic operations.

Payment Terms

Payment terms and conditions vary by contract and customer. Our standard payment
terms are typically less than 90 days from the date of invoice. In instances
where the timing of our revenue recognition differs from the timing of its
invoicing, we have determined that our contracts do not include a significant
financing component. The primary purposes of our invoicing terms are to provide
customers with simplified and predictable ways of purchasing our services and
provide payment protection for us.

Stock-based compensation

For options granted to employees, non-employees, and directors, stock-based
compensation is measured at grant date based on the fair value of the award. We
determine the grant-date fair value of options using the Black-Scholes
option-pricing model, except for certain performance-based awards for which an
alternative valuation method may be used. We determine the fair value of
restricted stock unit awards using the closing market price of the Company's
common stock on the date of grant. The grant-date fair value of awards is
amortized over the employees' requisite service period on a straight-line basis,
or the non-employees' vesting period as the goods are received or services
rendered. Forfeitures are accounted for as they occur. Additionally, our ESPP is
deemed to be a compensatory plan and therefore is included in stock-based
compensation expense.

Estimating the fair value of equity-settled awards as of the grant date using
valuation models, such as the Black-Scholes option-pricing model, is affected by
assumptions regarding a number of complex variables. Changes in the assumptions
can materially affect the fair value and ultimately how much stock-based
compensation expense is recognized. These inputs are subjective and generally
require significant analysis and judgment to develop.

• Expected Duration – The expected duration assumption represents the

         weighted-average period that the stock-based awards are expected to be
         outstanding. We have elected to use the "simplified method" for
         estimating the expected term of the options, whereby the expected term
         equals the arithmetic average of the vesting term and the original
         contractual term of the option.

• Expected Volatility – For all stock options granted to date,

         volatility was estimated based on an average historical stock price
         volatility of a peer group of publicly traded companies as we did not

have sufficient trading history for our own common stock. For the purposes of

identifying these peer companies, we considered the industry, stage of

         development, size, and financial leverage of potential comparable
         companies.

• Expected dividend yield – The Black-Scholes option pricing model

calls a single expected dividend yield as an input. We currently have

         no history or expectation of paying cash dividends on our common stock.


      •  Risk-Free Interest Rate-The risk-free interest rate is based on the yield
         available on U.S. Treasury zero-coupon issues similar in duration to the
         expected term of the award.

Differential borrowing rate

Lease liabilities are recognized at the present value of the fixed lease
payments, reduced by landlord incentives, using a discount rate based on the
Company's current borrowing rate at the lease commencement date (the incremental
borrowing rate), unless the rate implicit in the lease is readily determinable.

                                       70
--------------------------------------------------------------------------------
In August 2021, we entered into a 13.5-year lease for our new corporate
headquarters. We estimated our incremental borrowing rate as the rate implicit
in the lease was not readily determinable. To determine the incremental
borrowing rate, we estimated our credit rating by comparing certain financial
ratios and metrics of the Company to those of other issuers with publicly
available credit ratings from Standard & Poor's (S&P). We then adjusted yields
from publicly traded corporate bonds of companies of similar size and credit
rating over a term approximating the term of our lease for the nature of the
collateral. Our concluded incremental borrowing rate for this lease was 5.8%,
which resulted in a lease liability and right-of-use asset of $44.7 million.

Accounting election of the JOBS law

Prior to December 31, 2021, we were a smaller reporting company and eligible to
take advantage of the same reduced disclosures that an emerging growth company,
as defined in the Jumpstart Our Business Startups Act (the "JOBS Act"), could
avail itself to. Under the JOBS Act, emerging growth companies can delay
adopting new or revised accounting standards issued subsequent to the enactment
of the JOBS Act until such time as those standards apply to private companies.
We had irrevocably elected not to avail ourselves of this exemption from new or
revised accounting standards, and therefore, are subject to the same new or
revised accounting standards as other public companies that are not smaller
reporting companies or emerging growth companies.

Recent accounting pronouncements

See the sections entitled “Summary of Significant Accounting Policies – Recent Accounting Pronouncements” and “Recent Accounting Pronouncements Not Yet Adopted” in Note 2 to our Consolidated Financial Statements for additional information.

Item 7A. Quantitative and qualitative information on market risk.

As a “small reporting company”, we are not required to provide the information under this heading.

                                       71

————————————————– ——————————

© Edgar Online, source Previews