UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File Number 001-38943
Personalis, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of incorporation or organization)
6600 Dumbarton Circle
Fremont, California
(Address of principal executive offices)
27-5411038
(I.R.S. Employer Identification No.)
94555
(Zip Code)
Registrant’s telephone number, including area code: (650) 752-1300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.0001
Securities registered pursuant to Section 12(g) of the Act: None
Trading
Symbol(s)
PSNL
Name of each exchange on which registered
The Nasdaq Global Market
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☒
Emerging growth company
☐
Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the Registrant included in the filing reflect the
correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
Registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant, as of June 30, 2023, the last business day of the Registrant’s
most recently completed second fiscal quarter, was approximately $90,600,000 based on the closing price reported for such date on the Nasdaq Global Market.
Portions of the Registrant's definitive proxy statement relating to its 2024 annual meeting of shareholders are incorporated by reference into Part III of this Annual Report on
Form 10-K where indicated. The Registrant's definitive proxy statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this report relates.
50,503,889 shares of common stock were issued and outstanding as of February 22, 2024.
DOCUMENTS INCORPORATED BY REFERENCE
PERSONALIS, INC.
Form 10-K
For the Year Ended December 31, 2023
TABLE OF CONTENTS
Note Regarding Forward-Looking Statements
Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Item 1.
Item 1A.
Item 1B.
Item 1C.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART III
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
PART IV
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future results of
operations or financial condition, business strategy and plans, and objectives of management for future operations, are forward-looking statements. In some
cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,”
“intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” or “would” or the negative of these words or other similar
terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:
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the evolution of cancer therapies and market adoption of our services and products;
estimates of our total addressable market, future revenue and the timing thereof, expenses, use of cash and other resources, cost savings,
capital requirements, and our needs for additional financing;
future reimbursement and reimbursement rulings;
our ability to enter into and compete in new markets;
the impact our collaboration agreements and key opinion leaders may have on the broader use of our products in the future;
the expected benefits of and activities to be performed under our Commercialization and Reference Laboratory Agreement with Tempus AI,
Inc. (formerly known as Tempus Labs, Inc.);
our ability to obtain financing when needed;
the potential impacts of inflation, macroeconomic conditions, and geopolitical conflicts on our business and operations;
the benefits of our products and services, including their ability to increase the probability of clinical trial success;
our ability to compete effectively with existing competitors and new market entrants;
our sales, marketing and commercialization plans and strategies;
our business strategies, including our aim to focus on certain indications and the timing thereof;
our ability to benefit from the scaling of our infrastructure and new facility in Fremont;
our ability to manage and grow our business by expanding our sales to existing customers or introducing our services and products to new
customers;
our ability to establish and maintain intellectual property protection for our services and products or avoid claims of infringement;
our success in defending and enforcing our intellectual property rights, including patents;
potential effects of government regulation;
our ability to hire and retain key personnel;
the impact of our reductions in force on our operations and operating results;
our belief that approval of personalized cancer therapies by the U.S. Food and Drug Administration may drive benefits to our business;
our future business with the U.S. Department of Veterans Affairs' Million Veteran Program ("VA MVP"), Natera, Inc., and other collaboration
partners and customers; and
our ability to maintain proper and effective internal controls.
Actual events or results may differ from those expressed in forward-looking statements. As such, you should not rely on forward-looking
statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our
current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, prospects,
strategy, and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions, and
other factors described in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a highly competitive
and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties
that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. The results, events and circumstances reflected
in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in
the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are
based on information available to us as of the date of this Annual Report on Form 10-K. While we believe that such information provides a reasonable basis
for these statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive
inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these
statements.
The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made.
We undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the
date of this Annual Report on Form 10-K or to reflect new information, actual results, revised expectations, or the occurrence of unanticipated events, except
as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place
undue reliance on our forward-looking statements.
Unless the context otherwise requires, references in this Annual Report on Form 10-K to the “company,” “Personalis,” “we,” “us” and “our” refer to
Personalis, Inc. and our subsidiaries, Personalis (UK) Ltd. and Personalis (Shanghai) Ltd.
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Item 1. Business.
Company Background
PART I
Personalis develops and markets advanced cancer genomic tests and analytics. Our tests and analytics are used by pharmaceutical companies
for translational research, biomarker discovery, the development of personalized cancer therapies, and we expect in the near future, for clinical trial
enrollment. Our advanced tests are used by physicians to detect cancer recurrence, monitor cancer evolution, and uncover insights for therapy selection. We
also provide sequencing and data analysis services to support population sequencing initiatives.
We perform large-scale, high quality next-generation sequencing ("NGS") in our Clinical Laboratory Improvement Amendments of 1988 (“CLIA”)
certified and College of American Pathologists (“CAP”) accredited 100,000 square foot laboratory located in Fremont, California. We were incorporated
under the laws of the state of Delaware in 2011 under the name Personalis, Inc. and became a publicly-traded company in 2019.
Products
For pharmaceutical and biopharmaceutical companies
NeXT Personal
NeXT Personal is a tumor-informed liquid biopsy test for detection of minimal residual disease ("MRD") and recurrence in cancer. It delivers
industry-leading, ultra-high analytical sensitivity, which we believe allows for detection of cancer earlier than other technologies. NeXT Personal answers the
questions: Does the patient have MRD? What are the kinetics of circulating tumor DNA ("ctDNA")?
ImmunoID NeXT
ImmunoID NeXT is a tissue-based test that combines whole exome (DNA) and whole transcriptome (RNA) sequencing data with advanced
analytics to provide a multi-dimensional view of the tumor and the tumor microenvironment from a single sample. It is designed to enable the development of
more efficacious cancer immunotherapies and the next-generation of composite biomarkers to better predict patient response. ImmunoID NeXT answers the
question: What are the composite biomarkers in the tumor and the tumor microenvironment?
For cancer patients
NeXT Personal Dx
NeXT Personal Dx is a tumor-informed liquid biopsy test for detection of MRD and recurrence in cancer. We believe it provides for earlier
detection of cancer than other technologies and has been shown to detect cancer recurrence ahead of traditional imaging. It is designed to aid decision
making throughout a patient's cancer journey. NeXT Personal Dx involves an initial test (whole genome sequencing of a tumor and normal sample) and
subsequent blood/plasma tests based on a tumor-informed personalized panel for each patient. NeXT Personal Dx answers the questions: Does the patient
have MRD? Has the cancer returned?
NeXT Dx
NeXT Dx is a comprehensive tumor profiling test that unlocks the entire exome (DNA) and transcriptome (RNA) with matched tumor-normal
analysis. We believe it improves chances of finding an effective therapy or clinical trial. NeXT Dx answers the question: What are the actionable therapies
and clinical trials for the patient?
For diagnostics companies and population sequencing initiatives
WES
products.
WGS
We perform whole exome sequencing ("WES") of cancer tissue and matched blood samples for diagnostic companies as an input to their
We perform whole genome sequencing ("WGS") on human samples for research projects, such as population sequencing initiatives.
Markets and Distribution
Our customers include pharmaceutical companies, biopharmaceutical companies, diagnostics companies, universities, non-profits, government
entities, and patients. We sell through a small direct sales force, organized by geography. In November 2023, we entered into an agreement with Tempus AI,
Inc. (formerly known as Tempus Labs, Inc., and referred to herein as "Tempus") to commercialize NeXT Personal Dx in the clinical diagnostics market. As a
result, we will also leverage the sales force of Tempus beginning
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in 2024. The principal markets for our products are in the United States, Europe (including the U.K.), and Asia-Pacific, which accounted for 90%, 8%, and
2% of our revenue for the year ended December 31, 2023, respectively.
Clinical Evidence and Reimbursement
Generating clinical evidence is critical for driving adoption of our tests in the clinical market (i.e., for cancer patients). To this end, one of our key
strategies is working with a growing number of leading cancer centers and world-class academic research institutions to build and publish the clinical
evidence-base to support our products and our key indications. Because of the ultra-high analytical sensitivity of our technology, we are initially focusing on
three indications: breast cancer, lung cancer, and immunotherapy (IO) monitoring. We have collaborations with Cancer Research UK, University College
London, and the Francis Crick Institute (the TRACERx study); The Royal Marsden; the Vall d'Hebron Institute of Oncology (VHIO); Duke University; the
Dana-Farber Cancer Institute; University Medical Center Hamburg-Eppendorf (also known as UKE); and Criterium and the Academic Breast Cancer
Consortium that will focus on building the evidence-base for our technology and these indications. If the key opinion leaders ("KOLs") we are collaborating
with have a positive experience using our products, we are optimistic this will support broader use of our products by other KOLs, as well as clinicians in the
future.
Furthermore, generating clinical evidence is crucial to obtaining reimbursement coverage from Medicare and other payors. We are striving to
obtain reimbursement coverage for NeXT Personal Dx and NeXT Dx. In January 2024, we received a final Medicare coverage determination for our NeXT
Dx offering, extended retroactively to August 29, 2023. We estimate that approximately half of new solid tumor cancer cases will be diagnosed in patients
covered by Medicare. One of our 2024 goals is to submit for Medicare reimbursement for NeXT Personal Dx upon publication of compelling clinical evidence
in three key indications.
Competition
Our principal competition comes from commercial and academic organizations using established and new laboratory tests to produce information
that is similar to the information that we generate for our customers. These companies offer services that implement various technological approaches
including next-generation sequencing and microarray analyses. Some of our present or potential competitors include Adela, Inc., BostonGene Corporation,
Caris Life Sciences, Inc., Foresight Diagnostics Inc. (“Foresight”), Freenome, Inc., Fulgent Genetics, Inc., Geneseeq Technology Inc., GRAIL, Guardant
Health, Inc., Haystack Oncology, Inc., which was acquired by Quest Diagnostics Incorporated in June 2023, Invitae Corporation (which on February 13, 2024
filed a voluntary petition to commence proceedings under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the
District of New Jersey), MedGenome Inc., Myriad Genetics, Inc., Natera, NeoGenomics, Inc., Novogene Corporation, Predicine, Inc., Roche Molecular
Systems, Inc., Tempus, Inc., and Veracyte, Inc.
Additionally, several companies develop next-generation sequencing platforms that can be used for genomic profiling for biopharmaceutical
research and development applications. These include Illumina, Inc. ("Illumina"), Thermo Fisher Scientific Inc., and other organizations that specialize in the
development of next-generation sequencing instrumentation that can be sold directly to biopharmaceutical companies, clinical laboratories, and research
centers. Separate from their instrumentation product lines, both Illumina and Thermo Fisher Scientific Inc., for example, currently market next-generation
sequencing clinical oncology kits that are sold to customers who have bought and operate their respective sequencing instruments.
We believe that we compete favorably because of the high sensitivity and comprehensiveness of the data generated by our products. Maximizing
insights into both the tumor- and immune-related components of the tumor microenvironment is essential in identifying and understanding the reasons why
certain cancer patients respond more favorably to oncology therapies than others. It is via access to such a comprehensive dataset for each patient that our
customers can begin to discover new, clinically relevant biomarkers for the immunotherapy era, and ultimately improve cancer patient outcomes with the
development of more efficacious therapeutics.
Intellectual Property
Protection of our intellectual property is fundamental to the long-term success of our business. Specifically, our success is dependent on our ability
to obtain and maintain proprietary protection for our technology and the know-how related to our business, defend and enforce our intellectual property
rights, and operate our business without infringing, misappropriating, or otherwise violating valid and enforceable intellectual property rights of others. We
seek to protect our investments made into the development of our technology by relying on a combination of patents, trademarks, copyrights, trade secrets,
know-how, confidentiality agreements and procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment
agreements, and other contractual rights.
Our patent strategy is focused on seeking coverage for our core technology, our NeXT platform, including applications and implementations for
enhancing sequencing coverage of certain genomic regions, identifying neoantigens, analyzing cell-free nucleic acids, and creating personalized cancer
recurrence detection assays. In addition, we file for patent protection on our ongoing research and development efforts, particularly related to other novel
assay technologies which may be applicable to the diagnosis and treatment of cancer and other diseases.
Our patent portfolio is comprised of patents and patent applications owned by the Company. These patents and patent applications generally fall
into five broad categories:
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our Accuracy and Content Enhanced ("ACE") assay and NeXT platform technology, including claims directed to methods for enriching
nucleic acids from a sample based on differences in various genomic features, such as GC-content, molecular size, presence of genetic
variations or rearrangements, identification of biomedically interpretable variants, epigenetic modifications, and/or species-origin (e.g., human
and non-human);
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hybrid exome-genome technologies, including claims directed to methods for combining exome and/or whole genome sequencing data
generated from a sample, along with the identification of other variants to identify or detect disease;
liquid biopsy methods, including claims directed to methods of analyzing sequenced nucleic acids obtained from a patient sample in
comparison with nucleic acids representing the reference genome, obtained from a blood sample, to identify disease, or recommend a drug
treatment;
clinical interpretation and neoantigen identification and prediction methods, including claims directed to methods of ranking genes associated
with a phenotype and inheritance pattern or identifying neoantigens expressed in a disease sample that may be used for targeted treatments;
and
personalized genetic testing assays, including claims directed to methods for using sequencing data to create a personalized genetic test to
monitor cancer progression, identify neoantigen candidates for personalized cancer vaccine treatment, or detect the recurrence of disease at
the earliest possible timepoint.
As of December 31, 2023, we own 27 issued U.S. patents and 14 issued foreign patents. Issued U.S. patents in our portfolio of company-owned
patents are expected to expire between 2033 and 2038, excluding any additional term for patent term adjustments or patent term extensions. If patents are
issued on our pending patent applications, the resulting patents are projected to expire on dates ranging from 2033 to 2042.
Supply of Materials
We rely on a limited number of suppliers for sequencers and other equipment and raw materials that we use in our laboratory operations. For
example, we rely on Illumina as the sole supplier of sequencers and various associated reagents, and as the sole provider of maintenance and repair
services for these sequencers. We have certain agreements and purchase arrangements in place with Illumina to satisfy the projected needs of our
laboratory operations.
Customer Concentration
We currently derive a significant portion of our revenue from Natera, Inc. ("Natera") under our partnership to provide advanced tumor analysis for
use in Natera's MRD testing offerings. Natera accounted for 43%, 41%, and 10% of our revenue for the years ended December 31, 2023, 2022, and 2021,
respectively. We previously derived a significant portion of our revenue from the U.S. Department of Veterans Affairs Million Veteran Program ("VA MVP"),
which is a large-scale population sequencing initiative. VA MVP accounted for 13%, 13%, and 53% of our revenue for the years ended December 31, 2023,
2022, and 2021, respectively. Our top five customers, including the VA MVP and Natera, accounted for 74%, 76% and 84% of our revenue for the years
ended December 31, 2023, 2022 and 2021, respectively.
Segments
We manage our business as one operating segment, which is the sale of sequencing and data analysis services.
Regulatory Environment
Coverage and Reimbursement
Our ability, and the ability of our customers, to commercialize diagnostic tests based on our technology will depend in part on the extent to which
coverage and reimbursement for these tests will be available from third-party payors. Coverage and reimbursement of new products and services is
uncertain, and whether the companies that use our instruments to develop their own products or services will attain coverage and adequate reimbursement
is unknown. In the U.S., there is no uniform policy for determining coverage and reimbursement. Coverage can differ from payor to payor, and the process
for determining whether a payor will provide coverage may be separate from the process for setting the reimbursement rate. In addition, the U.S.
government, state legislatures and foreign governments have shown significant interest in implementing cost containment programs to limit the growth of
government-paid healthcare costs, including price controls and restrictions on reimbursement. Additionally, the coverage and reimbursement status of newly-
approved or cleared laboratory tests, including our NeXT Personal Dx offering, is uncertain. If we are inadequately covered by insurance or ineligible for
such reimbursement, this could limit our ability to market tests in the future. The commercial success of future products in both domestic and international
markets may depend in part on the availability of coverage and adequate reimbursement from third-party payors, including government payors, such as the
Medicare and Medicaid programs, managed care organizations, and other third-party payors.
Federal and State Laboratory Licensing Requirements
Under the CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing
information for the diagnosis, prevention or treatment of disease, or the impairment of or assessment of health. CLIA requires that a laboratory hold a
certificate applicable to the type of laboratory examinations it performs and that it complies with, among other things, standards covering operations,
personnel, facilities administration, quality systems and proficiency testing, which are intended to ensure, among other things, that clinical laboratory testing
services are accurate, reliable and timely.
To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Because
we are a CAP accredited laboratory, the CMS does not perform this survey and inspection and relies on our CAP survey and inspection. We also may be
subject to additional unannounced inspections. Laboratories performing high complexity testing are required to meet more stringent requirements than
laboratories performing less complex tests. In addition, a laboratory that is certified
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as “high complexity” under CLIA may develop, manufacture, validate, and use proprietary tests referred to as laboratory developed tests (“LDTs”). CLIA
requires analytical validation including accuracy, precision, specificity, sensitivity, and establishment of a reference range for any LDT used in clinical testing.
The regulatory and compliance standards applicable to the testing we perform may change over time, and any such changes could have a material effect on
our business.
CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have
implemented their own more stringent laboratory regulatory requirements. State laws may require that nonresident laboratories, or out-of-state laboratories,
maintain an in-state laboratory license to perform tests on samples from patients who reside in that state. As a condition of state licensure, these state laws
may require that laboratory personnel meet certain qualifications, specify certain quality control procedures or facility requirements, or prescribe record
maintenance requirements. Because our laboratory is located in the state of California, we are required to and do maintain a California state laboratory
license. We also maintain licenses to conduct testing in other states where nonresident laboratories are required to obtain state laboratory licenses, including
Maryland, Pennsylvania, Rhode Island, and New York. Other states may currently have or adopt similar licensure requirements in the future, which may
require us to modify, delay, or stop its operations in those states.
Regulatory framework for medical devices in the United States
Pursuant to its authority under the Federal Food, Drug and Cosmetic Act (“FDC Act”), the FDA has jurisdiction over medical devices, which are
defined to include, among other things, in vitro diagnostic devices (“IVDs”). The FDA regulates, among other things, the research, design, development, pre-
clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse
event reporting, marketing, promotion, sales, distribution, and import and export of medical devices. Unless an exemption applies, each new or significantly
modified medical device we seek to commercially distribute in the United States will require either a premarket notification to the FDA requesting permission
for commercial distribution under Section 510(k) of the FDC Act, also referred to as a 510(k) clearance, or approval from the FDA of a premarket approval
application (“PMA”). Both the 510(k) clearance and PMA processes can be resource intensive, expensive, and lengthy, and require payment of significant
user fees.
Although the FDA regulates medical devices, including IVDs, the FDA has historically exercised its enforcement discretion and not enforced
applicable provisions of the FDC Act and FDA regulations with respect to LDTs, which are a subset of IVDs that are intended for clinical use and developed,
validated, and offered within a single laboratory for use only in that laboratory. We currently market our diagnostic tests as LDTs.
On October 3, 2023, the FDA published a Notice of Proposed Rulemaking (the “Proposed Rule”) to regulate LDTs as medical devices under the
FDC Act. The Proposed Rule outlines a 5-stage, 4-year, risk-based timeline for all LDTs to come within the existing medical device regulatory framework. In
early December 2023, following the close of a public comment period, the FDA announced its intention to publish the Proposed Rule in final form in April
2024. On January 18, 2024, the Director of FDA’s Center for Devices and Radiological Health, which oversees IVD regulation within the FDA, and the Chief
Medical Officer and Acting Director of CMS’ Center for Clinical Standards and Quality, which oversees CLIA within CMS, issued a joint press release
supporting the Proposed Rule, indicating broad support within the Department of Health and Human Services for FDA’s Proposed Rule. If finalized as
proposed, we would be required to obtain PMA approval for certain of our tests by October 1, 2027. We would also be subject to device registration and
listing requirements, medical device reporting requirements and the requirements of the FDA’s Quality System Regulation. If the FDA determines that our
tests are subject to enforcement as medical devices, we could be subject to enforcement action, including administrative and judicial sanctions, and
additional regulatory controls and submissions for our tests, all of which could be burdensome. We and/or our collaborators may also be required to submit
one or more of our tests for premarket notification, review, clearance or approval by the FDA as medical devices.
If the FDA determines that our tests and associated software do not fall within the definition of an LDT, or the Proposed Rule is finalized in its
present form, or there are other regulatory or legislative changes, or if we voluntarily submit one or more of our tests for premarket notification, review,
clearance or approval by the FDA as medical devices, we may be required to obtain premarket clearance for our tests and associated software under
Section 510(k) of the FDC Act or approval of a PMA. We would also be subject to ongoing regulatory requirements such as registration and listing
requirements, medical device reporting requirements, and quality control requirements. The regulatory requirements to which our tests are subject would
depend on the FDA’s classification of our tests. The FDA has issued regulations classifying medical devices into one of three regulatory control categories
(Class I, Class II, or Class III) depending on the degree of regulation that the FDA finds necessary to provide reasonable assurance of their safety and
effectiveness. The class into which a device is placed determines the requirements that a medical device manufacturer must meet both pre- and post-
market. On January 31, 2024, FDA announced its intent to initiate a reclassification process for most IVDs that are currently Class III (high risk), the majority
of which are infectious disease and companion diagnostic IVDs, into Class II (moderate risk). This reclassification would allow manufacturers of certain types
of IVDs to seek marketing clearance through the less burdensome Class II 510(k) premarket notification pathway rather than the Class III premarket
approval (PMA) pathway, the most stringent type of FDA medical device review.
Generally, Class I devices do not require premarket authorization, but are subject to a comprehensive set of regulatory authorities referred to as
general controls. Class II devices, in addition to general controls, generally require special controls and premarket clearance through the submission of a
section 510(k) premarket notification. Class III devices are subject to general controls and special controls, and also require premarket approval prior to
commercial distribution, which is a more rigorous process than premarket clearance. Under the FDC Act, a device that is first marketed after May 28, 1976 is
by default a Class III device requiring premarket approval unless it is within a type of generic device class that has been classified as Class I or Class II.
Even if a device falls under an existing Class II, non-exempt, device classification, the product must also be shown to be “substantially equivalent” to a
legally marketed predicate device through submission of a section 510(k) premarket notification. If after reviewing a firm’s 510(k) premarket notification, the
FDA determines that a device is not substantially equivalent to a legally marketed predicate device, the new device is classified into Class III, requiring
premarket approval. It is possible for a manufacturer to obtain a Class I or Class II designation without an appropriate predicate by submitting a de novo
request for reclassification.
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The process for submitting a 510(k) premarket notification and receiving FDA clearance usually takes from three to 12 months, but it can take
significantly longer and clearance is never guaranteed. The process for submitting and obtaining FDA approval of a PMA is much more costly, lengthy, and
uncertain. It generally takes from one to three years or even longer and approval is not guaranteed. PMA approval typically requires extensive clinical data
and can be significantly longer, more expensive and more uncertain than the 510(k) clearance process. Despite the time, effort and expense expended,
there can be no assurance that a particular device ultimately will be cleared or approved by the FDA through either the 510(k) clearance process or the PMA
process on a timely basis, or at all.
One classification regulation that could be relevant to one or more of our tests is a classification for genetic health risk (“GHR”) assessment tests,
codified at 21 C.F.R. § 866.5950. If our tests fall under the 21 C.F.R. § 866.5950 classification regulation for GHR tests, or under another Class II
classification that is subject to a premarket notification requirement, we would be required to obtain marketing clearance for such tests. Further, if considered
to fall under the 21 C.F.R. § 866.5950 classification for GHR tests, our tests would be required to adhere to specified special controls, such as labeling and
testing specifications and information about the test to be posted on the manufacturer’s website.
The FDA requires medical device manufacturers to comply with, among other things, current good manufacturing practices for medical devices,
set forth in the Quality System Regulation at 21 C.F.R. Part 820, which requires manufacturers to follow elaborate design, testing, control, documentation,
and other quality assurance procedures during the manufacturing process; the medical device reporting regulation, which requires that manufacturers report
to the FDA if their device or a similar device they market may have caused or contributed to a death or serious injury or malfunctioned in a way that would
likely cause or contribute to a death or serious injury if it were to recur; labeling regulations, including the FDA’s general prohibition against promoting
products for unapproved or “off-label” uses; the reports of corrections and removals regulation, which requires manufacturers to report to the FDA if a device
correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the FDC Act caused by the device which may
present a risk to health; and the establishment registration and device listing regulation.
In addition, any clearance or approval we obtain for our products may contain requirements for costly post-market testing and surveillance to
monitor the safety or efficacy of the product. The FDA has broad post-market enforcement powers, and if unanticipated problems with our products arise, or
if we or our suppliers fail to comply with regulatory requirements following FDA clearance or approval, we may become subject to enforcement actions such
as:
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restrictions on manufacturing processes;
restrictions on product marketing;
warning letters;
withdrawal or recall of products from the market;
refusal to approve pending PMAs, 510(k)s, or supplements to approved PMAs or cleared 510(k)s that we submit;
fines, restitution, or disgorgement of profits or revenue;
suspension or withdrawal of regulatory clearances or approvals;
limitation on, or refusal to permit, import or export of our products;
product seizures;
injunctions; or
imposition of civil or criminal penalties.
Moreover, the FDA strictly regulates the promotional claims that may be made about medical devices. In particular, a medical device may not be
promoted for uses that are not approved by the FDA as reflected in the device’s approved labeling. However, companies may share truthful and not
misleading information that is otherwise consistent with the product’s FDA approved labeling. The FDA and other agencies actively enforce the laws and
regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant
civil, criminal, and administrative penalties.
In addition, many of the products we use to perform our tests, including sequencers and various associated reagents supplied to us by Illumina,
are labeled as research use only (“RUO”) in the U.S. RUO products are exempt from FDA medical device requirements provided their manufacturers comply
with specified labeling and restrictions on distribution. The products must bear the statement: “For Research Use Only. Not for Use in Diagnostic
Procedures.” Manufacturers of RUO products cannot make any claims related to safety, effectiveness or diagnostic utility, and RUO products cannot be
intended by the manufacturer for clinical diagnostic use. A product promoted for diagnostic use may be viewed by the FDA as adulterated and misbranded
under the FDC Act and is subject to FDA enforcement activities, including requiring the manufacturer to seek marketing authorization for the products. We
currently use Illumina and other RUO products for our clinical diagnostic tests. If the FDA were to require clearance, approval or authorization for the sale of
Illumina’s RUO products and if Illumina does not obtain such clearance, approval or authorization, we would have to find an alternative sequencing platform
for some or all of our clinical diagnostic tests.
Federal and State Fraud and Abuse Laws
We are subject to federal fraud and abuse laws such as the federal Anti-Kickback Statute (the “AKS”), the federal prohibition against physician
self-referral (the “Stark Law”), and the federal false claims law, or the False Claims Act (the “FCA”). We are also subject to similar state and foreign fraud and
abuse laws.
The AKS prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or
covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order,
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arrange for, or recommend purchasing, leasing, or ordering, any good, facility, item, or service that is reimbursable, in whole or in part, under a federal
healthcare program.
The Stark Law and similar state laws, including California’s Physician Ownership and Referral Act, generally prohibit, among other things, clinical
laboratories and other entities from billing a patient or any governmental or commercial payor for any diagnostic services when the physician ordering the
service, or any member of such physician’s immediate family, has a direct or indirect investment interest in or compensation arrangement with us, unless the
arrangement meets an exception to the prohibition.
The federal civil and criminal false claims laws including the FCA, which imposes liability on any person or entity that, among other things,
knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government, and the federal Civil Monetary Penalties
Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows
or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a
state healthcare program, unless an exception applies. Under the FCA, private citizens can bring claims on behalf of the government through qui tam
actions. We must also operate within the bounds of the fraud and abuse laws of the states in which we do business which may apply to items or services
reimbursed by non-governmental third-party payors, including private insurers.
The Eliminating Kickbacks in Recovery Act
The Eliminating Kickbacks in Recovery Act of 2018 (“EKRA”) prohibits payments for referrals to recovery homes, clinical treatment facilities, and
laboratories and is similar to the federal Anti-Kickback Statute in that it creates criminal penalties for knowing or willful payment or offer, or solicitation or
receipt, of any remuneration, whether directly or indirectly, overtly or covertly, in cash or in kind, in exchange for the referral or inducement of laboratory
testing unless a specific exception applies. Unlike the federal Anti-Kickback Statute, EKRA’s reach extends beyond federal health care programs to include
private insurance (i.e., it is an “all payor” statute). Additionally, most of the safe harbors available under the federal Anti-Kickback Statute are not reiterated
under EKRA, and certain EKRA safe harbors conflict with the safe harbors available under the federal Anti-Kickback Statute. Therefore, compliance with a
federal Anti-Kickback safe harbor does not guarantee protection under EKRA. Because EKRA is a new law, there is very little additional guidance to indicate
how and to what extent it will be interpreted, applied and enforced by the government. Currently, there is no proposed regulation interpreting or implementing
EKRA, nor any public guidance released by a federal agency concerning EKRA.
Other Federal and State Healthcare Laws
In addition to the requirements discussed above, several other healthcare laws could have an effect on our business. For example, the Health
Insurance Portability and Accountability Act of 1996 (“HIPAA”) fraud and abuse provisions created federal civil and criminal statutes that prohibit, among
other things, defrauding healthcare programs, willfully obstructing a criminal investigation of a healthcare offense, and falsifying or concealing a material fact
or making any materially false statements in connection with the payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback
Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
The federal Physician Payments Sunshine Act requires certain manufacturers of drugs, biologicals, and medical devices or supplies that require
premarket approval by or notification to the FDA, and for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program
(“CHIP”), with certain exceptions, to report annually to CMS information related to (i) payments and other transfers of value to physicians (defined to include
doctors, dentists, optometrists, podiatrists, and chiropractors), other healthcare professionals (such as physicians assistants and nurse practitioners) and
teaching hospitals, and (ii) ownership and investment interests held by physicians and their immediate family members.
The “Anti-Markup Rule” and similar state laws prohibit, among other things, a physician or supplier billing the Medicare program from marking up
the price of a purchased diagnostic service performed by another laboratory or supplier that does not “share a practice” with the billing physician or supplier.
Penalties may apply to the billing physician or supplier if Medicare or another payor is billed at a rate that exceeds the performing laboratory’s charges to the
billing physician or supplier, and the performing laboratory could be at risk under false claims laws, described below, for causing the submission of a false
claim.
The “14-Day Rule,” also known as the Medicare Date of Service Rule, prohibits a laboratory supplier from billing the Medicare program for tests
performed on samples collected during or within 14 days of an inpatient hospital stay, unless an exception applies, and requires the laboratory supplier to bill
the hospital in those cases. Penalties may apply to the laboratory supplier if Medicare determines that the Medicare program was inappropriately billed for
testing that should have been billed to the hospital where the sample was collected.
State client billing laws specify whether a person that did not perform the service is permitted to submit the claim for payment and if so, whether
the non-performing person is permitted to mark up the cost of the services in excess of the price the purchasing provider paid for such services. For
example, California has an anti-markup statute which prohibits providers from charging for any laboratory test that it did not perform unless the provider (a)
notifies the patient, client or customer of the name, address, and charges of the laboratory performing the test, and (b) charges no more than what the
provider was charged by the clinical laboratory which performed the test except for any other service actually rendered to the patient by the provider (for
example, specimen collection, processing and handling) (California Business and Professions Code Section 655.5). This provision applies, with certain
limited exceptions, to licensed persons such as physicians and clinical laboratories regulated under the Business and Professions Code. In addition, many
states also have “direct-bill” laws, which means that the services actually performed by an individual or entity must be billed by such individual or entity, thus
preventing ordering physicians from purchasing services from a laboratory and rebilling for the services they order. For example, California has a direct bill
rule specific to anatomic pathology services that prohibits any provider from billing for anatomic pathology services if those services were not actually
rendered by that person or under his or her direct supervision with some exemptions (California Business and Professions Code Section 655.7).
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In addition, we may be subject to state laws that prohibit other specified practices, such as billing physicians for testing that they order; waiving
coinsurance, copayments, deductibles, and other amounts owed by patients; billing a state Medicaid program at a price that is higher than what is charged to
one or more other payors; employing, exercising control over, licensed professionals in violation of state laws prohibiting corporate practice of medicine and
other professions, and prohibitions against the splitting of professional fees with licensed professionals.
As a clinical laboratory, our business practices may face additional scrutiny from government regulatory agencies such as the Department of
Justice, the U.S. Department of Health and Human Services ("HHS"), Office of Inspector General (the “OIG”), and CMS. Certain arrangements between
clinical laboratories and referring physicians have been identified in fraud alerts issued by the OIG as implicating the Anti-Kickback Statute. Efforts to ensure
that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. If our operations
are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal
and administrative penalties, damages, fines, imprisonment, exclusion from government-funded healthcare programs, such as Medicare and Medicaid,
disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting, or oversight obligations if we become
subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law and the curtailment or restructuring of
our operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable
laws, they may be subject to significant criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs.
HIPAA and HITECH
Under the administrative simplification provisions of HIPAA, as amended by the Health Information Technology for Economic and Clinical Health
Act (“HITECH”), HHS issued regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and
requirements for protecting the privacy and security of protected health information (“PHI”), used or disclosed by covered entities and business associates.
Covered entities and business associates are subject to HIPAA and HITECH. Our subcontractors that create, receive, maintain, transmit, or otherwise
process PHI on behalf of us are HIPAA “business associates” and must also comply with HIPAA as a business associate.
HIPAA and HITECH include privacy and security rules, breach notification requirements, and electronic transaction standards.
The Privacy Rule covers the use and disclosure of PHI by covered entities and business associates. The Privacy Rule generally prohibits the use
or disclosure of PHI, except as permitted under the Rule. The Privacy Rule also sets forth individual patient rights, such as the right to access or amend
certain records containing his or her PHI, or to request restrictions on the use or disclosure of his or her PHI.
The Security Rule requires covered entities and business associates to safeguard the confidentiality, integrity, and availability of electronically
transmitted or stored PHI by implementing administrative, physical, and technical safeguards. Under HITECH’s Breach Notification Rule, a covered entity
must notify individuals, the Secretary of the HHS, and in some circumstances, the media of breaches of unsecured PHI.
In addition, we may be subject to state health information privacy and data breach notification laws, which may govern the collection, use,
disclosure, and protection of health-related and other personal information. California, for example, has enacted the Confidentiality of Medical Information
Act, which sets forth standards in addition to HIPAA and HITECH with which all California health care providers like us must abide. State laws may be more
stringent, broader in scope, or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other, which may
complicate compliance efforts.
Entities that are found to be in violation of HIPAA as the result of a failure to secure PHI, a complaint about our privacy practices or an audit by
HHS, may be subject to significant civil and criminal fines and penalties and additional reporting and oversight obligations if such entities are required to
enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance.
U.S. Healthcare Reform
In the United States, there have been a number of legislative and regulatory changes at the federal and state levels that seek to reduce healthcare
costs and improve the quality of healthcare. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care
and Education Reconciliation Act (collectively, the “ACA”), became law. This law substantially changed the way health care is financed by both commercial
payors and government payors, and significantly impacted our industry. The ACA contained a number of provisions expected to impact the clinical laboratory
industry, such as changes governing enrollment in state and federal health care programs, reimbursement changes, and fraud and abuse.
There have been executive, judicial and Congressional challenges to certain aspects of the ACA. Since January 2017, former President Trump
signed two executive orders and other directives designed to delay the implementation of certain provisions of the ACA. Concurrently, Congress considered
legislation that would repeal, or repeal and replace, all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted
laws that modify certain provisions of the ACA such as removing penalties, starting January 1, 2019, for not complying with the ACA’s individual mandate to
carry health insurance and delaying the implementation of certain ACA-mandated fees. On June 17, 2021 the U.S. Supreme Court dismissed a challenge on
procedural grounds that argued the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Thus, the ACA will
remain in effect in its current form. Further, prior to the U.S. Supreme Court ruling, on January 28, 2021, President Biden issued an executive order that
initiated a special enrollment period for purposes of obtaining health insurance coverage through the ACA marketplace The executive order also instructed
certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining
Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to
health insurance coverage through Medicaid or the ACA. Further, on
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August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“IRA 2022”) into law, which among other things, extends enhanced subsidies
for individuals purchasing health insurance coverage in ACA marketplaces through plan year 2025. The IRA 2022 also eliminates the “donut hole” under the
Medicare Part D program beginning in 2025 by significantly lowering the beneficiary maximum out-of-pocket cost and through a newly established
manufacturer discount program. It is possible that the ACA will be subject to judicial or Congressional challenges in the future. It is unclear how any such
challenges and the health reform measures of the Biden administration will impact the ACA.
Other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was
signed into law, which, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent
legislative amendments to the statute, will remain in effect until 2032, unless additional Congressional action is taken. On January 2, 2013, the American
Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and
increased the statute of limitations period for the government to recover overpayments to providers from three to five years. The Medicare Access and CHIP
Reauthorization Act of 2015, enacted on April 16, 2015 (“MACRA”), repealed the formula by which Medicare made annual payment adjustments to
physicians and replaced the former formula with fixed annual updates, and established a quality payment incentive program, also referred to as the Quality
Payment Program. This program provides clinicians with two ways to participate, including through the Advanced Alternative Payment Models (“APMs”), and
the Merit-based Incentive Payment System (“MIPS”). Under both APMs and MIPS, performance data collected each performance year will affect Medicare
payments in later years, including potentially reducing payments.
In April 2014, Congress passed the Protecting Access to Medicare Act of 2014 (“PAMA”), which included substantial changes to the way in which
clinical laboratory services are paid under Medicare. Under PAMA, laboratories that receive the majority of their Medicare revenue from payments made
under the Medicare Clinical Laboratory Fee Schedule (the "Physician Fee Schedule") are required to report to CMS, beginning in 2017 and every three
years thereafter (or annually for “advanced diagnostic laboratory tests”), private payor payment rates and volumes for their tests. CMS will use this data to
calculate a weighted median payment rate for each test, which will be used to establish revised Medicare reimbursement rates for the tests. Laboratories
that fail to report the required payment information may be subject to substantial civil monetary penalties. Reporting of payment data under PAMA for clinical
diagnostic laboratory tests has been delayed on numerous occasions. Beginning on January 1, 2018, CMS has begun using reported private payor pricing to
periodically revise payment rates under the CLFS. Based on current law, between January 1, 2025 and March 31, 2025, applicable laboratories will be
required to report on data collected during January 1, 2019 and June 30, 2019. This data will be utilized to determine 2025 to 2027 CLFS rates. The
payment rate applies to laboratory tests furnished by a hospital laboratory if the test is separately paid under the hospital outpatient prospective payment
system. It is still too early to predict the full impact on reimbursement for our current tests or those in development. Pursuant to the Coronavirus Aid, Relief,
and Economic Security Act ("CARES Act"), the statutory phase-in of the payment reductions has been extended through 2024 with a 0% reduction cap for
2021-2022 and a 15% reduction cap for 2023 through 2025. It is unclear what impact new quality and payment programs, such as MACRA, or new pricing
structures, such as those adopted under PAMA, may have on our business, financial condition, results of operations, or cash flows.
We also anticipate there will continue to be proposals by legislators at both the federal and state levels, regulators and private payors to reduce
costs while expanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices we will be able to charge for
our tests, the coverage of or the amounts of reimbursement available for our tests from payors, including commercial payors and government payors.
Human Capital
We recognize that our employees are both our most valuable asset and our most important investment. The success of our organization is reliant
upon each individual’s significant contribution to our corporate culture and goals. Following is a list of our core company values:
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Integrity
Passion
Scientific excellence and innovation
Respect and inclusion
Teamwork and collaboration
At a foundational level, employees receive training related to workplace safety and emergency preparedness, awareness and expectations of
inclusion and diversity, required data protection, and other regulatory matters. We offer competitive total rewards programs, ongoing training and
development, and a commitment to the safety and health of our employees. We also practice a commitment to diversity by including broader outreach and
sourcing for candidates for new roles as well as education and a visible commitment to diversity and inclusion internally.
An engaged workforce with skills specific to our needs is critical for our successful growth in a competitive market and sector. We regularly
benchmark our compensation and benefits by geography, industry (life sciences), and by role to ensure we maintain our status as an employer of choice in
these areas. Our turnover rates over the last three years have been consistent with such benchmarks. Reports of our position relative to the benchmarks are
reported to management and the compensation committee of our board of directors on a periodic basis.
As of January 31, 2024, we had 225 employees, of which 223 were full-time employees. Of these full-time employees, 80 were in research and
development, 70 in laboratory operations, 38 in commercial operations and 35 in general and administrative functions. 221 of our full-time employees were
located in the United States, with the remaining two located in Europe (including the U.K.). As of January 31, 2024, more than 40% of our employees had
completed a Ph.D. or other advanced science or medical degree.
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None of our employees are represented by a labor union or covered by collective bargaining agreements, and we have not experienced any work
stoppages. We consider our relations with our employees to be good. The use of independent contractors is not a material part of our workforce strategy.
Environment
We believe we are in compliance with the regulations established by the state of California Division of Occupational Safety and Health
Requirements and California Environmental Protection Agency applicable to our operations in Fremont, California. This includes, but is not limited to, having
an Injury and Illness Prevention Program, a Hazard Communication Program, an Emergency Action Plan, a Chemical Hygiene Plan and an Exposure
Control Plan, which are captured in written standard operating procedures (“SOPs”). We provide training to our employees on these SOPs. We are
committed to evaluate our compliance to such regulations on a recurring basis.
Available Information
Our website is located at https://www.personalis.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, including their exhibits, proxy and information statements, and amendments to those reports filed or furnished pursuant to Sections 13(a), 14, and
15(d) of the Securities Exchange Act of 1934, as amended, are available through the “Investors” portion of our website free of charge as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the SEC. We also use the investor relations page on our website as a channel of
distribution for important company information, including press releases, analyst coverage and financial information regarding us, as well as corporate
governance information. Information on our website is not part of this Annual Report on Form 10-K or any of our other securities filings unless specifically
incorporated herein or therein by reference. In addition, our filings with the SEC may be accessed through the SEC’s Interactive Data Electronic Applications
system at http://www.sec.gov. All statements made in any of our securities filings, including all forward-looking statements or information, are made as of the
date of the document in which the statement is included, and we do not assume or undertake any obligation to update any of those statements or documents
unless we are required to do so by law.
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Item 1A. Risk Factors.
Summary of Risk Factors
The following is a summary of the principal risks and uncertainties that could materially adversely affect our business, financial condition, or results
of operations. You should read this summary together with the more detailed description of risk factors below under the heading “Risk Factors”.
Operational, Strategic and Business Risks
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We have a history of losses and we expect to incur significant losses for the foreseeable future and may not be able to generate sufficient revenue
to achieve or sustain profitability.
If we are unable to increase sales of our current services or successfully develop and commercialize other services or products, or if we are
unable to execute our sales and marketing strategy for our services or unable to gain sufficient acceptance in the market, we may fail to generate
sufficient revenue to achieve profitability and sustain our business.
We have substantial customer concentration, with a limited number of customers accounting for a substantial portion of our revenue and accounts
receivable; in particular, we currently derive a substantial portion of our revenue from one of our largest customers, Natera, and in the past have
derived a substantial portion of our revenue from another of our largest customers, the VA MVP.
When we grow our business by developing in vitro diagnostic tests, we may be subject to reimbursement challenges.
We rely on a limited number of suppliers, or in some cases, a sole supplier, for some laboratory instruments and materials, and we may not be
able to replace or immediately transition to alternative suppliers should we need to do so.
If our facilities become damaged or inoperable, or we are required to vacate the facilities, our ability to sell and provide our services and pursue
our research and development efforts may be jeopardized.
If we cannot develop services and products to keep pace with rapid advances in technology, medicine, and science our operating results and
competitive position could be harmed.
Personalized cancer therapies represent new therapeutic approaches that could result in heightened regulatory scrutiny, delays in clinical
development, or delays in or inability to achieve regulatory approval, commercialization, or payor coverage, any of which could adversely affect
our business.
The loss of key members of our executive management team or the inability to hire, retain, or motivate highly skilled personnel could adversely
affect our business.
We may not be able to manage our future growth effectively, which could make it difficult to execute our business strategy.
We may acquire businesses or assets, form joint ventures, or make investments in other companies or technologies that could harm our operating
results, dilute stockholders’ ownership, or cause us to incur debt or significant expense.
Regulatory, Legal and Cybersecurity Risks
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Complying with numerous statutes and regulations pertaining to our business is an expensive and time-consuming process, and we may be
subject to regulatory action if we or our service or product offerings do not comply with applicable requirements.
Our internal information technology systems, or those of our third-party vendors, contractors, or consultants, may fail or suffer security breaches,
loss or leakage of data, and other disruptions, which could adversely affect our business.
Failure or perceived failure to comply with existing or future laws, regulations, contracts, self-regulatory schemes, standards, and other obligations
related to data privacy and security (including security incidents) could harm our business. Compliance or the actual or perceived failure to comply
with such obligations could increase the cost of our offerings, limit their use or adoption, and otherwise negatively affect our operating results and
business.
Our employees may engage in misconduct or other improper activities, such as noncompliance with regulatory standards and requirements,
including the Foreign Corrupt Practices Act of 1977 and other anti-bribery laws, which could cause significant liability for us and harm our
reputation.
Changes in health care policy could increase our costs, decrease our revenue, and impact sales of and reimbursement for our tests. When we
grow our business by developing in vitro diagnostic tests, we may be subject to reimbursement challenges.
Intellectual Property Risks
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Litigation or other proceedings or claims of intellectual property infringement, misappropriation, breach of license terms or other violations may
require us to spend significant time and money, including damages, and could prevent us from selling our tests.
If we cannot license rights to use necessary technologies on reasonable terms, we may not be able to commercialize new services and products.
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If we are not able to obtain, maintain and enforce patent protection for our products, services or technologies, our competitors and other third
parties could develop and commercialize products, services and technologies similar or identical to ours, and our ability to successfully
commercialize our products, services, and technologies may be adversely affected.
If we are unable to protect the confidentiality of our trade secrets and know-how, our business would be harmed.
Our use of “open source” software could subject our proprietary software to general release, adversely affect our ability to sell our products and
services, and subject us to possible litigation.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and
our business may be adversely affected.
Financial and Market Risks and Risks Related to Owning Our Common Stock
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Our inability to raise additional capital on acceptable terms in the future may limit our ability to continue to operate our business and further
expand our operations.
The market price of our common stock may be volatile or may decline steeply or suddenly regardless of our operating performance, we may not
be able to meet investor or analyst expectations, and you may lose all or part of your investment.
Our quarterly results may fluctuate significantly, which could adversely impact our common stock’s value.
Insiders may exercise significant control over our company and will be able to influence corporate matters.
Future sales of shares by existing stockholders, or the perception that such sales could occur, could cause the stock price of our common stock to
decline.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will
depend on appreciation of the value of our common stock.
If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research about our
business, our stock price and trading volume could decline.
Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger,
tender offer, or proxy contest difficult, thereby depressing the trading price of our common stock; our amended and restated certificate of
incorporation has an exclusive forum provision, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or
our directors, officers, or employees.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
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Risk Factors.
Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully
the risks and uncertainties described below, in addition to other information contained in this Annual Report on Form 10-K, including our audited consolidated
financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we
are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following
risks or others not specified below materialize, our business, financial condition, and results of operations could be materially and adversely affected. In that
case, the trading price of our common stock could decline.
Operational, Strategic and Business Risks
We have a history of losses and we expect to incur significant losses for the foreseeable future and may not be able to generate
sufficient revenue to achieve or sustain profitability.
We have incurred net losses since our inception. For the years ended December 31, 2023, 2022, and 2021 we had net losses of $108 million,
$113 million and $65 million, respectively. As of December 31, 2023, we had an accumulated deficit of $469 million. To date, we have not generated
sufficient revenue to achieve profitability, and we may never achieve or sustain profitability. In addition, we expect to continue to incur net losses for the
foreseeable future, and we expect our accumulated deficit to continue to increase as we focus on scaling our business and operations. Our efforts to sustain
and grow our business may be more costly than we expect, and we may not be able to increase our revenue sufficiently to offset our higher operating
expenses. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
Our failure to achieve and sustain profitability in the future would negatively affect our business, financial condition, results of operations, and cash flows, and
could cause the market price of our common stock to decline.
If we are unable to increase sales of our current services or successfully develop and commercialize other services or products, or if
we are unable to execute our sales and marketing strategy for our services or unable to gain sufficient acceptance in the market, we
may fail to generate sufficient revenue to achieve profitability and sustain our business.
We currently derive substantially all of our revenue from sales of our services. We began offering our services through our CLIA-certified, CAP-
accredited, and state-licensed laboratory in 2013. We are in varying stages of research and development for other services and products that we may offer. If
we are unable to increase sales of our existing services or successfully develop and commercialize other services and products, we will not generate
sufficient revenue to become profitable.
In addition, as a growing genomics company, we have engaged in targeted sales and marketing activities for our services. Although we have had
revenue from sales of our services since 2013, our services may never gain significant acceptance in the marketplace and therefore may never generate
substantial revenue or permit us to become profitable. We will need to further establish and grow the market for our services through the expansion of our
current relationships and development of new relationships with biopharmaceutical customers and through gaining acceptance in medical communities.
Gaining acceptance in medical communities can be supported by, among other things, publications in leading peer-reviewed journals of results from studies
using our services. The process of publication in leading medical journals is subject to a peer review process and peer reviewers may not consider the
results of our studies sufficiently novel or worthy of publication. Failure to have our studies published in peer-reviewed journals would limit the adoption of our
services.
Our ability to successfully market our services that we have developed, and may develop in the future, will depend on numerous factors, including:
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our ability to demonstrate the utility and value of our services to our customers and potential customers;
the success of our commercial team, including sales and business development personnel;
the recruitment, hiring, and retention of our commercial team personnel;
whether our customers and potential customers accept that our services are sufficiently sensitive and specific;
our ability to educate our customers and potential customers of the utility of the comprehensiveness of our services and of testing patients at
multiple time points;
our ability to continue to fund sales and marketing activities;
whether our services are considered superior to those of our competitors;
any negative publicity regarding our or our competitors’ services resulting from defects or errors;
our success obtaining and maintaining patent and trade secret protection for our services and technologies; and
our success enforcing and defending intellectual property rights and claims.
Failure to achieve broad market acceptance of our services would materially harm our business, financial condition, and results of operations.
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If we cannot compete successfully with our competitors, we may be unable to increase or sustain our revenue or achieve and sustain
profitability.
Our principal competition comes from commercial and academic organizations using established and new laboratory tests to produce information
that is similar to the information that we generate for our customers. These commercial and academic organizations may not utilize our services or may not
believe them to be superior to those tests that they currently use or others that are developed. Further, it may be difficult to educate our customers and
potential customers on the benefits of our comprehensive tests compared to simpler panels provided by our competitors. For example, the information that
we provide may be more challenging or require additional resources for our customers to interpret than the information provided by our competitors’ less
comprehensive assays. In addition, our suppliers or competitors may announce the development of new products, services or features that results in our
customers’ or potential customers’ decision to reduce, postpone or cancel orders from us while they wait to determine which products, services or features
are or will be perceived as technologically superior, more commercially successful or adopted as standards in the industry; such decisions by our customers
or potential customers may be influenced by their concerns regarding the potential obsolescence of data generated using our services and features if our
services or features are or will not be perceived as technologically superior, commercially successful or adopted as standards in the industry.
Some of our present or potential competitors, including Adela, Inc., BostonGene Corporation, Caris Life Sciences, Inc., Foresight Diagnostics Inc.
(“Foresight”), Freenome, Inc., Fulgent Genetics, Inc., Geneseeq Technology Inc., GRAIL, Guardant Health, Inc., Haystack Oncology, Inc., which was
acquired by Quest Diagnostics Incorporated in June 2023, Invitae Corporation, MedGenome Inc., Myriad Genetics, Inc., Natera, NeoGenomics, Inc.,
Novogene Corporation, Predicine, Inc., Roche Molecular Systems, Inc., Tempus, Inc., and Veracyte, Inc. may have more widespread brand recognition or
substantially greater financial or technical resources, development or production capacities, or marketing capabilities than we do. They may be able to
devote greater resources to the development, promotion and sale of their products and services than we do or sell their products and services at prices
designed to win more significant levels of market share. Also, we have had, and may have in the future, customer or supply relationships with our present or
potential competitors. For example, we have an agreement with Natera to provide advanced tumor analysis for use in Natera’s MRD testing offerings. During
the year ended December 31, 2023, revenue under our agreement accounted for 43% of our total revenue. See “—We currently derive a substantial portion
of our revenue from DNA sequencing and data analysis services that we provide to Natera. If Natera’s demand for our DNA sequencing and data analysis
services were to be substantially reduced, our business, financial condition, revenue and other operating results, and cash flows may be materially harmed.”
In addition, our present or potential competitors may be acquired by, receive investments from, or enter into other commercial relationships with larger, more
well-established and well-financed companies. Others may develop lower-priced, less complex products and services that pharmaceutical companies could
view as functionally equivalent to our current or planned future services, which could force us to lower the price of our services and impact our operating
margins and our ability to achieve and maintain profitability. In addition, companies or governments that control access to genetic testing and related
services through umbrella contracts or regional preferences could promote our competitors or prevent us from performing certain services. In addition,
technological innovations that result in the creation of enhanced products or diagnostic tools that are more sensitive or specific than ours may enable other
clinical laboratories, hospitals, physicians, or medical providers to provide specialized products or services similar to ours in a more patient-friendly, efficient,
or cost-effective manner than is currently possible. If we cannot compete successfully against current or future competitors, or if we cannot maintain
successful customer or supply relationships with Natera, Illumina or other present or potential competitors, we may be unable to ensure or increase market
acceptance and sales of our current or planned future services, which could prevent us from increasing or sustaining our revenue or achieving or sustaining
profitability.
We expect that biopharmaceutical companies will increasingly focus attention and resources on the targeted and personalized cancer diagnostic
sector as the potential and prevalence of molecularly targeted oncology therapies approved by the FDA along with companion diagnostics increases. For
example, the FDA has approved several such targeted oncology therapies that use companion diagnostics, including the anaplastic lymphoma kinase FISH
test from Abbott Laboratories, Inc. for use with Xalkori® from Pfizer Inc., the BRAF kinase V600 mutation test from Roche Molecular Systems, Inc. for use
with Zelboraf® from Daiichi-Sankyo/Genentech/Roche, and the BRAF kinase V600 mutation test from bioMerieux for use with Tafinlar® from
GlaxoSmithKline. Since companion diagnostic tests are part of FDA labeling, non-FDA cleared tests, such as the ones we currently offer as part of our
services, would be considered an off-label use and this may limit our access to this market segment. Our customers and potential customers may request, or
in some cases have requested, that we consider developing and seeking FDA approval for companion diagnostic tests to accompany those customers’
therapeutic product candidates, and it may be necessary for us to do so in order to successfully compete for the business of these customers. If we do not
successfully develop FDA-approved companion diagnostics, we may be at a competitive disadvantage and may be unable to increase market acceptance
and sales of our other service or product offerings, which would prevent us from increasing or sustaining our revenue or achieving or sustaining profitability. If
we were to develop one or more FDA-approved companion diagnostics, we would incur increased research and development expenses, and such activities
may also divert our resources or the attention of our management and may create competing internal priorities for us. In addition, we have limited experience
developing diagnostics, have never developed an FDA-approved companion diagnostic, and may be unable to successfully compete against companies with
more experience developing and commercializing companion diagnostics.
Additionally, projects related to cancer diagnostics and particularly genomics have received increased government funding, both in the United
States of America (the “U.S.”) and internationally. As more information regarding cancer genomics becomes available to the public, we anticipate that more
products and services aimed at identifying treatment options will be developed and that these products and services may compete with our services. In
addition, competitors may develop their own versions of our current or planned future services and products in countries where we did not apply for or
receive patents and compete with us in those countries, including encouraging the use of their products or services by biopharmaceutical companies in other
countries.
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We have substantial customer concentration, with a limited number of customers accounting for a substantial portion of our revenue
and accounts receivable; in particular, we currently derive a substantial portion of our revenue from one of our largest customers,
Natera, and in the past have derived a substantial portion of our revenue from another of our largest customers, the VA MVP.
Like other genomic profiling companies that sell to the pharmaceutical industry, we have substantial customer concentration. We currently derive a
significant portion of our revenue from Natera, which accounted for 43%, 41%, and 10% of our revenue for the years ended December 31, 2023, 2022, and
2021, respectively. We previously derived a significant portion of our revenue from the VA MVP, which more recently accounted for 13%, 13%, and 53% of
our revenue for the years ended December 31, 2023, 2022, and 2021, respectively. Our top five customers, including the VA MVP and Natera, accounted for
74%, 76% and 84% of our revenue for the years ended December 31, 2023, 2022 and 2021, respectively. There are inherent risks whenever a large
percentage of revenue is concentrated with a limited number of customers. While we have attempted to grow our customer base and diversify our revenue
concentration beyond the VA MVP and Natera, we may not be able to successfully do so in the future. Our predictions regarding the future level of demand
for our services that will be generated by these customers may be wrong. In addition, revenue from our larger customers have historically fluctuated and may
continue to fluctuate based on the commencement and completion of clinical trials or other projects, the timing of which may be affected by market
conditions or other factors, some of which may be outside of our control. Some of our customers have in the past suspended or terminated clinical trials or
projects, received less funding than expected, experienced declining or delayed sales, or otherwise decided to reduce or eliminate their use of our services,
and these and other customers may also do so in the future. As a result, we could be pressured to reduce the prices we charge for our services, which would
have an adverse effect on our margins and financial position, and which would likely negatively affect our revenue and results of operations. In particular, if
we do not win future VA MVP renewals with a value comparable to that of our historical contracted orders, it may have a material adverse effect on our
revenue, cash position, and results of operations. Similarly, if the VA MVP was eliminated, awarded its contract to one of our competitors, further reduced the
size of our contract or failed to renew our contract in the future, then our revenue, cash position, and results of operations would be materially adversely
impacted. Likewise, if Natera or any of our other significant customers were to reduce or cease their use of our services, then our revenue, cash position,
and results of operations may be materially adversely impacted. Further, if any of our significant customers were to stop payment for our services, it would
have a material adverse effect on our accounts receivable, increasing our credit risk. The failure of these customers to pay their balances, or any customer
to pay future outstanding balances, would result in an operating expense and reduce our cash flows.
We currently derive a substantial portion of our revenue from DNA sequencing and data analysis services that we provide to Natera. If
Natera’s demand for our DNA sequencing and data analysis services were to be substantially reduced, our business, financial
condition, revenue and other operating results, and cash flows may be materially harmed.
In February 2021, we entered into a partnership in the field of personalized oncology with Natera, pairing our NeXT tumor profiling and diagnostic
services and products with Natera’s personalized ctDNA platform Signatera™ for treatment monitoring and MRD assessment. Under this non-exclusive
agreement, Natera is responsible for validating the design of, and commercialization of, Signatera personalized ctDNA assays using matched tumor and
normal exome sequence data from us. The agreement covers MRD testing for both clinical use and research use. Since that time, Natera’s sample volumes
have increased such that we currently derive a significant portion of our revenue from sales of our DNA sequencing and data analysis services to Natera
under our agreement. For example, in 2023, revenue under our agreement accounted for 43% of our total revenue. In November 2023, we amended our
agreement to extend minimum volume commitments through the end of 2024. We are aware that Natera has at least one third party supplier of DNA
sequencing and analysis services, such that Natera has elected, and may continue to elect in the future, to send a portion (or all) of its samples to its other
supplier(s) instead of us, which it is not contractually prohibited from doing, given the non-exclusive nature of our agreement. Natera may also bring a portion
(or all) of such services in-house in the future, which may result in them purchasing fewer (or no) such services from us, or none from us at all. Our
agreement with Natera requires us to achieve certain quality and turnaround time metrics for Natera samples. Recently, the volumes of samples sent to us
by Natera have fluctuated significantly and may continue to do so in the future, which could cause us to experience difficulty in achieving such metrics from
time to time, or to meet our other obligations under our agreement. If we consistently fail to achieve such metrics, or any of our other obligations under our
agreement with Natera, Natera may elect to send a portion (or all) of its samples to its other supplier(s) and/or bring such services in-house.
Additionally, Natera may allege that such failures to achieve the required metrics are a breach of our agreement and seek to terminate our
agreement and/or pursue any remedies available to it under the agreement, at law or in equity. Relatedly, we have incurred expenses in connection with our
scale-up activities under our agreement with Natera, and we may incur additional expenses to increase our laboratory’s capacity to process increased
sample volumes from Natera, in addition to those from our other customers, in the future. Our activities under our agreement with Natera have had, and may
continue to have, an impact on our business, including diversion of our resources and the attention of our management, including with respect to our internal
research and development objectives and projects for our other customers, collaborators and/or partners. If we are unable to successfully increase our
laboratory’s capacity and manage any such competing objectives and/or projects for other customers, we may be unable to meet the quality and timing
requirements of our agreement with Natera or our other customers, collaborators and/or partners. We may also be unable to successfully research, develop,
launch and/or commercialize our services or service capabilities. Furthermore, our NeXT Personal test is a next-generation, tumor-informed liquid biopsy
assay designed to detect and quantify MRD and recurrence in patients previously diagnosed with cancer. If NeXT Personal or any of our other services is
seen as competing with Signatera or any of Natera’s other services, we will still be required to fulfill our obligations to Natera under our agreement, although
Natera may elect to send a portion (or all) of its samples to its other supplier(s) and/or bring such services in-house. If the volume of samples received under
our agreement with Natera were to be significantly reduced or eliminated, or if our agreement with Natera were to be terminated, for these or other reasons,
or if we are
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unable to successfully research, develop, launch and/or commercialize our services or service capabilities, including NeXT Personal, our business, financial
condition, revenue and other operating results, and cash flows may be materially harmed.
We have derived a substantial portion of our current revenue from DNA sequencing and data analysis services that we provided to one
of our largest customers, the VA MVP. If the VA MVP’s demand for and/or funding for our DNA sequencing and data analysis services
continues to be substantially reduced, or if our new contract with the VA MVP were to be terminated, our business, financial condition,
revenue and other operating results, and cash flows will be materially harmed.
We have derived a substantial portion of our revenue from sales of our DNA sequencing and data analysis services to the VA MVP. In September
2017, we entered into a one-year contract with three one-year optional renewal periods with the VA for the VA MVP, pursuant to which we received
contracted orders from the VA MVP in September 2017, 2018, 2019, 2020, and 2021. In September 2022, we entered into a new contract with the VA MVP
to continue providing them WGS services and received an initial task order with a value of up to $10.0 million. The performance period under the new
contract includes a base period of one year, with four one-year renewal option periods that may be exercised upon discretion of the VA MVP. In August 2023,
we received notice of the VA MVP's intention to exercise its first renewal option period and received a second task order with a value of up to $7.5 million,
subject to the receipt of samples from the VA MVP. There is no guarantee that the VA MVP will exercise any subsequent renewal option.
The VA MVP’s contracted orders for DNA sequencing and data analysis services have fluctuated significantly in value over time and are subject to
the availability of funding, enrollment of veterans in the VA MVP study, and the VA MVP’s continued demand, if any, for our services among other factors. For
example, the VA MVP contracted order received in September 2020 had a value of $30.9 million, whereas the VA MVP contracted orders received in
September 2021, 2022, and 2023 had values of $9.7 million, $10.0 million, and $7.5 million, respectively, which represents a substantial decline. We have no
certainty that funding will be made available for our services, or that the VA MVP will award any future contracts, contract renewals or contracted orders to
us. The priorities of the VA, the VA MVP, or the U.S. government may change, including in response to a health epidemic or pandemic. For example, funding
for our services may be limited or not available, and our business, financial condition, and operating results and cash flows will be materially harmed.
Similarly, if we do not win future VA MVP contracts and renewals (whether due to being outbid by a competitor or the VA MVP’s decision not to award a
future contract on a timely basis or at all, or to terminate for convenience or failure to renew any contract, for whatever reason) with a value comparable to
that of our historical contracted orders, our business, financial condition, revenue and other operating results and cash flows may be materially harmed.
We have only recognized revenue under our VA MVP contract upon the receipt and processing of samples, and the timing and number of VA MVP
samples we have received has been and could in the future be negatively affected by factors beyond our control, which has resulted, and may result in the
future, in delaying our ability to process and recognize revenue for such samples. For example, the revenue we recognized during the contract year that
began in September 2020 significantly exceeded the value of the VA MVP contracted order we received in September 2020 because we continued to
receive after such date, and subsequently processed, samples under VA MVP contracted orders that remained unfulfilled as of September 2020 due to the
time required for the VA to select optimal samples from its collection for research and then provide us those samples. Therefore, period-to-period
comparisons of our operating results relating to VA MVP contracted orders may not be meaningful. The timing and number of VA MVP samples may also be
negatively affected by a public health crisis. For example, in March 2020, the VA MVP announced that it was suspending sample collection due to the
COVID-19 pandemic. In addition, we believe the COVID-19 pandemic may have been a contributing factor to the reduction in values of the September 2021
and 2022 VA MVP contracted orders compared to the September 2020 contracted order, as the VA MVP delayed new enrollment and also may have needed
to divert resources to respond to the pandemic. A health epidemic or pandemic may negatively impact the value of any potential new VA MVP contract or
order.
If we cannot maintain our current customer relationships, or fail to acquire new customers, our revenue prospects will be reduced.
Many of our customers are biopharmaceutical companies engaged in clinical trials of new drug candidates, which trials are expensive,
can take many years to complete, and have inherently uncertain outcomes.
Our customers other than the VA MVP and Natera are primarily biopharmaceutical companies that use our services to support clinical trials. Our
future success is substantially dependent on our ability to maintain our customer relationships and to establish new ones. Many factors have the potential to
impact our customer relations, including the type of support our customers and potential customers require and our ability to deliver it, our customers’
satisfaction with our services, and other factors that may be beyond our control. Furthermore, our customers may decide to decrease or discontinue their use
of our services due to changes in research and product development plans (including as a result of a public health crisis), failures in their clinical trials (which
failures are statistically much more likely to occur than not at some point in the clinical development process, notwithstanding any enhanced patient
stratification from the use of our proprietary tests and algorithms), financial constraints, or utilization of internal testing resources or tests performed by other
parties, or other circumstances outside of our control.
We engage in conversations with customers regarding potential commercial opportunities on an ongoing basis in the event that one of these
customers’ drug candidates is approved. There is no assurance that any of these conversations will result in a commercial agreement, or if an agreement is
reached, that the resulting relationship will be successful or that clinical studies conducted as part of the engagement will produce successful outcomes.
Speculation in the industry about our existing or potential relationships with biopharmaceutical companies could be a catalyst for adverse speculation about
us, our services, and our technology, which can adversely affect our reputation and our business. In addition, the termination of these relationships could
result in a temporary or permanent loss of revenue.
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Our customers’ clinical trials are expensive, can take many years to complete, and their outcome is inherently uncertain. Failure can occur at any
time during the clinical trial process. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having
progressed through pre-clinical studies and early clinical trials. Many of the biopharmaceutical companies that are our customers do not have products
approved for commercial sale and are not profitable. These customers must continue to raise capital in order to continue their development programs and to
potentially continue as our customers. If our customers’ clinical trials fail or they are unable to raise sufficient capital to continue investing in their clinical
programs, our revenue from these customers may decrease or cease entirely, and our business may be harmed. Furthermore, even if these customers have
a drug approved for commercial sale, they may not choose to use our services as a companion diagnostic with their drug, thereby limiting our potential
revenue.
When we grow our business by developing in vitro diagnostic tests, we may be subject to reimbursement challenges.
The coverage and reimbursement status of newly-approved or cleared laboratory developed tests, including our NeXT Dx and NeXT Personal Dx
products, is uncertain. We are seeking reimbursement for our NeXT Dx and NeXT Personal Dx tests, and other in vitro diagnostic tests we may develop, and
if such tests are inadequately covered by insurance or ineligible for such reimbursement, this could limit our ability to derive revenue from any such current
or future tests. The commercial success of current or future services and products in both domestic and international markets may depend in part on the
availability of coverage and adequate reimbursement from third-party payors, including government payors, such as the Medicare and Medicaid programs,
or equivalent foreign programs, managed care organizations, and other third-party payors. The government and other third-party payors are increasingly
attempting to contain health care costs by limiting both insurance coverage and the level of reimbursement for new diagnostic tests. As a result, they may
not cover or provide adequate payment for any current or future in vitro diagnostic tests that we develop. These payors may conclude that our services or
products are less safe, less effective, or less cost-effective than existing or later-introduced services or products. These payors may also conclude that the
overall cost of using one of our tests exceeds the overall cost of using a competing test, and third-party payors may not approve any current or future in vitro
diagnostic tests we develop for insurance coverage and adequate reimbursement.
In January 2024, we announced that we received a final Medicare coverage determination for our NeXT Dx offering, extended retroactively to
August 29, 2023. While we estimate that approximately half of new solid tumor cancer cases will be diagnosed in patients covered by Medicare, the
Medicare coverage determination may not be indicative of our ability to obtain coverage with other payors. Even if favorable coverage and reimbursement
status is attained for one or more of our products, less favorable coverage policies and reimbursement rates may be implemented in the future.
We rely on a limited number of suppliers, or in some cases, a sole supplier, for some of our laboratory instruments and materials, and
we may not be able to find replacements or immediately transition to alternative suppliers should we need to do so.
We rely on a limited number of suppliers for sequencers and other equipment and materials that we use in our laboratory operations. For example,
we rely on Illumina as our sole supplier of sequencers and various associated reagents and other materials used in our routine laboratory operations, and as
the sole provider of maintenance and repair services for these sequencers. Any disruption in Illumina’s operations or our inability to negotiate pricing with
Illumina on acceptable terms, or at all, could negatively impact our supply chain and laboratory operations and our ability to conduct our business and
generate revenue. Additionally, COVID-19 previously disrupted Illumina’s ability to fulfill our purchase orders for reagents or other materials in a timely
manner and another health epidemic or pandemic may disrupt the ability of Illumina and our other suppliers to fulfill our purchase orders in a timely manner
or at all. Our suppliers, including Illumina, could cease supplying these materials and equipment at any time, could increase the price of these materials or
equipment (including the promotional pricing offered to us by Illumina for our 2022 VA MVP Agreement and certain other projects) or fail to provide us with
sufficient quantities of materials or equipment that meet our specifications. Our laboratory operations have been and in the future could be interrupted if we
encounter delays or difficulties in securing sequencers or other equipment or materials, or if we cannot obtain an acceptable substitute. We have also
experienced, and may experience in the future, delays or difficulties in upgrading to newer versions or replacements of these materials and equipment,
which may have better performance or be more cost-effective than the current versions. Any such interruption, delay or difficulty could significantly affect our
business, financial condition, results of operations, and reputation.
We believe that there are only a few manufacturers other than Illumina that are currently capable of supplying and servicing the equipment
necessary for our laboratory operations, including sequencers and various associated reagents. Likewise, we believe that there are a limited number of
manufacturers and suppliers for other reagents and materials necessary for our laboratory operations, such as the sample preparation reagents required for
our ACE technology, which enables our NeXT Platform to provide more comprehensive sequencing coverage, as well as those required to create
personalized liquid biopsy panels for each patient as part of our NeXT Personal assay. Although we have evaluated and may continue in the future to
evaluate equipment and materials from other suppliers, the use of equipment or materials provided by these replacement suppliers would require us to alter
our laboratory operations. Transitioning to a new supplier would be time-consuming and expensive, would likely result in interruptions in our laboratory
operations, could affect the performance specifications of our laboratory operations, or could require that we revalidate our tests. Additionally, an existing
supplier of ours may allege that such activities constitute a breach of its agreement with us and may cease supplying us with sufficient quantities of materials
or equipment that meet our specifications, in a timely manner or at all. Moreover, an existing supplier or third party may allege that such activities,
replacement equipment or materials infringe, misappropriate or otherwise violate its intellectual property, and may bring infringement or other intellectual
property-related claims against us. See “—Litigation or other proceedings or third-party claims of intellectual property infringement, misappropriation or other
violations may require us to spend significant time and money, and could in the future prevent us from selling our tests or impact our stock price, any of
which could have a material adverse effect.” We cannot
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assure you that, if we were forced to replace Illumina or another supplier on which we rely, we would be able to secure alternative equipment, reagents, and
other materials, and bring such equipment, reagents, and other materials on-line and revalidate them without experiencing interruptions in our workflow. If we
encounter delays or difficulties in securing, reconfiguring, or revalidating the equipment and reagents we require for our services, our business, financial
condition, results of operations, and reputation could be adversely affected.
In addition, the Device Master Files that we filed with the FDA, which are focused on the technology, quality management, and validation of our
platform, specifically on its use for the development of personalized immunotherapies, are predicated on our use of specified equipment and processes,
including Illumina sequencers and related equipment. The detailed information in the Device Master Files is not shared with our customers, but with our
permission they can reference our FDA file numbers in their Investigational New Drug filings with the FDA. If we were required to transition to a new supplier
of sequencers or certain other equipment or processes in our laboratory, our Device Master Files would need to be replaced or updated, and until such time
as that occurred, customers for which we deliver services after the transition would not be able to reference our Device Master Files, which would cause us
to lose a competitive advantage.
If our facilities become damaged or inoperable, or we are required to vacate the facilities, our ability to sell and provide our services and
pursue our research and development efforts may be jeopardized.
We currently derive our revenue from our genomic analysis conducted in our laboratories. Currently, our only clinical reference or research and
development laboratory facilities are in Fremont, California. Our facilities and equipment could be harmed or rendered inoperable by natural or man-made
disasters, including fires, earthquakes, flooding, and power outages, which may render it difficult or impossible for us to sell or perform our services for some
period of time. Northern California continues to experience serious fires and the San Francisco Bay Area is considered to lie in an area with earthquake risk.
The inability to sell or to perform our sequencing and analysis services, disruptions in our operations, or the backlog of samples that could develop if our
facilities are inoperable for even a short period of time, may result in the loss of customers or harm to our reputation or relationships with scientific or clinical
collaborators, and we may be unable to regain those customers or repair our reputation or such relationships in the future. For example, from January 2023
through April 2023, we experienced substantial disruption to our use of the Fremont facility due to a failure of an electrical bus duct serving the facility. See
“—The process of opening our new laboratory facilities in Fremont, California has diverted and could continue to divert management’s attention and has
disrupted and could continue to disrupt our ongoing business.” Furthermore, our facilities and the equipment we use to perform our services and our
research and development work could be costly and time-consuming to repair or replace.
Additionally, a key component of our research and development process involves using biological samples as the basis for the development of our
services, and our services typically involve using biological samples provided by or on behalf of our customers or collaborators. In some cases, these
samples are difficult to obtain. If the parts of our laboratory facilities where we store these biological samples were damaged or compromised, or if these
biological samples or the resulting data were otherwise lost, damaged or compromised due to equipment malfunction, human error or other causes, our
ability to pursue our research and development projects or provide our services, as well as our reputation, could be jeopardized. For example, we have
experienced from time to time, and may experience in the future, equipment malfunctions that have resulted in lost, damaged or compromised samples or
resulting data. We carry insurance for damage to our property or to our customer's property while in our possession, and we also carry insurance for the
disruption of our business, but these types of insurance may not be sufficient to cover all of our potential losses or liabilities and may not continue to be
available to us on acceptable terms, if at all.
Further, if our laboratory facilities became inoperable, we would likely not be able to license or transfer our technology to other facilities with the
qualifications, including state licensure and CLIA certification, that would be necessary to cover the scope of our current and our planned future services.
Even if we were to find facilities with such qualifications to perform our services, they may not be available to us on commercially reasonable terms.
Our success depends on our ability to provide reliable and timely, high-quality genomic data and analyses and to rapidly evolve to meet
our customers’ needs.
Errors, including if our tests fail to accurately detect gene variants, or mistakes, including if we fail to or incompletely or incorrectly identify the
significance of gene variants, could have a significant adverse impact on our business. We classify variants in accordance with guidelines that are subject to
change and subject to our interpretation. There have also been and could in the future be flaws in the databases, third-party tools or algorithms we use, or in
the software that handles automated parts of our classification protocol. If we receive poor quality or degraded samples, our tests may be unable to
accurately detect gene variants or we may fail to or incompletely or incorrectly identify the significance of gene variants, which could have a significant
adverse impact on our business. In addition, our customers require timely turnaround of high-quality genomic data and analyses, and if we were not able to
meet our customers’ specific requirements, it could also have a significant adverse effect on our business.
Inaccurate results or misunderstandings of, or inappropriate reliance on, the information we provide to our customers could lead to, or be
associated with, lack of efficacy, side effects or adverse events in patients who use our tests, or who rely on our tests to determine therapies to develop,
select or monitor, including treatment-related death, and could lead to termination of our services or result in claims against us. A product liability or
professional liability claim could result in substantial damages and be costly and time-consuming for us to defend.
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Although we maintain liability insurance, including for errors and omissions and professional liability, we cannot assure you that our insurance
would be sufficient to protect us from the financial impact of defending against these types of claims, or any judgments, fines, or settlement costs arising out
of any such claims. Any liability claim, including an errors and omissions liability claim, brought against us, with or without merit, could increase our insurance
rates or prevent us from securing insurance coverage in the future. Additionally, any liability lawsuit could cause injury to our reputation or cause us to
suspend sales of our tests or cause a suspension of our license to operate. The occurrence of any of these events could have an adverse effect on our
business, reputation, and results of operations.
If we cannot develop services and products to keep pace with rapid advances in technology, medicine, and science, or if we experience
delays in developing such services and products, our operating results and competitive position could be harmed.
In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. Several new cancer drugs
have been approved, and a number of new drugs are in pre-clinical and clinical development. There have also been advances in methods used to identify
patients likely to benefit from these drugs based on analysis of biomarkers. We must continuously develop new services and products, enhance any existing
services, and avoid delays in such developments and enhancements to keep pace with evolving technologies on a timely and cost-effective basis. Our
current services and our planned future services and products could become obsolete unless we continually innovate and expand them to demonstrate
benefit in the diagnosis, monitoring, or prognosis of patients with cancer. New cancer therapies typically have only a few years of clinical data associated
with them, and much of that data may not be disclosed by the pharmaceutical company that conducted the clinical trials. This could limit our ability to
develop services and products based on, for example, biomarker analysis related to the appearance or development of resistance to those therapies. If we
cannot adequately demonstrate the clinical utility of our services and our planned future services and products to new treatments, sales of our services could
decline, which would have a material adverse effect on our business, financial condition, and results of operations.
We are researching and developing improvements to our tests and test features on a continuous basis, but we may not be able to make
these improvements on a timely basis, and even if we do, we may not realize the benefits of these efforts in our financial results.
To remain competitive, we must continually research and develop improvements to our tests or test features. However, we cannot assure you that
we will be able to develop and commercialize the improvements to our tests or test features on a timely basis. Our competitors may develop and
commercialize competing or alternative tests and improvements faster than we are able to do so. In addition, we must expend significant time and funds in
order to conduct research and development, further develop and scale our laboratory processes, and further develop and scale our infrastructure. We may
never realize a return on investment on this effort and expense, especially if our improvements fail to perform as expected. If we are not able to realize the
benefits of our efforts to improve our tests or test features, it could have an adverse effect on our business, financial condition, and results of operations.
Personalized cancer therapies represent new therapeutic approaches that could result in heightened regulatory scrutiny, delays in
clinical development, or delays in or inability to achieve regulatory approval, commercialization, or payor coverage, any of which could
adversely affect our business.
We currently work with certain companies developing personalized cancer therapies, and our future success will in part depend on our
personalized cancer customers obtaining regulatory approval for and commercializing their product candidates. Because personalized cancer therapies
represent a new approach to immunotherapy for the treatment of cancer and other diseases, developing and commercializing personalized cancer therapies
is subject to a number of challenges.
Actual or perceived safety issues, including adoption of new therapeutics or novel approaches to treatment, may adversely influence the
willingness of subjects to participate in clinical studies, or if approved by applicable regulatory authorities, of physicians to subscribe to the novel treatment
mechanics. The FDA or other applicable regulatory authorities may ask for specific post-market requirements, and additional information regarding benefits
or risks of our services may emerge at any time prior to or after regulatory approval.
In the European Economic Area (and Northern Ireland) (“EEA”), in order to place an in vitro diagnostic medical device ("IVD"), or an accessory to
an IVD, on the market, or put it into service in the EEA, the device must be designed, developed, manufactured and marketed in compliance with the
relevant legal framework. On May 26, 2022, the Regulation on In-Vitro Diagnostic Devices (Regulation (EU) 2017/746) (“IVDR”) entered into application,
repealing and replacing the Directive on In-Vitro Diagnostic Devices (98/79/EC) (the “IVDD”). The IVDR and its associated guidance documents and
harmonized standards govern, among other things, device design and development, preclinical and clinical or performance testing, premarket conformity
assessment, registration and listing, manufacturing, labeling, storage, claims, sales and distribution, export and import and post-market surveillance,
vigilance, and market surveillance. IVDs must comply with the General Safety and Performance Requirements (“GSPRs”) set out in Annex I of the IVDR.
Compliance with these requirements is a prerequisite to be able to affix the CE Mark to IVDs, without which they cannot be marketed or sold in the EEA.
In accordance with the IVDR, devices that are not placed on the market but are used within the context of a commercial activity, whether in return
for payment or free of charge, for the provision of a diagnostic or therapeutic service offered by means of information society services, as defined in point (b)
of Article 1(1) of Directive (EU) 2015/1535, or by other means of communication, directly or through intermediaries, to a natural or legal person established in
the EEA (and Northern Ireland) will be subject to the IVDR. As a result,
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diagnostic and therapeutic services offered to customers in the EEA (and Northern Ireland) (whether directly or via intermediaries) by providers that are
based outside the EEA will be covered by the IVDR.
Fulfillment of the obligations imposed by the IVDR are likely to increase the cost and time required in order to obtain regulatory approval for
products and services in the EEA. If we offer tests or services to customers within the EEA (and Northern Ireland) (whether directly or via intermediaries) that
fall within the scope of the IVDR, we may be unable to fulfill these obligations, or a notified body, where applicable, may consider that we have not
adequately demonstrated compliance with our related obligations to merit a CE Certificate of Conformity on the basis of the IVDR. Our ability, and the ability
of our customers, to commercialize diagnostic tests based on our technology will depend in part on the extent to which coverage and reimbursement for
these tests will be available from third-party payors. Coverage and reimbursement of new products and services is uncertain, and whether the companies
that use our tests or services to develop their own products or services will attain coverage and adequate reimbursement is unknown. In the U.S. and the
EU, there is no uniform policy for determining coverage and reimbursement. Coverage can differ from payor to payor, and the process for determining
whether a payor will provide coverage may be separate from the process for setting the reimbursement rate. In addition, the U.S. government, state
legislatures and foreign governments have shown significant interest in implementing cost containment programs to limit the growth of government-paid
healthcare costs, including price controls and restrictions on reimbursement.
Physicians, hospitals, and third-party payors often are slow to adopt new products, services, technologies, and treatment practices that require
additional upfront costs and training. Physicians may not be willing to undergo training to adopt personalized cancer therapies, may decide that such
therapies are too complex to adopt without appropriate training or not cost-efficient, and may choose not to administer these therapies. Based on these and
other factors, hospitals and payors may decide that the benefits of personalized cancer therapies do not or will not outweigh their costs.
The loss of key members of our executive management team could adversely affect our business.
Our success in implementing our business strategy depends largely on the skills, experience, and performance of key members of our executive
management team and others in key management positions. The collective efforts of each of our executives and others working with them as a team are
critical to us as we continue to develop our technologies, services, products, and research and development programs. As a result of the difficulty in locating
qualified new management, the loss or incapacity of existing members of our executive management team could adversely affect our operations. If we were
to lose one or more of these key employees, we could experience difficulties in finding qualified successors, competing effectively, developing our
technologies, and implementing our business strategy. Effective December 31, 2022, John West retired from his role as our Chief Executive Officer. Aaron
Tachibana, our Chief Financial Officer, served as our interim Chief Executive Officer from December 31, 2022 until March 2, 2023, when Christopher Hall,
who served as our SVP and Head, Diagnostics Business, was appointed Chief Executive Officer, in addition to his role as our President. As with any change
in leadership, there is a risk to organizational effectiveness and employee retention as well as the potential for disruption to our business. Integrating
members into new or different management roles could prove disruptive to our operations, require substantial resources and management attention and
ultimately prove unsuccessful. Each member of our executive management team has an employment agreement; however, the existence of an employment
agreement does not guarantee retention of members of our executive management team, and we may not be able to retain those individuals or replace them
in the event we lose their services. We do not maintain “key person” life insurance on any of our employees.
In addition, we rely on collaborators, consultants, and advisors, including scientific and clinical advisors, to assist us in formulating our research
and development and commercialization strategy. Our collaborators, consultants, and advisors are generally self-employed or employed by employers other
than us and may have commitments under agreements with other entities that may limit their availability to us.
The loss or extended illness of a key employee, the failure of a key employee to perform in his or her current position, or our inability to attract and
retain skilled employees could result in our inability to continue to grow our business or to implement our business strategy.
We rely on highly skilled personnel in a broad array of disciplines and if we are unable to hire, retain, or motivate these individuals, or
maintain our corporate culture, we may not be able to maintain the quality of our services or grow effectively.
Our performance, including our research and development programs and laboratory operations, largely depends on our continuing ability to
identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees is
intense, and we may not be able to attract or retain qualified personnel in the future, including bioinformatic scientists, bioinformatic engineers, software
engineers, statisticians, variant curators, clinical laboratory scientists (“CLS”), and genetic counselors, due to the competition for qualified personnel among
life science businesses, technology companies, as well as universities and public and private research institutions, particularly in the San Francisco Bay
Area. For example, California has a shortage of qualified CLS, who must be licensed by the California Department of Public Health to perform clinical testing
in laboratories located in California such as our CLIA-certified and CAP-accredited laboratory. We face intense competition for, and we have experienced
and may in the future experience difficulty attracting and retaining, sufficient numbers of licensed and qualified CLS to support the needs of our business and
our laboratory capacity expansion efforts. All of our U.S. employees are at-will, which means that either we or the employee may terminate their employment
at any time. In addition, our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees
and retaining and motivating our existing employees for reasons that may include movements in our stock price. If we are not able to attract and retain the
necessary personnel, including licensed and qualified CLS, to accomplish our business objectives, we may experience constraints that could adversely
affect our ability to scale our business and
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support our research and development efforts and our laboratory operations. We believe that our corporate culture fosters innovation, creativity, and
teamwork. However, as our organization grows, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This could
negatively impact our ability to retain and attract employees and our future success.
We have undertaken in the past, and may in the future undertake, internal restructuring activities that could result in disruptions to our
business or otherwise harm our results of operations or financial condition.
From time to time we may undertake internal restructuring activities as we continue to evaluate and attempt to optimize our cost and operating
structure in light of developments in our business strategy and long-term operating plans. For example, in the first quarter of 2023 and in the fourth quarter of
2023, we implemented reductions in our workforce to reduce operating costs and improve operating efficiency that collectively affected nearly 50% of our
workforce. Any restructuring activities that we may undertake in the future may result in write-offs or other restructuring charges. There can be no assurance
that any restructuring activities that we undertake in the future will achieve the cost savings, operating efficiencies or other benefits that we may initially
expect. Restructuring activities may also result in a loss of continuity, accumulated knowledge and inefficiency during transitional periods and thereafter. In
addition, internal restructurings can require a significant amount of time and focus from management and other employees, which may divert attention from
commercial operations and disrupt our ongoing business. If any internal restructuring activities we undertake in the future fail to achieve some or all of the
expected benefits therefrom, our business, results of operations and financial condition could be materially and adversely affected.
The process of opening our new laboratory facilities in Fremont, California has diverted and could continue to divert management’s
attention and has disrupted and could continue to disrupt our ongoing business.
We have relocated our corporate headquarters and all laboratory facilities to Fremont, California. These efforts have involved significant tenant
improvements, construction and regulatory compliance activities to be undertaken. Such efforts have distracted and may continue to distract management
from current operations, have disrupted and may continue to disrupt planned research, development or regulatory compliance activities, and have resulted in
and may continue to result in greater than expected liabilities and expenses, any of which could result in a material adverse effect on our business
prospects, financial condition, or results of operations. For example, delays in the completion of updates to our new corporate headquarters in Fremont
delayed our previously planned move-in date. Additionally, from January 2023 through April 2023, we experienced substantial disruption to our use of the
Fremont facility due to a failure of an electrical bus duct serving the facility. We used backup generators to power our laboratories and emergency lights at
the facility through February 2023 but were unable to use the office portions of the facility, or use the facility's heating, ventilation and air conditioning system
during this time. We were able to restore full power to the facility on a temporary basis during March 2023 and April 2023 using additional generators, and
regular electrical service to the facility has since been restored. However, we may experience additional disruptions in the future. We incurred costs in
maintaining temporary power to the facility and in attempting to permanently remedy the problem, including obtaining additional backup generators,
equipment, and back up batteries, and purchasing fuel for the generators on a daily basis. If we experience additional disruptions to our power supply, it may
result in a loss in productivity, including delays to research and development programs, and could render it difficult or impossible for us to sell or perform
certain of our services for some period of time. Additionally, if the backup generators were to fail, it could result in damage to biological samples stored within
the Fremont facility, which may include certain customer samples. See “—If our facilities become damaged or inoperable, or we are required to vacate the
facilities, our ability to sell and provide our services and pursue our research and development efforts may be jeopardized."
We may not be able to manage our future growth effectively, which could make it difficult to execute our business strategy.
Our expected future growth could create a strain on our organizational, administrative, and operational infrastructure, including facilities (such as
our new facility in Fremont, California), laboratory operations, quality control, customer service, marketing and sales, and management. We may not be able
to maintain the quality of or expected turnaround times for our tests, or satisfy customer demand as our test volume grows. Our ability to manage our growth
properly will require us to continue to improve our operational, financial, and management controls, as well as our reporting systems and procedures. As a
result of our growth, our operating costs may escalate even faster than planned, and some of our internal systems may need to be enhanced or replaced. If
we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our business could be harmed.
We may need to continue to invest in our infrastructure in advance of increased demand for our services; our failure to accurately
forecast demand would have a negative impact on our business and our ability to achieve and sustain profitability.
Our new Fremont facility expanded our laboratory capacity and, in order to execute our business model, we may need to make additional
investments to further scale our infrastructure, including purchases of additional equipment, some of which can take several months or more to procure,
setup, and validate, or increases to our software and computing capacity. There is no assurance that any of these increases in scale, equipment, software,
and computing capacities, or process enhancements will be successfully implemented.
We expanded our laboratory facilities in advance of increased demand for our services. Our current and projected future expense levels are to a
large extent fixed and are largely based on our current investment plans and our estimates of future test volume. As a result, if revenue does not meet our
expectations we may not be able to promptly adjust or reduce our spending to levels commensurate with our revenue, or at all. If we fail to generate demand
commensurate with our infrastructure growth or if we fail to scale our infrastructure sufficiently in advance of demand to successfully meet such demand, our
business, prospects, financial condition, and results of operations could be adversely affected.
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As we commercialize additional services or products, we may need to incorporate new equipment, implement new technology systems and
laboratory processes, or hire new personnel with different qualifications. Failure to manage this growth or transition could result in turnaround time delays,
higher costs, declining service and/or product quality, deteriorating customer service, and slower responses to competitive challenges. A failure in any one of
these areas could make it difficult for us to meet market expectations for our services and could damage our reputation and the prospects for our business.
We may acquire businesses or assets, form joint ventures, or make investments in other companies or technologies that could harm
our operating results, dilute our stockholders’ ownership, or cause us to incur debt or significant expense.
As part of our business strategy, we may pursue acquisitions of complementary businesses or assets, as well as technology licensing
arrangements. We may also pursue strategic alliances that leverage our core technology and industry experience to expand our offerings or distribution, or
make investments in other companies. As an organization, we have limited experience with respect to acquisitions as well as the formation of strategic
alliances and joint ventures. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not
realize the anticipated benefits of any acquisition, technology license, strategic alliance, joint venture or investment, and their consideration may be
distracting to our management or prevent us from pursuing other opportunities. In addition, we may not be able to find suitable partners or acquisition
candidates, and we may not be able to complete such transactions on favorable terms, if at all. Any future such transactions by us also could result in
significant write-offs, the incurrence of debt and contingent liabilities, exposure to additional liability, exposure to additional revenue concentration, additional
regulatory obligations and exposure to additional potential liability, any of which could harm our operating results and future prospects. If we make any
acquisitions in the future, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or
contingent liabilities. Integration of an acquired company or business also may require management resources that otherwise would be available for ongoing
development of our existing business.
To finance any acquisitions or investments, we may choose to raise additional funds. The various ways we could raise additional funds carry
potential risks. See “—Financial and Market Risks and Risks Related to Owning Our Common Stock—Our inability to raise additional capital on acceptable
terms in the future may limit our ability to continue to operate our business and further expand our operations.” If the price of our common stock is low or
volatile, we may not be able to acquire other companies using stock as consideration. Alternatively, it may be necessary for us to raise additional funds for
these activities through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all.
Ethical, legal, and social concerns related to the use of genetic information could reduce demand for our tests.
Genetic testing has raised ethical, legal, and social concerns regarding privacy and the appropriate uses of the resulting information.
Governmental authorities have, through the Genetic Information Nondisclosure Act, and could further, for social or other purposes, limit or regulate the use of
genetic information or genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Ethical
and social concerns may also influence governmental authorities to deny or delay the issuance of patents for technology relevant to our business. Similarly,
these concerns may lead patients to refuse to use, or clinicians to be reluctant to order, genetic tests even if permissible. These and other ethical, legal, and
social concerns may limit market acceptance of our tests or reduce the potential markets for our tests, either of which could have an adverse effect on our
business, financial condition, or results of operations.
Any collaboration arrangements that we have entered into or may enter into in the future may not be successful, which could adversely
affect our ability to develop and commercialize our services and products.
Any current or future collaborations, including any strategic alliances or any collaborations to develop companion diagnostic tests, that we have
entered (for example, our collaborations with Tempus; Myriad; ClearNote Health, Inc.; Cancer Research UK, University College London, and the Francis
Crick Institute (the TRACERx study); The Royal Marsden; the Vall d'Hebron Institute of Oncology (VHIO); Duke University; the Dana-Farber Cancer Institute;
University Medical Center Hamburg-Eppendorf (also known as UKE); and Criterium and the Academic Breast Cancer Consortium) or may enter into may not
be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborations are subject
to numerous risks, which include that:
•
•
•
•
•
we may incur increased research and development expenses, and such activities may also divert management attention and resources
and/or create competing internal priorities for us, which could prevent us from successfully conducting other parts of our business or
collaborating with others;
collaborators have significant discretion in determining the efforts and resources that they will apply to collaborations;
collaborators may not pursue development and commercialization of our services or products or may elect not to continue or renew
development or commercialization programs based on trial or test results, changes in their strategic focus due to the acquisition of
competitive services or products, availability of funding, or other external factors, such as a business combination that diverts resources or
creates competing priorities for our collaborator;
collaborators could independently develop, or develop with third parties, services or products that compete directly or indirectly with our
services or products;
collaborators with marketing, manufacturing, and distribution rights to one or more services or products may not commit sufficient resources
to or otherwise not perform satisfactorily in carrying out these activities;
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•
•
•
•
•
•
•
•
we could grant exclusive rights to our collaborators that would prevent us from collaborating with others;
a large percentage of our revenue may be concentrated with the collaborators if the collaborations are successful and we may experience
further losses if they are or later become unsuccessful;
collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary
information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary
information or expose us to potential liability;
disputes may arise between us and a collaborator that causes the delay or termination of the research, development, or commercialization of
our current or future services or products or that results in costly litigation or arbitration that diverts management attention and resources;
collaborations may be terminated, and, if terminated, may result in a need for additional capital to pursue further development or
commercialization of the applicable current or future services or products;
collaborators may own or co-own intellectual property covering our services or products that results from our collaborating with them, and in
such cases, we would not have the exclusive right to develop or commercialize such intellectual property;
collaborators’ activities or use of our services or deliverables may create additional regulatory obligations and could lead to side effects or
adverse events in patients, exposing us to potential liability or regulatory review; and
collaborators’ sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or criminal
proceedings.
If we are unable to successfully obtain rights to required third-party intellectual property rights or maintain the existing intellectual property rights
we have, we may have to abandon development of that program and our business and financial condition could suffer.
Our operations and employees face risks related to health crises that could adversely affect our operations, our financial condition, and
the business or operations of our customers or other third parties with whom we conduct business.
Our business could be adversely impacted by the effects of a health crisis that could cause significant disruption in the operations of our
customers and third-party suppliers upon whom we rely. Our laboratory facilities, executive team, and most of our employees are located in the San
Francisco Bay Area. In the event of a health crisis that becomes widespread in or around the San Francisco Bay Area, we may proactively, or be ordered by
government officials to, take precautionary measures such as suspending our lab operations, implementing alternative work arrangements for our
employees, and limiting our employees’ travel activities.
Our operations were previously impacted by the COVID-19 pandemic. For example, the previous shelter-in-place order and health orders
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
cause similar effects on our operations. COVID-19 disrupted, and a future health epidemic or pandemic may disrupt in the future, the ability of our suppliers
to fulfill our purchase orders in a timely manner or at all. Additionally, we use certain 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 a health epidemic or pandemic or if other supply chain issues
arise as a result of such a public health crisis. Several of our customers were delayed in sending us samples 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 or samples to us
in the future in the event of the emergence of another health epidemic or pandemic.
Moreover, the ultimate impact of a health epidemic or pandemic on our business, operations, or the global economy as a whole is highly uncertain,
but a continued and prolonged public health crisis could have a material negative impact on our business, financial condition, and operating results.
Expansion into international markets would subject us to increased regulatory oversight and regulatory, economic, social, health and
political uncertainties, which could cause a material adverse effect on our business, financial position, and results of operations.
We may in the future expand our business and operations into international jurisdictions in which we have limited operating experience, including
with respect to seeking regulatory approvals and marketing and selling products and services. As we expand internationally, our operations in these
jurisdictions may be adversely affected by general economic conditions and economic and fiscal policy, including changes in exchange rates and controls,
interest rates and taxation policies, increased government regulation, social instability, local or regional health crises, and political, economic or diplomatic
developments in the future. Certain jurisdictions have, from time to time, experienced instances of civil unrest and hostilities, both internally and with
neighboring countries. Rioting, military activity, terrorist attacks, or armed hostilities could cause our operations in such jurisdictions to be adversely affected
or suspended. We generally do not have insurance for losses and interruptions caused by terrorist attacks, military conflicts and wars. In addition, anti-
bribery and anti-corruption laws may conflict with some local customs and practices in foreign jurisdictions. Our international operations may subject us to
heightened scrutiny under the Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the United Kingdom (the “U.K.”) Bribery Act and similar anti-
bribery laws, and could subject us to liability under such laws despite our best efforts to comply with such laws. As a result of our policy to comply with the
FCPA, the U.K. Bribery Act and similar anti-bribery laws, we may be at a competitive disadvantage to competitors that are not subject to, or do not comply
with, such laws. Further, notwithstanding our compliance programs,
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there can be no assurances that our policies will prevent our employees or agents from violating these laws or protect us from any such violations.
Additionally, we cannot predict the nature, scope or impact of any future regulatory requirements that may apply to our international operations or how
foreign governments will interpret existing or new laws. Alleged, perceived, or actual violations of any such existing or future laws by us or due to the acts of
others, may result in criminal or civil sanctions, including contract cancellations or debarment, and damage to our reputation, any of which could have a
material adverse effect on our business.
Regulatory, Legal and Cybersecurity Risks
Our tests may be subject to regulatory action if regulatory agencies or authorities determine that our tests do not appropriately comply
with statutory and regulatory requirements enforced by the FDA, or equivalent foreign regulatory authorities and/or CLIA requirements
for quality laboratory testing or equivalent foreign requirements.
The laws and regulations governing the marketing of clinical laboratory tests are extremely complex and in many instances there are no significant
regulatory or judicial interpretations of these laws and regulations. The Federal Food, Drug and Cosmetic Act (the “FDC Act”) defines a medical device to
include any instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent or other similar or related article, including a component, part,
or accessory, intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, in man or other
animals. Some of our tests may be considered by the FDA to be in vitro diagnostic products that are subject to regulation as medical devices. Among other
things, pursuant to the FDC Act and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage,
recordkeeping, premarket clearance or approval, marketing and promotion, and sales and distribution of medical devices in the U.S. to ensure that medical
devices distributed domestically are safe and effective for their intended uses. In addition, the FDA regulates the import and export of medical devices.
Although the FDA has statutory authority to assure that medical devices are safe and effective for their intended uses, the FDA has generally
exercised its enforcement discretion and not enforced applicable regulations with respect to LDTs, which are a subset of in vitro diagnostic devices that are
intended for clinical use and designed, manufactured, and used entirely within a single laboratory. We currently market our tests as LDTs and, therefore, we
believe that they are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDC Act provisions.
On October 3, 2023 FDA issued proposed regulations under which it would phase out its enforcement discretion approach to LDTs over a period
of four years (the "Proposed Rule"). If the Proposed Rule is finalized as proposed, we anticipate that we would be required to obtain PMA approval for
certain of our tests by October 1, 2027. We would also be subject to device registration and listing requirements, medical device reporting requirements and
the requirements of the FDA’s Quality System Regulation. If the FDA determines that our tests are subject to enforcement as medical devices, we could be
subject to enforcement action, including administrative and judicial sanctions, and additional regulatory controls and submissions for our tests, all of which
could be burdensome. We and/or our collaborators may also be required to submit one or more of our tests for premarket notification, review, clearance or
approval by the FDA as medical devices. See “—Failure to comply with federal, state, and foreign laboratory licensing requirements and the applicable
requirements of the FDA or any other regulatory authority, could cause us to lose the ability to perform our tests, experience disruptions to our business or
become subject to administrative or judicial sanctions.”
In early December 2023, following the close of a public comment period, FDA announced its intention to publish the Proposed Rule in final form in
April 2024. On January 18, 2024, the Director of FDA’s Center for Devices and Radiological Health, which oversees IVD regulation within the FDA, and the
Chief Medical Officer and Acting Director of CMS’ Center for Clinical Standards and Quality, which oversees CLIA within CMS, issued a joint press release
supporting the Proposed Rule, indicating broad support within the Department of Health and Human Services for FDA’s Proposed Rule.
Legislative proposals addressing oversight of genetic testing and LDTs have been introduced in previous Congresses, and we expect that new
legislative proposals will be introduced from time to time in the future. For example, the proposed “Verifying Accurate, Leading-edge IVCT Development” Act
(the “VALID Act”) would clarify and enhance FDA’s authority to regulate LDTs, including premarket review of non-exempted tests. We cannot predict whether
the VALID Act will become legislation and cannot provide any assurance that FDA regulation, including premarket review, will not be required in the future for
our tests, whether through finalization of the Proposed Rule, new enforcement policies adopted by the FDA or new legislation enacted by Congress.
It is possible that legislation will be enacted into law or guidance such as the Proposed Rule could be issued by the FDA that may result in
increased regulatory burdens for us to continue to offer our tests or to develop and introduce new tests. This legislative and regulatory uncertainty exposes
us to the possibility of enforcement action or additional regulatory controls and submissions for our tests, both of which could be burdensome. In addition, we
cannot be certain that the FDA will not enact rules or guidance documents that could impact our ability to purchase certain materials necessary for the
performance of our tests, such as products labeled for research use only. Should any of the reagents obtained by us from suppliers and used in conducting
our tests be affected by future regulatory actions, our business could be adversely affected by those actions, including increasing the cost of testing or
delaying, limiting, or prohibiting the purchase of reagents necessary to perform testing.
In the EEA, IVDs are governed by the IVDR and must comply with the requirements of the IVDR in order to be placed on the market or put into
service in the EEA. The IVDR does not specifically address the regulation of products falling within the description "laboratory-developed tests". Moreover,
while the Regulation includes only limited exemptions for devices that are manufactured and used only within health institutions established in the EEA,
diagnostic and therapeutic services undertaken outside of the EEA (for example at our facilities in the U.S.) would not fall within the scope of such
exemptions. We believe that we do not currently offer tests or services
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to customers established in the EEA which would fall within the scope of the IVDR. If, in the future, we offer tests or services to customers within the EEA
(whether directly or via intermediaries) that fall within the scope of the IVDR, it is unlikely that we will benefit from IVDR exemptions foreseen for health
institutions established in the EEA. This means that we will have to comply with the IVDR in full.
If the FDA determines that our services are subject to enforcement as medical devices, or if foreign regulatory authorities regulate our
products as IVDs, we could incur substantial costs and time delays associated with satisfying statutory and regulatory requirements
such as pre-market clearance, approval or certification, and we could incur additional expense in offering our tests and tests that we
may develop in the future.
If the FDA determines that our tests and associated software do not fall within the definition of an LDT, or there are regulatory or legislative
changes such as FDA's Proposed Rule, or if we voluntarily submit one or more of our tests for premarket notification, review, clearance or approval by the
FDA as medical devices, we may be required to obtain premarket clearance for our tests and associated software under Section 510(k) of the FDC Act or
approval of a premarket approval application (“PMA”). We would also be subject to ongoing regulatory requirements such as registration and listing
requirements, medical device reporting requirements, and quality control requirements. If our tests are considered medical devices not subject to
enforcement discretion, or if we voluntarily submit one or more of our tests for premarket notification, review, clearance or approval by the FDA as medical
devices, the regulatory requirements to which our tests are subject would depend on the FDA’s classification of our tests. The FDA has issued regulations
classifying generic types of medical devices into one of three regulatory control categories (Class I, Class II, or Class III) depending on the degree of
regulation that the FDA finds necessary to provide reasonable assurance of their safety and effectiveness. The class into which a device is placed
determines the requirements that a medical device manufacturer must meet both pre- and post-market. On January 31, 2024, FDA announced its intent to
initiate a reclassification process for most IVDs that are currently Class III (high risk), the majority of which are infectious disease and companion diagnostic
IVDs, into Class II (moderate risk). This reclassification would allow manufacturers of certain types of IVDs to seek marketing clearance through the less
burdensome Class II 510(k) premarket notification pathway rather than the Class III premarket approval (PMA) pathway, the most stringent type of FDA
medical device review.
Generally, Class I devices do not require premarket authorization, but are subject to a comprehensive set of regulatory authorities referred to as
general controls. Class II devices, in addition to general controls, generally require special controls and premarket clearance through the submission of a
section 510(k) premarket notification. Class III devices are subject to general controls and special controls, and also require premarket approval prior to
commercial distribution, which is a more rigorous process than premarket clearance. Under the FDC Act, a device that is first marketed after May 28, 1976 is
by default a Class III device requiring premarket approval unless it is within a type of generic device class that has been classified as Class I or Class II.
Even if a device falls under an existing Class II, non-exempt, device classification, the device must also be shown to be “substantially equivalent” to a legally
marketed predicate device through submission of a section 510(k) premarket notification. If after reviewing a firm’s 510(k) premarket notification, the FDA
determines that a device is not substantially equivalent to a legally marketed predicate device, the new device is classified into Class III, requiring premarket
approval. It is possible for a manufacturer to obtain a Class I or Class II designation without an appropriate predicate by submitting a de novo request for
reclassification.
The process for submitting a 510(k) premarket notification and receiving FDA clearance usually takes from three to 12 months, but it can take
significantly longer and clearance is never guaranteed. The process for submitting and obtaining FDA approval of a PMA is much more costly, lengthy, and
uncertain. It generally takes from one to three years or even longer and approval is not guaranteed. PMA approval typically requires extensive clinical data
and can be significantly longer, more expensive and more uncertain than the 510(k) clearance process. Despite the time, effort and expense expended,
there can be no assurance that a particular device ultimately will be cleared or approved by the FDA through either the 510(k) clearance process or the PMA
process on a timely basis, or at all.
If our tests are considered medical devices not subject to enforcement discretion, or if we voluntarily submit one or more of our tests for premarket
notification, review, clearance or approval by the FDA as medical devices, one classification regulation that could be relevant to one or more of our tests is a
classification for genetic health risk (“GHR”) assessment tests, codified at 21 C.F.R. § 866.5950. If our tests are considered medical devices that are not
subject to enforcement discretion, or if we voluntarily submit one or more of our tests for premarket notification, review, clearance or approval by the FDA as
medical devices, and one or more of our tests is considered to fall under the 21 C.F.R. § 866.5950 classification regulation for GHR tests, or under another
Class II classification that is subject to a premarket notification requirement, we would be required to obtain marketing clearance for such tests. Further, if
considered to fall under the 21 C.F.R. § 866.5950 classification for GHR tests, our tests would be required to adhere to specified special controls, such as
labeling and testing specifications and information about the test to be posted on the manufacturer’s website. If any of our current or pipeline tests are not
considered by the FDA to be GHR tests or do not qualify for the limited exemption for a sponsor’s subsequent GHR tests once the assessment system has
been reviewed and cleared by FDA, or if any of our tests fall under a different non-exempt classification or are unclassified, we could be required to obtain
510(k) clearance or approval of a PMA for such test in the future.
If premarket review of our tests is required, the premarket review process may involve, among other things, successfully completing additional
clinical trials. If we are required to conduct premarket clinical trials, whether using prospectively acquired samples or archival samples, delays in the
commencement or completion of clinical testing could significantly increase our service and product development costs, delay commercialization of any
future services or products, and interrupt sales of our current services and products. Many of the factors that may cause or lead to a delay in the
commencement or completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval. The commencement of clinical
trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the concerns
around genetic testing, the nature of the protocol, the proximity of patients to clinical sites, and the eligibility criteria for the clinical trial.
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If we are required to conduct clinical trials, we and any third-party contractors we engage would be required to comply with good clinical practices
(“GCPs”), which are regulations and guidelines enforced by the FDA, for devices in clinical development. The FDA enforces these GCPs through periodic
inspections of trial sponsors, principal investigators, and trial sites. If we or any third-party contractor fails to comply with applicable GCPs, the clinical data
generated in clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before clearing or approving our
marketing applications. A failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory clearance or
approval process. In addition, if these parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality,
completeness or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical
trials may have to be extended, delayed or terminated. Many of these factors would be beyond our control. We may not be able to enter into replacement
arrangements without undue delays or considerable expenditures. If there are delays in testing or approvals as a result of the failure to perform by third
parties, our research and development costs would increase, and we may not be able to obtain regulatory clearance or approval for our tests. In addition, we
may not be able to establish or maintain relationships with these parties on favorable terms, if at all. Each of these outcomes would harm our ability to
market our tests or to achieve or sustain profitability. Similar actions and obligations may be imposed by the competent authorities of an EU Member State,
or a foreign regulatory authority.
The FDA requires medical device manufacturers to comply with, among other things, current good manufacturing practices for medical devices,
set forth in the Quality System Regulation at 21 C.F.R. Part 820, which requires manufacturers to follow elaborate design, testing, control, documentation,
and other quality assurance procedures during the manufacturing process; the medical device reporting regulation, which requires that manufacturers report
to the FDA if their device or a similar device they market may have caused or contributed to a death or serious injury or malfunctioned in a way that would
likely cause or contribute to a death or serious injury if it were to recur; labeling regulations, including the FDA’s general prohibition against promoting
devices for unapproved or “off-label” uses; the reports of corrections and removals regulation, which requires manufacturers to report to the FDA if a device
correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the FDC Act caused by the device which may
present a risk to health; and the establishment registration and device listing regulation.
Moreover, there can be no assurance that any cleared or approved labeling claims will be consistent with our current claims or adequate to
support continued adoption of our services and products. If premarket review is required for some or all of our services and products, the FDA may require
that we stop selling such services and products pending clearance or approval, which would negatively impact our business. Even if our services and
products are allowed to remain on the market prior to clearance or approval, demand for our services and products may decline if there is uncertainty about
our services or products, if we are required to label our services or products as investigational by the FDA, or if the FDA limits the labeling claims we are
permitted to make for our services or products. As a result, we could experience significantly increased development costs and a delay in generating
additional revenue from our services and products, or from other services or products now in development.
In addition, any clearance or approval we obtain for our services or products may contain requirements for costly post-market testing and
surveillance to monitor the safety or efficacy of the product. The FDA has broad post-market enforcement powers, and if unanticipated problems with our
services or products arise, or if we or our suppliers fail to comply with regulatory requirements following FDA clearance or approval, we may become subject
to enforcement actions such as:
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restrictions on manufacturing processes;
restrictions on service or product marketing;
warning letters;
withdrawal or recall of services or products from the market;
refusal to approve pending PMAs, 510(k)s, or supplements to approved PMAs or cleared 510(k)s that we submit;
fines, restitution, or disgorgement of profits or revenue;
suspension or withdrawal of regulatory clearances or approvals;
limitation on, or refusal to permit, import or export of our products;
product seizures;
injunctions; or
imposition of civil or criminal penalties.
Moreover, the FDA strictly regulates the promotional claims that may be made about medical devices. In particular, a medical device may not be
promoted for uses that are not approved by the FDA as reflected in the device’s approved labeling. However, companies may share truthful and not
misleading information that is otherwise consistent with the device’s FDA approved labeling. The FDA and other agencies or authorities actively enforce the
laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to
significant civil, criminal, and administrative penalties.
In addition, many of the products we use to perform our tests, including sequencers and various associated reagents supplied to us by Illumina,
are labeled as research use only (“RUO”) in the U.S. RUO products are exempt from FDA medical device requirements provided their manufacturers comply
with specified labeling and restrictions on distribution. The products must bear the statement: “For Research Use Only. Not for Use in Diagnostic
Procedures.” Manufacturers of RUO products cannot make any claims related to safety,
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effectiveness or diagnostic utility, and RUO products cannot be intended by the manufacturer for clinical diagnostic use. A product promoted for diagnostic
use may be viewed by the FDA as adulterated and misbranded under the FDC Act and is subject to FDA enforcement activities, including requiring the
manufacturer to seek marketing authorization for the products. We currently use Illumina and other RUO products for our clinical diagnostic tests. If the FDA
were to require clearance, approval or authorization for the sale of Illumina’s RUO products and if Illumina does not obtain such clearance, approval or
authorization, we would have to find an alternative sequencing platform for some or all of our clinical diagnostic tests. We currently have not validated an
alternative sequencing platform on which our tests could be run in a commercially viable manner. If we were not successful in selecting, acquiring on
commercially reasonable terms and implementing an alternative platform on a timely basis, our business, financial condition and results of operations would
be adversely affected. Similarly, a finding that any of our other suppliers failed to comply with applicable requirements could result in interruptions in our
ability to supply our services to the market and adversely affect our operations.
In addition, if we offer tests or services to customers within the EEA (and Northern Ireland) (whether directly or via intermediaries) that fall within
the scope of the IVDR, we would be required to comply with strict requirements in order to affix the CE mark to our products, including requirements for
clinical evidence, pre-market assessment of safety and performance, quality management system, traceability of products, promotion and advertising, and
conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our products in the EEA and detailed reporting obligations.
Failure to comply with federal, state, and foreign laboratory licensing requirements and the applicable requirements of the FDA or any
other regulatory authority, or equivalent foreign regulatory authority, could cause us to lose the ability to perform our tests, experience
disruptions to our business, or become subject to administrative or judicial sanctions.
We are subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose
of providing information for the diagnosis, prevention, or treatment of disease. CLIA regulations establish specific standards with respect to personnel
qualifications, facility administration, proficiency testing, quality control, quality assurance, and inspections. We have a current CLIA certificate to conduct our
tests at our laboratory in Fremont, California. To renew this certificate, we are subject to survey and inspection every two years. Because we are a CAP-
accredited laboratory, the Centers for Medicare & Medicaid Services ("CMS") does not perform this survey and inspection and relies on our CAP survey and
inspection. We also may be subject to additional unannounced inspections.
We are also required to maintain a license to conduct testing in California. California laws establish standards for day-to-day operation of our
clinical reference laboratory, including the training and skills required of personnel and quality control. Several other states in which we operate also require
that we hold licenses to test specimens from patients in those states, under certain circumstances. For example, our clinical reference laboratory is required
to be licensed on a test-specific basis by New York as an out-of-state laboratory, and our LDTs must be approved by the New York State Department of
Health (the “NYDOH”) on a test-by-test basis before they are offered in New York. We are subject to periodic inspection by the NYDOH and are required to
demonstrate ongoing compliance with NYDOH regulations and standards. To the extent NYDOH identified any non-compliance and we are unable to
implement satisfactory corrective actions to remedy such non-compliance, the State of New York could withdraw approval for our tests. Additionally, states
such as Maryland, Pennsylvania, and Rhode Island also require us to maintain out-of-state licenses. Other states may have similar requirements or may
adopt similar requirements in the future. Although we have obtained licenses from states for our clinical reference laboratory where we believe we are
required to be licensed, we may become aware of other states that require out-of-state laboratories to obtain licensure in order to accept specimens from the
state, and it is possible that other states currently have such requirements or will have such requirements in the future. We may also be subject to regulation
in foreign jurisdictions as we seek to expand international utilization of our tests or such jurisdictions adopt new licensure requirements, which may require
review of our tests in order to offer them or may have other limitations such as restrictions on the transport of human blood necessary for us to perform our
tests that may limit our ability to make our tests available outside of the U.S. Complying with licensure requirements in new jurisdictions may be expensive
and/or time-consuming, may subject us to significant and unanticipated delays, or may be in conflict with other applicable requirements.
Failure to comply with applicable clinical laboratory licensure requirements may result in a range of enforcement actions, including license
suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, and criminal sanctions as well as significant adverse
publicity. Any sanction imposed under CLIA, its implementing regulations or state or foreign laws or regulations governing clinical laboratory licensure, or our
failure to renew our CLIA certificate, a state or foreign license or accreditation, could have a material adverse effect on our business, financial condition, and
results of operations. Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in
doing so.
Failure to comply with the IVDR may result in a range of enforcement actions by the regulatory authorities of EU Member States as well as
repercussions for any CE Certificates of Conformity issued by notified bodies, including fines, suspension variation or withdrawal of CE Certificates of
Conformity, product seizures, injunctions or the imposition of civil or criminal penalties which would adversely affect our business, operating results and
prospects.
Although we market our tests as LDTs that are currently subject to the FDA’s exercise of enforcement discretion, if we fail to operate within the
conditions of that exercise of enforcement discretion, if any of our services or products otherwise fail to comply with FDA regulatory requirements as
enforced, or if we are required or voluntarily submit one or more of our tests for premarket notification, review, clearance or approval by the FDA as medical
devices, we would be subject to the applicable requirements of the FDC Act and the FDA’s implementing regulations. The FDA is empowered to impose
sanctions for violations of the FDC Act and the FDA’s implementing regulations, including warning letters, civil and criminal penalties, injunctions, product
seizure or recall, import bans, restrictions on the conduct of our operations and total or partial suspension of production. Any of the aforementioned sanctions
could cause reputational damage, undermine our ability to maintain and increase our revenue, and harm our business, financial condition, and
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results of operations. In particular, if we or the FDA discover that any of our services or products have defects that call into question the accuracy of their
results, we may be required to undertake a retest of all results and analyses provided during the period relevant to the defect, or recall the affected services
and products. The direct costs incurred in connection with such a recall in terms of management time, administrative, and legal expenses and lost revenue,
together with the indirect costs to our reputation, could harm our business, financial condition, and results of operations, and our ability to execute our
business strategy. While we believe that we are currently in material compliance with applicable laws and regulations as currently enforced, the FDA or other
regulatory agencies and authorities may not agree, and a determination that we have violated these laws or a public announcement that we are being
investigated for possible violations of these laws could adversely affect our business, financial condition, results of operations, and prospects.
If our information technology systems or data, or those of third parties upon which we rely, are or were compromised, we could
experience adverse consequences resulting from such compromise, including but not limited to regulatory investigations or actions;
litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; loss of customers
or sales; and other adverse consequences.
In the ordinary course of our business, we, and the third parties upon which we rely, collect, process, receive, generate, use, transfer, disclose,
make accessible, protect, secure, dispose of, transmit, share and store (collectively, “process”) proprietary, confidential, and sensitive information, including
protected health information (“PHI”), personal information, credit card and other financial information, intellectual property, trade secrets, medical information,
biometric information and genomic information (collectively, “sensitive information”) owned or controlled by ourselves or our customers, payors, and other
parties.
Cyberattacks, malicious internet-based activity, and online and offline fraud, and other similar activities threaten the confidentiality, integrity, and
availability of our sensitive information and information technology systems, and those of the third parties upon which we rely. Such threats are prevalent and
continue to increase, are becoming increasingly difficult to detect, and come from a variety of sources, including traditional computer “hackers,” threat actors,
“hacktivists,” organized criminal threat actors, personnel (such as through theft or misuse), sophisticated nation states, and nation-state-supported actors.
Some actors now engage and are expected to continue to engage in cyberattacks, including without limitation nation-state actors for geopolitical reasons
and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, including the war between Russia and Ukraine,
the state of war between Israel and Hamas and the risk of a larger regional conflict, we, and the third parties upon which we rely, may be vulnerable to a
heightened risk of these attacks, including retaliatory cyberattacks, that could materially disrupt our systems and operations, supply chain, and ability to
produce, sell, and distribute our platform, products, and services.
We and the third parties upon which we rely are subject to a variety of evolving threats, including but not limited to social-engineering attacks
(including through deep fakes, which may be increasingly more difficult to identify as fake, and phishing attacks), malicious code (such as viruses and
worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks, credential stuffing, credential harvesting,
personnel misconduct or error, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, attacks enhanced or facilitated by artificial
intelligence ("AI"), software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, natural disasters,
terrorism, and other similar threats. In particular, ransomware attacks are becoming increasingly prevalent and severe and can lead to significant
interruptions in our operations, ability to provide our services, loss of data and income, reputational harm, and diversion of funds. Extortion payments may
alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or
regulations prohibiting such payments. Most of our employees are working remotely at least part of the time and such remote work has increased risks to our
information technology systems and data, as more of our employees utilize network connections, computers and devices outside our premises or network,
including working at home, while in transit and in public locations. Future or past business transactions (such as acquisitions or integrations) could expose us
to additional cybersecurity risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’
systems and technologies. Furthermore, we may discover security issues that were not found during due diligence of such acquired or integrated entities,
and it may be difficult to integrate companies into our information technology environment and security program.
We rely on third-party service providers and technologies to operate critical business systems to process sensitive information in a variety of
contexts, including, without limitation, on-site systems and cloud-based data centers, systems handling human resources, financial reporting and controls,
customer relationship management, regulatory compliance, and other infrastructure operations. We also communicate sensitive data, including patient data,
electronically, and through relationships with multiple third-party vendors and their subcontractors. These applications and data encompass a wide variety of
sensitive information, including research and development information, patient data, commercial information, and business and financial information. Our
ability to monitor these third parties’ security practices is limited, and these third parties may not have adequate security measures in place. If any of our
third-party service providers experience a security incident or other interruption, we could experience adverse consequences. While we may be entitled to
damages if any of our third-party service providers fail to satisfy their privacy or security-related obligations to us, any award may be insufficient to cover our
damages, or we may be unable to recover such award. In addition, supply-chain attacks have increased in frequency and severity, and we cannot guarantee
that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain
exploitable defects or bugs that could result in a breach of or disruption to our information technology systems or the third-party information technology
systems that support us and our services.
Despite the measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications
systems, failures or significant downtime of our information technology or telecommunications systems or those used by our third-party service providers
could prevent us from conducting tests, preparing and providing reports to our customers, billing customers, collecting revenue, handling inquiries from our
customers, conducting research and development activities, and managing the administrative aspects of our business. For example, in 2018, we
experienced downtime in our information technology systems in
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connection with the adoption of certain new information technology, and our results of operations in the first and second quarters of 2018 were adversely
affected as a result. Any of the previously identified or similar threats could cause a security incident or other interruption that could result in unauthorized,
unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive information or our
information technology systems, or those of the third parties upon whom we rely. A security incident or other interruption could disrupt our ability (and that of
third parties upon whom we rely) to provide our platform, products, and services.
We may expend significant resources or modify our business activities (including our clinical trial activities) to try to protect against security
incidents. Additionally, certain data privacy and security obligations may require us to implement and maintain certain measures to protect our information
technology systems and sensitive information.
While we have implemented security measures designed to protect against security incidents, there can be no assurance that these measures will
be effective. We take steps designed to detect, mitigate and remediate vulnerabilities in our information systems (such as our hardware and/or software,
including that of third parties upon which we rely). We may not, however, detect and remediate all such vulnerabilities, including on a timely basis. Further,
we may experience delays in developing and deploying remedial measures and patches designed to address identified vulnerabilities, but we may not be
able to detect and remediate all vulnerabilities because the threats and techniques used to exploit the vulnerability change frequently and are often
sophisticated in nature. Therefore, such vulnerabilities could be exploited but may not be detected until after a security incident has occurred. Further, if the
information technology systems of the third parties upon which we rely become subject to security incidents, we may have insufficient recourse against such
third parties, and we may have to expend significant resources to mitigate the impact of such an event, and to develop and implement protections to prevent
future events of this nature from occurring. Any of the previously identified or similar threats could cause a security incident or other interruption that could
result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive
information or our information technology systems, or those of the third parties upon whom we rely. A security incident or other interruption could disrupt our
ability (and that of third parties upon whom we rely) to provide our tests and services and otherwise conduct our business in the ordinary course.
Unauthorized access, loss, or dissemination could also damage our reputation or disrupt our operations, including our ability to conduct our
analyses, deliver test results, process claims and appeals, provide customer assistance, conduct research and development activities, collect, process, and
prepare company financial information, provide information about our tests and other patient and physician education and outreach efforts through our
website, and manage the administrative aspects of our business. Further, we may experience delays in developing and deploying remedial measures
designed to address any such identified vulnerabilities. For example, like many companies, we use Log4j with respect to certain software or systems to log
security and performance information. In early 2022, we discovered a Log4j vulnerability in our environment although to date we have found no indication
that our or our partners’ data was exposed. Upon learning of this vulnerability, we applied a patch and made updates to our systems and infrastructure
intended to reduce risks associated with the vulnerability.
Applicable data privacy and security obligations, including applicable federal and/or state breach notification laws and foreign equivalents, as well
as public company disclosure obligations, may require us to notify relevant stakeholders, including affected individuals, regulatory authorities and our
stockholders, of certain security incidents. Such disclosures are costly, and the disclosure or the failure to comply with such requirements could lead to
adverse consequences. If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident,
we may experience adverse consequences, such as government enforcement actions (for example, investigations, fines, penalties, audits, and inspections);
additional reporting requirements and/or oversight; restrictions on processing sensitive information (including personal information); litigation (including class
claims) and mass arbitration; indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations
(including availability of data); financial loss; and other similar harms. Security incidents and attendant consequences may prevent or cause customers or
partners to stop using our platform, products, and services, deter new customers or partners from using our platform, products, and services, and negatively
impact our ability to grow and operate our business. Whether a cybersecurity incident is reportable to our stockholders may not be straightforward, may take
considerable time to determine, and may be subject to change as the investigation of the incident progresses, including changes that may significantly alter
any initial disclosure that we provide.
Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts
are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. We cannot be sure that our insurance
coverage will be adequate or sufficient to protect us from or to mitigate liabilities arising out of our data privacy and security practices. Additionally, we cannot
be sure that such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims.
In addition to experiencing a security incident, third parties may gather, collect, or infer sensitive information about us from public sources, data
brokers, or other means that reveals competitively sensitive details about our organization and could be used to undermine our competitive advantage or
market position. Additionally, our sensitive information could be leaked, disclosed, or revealed as a result of or in connection with our employee’s,
personnel’s, or vendor’s use of generative AI technologies.
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We are subject to stringent and evolving U.S. and foreign laws, regulations, rules, contractual obligations, industry standards, policies
and other obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to
regulatory investigations or actions; litigation (including class claims) and mass arbitration demands; fines and penalties; disruptions
of our business operations; reputational harm; loss of revenue or profits; loss of customers or sales; and other adverse business
consequences.
In the ordinary course of business, we process sensitive information, including data we collect from our customers about trial participants in
connection with clinical trials. Our data processing activities subject us to numerous data privacy and security obligations, such as various laws, regulations,
guidance, industry standards, external and internal privacy and security policies, contractual requirements, and other obligations relating to data privacy and
security.
In the United States, federal, state, and local governments have enacted numerous data privacy, and security laws, including data breach
notification laws, personal information privacy laws, and consumer protection laws. For example, the Health Insurance Portability and Accountability Act
("HIPAA"), as amended by the Health Information Technology for Economic and Clinical Health Act ("HITECH"), imposes specific requirements relating to the
privacy, security, and transmission of individually identifiable health information. Penalties for failure to comply with HIPAA and HITECH include significant
civil monetary penalties and criminal penalties in certain circumstances with fines up to $250,000 per violation and/or imprisonment. Further, various states,
such as California and Massachusetts, have implemented similar privacy laws and regulations, such as the California Confidentiality of Medical Information
Act, that impose restrictive requirements regulating the use and disclosure of health information and other personally identifiable information. These laws and
regulations are not necessarily preempted by HIPAA, particularly if a state affords greater protection to individuals than HIPAA. Where state laws are more
protective and applicable to us, we may have to comply with the stricter provisions. In addition to fines and penalties imposed upon violators, some of these
state laws also afford private rights of action to individuals who believe their personal information has been misused. Similarly, the California Consumer
Privacy Act of 2018, as amended by the California Privacy Rights Act of 2020 (“CPRA”) (collectively, "CCPA") applies to personal information of consumers,
business representatives, and employees, and requires businesses to provide specific disclosures in privacy notices and honor requests of California
residents to exercise certain privacy rights, including those noted below. The CCPA provides for fines of up to $7,500 per intentional violation and allows
private litigants affected by certain data breaches to recover significant statutory damages. Although the CCPA exempts some data processed in the context
of clinical trials, the CCPA increases compliance costs and potential liability with respect to other personal information we maintain about California
residents. In addition, the CPRA expands the CCPA’s requirements, including by adding a new right for individuals to correct their personal information and
establishing a new regulatory agency to implement and enforce the law. Other states, such as Virginia, Colorado, Connecticut and Utah have also enacted
comprehensive privacy laws, and similar laws are being considered in several other states, as well as at the federal and local levels. These state laws and
the CCPA provide individuals with certain rights concerning their personal information, including the right to access, correct, or delete certain personal
information, and opt-out of certain data processing activities, such as targeted advertising, profiling, and automated decision-making. The exercise of these
rights may impact our business and ability to provide our products and services. While these states, like the CCPA, also exempt some data processed in the
context of clinical trials, these developments further complicate compliance efforts, and increase legal risk and compliance costs for us, the third parties upon
whom we rely and our customers. Additionally, several states and localities have enacted statutes banning or restricting the collection of biometric
information and regulators, such as the Federal Trade Commission, have indicated that use of biometric technologies (including facial recognition
technologies) may be subject to additional scrutiny.
We may be subject to new laws governing the privacy of consumer health data, including reproductive, sexual orientation, and gender identity
privacy rights. For example, Washington’s My Health My Data Act (“MHMD”) broadly defines consumer health data, places restrictions on processing
consumer health data (including imposing stringent requirements for consents), provides consumers certain rights with respect to their health data, and
creates a private right of action to allow individuals to sue for violations of the law. Other states are considering and may adopt similar laws. California also
recently passed a law protecting privacy of abortion-related records and other reproductive healthcare services.
Outside the U.S., an increasing number of laws, regulations, and industry standards govern data privacy and security. For example, the General
Data Protection Regulation 2016/679 (“EU GDPR”), the United Kingdom’s GDPR (“UK GDPR”), Brazil’s General Data Protection Law (Lei Geral de Proteção
de Dados Pessoais) (Law No. 13,709/2018), and China’s Personal Information Protection Law (“PIPL”) impose strict requirements for processing personal
information. Under the EU GDPR and UK GDPR, companies may face temporary or definitive bans on data processing and other corrective actions; fines of
up to 20 million Euros under the EU GDPR, 17.5 million pounds sterling under the UK GDPR or, in each case, 4% of annual global revenue, whichever is
greater; or private litigation related to processing of personal information brought by classes of data subjects or consumer protection organizations
authorized at law to represent their interests. In Canada, the Personal Information Protection and Electronic Documents Act (“PIPEDA”) and various related
provincial laws, as well as Canada’s Anti-Spam Legislation (“CASL”), applies to our operations. We also receive personal information from customers in Asia
and may be subject to new and emerging data privacy and security regimes in Asia, including Japan’s Act on the Protection of Personal Information, and
Singapore's Personal Data Protection Act.
In the ordinary course of business, we may transfer personal information from Europe and other jurisdictions to the U.S. or other countries. Europe
and other jurisdictions have enacted laws requiring data to be localized or limiting the transfer of personal information to other countries. In particular, the
EEA and the U.K. have significantly restricted the transfer of personal information to the U.S. and other countries whose data privacy and security laws they
generally believe are inadequate. Other jurisdictions may adopt similarly stringent interpretations of their data localization and cross-border data transfer
laws. Although there are currently various mechanisms that may be used to transfer personal information from the EEA and U.K. to the U.S. in compliance
with law, such as the EEA’s standard contractual clauses, the U.K.'s International Data Transfer Agreement / Addendum, and the EU-U.S. Data Privacy
Framework (and U.K. extension thereto) (which allows for transfers for relevant U.S.-based organizations who self-certify compliance and participate in such
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framework), these mechanisms are susceptible to legal challenges, and there is no assurance that we can satisfy or rely on these measures to lawfully
transfer personal information to the U.S. If there is no lawful manner for us to transfer personal information from the EEA, the U.K. or other jurisdictions to the
U.S., or if the requirements for a legally-compliant transfer are too onerous, we could face significant adverse consequences, including the interruption or
degradation of our operations, the need to relocate part of or all of our business or data processing activities to other jurisdictions at significant expense,
increased exposure to regulatory actions, substantial fines and penalties, the inability to transfer data and work with partners, vendors and other third parties,
and injunctions against our processing or transferring of personal information necessary to operate our business. Additionally, companies that transfer
personal information out of the EEA and U.K. to other jurisdictions, particularly to the U.S., are subject to increased scrutiny from regulators, individual
litigants, and activist groups. Some European regulators have ordered certain companies to suspend or permanently cease certain transfers out of Europe
for allegedly violating the GDPR’s cross-border data transfer limitations. EEA countries may also introduce national legislation further limiting the processing
of personal genetic, biometric, or health data, which could limit our ability to collect, use and share data originating from the EEA, or could cause our
compliance costs to increase, require us to change our practices, adversely impact our business, and harm our financial condition.
In addition to data privacy and security laws, because we process some credit card payments through a third-party payment processing partner,
we are contractually subject to industry standards adopted by industry groups and may become subject to such obligations in the future. For example, we
may also be subject to the Payment Card Industry Data Security Standard (“PCI DSS”). The PCI DSS requires companies to adopt certain measures to
ensure the security of cardholder information, including using and maintaining firewalls, adopting proper password protections for certain devices and
software, and restricting data access. Noncompliance with PCI-DSS can result in penalties ranging from $5,000 to $100,000 per month by credit card
companies, litigation, damage to our reputation, and revenue losses.
We also rely on vendors to process payment card data, who may be subject to PCI DSS, and our business may be negatively affected if our
vendors are fined or suffer other consequences as a result of PCI DSS noncompliance. We are also bound by contractual obligations related to data privacy
and security, and our efforts to comply with such obligations may not be successful. For example, certain privacy laws, such as the GDPR, require our
customers to impose specific contractual restrictions on their service providers. We publish privacy policies, marketing materials and other statements
regarding data privacy and security. If these policies, materials or statements are found to be deficient, lacking in transparency, deceptive, unfair, or
misrepresentative of our practices, we may be subject to investigation, enforcement actions by regulators or other adverse consequences.
Our employees and personnel may use generative AI technologies to perform their work, and the disclosure and use of personal information in
generative AI technologies is subject to various data privacy laws and other privacy obligations. Governments have passed and are likely to pass additional
laws regulating generative AI. Our use of this technology could result in additional compliance costs, regulatory investigations and actions, and consumer
lawsuits. If we are unable to use generative AI, it could make our business less efficient and result in competitive disadvantages.
Obligations related to data privacy and security (and consumers' data privacy and security expectations) are quickly changing, becoming
increasingly stringent, and creating uncertainty. Additionally, these obligations may be subject to differing applications and interpretations, which may be
inconsistent or conflict among jurisdictions. Preparing for and complying with these obligations requires us to devote significant resources, which may
necessitate changes to our platform, products and/or services, information technologies, systems, and practices and to those of any third parties that
process personal information on our behalf. In addition, these obligations may require us to change our business model. Our business model materially
depends on our ability to process personal information, so we are particularly exposed to the risks associated with the rapidly changing legal landscape. For
example, because we process PHI, personal information and sensitive information, we may be at heightened risk of regulatory scrutiny, and any changes in
the regulatory framework could require us to fundamentally change our business model, including causing us to take on more onerous obligations in our
contracts, restrict our ability to collect, use and disclose data, or in some cases, impact our ability to operate in certain jurisdictions. We typically rely on our
customers to obtain valid and appropriate consents from data subjects whose genetic samples and data we process on such customers’ behalf particularly
with respect to our RUO and clinical trial services, and we also typically rely on each provider ordering our LDTs or diagnostic services to obtain valid and
appropriate consent from each of his or her patients whose genetic samples and data we process on such patient's behalf. Given that we do not typically
obtain direct consent from such data subjects or patients, and we do not audit our customers or the ordering providers to ensure that they have obtained the
necessary consents required by law, the failure of our customers or the order providers to obtain consents that are valid under applicable law could result in
our own non-compliance with data privacy and security laws. For example, our NeXT Personal RUO test leverages WGS, and the scope of existing consents
from our customers' clinical trial subjects may be insufficient to cover use of NeXT Personal on their samples, which may either limit uptake of NeXT
Personal or expose our customers and ourselves to risk of exceeding the scope of prior consent for specimen testing. A failure, or a perceived failure, to
address or comply with U.S. and foreign data privacy and security laws could result in government enforcement actions (which could include civil or criminal
penalties), private litigation and/or adverse publicity and could negatively affect our operating results and business. Claims that we have violated individuals’
privacy rights, failed to comply with data privacy and security laws, or breached our contractual obligations, even if we are not found liable, could be
expensive and time consuming to defend, could result in adverse publicity and could have a material adverse effect on our business, financial condition, and
results of operations.
If we or the third parties on which we rely fail, or are perceived to have failed, to address or comply with applicable data privacy and security
obligations, we could face significant consequences, including but not limited to: government enforcement actions (e.g., investigations, fines, penalties,
audits, inspections, and similar); litigation (including class-action claims) and mass arbitration demands; additional reporting requirements and/or oversight;
bans on processing personal information; orders to destroy or not use personal information; and imprisonment of company officials. In particular, plaintiffs
have become increasingly more active in bringing data privacy-related claims against companies, including class claims and mass arbitration demands.
Some of these claims allow for the recovery of
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statutory damages on a per violation basis, and, if viable, carry the potential for monumental statutory damages, depending on the volume of data and the
number of violations. Any of these events could have a material adverse effect on our reputation, business, or financial condition, including but not limited to:
loss of customers; interruptions or stoppages in our business operations (including, clinical trials); interruptions or stoppages of data collection needed to
train our algorithms; inability to process personal information or to operate in certain jurisdictions; limited ability to develop or commercialize our platform,
products, and services; expenditure of time and resources to defend any claim or inquiry; adverse publicity; or substantial changes to our business model or
operations.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and
requirements, which could cause significant liability for us and harm our reputation.
We are exposed to the risk of employee fraud or other misconduct, including intentional failures to comply with government regulations, including
federal and state healthcare fraud and abuse laws and regulations, to misuse information, including patient information, and to report financial information or
data accurately or disclose unauthorized activities to us. Such misconduct could also involve the improper use of information obtained in the course of
clinical studies, which could result in regulatory sanctions and cause serious harm to our reputation.
We have a code of conduct and ethics for our directors, officers and employees, but it is not always possible to identify and deter employee
misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling risks or losses or in protecting us from
governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are
instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business
and results of operations, including the imposition of significant administrative, civil and criminal penalties, damages, fines, imprisonment, exclusion from
government healthcare programs, contractual damages, refunding of payments received by us, reputational harm, additional reporting, or oversight
obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law and curtailment
or restructuring of our operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs,
including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.
Complying with numerous statutes and regulations pertaining to our business is an expensive and time-consuming process, and any
failure to comply could result in substantial penalties.
Our operations are or may be subject to other extensive federal, state, local, and foreign laws and regulations, all of which are subject to change.
These laws and regulations currently include, among others:
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the federal Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or
indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order,
arrange for, or recommend purchasing, leasing or ordering, any good, facility, item or service that is reimbursable, in whole or in part, under a
federal healthcare program. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to
have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the
federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes;
the federal Stark physician self-referral law, which prohibits a physician from making a referral for certain designated health services covered
by the Medicare program, including laboratory and pathology services, if the physician or an immediate family member has a financial
relationship with the entity providing the designated health services, and prohibits that entity from billing or presenting a claim for the
designated health services furnished pursuant to the prohibited referral, unless an exception applies. Failure to refund amounts received as a
result of a prohibited referral on a timely basis may constitute a false or fraudulent claim under the False Claims Act;
the Anti-Markup Rule, which, among other things, prohibit a physician or supplier billing the Medicare program from marking up the price of a
purchased diagnostic service performed by another laboratory or supplier that does not “share a practice” with the billing physician or
supplier. Penalties may apply to the billing physician or supplier if Medicare or another payor is billed at a rate that exceeds the performing
laboratory’s charges to the billing physician or supplier, and the performing laboratory could be at risk under false claims laws, described
below, for causing the submission of a false claim;
the 14-Day Rule, also known as the Medicare Date of Service Rule, which prohibits a laboratory supplier from billing the Medicare program
for tests performed on samples collected during or within 14 days of an inpatient hospital stay, unless an exception applies, and requires the
laboratory supplier to bill the hospital in those cases. Penalties may apply to the laboratory supplier if Medicare determines that the Medicare
program was inappropriately billed for testing that should have been billed to the hospital where the sample was collected;
state client billing laws, which specify whether a person that did not perform the service is permitted to submit the claim for payment and if
so, whether the non-performing person is permitted to mark up the cost of the services in excess of the price the purchasing provider paid for
such services. For example, California has an anti-markup statute which prohibits providers from charging for any laboratory test that it did
not perform unless the provider (a) notifies the patient, client or customer of the name, address, and charges of the laboratory performing the
test, and (b) charges no more than what the provider was charged by the clinical laboratory which performed the test except for any other
service actually rendered to the patient by the provider (for example, specimen collection, processing and handling) (California Business and
Professions Code Section 655.5). This provision applies, with certain limited exceptions, to licensed persons such as physicians and clinical
laboratories regulated under the Business and Professions Code. In addition, many states also have “direct-bill” laws, which
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means that the services actually performed by an individual or entity must be billed by such individual or entity, thus preventing ordering
physicians from purchasing services from a laboratory and rebilling for the services they order. For example, California has a direct bill rule
specific to anatomic pathology services that prohibits any provider from billing for anatomic pathology services if those services were not
actually rendered by that person or under his or her direct supervision with some exemptions (California Business and Professions Code
Section 655.7);
the federal civil and criminal false claims laws, including the False Claims Act, which impose liability on any person or entity that, among
other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government. These laws
can apply to entities that provide information on coverage, coding, and reimbursement of their products and services and assistance with
obtaining reimbursement to persons who bill payors. Private individuals can bring False Claims Act “qui tam” actions, on behalf of the
government and such individuals, commonly known as “whistleblowers,” may share in amounts paid by the entity to the government in fines
or settlement;
the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state
healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider,
practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies;
the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, biologicals, and medical devices or supplies
that require premarket approval by or notification to the FDA, and for which payment is available under Medicare, Medicaid, or the Children’s
Health Insurance Program, with certain exceptions, to report annually to CMS information related to (i) payments and other transfers of value
to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), other healthcare professionals (such as
physicians assistants and nurse practitioners) and teaching hospitals, and (ii) ownership and investment interests held by physicians and
their immediate family members;
the HIPAA fraud and abuse provisions, which created federal civil and criminal statutes that prohibit, among other things, defrauding
healthcare programs, willfully obstructing a criminal investigation of a healthcare offense, and falsifying or concealing a material fact or
making any materially false statements in connection with the payment for healthcare benefits, items or services. Similar to the federal Anti-
Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have
committed a violation;
HIPAA, as amended by HITECH, and their respective implementing regulations, which impose obligations on certain healthcare providers,
health plans, and healthcare clearinghouses, known as covered entities, as well as individuals and entities that create, receive, maintain or
transmit individually identifiable health information for or on behalf of a covered entity, known as business associates, as well as their covered
subcontractors, with respect to safeguarding the privacy, security and transmission of individually identifiable health information. HITECH
also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business
associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in U.S. federal courts to enforce the
federal HIPAA laws and seek attorneys' fees and costs associated with pursuing federal civil actions;
the Eliminating Kickbacks in Recovery Act of 2018 (“EKRA”), which prohibits payments for referrals to recovery homes, clinical treatment
facilities, and laboratories and is similar to the federal Anti-Kickback Statute in that it creates criminal penalties for knowing or willful payment
or offer, or solicitation or receipt, of any remuneration, whether directly or indirectly, overtly or covertly, in cash or in kind, in exchange for the
referral or inducement of laboratory testing unless a specific exception applies. Unlike the federal Anti-Kickback Statute, EKRA’s reach
extends beyond federal health care programs to include private insurance (i.e., it is an “all payor” statute). Additionally, most of the safe
harbors available under the federal Anti-Kickback Statute are not reiterated under EKRA, and certain EKRA safe harbors conflict with the
safe harbors available under the federal Anti-Kickback Statute. Therefore, compliance with a federal Anti-Kickback safe harbor does not
guarantee protection under EKRA. Because EKRA is a new law, there is very little additional guidance to indicate how and to what extent it
will be interpreted, applied and enforced by the government. Currently, there is no proposed regulation interpreting or implementing EKRA,
nor any public guidance released by a federal agency concerning EKRA;
other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, fee-splitting restrictions, insurance
fraud laws, prohibitions on the provision of tests at no or discounted cost to induce physician or patient adoption, and false claims acts, which
may extend to services reimbursable by any payor, including private insurers;
the prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims to
any other party;
state laws that prohibit other specified practices, such as billing physicians for testing that they order as discussed above; waiving
coinsurance, copayments, deductibles, and other amounts owed by patients; billing a state Medicaid program at a price that is higher than
what is charged to one or more other payors; employing, exercising control over, licensed professionals in violation of state laws prohibiting
corporate practice of medicine and other professions, and prohibitions against the splitting of professional fees with licensed professionals;
and
similar foreign laws and regulations that apply to us in the countries in which we operate or may operate in the future.
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As a clinical laboratory, our business practices may face additional scrutiny from government regulatory agencies and authorities such as the
Department of Justice, the U.S. Department of Health and Human Services ("HHS"), Office of Inspector General (the “OIG”), and CMS. Certain
arrangements between clinical laboratories and referring physicians have been identified in fraud alerts issued by the
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OIG as implicating the Anti-Kickback Statute. The OIG has stated that it is particularly concerned about these types of arrangements because the choice of
laboratory, as well as the decision to order laboratory tests, typically are made or strongly influenced by the physician, with little or no input from patients.
Moreover, the provision of payments or other items of value by a clinical laboratory to a referral source could be prohibited under the Stark Law unless the
arrangement meets all criteria of an applicable exception. The government has been active in enforcement of these laws as they apply to clinical
laboratories.
The growth of our business, including services we provide under our agreement with Natera, and our expansion outside of the U.S. may increase
the potential of violating these laws or our internal policies and procedures. The risk of our being found in violation of these or other laws and regulations is
further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of
interpretations. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to
incur significant legal expenses and reputational harm and divert our management’s attention from the operation of our business. If our operations are found
to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including significant
administrative, civil and criminal penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in federal healthcare programs,
refunding of payments received by us, integrity oversight and reporting obligations, and curtailment or cessation of our operations. Any of the foregoing
consequences could seriously harm our business and our financial results.
We could be adversely affected by violations of the FCPA and other worldwide anti-bribery laws.
We are subject to the FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non-U.S. government
officials for the purpose of obtaining or retaining business or securing any other improper advantage. Other U.S. companies in the medical device and
pharmaceutical fields have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with
these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including the U.K.’s Bribery Act of 2010, which also
prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. These laws are complex and far-reaching in nature, and, as a
result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any
changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve
significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our
business, prospects, financial condition or results of operations. We could also incur severe penalties, including criminal and civil penalties, disgorgement,
and other remedial measures.
Changes in health care policy could increase our costs, decrease our revenue, and impact sales of and reimbursement for our tests.
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (the “ACA”),
became law. This law substantially changed the way health care is financed by both commercial payors and government payors, and significantly impacts
our industry. The ACA contains a number of provisions that are expected to impact the business and operations of our customers, some of which in ways we
cannot currently predict, including those governing enrollment in state and federal health care programs, reimbursement changes, and fraud and abuse,
which will impact existing state and federal health care programs and will result in the development of new programs.
Among other things, the ACA:
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expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals
and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby
potentially increasing manufacturers’ Medicaid rebate liability;
established a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical efficacy research in
an effort to coordinate and develop such research; and
established a Center for Medicare and Medicaid Innovation at CMS to test innovative payment and service delivery models to lower
Medicare and Medicaid spending.
There have been executive, judicial and Congressional challenges to certain aspects of the ACA, as well as efforts by the former Trump
administration to repeal or replace certain aspects of the ACA. Since January 2017, former President Trump signed several Executive Orders and other
directives to delay the implementation of certain requirements of the ACA. Concurrently, Congress considered legislation that would repeal, or repeal and
replace, all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the
ACA such as removing penalties, starting January 1, 2019, for not complying with the ACA’s “individual mandate” to carry health insurance and eliminating
the implementation of certain ACA-mandated fees. On June 17, 2021 the U.S. Supreme Court dismissed a challenge on procedural grounds that argued the
ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Further, prior to the U.S. Supreme Court ruling, on
January 28, 2021, President Biden issued an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage
through the ACA marketplace The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules
that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements,
and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. Further, on August 16, 2022,
President Biden signed the Inflation Reduction Act of 2022 (the “IRA 2022”) into law, which among other things, extends enhanced subsidies for individuals
purchasing health insurance coverage in ACA marketplaces through plan year 2025. The IRA 2022 also eliminates the “donut hole” under the Medicare Part
D program beginning
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in 2025 by significantly lowering the beneficiary maximum out-of-pocket cost and through a newly established manufacturer discount program. It is possible
that the ACA will be subject to judicial or Congressional challenges in the future. Efforts to repeal, substantially modify or invalidate some or all of the
provisions of the ACA create considerable uncertainties for all businesses involved in healthcare, including our own. It is unclear how such future efforts to
repeal and replace the ACA will impact the ACA and our business. Additional legislation may be enacted that further amends, or repeals, the ACA, which
could result in lower numbers of insured individuals, reduced coverage for insured individuals and adversely affect our and our customers’ business.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of
2011 was signed into law, which, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to
subsequent legislative amendments to the statute, will remain until 2032 unless additional Congressional action is taken. On January 2, 2013, the American
Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and
increased the statute of limitations period for the government to recover overpayments to providers from three to five years. The Medicare Access and CHIP
Reauthorization Act of 2015, enacted on April 16, 2015 (“MACRA”) repealed the formula by which Medicare made annual payment adjustments to
physicians and replaced the former formula with fixed annual updates, and established a quality payment incentive program, also referred to as the Quality
Payment Program. This program provides clinicians with two ways to participate, including through the APMs, and the Merit-based Incentive Payment
System. Under both APMs and MIPS, performance data collected each performance year will affect Medicare payments in later years, including potentially
reducing payments.
In April 2014, Congress passed the Protecting Access to Medicare Act of 2014 (“PAMA”), which included substantial changes to the way in which
clinical laboratory services are paid under Medicare. Under PAMA, laboratories that receive the majority of their Medicare revenue from payments made
under the Physician Fee Schedule are required to report to CMS, beginning in 2017 and every three years thereafter (or annually for “advanced diagnostic
laboratory tests”), private payor payment rates and volumes for their tests. CMS will use this data to calculate a weighted median payment rate for each test,
which will be used to establish revised Medicare reimbursement rates for the tests. Laboratories that fail to report the required payment information may be
subject to substantial civil monetary penalties. Reporting of payment data under PAMA for clinical diagnostic laboratory tests has been delayed on numerous
occasions. Beginning on January 1, 2018, CMS has begun using reported private payor pricing to periodically revise payment rates under the CLFS. Based
on current law, between January 1, 2025 and March 31, 2025, applicable laboratories will be required to report on data collected during January 1, 2019 and
June 30, 2019. This data will be utilized to determine 2025 to 2027 Clinical Laboratory Fee Schedule rates. The payment rate applies to laboratory tests
furnished by a hospital laboratory if the test is separately paid under the hospital outpatient prospective payment system. It is still too early to predict the full
impact on reimbursement for our current tests or those in development.
Pursuant to the Consolidated Appropriations Act, the statutory phase-in of the payment reductions has been extended through 2026 with a 0%
reduction cap for 2021-2023 and a 15% reduction cap for 2024 through 2026. It is unclear what impact new quality and payment programs, such as MACRA,
or new pricing structures, such as those adopted under PAMA, may have on our business, financial condition, results of operations, or cash flows. We also
anticipate there will continue to be proposals by legislators at both the federal and state levels, regulators and private payors to reduce costs while
expanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices we will be able to charge for our tests,
the coverage of or the amounts of reimbursement available for our tests from payors, including commercial payors and government payors. Therefore, even
if favorable coverage and reimbursement status is attained, less favorable coverage policies and reimbursement rates may be implemented in the future.
If we use hazardous materials in a manner that causes injury, we could be liable for resulting damages.
Our activities currently require the use of hazardous chemicals and biological material. We cannot eliminate the risk of an accidental
environmental release or injury to employees or third parties from the use, storage, handling, or disposal of these materials. In the event of an environmental
release or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we
may have. Additionally, we are subject on an ongoing basis to federal, state, and local laws and regulations governing the use, storage, handling, and
disposal of these materials and specified waste products. The cost of maintaining compliance with these laws and regulations may become significant and
our failure to comply may result in substantial fines or other consequences, and either could negatively affect our operating results.
Changes in tax laws or regulations could adversely affect our business and financial condition.
On December 22, 2017, former President Trump signed into law comprehensive tax legislation (the “Tax Cuts and Jobs Act”) that significantly
revised the Internal Revenue Code of 1986, as amended (the “Code”). Future guidance from the U.S. Internal Revenue Service and other tax authorities with
respect to the Tax Cuts and Jobs Act may affect us, and certain aspects of the Tax Cuts and Jobs Act could be repealed or modified in future legislation. For
example, on March 27, 2020, the CARES Act was enacted, which includes changes to the tax provisions that benefit business entities and makes certain
technical corrections to the Tax Cuts and Jobs Act. On December 27, 2020, the Consolidated Appropriations Act, a coronavirus relief package that extended
and expanded various tax provisions, was signed into law. The IRA 2022 includes provisions that will impact the U.S. federal income taxation of
corporations, including imposing a minimum tax on the book income of certain large corporations and an excise tax on certain corporate stock repurchases
that would be imposed on the corporation repurchasing such stock. Changes in corporate tax rates, the realization of net deferred tax assets relating to our
U.S. operations, the taxation of foreign earnings, and the deductibility of expenses under the Tax Cuts and Jobs Act, the CARES Act, or future tax reform
legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges in the current or future taxable
years, and could increase our future U.S. tax expense. The foregoing items, as well as any other future changes in tax laws, could have a material adverse
effect on our business, cash flow, financial condition,
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or results of operations. In addition, it is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act, the CARES Act, IRA 2022,
or any newly enacted federal tax legislation.
Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of accrued amounts.
We are subject to taxation in numerous U.S. states and territories, as well as various non-U.S. jurisdictions. As a result, our effective tax rate is
derived from a combination of applicable tax rates in the various jurisdictions that we operate. In preparing our financial statements, we estimate the amount
of tax that will become payable in each jurisdiction. Nevertheless, our effective tax rate may be different than experienced in the past due to numerous
factors, including passage of the Tax Cuts and Jobs Act and the CARES Act, changes in the mix of our profitability from state to state, the results of
examinations and audits of our tax filings, our inability to secure or sustain acceptable agreements with tax authorities, changes in accounting for income
taxes and changes in tax laws. The foregoing items could increase our future tax expense, change our future intentions regarding reinvestment of foreign
earnings, and could have a material adverse effect on our business, financial condition and results of operations. Any of these factors could cause us to
experience an effective tax rate significantly different from previous periods or our current expectations and may result in tax obligations in excess of
amounts accrued in our financial statements.
The exit of the U.K. from the EU could lead to further regulatory divergence and require us to incur additional expenses in order to
develop, manufacture, and commercialize our products and services.
Following the result of a referendum in 2016, the U.K. left the EU on January 31, 2020, commonly referred to as “Brexit.” Pursuant to the formal
withdrawal arrangements agreed between the U.K. and the EU, the U.K. was subject to a transition period until December 31, 2020 (the “Transition Period”),
during which EU rules continued to apply. The U.K. and the EU have signed the EU-U.K. Trade and Cooperation Agreement ("TCA"), which became
provisionally applicable on January 1, 2021 and entered into force on May 1, 2021. This agreement provides details on how some aspects of the U.K. and
EU's relationship will operate in the future. However, there are still many uncertainties. On May 26, 2022, the IVDR entered into application in the EU.
However, the IVDR is not applicable in the U.K. In the U.K., IVDs are governed by the Medical Devices Regulations 2002 (SI 2002 No 618, as amended) (UK
MDR 2002) which retains a regulatory framework similar to the framework set out by the IVDD. As a result, there will be some regulatory divergence in the
U.K. from the EU in light of the fact that the CE marking process is set out in EU law, which no longer applies in the U.K. The U.K. has devised a new route
to market culminating in a U.K. Conformity Assessed ("UKCA") mark to replace the CE Mark for placing IVDs on the market in Great Britain (“G.B.”).
Northern Ireland will, however, continue to be covered by the regulations governing CE Marks (a CE Mark or a CE Mark and UKNI Mark will be required to
place products on the Northern Ireland market). The EU legal framework, including the IVDR, remains applicable in Northern Ireland (any products placed on
the market in the Northern Ireland must be compliant with EU law). However, all medical devices and IVDs must be registered with the MHRA, in order to be
placed on the G.B. market.
The U.K. Government has introduced legislation permitting EU CE Marks to continue to be recognized in G.B. for medical devices. The duration of
such recognition depends on the EU regulatory framework on the basis of which the medical devices were previously CE marked. The risk classification of
the devices also has an impact if they were CE marked in accordance with the IVDD. The U.K. government also intends to introduce legislation establishing
reinforced post-market surveillance requirements in early 2024. The World Trade Organization ("WTO") published notification of the draft Post-market
Surveillance Requirements Statutory Instrument (PMS SI) on July 26, 2023. These post-market surveillance requirements are anticipated to apply from mid-
2024. The U.K. government is aiming to have core aspects of the future regulatory regime for medical devices applicable from July 1, 2025. The nature of
any new regulation in the U.K. is uncertain, and as such, we may experience delays in obtaining future access to the U.K. and other European markets. The
U.K.’s departure from the EU has also impacted customs regulations and impacted timing and ease of shipments into the EU from the U.K.
The UK government has recently amended the MDR 2002 to extend the recognition of CE marked medical devices in Great Britain. The
amendments provide that CE marks will cease to be recognized in Great Britain on June 30, 2030, at the latest. Shorter deadlines may apply depending on
the regulatory framework on the basis of which the CE mark is affixed and the classification of the medical devices. In addition, CE marks may cease to have
affect before the deadlines established in the amended UK MDR – if CE Certificates of Conformity expire, or if related application of European Union law
renders the CE Certificates of Conformity invalid at an earlier date. Accordingly, IVDs CE marked in accordance with the IVDD can be placed on the Great
Britain market until May 26, 2025 if they are list A, list B, or self-testing IVDs or until June 30, 2030 if they are General IVDs which were self-assessed under
the IVDD, for which the EU Declaration of Conformity was issued in accordance with the IVDD prior to May 26, 2022, and for which the conformity
assessment under Regulation 217/746 on IVDs (IVDR) will require the involvement of a notified body. IVDs CE marked in accordance with the IVDR can be
placed on the Great Britain market until June 30, 2030.
Should the U.K. or G.B. further diverge from the EU from a regulatory perspective, tariffs could be put into place in the future. We could therefore,
both now and in the future, face significant additional expenses to operate our business, which could significantly and materially harm or delay our ability to
generate revenue or achieve profitability of our business. Any further changes in international trade, tariff and import/export regulations as a result of Brexit
or otherwise may impose unexpected duty costs or other non-tariff barriers on us. These developments, or the perception that any of them could occur, may
significantly reduce global trade and, in particular, trade between the EU and the U.K. It is also possible that Brexit may negatively affect our ability to attract
and retain employees in the U.K., particularly those from the EU.
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Our business could be negatively impacted by environmental, social and corporate governance (ESG) matters or our reporting of such
matters.
There is an increasing focus from certain investors, employees, partners, and other stakeholders concerning ESG matters. We currently do not
report our environmental emissions and absent a legal requirement to do so we currently do not plan to report our environmental emissions, and lack of
reporting could result in certain investors declining to invest in our common stock. As ESG best practices and reporting standards continue to develop, we
may incur increasing costs relating to ESG monitoring and reporting and complying with ESG initiatives. For example, California recently enacted Assembly
Bill 1305 (“AB 1305”). AB 1305, which became effective on January 1, 2024, creates new annual disclosure requirements regarding substantiation of certain
climate-related statements, and, if we report climate related statements in the future, could increase our compliance and reporting costs. Additionally, the
SEC has recently proposed, and may continue to propose, certain mandated ESG reporting requirements, such as the SEC's proposed rules designed to
enhance and standardize climate-related disclosures, which, if finally approved, would significantly increase our compliance and reporting costs. AB 1305
and the proposed SEC rules may also result in disclosures that certain investors or other stakeholders deem to negatively impact our reputation and/or that
harm our stock price. In the event that we communicate certain initiatives or goals regarding ESG matters in the future, we could fail, or be perceived to fail,
in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. If we fail to satisfy the expectations of
certain investors and other stakeholders or our initiatives are not executed as planned, our business, financial condition, results of operations, and prospects
may be adversely affected.
Intellectual Property Risks
Litigation or other proceedings or third-party claims of intellectual property infringement, misappropriation or other violations may
require us to spend significant time and money, and could in the future prevent us from selling our tests or impact our stock price, any
of which could have a material adverse effect.
Our commercial success will depend, in part, on our avoiding infringement of patents and the infringement, misappropriation, or other violation of
proprietary rights of third parties, including, for example, the intellectual property of competitors. There is extensive intellectual property litigation involving the
biotechnology and pharmaceutical industries and genetic sequencing technology, including with regard to liquid biopsy assays such as those designed to
detect or quantify MRD or recurrence in patients previously diagnosed with cancer. Our activities may be subject to claims that we infringe or otherwise
violate patents owned or controlled by third parties. Numerous U.S. and foreign patents and pending patent applications exist in the genetic testing market
and are owned by third parties. We cannot assure you that our operations do not, or will not in the future, infringe existing or future patents. For example, we
are aware of several third-party issued U.S. patents and pending patent applications with claims relating to genetic sequencing technology and methodology
that may be asserted against us and may be construed to encompass our products and services. In order to avoid liability related to an allegation of
infringement of these third-party patents, we may find it necessary or prudent to initiate invalidity proceedings against such patents or to obtain licenses from
such third-party intellectual property holders. If we are not able to invalidate such patents or obtain or maintain a license on commercially reasonable terms
and such third parties assert infringement claims against us, we may be prevented from exploiting our technology and our business, financial condition,
results of operations, and prospects may be materially and adversely affected. We may also be unaware of patents that a third party, including for example a
competitor in the genetic testing market, might assert are infringed by our business. There may also be patent applications that, if issued as patents, could
be asserted against us. Patent applications in the U.S. and elsewhere are typically published approximately 18 months after the earliest filing for which
priority is claimed, with such earliest filing date being commonly referred to as the priority date. Certain U.S. patent applications that will not be filed outside
the U.S. can remain confidential until patents issue. Therefore, patent applications covering our products, services, or technologies could have been filed by
third parties without our knowledge. Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended
in a manner that could cover our products, services, technologies, and their use. The scope of a patent claim is determined by an interpretation of the law,
the written disclosure in a patent, and the patent’s prosecution history and can involve other factors such as expert opinion. Our interpretation of the
relevance or the scope of claims in a patent or a pending application may be incorrect, which may negatively impact our ability to market our products and
services. Further, we may incorrectly determine that our technologies, products, or services are not covered by a third-party patent or may incorrectly predict
whether a third party’s pending patent application will issue with claims of relevant scope. Our determination of the expiration date of any patent in the U.S.
or abroad that we consider relevant may be incorrect, which may negatively impact our ability to develop and market our products or services.
Third-party intellectual property right holders may also actively bring infringement or other intellectual property-related claims against us, even if
we have received patent protection for our technologies, products, and services. Regardless of the merit of third parties’ claims against us for infringement,
misappropriation, or violations of their intellectual property rights, such third parties may seek and obtain injunctive or other equitable relief, which could
effectively block our ability to perform our tests. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay our
development or sales of any tests or other activities that are the subject of such suit. Defense of these claims, even if such claims are resolved in our favor,
could cause us to incur substantial expenses and be a substantial diversion of our employee resources even if we are ultimately successful. Any adverse
ruling or perception of an adverse ruling in defending ourselves could have a material adverse impact on our cash position and stock price. Such litigation or
proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing,
or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our
competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources.
As we continue to commercialize our tests in their current or an updated form, launch different and expanded tests, and enter new markets, other
competitors or potential competitors might claim that our tests infringe, misappropriate, or violate their intellectual
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property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. If such a suit were brought,
regardless of merit, there is no assurance that a court would find in our favor on questions of infringement, validity, enforceability, or priority. Even if we are
successful in defending against such a suit, we could incur substantial costs and diversion of the attention of our management and technical personnel in
defending ourselves against such claims. A court of competent jurisdiction could hold that third-party patents asserted against us are valid, enforceable, and
infringed, which could materially and adversely affect our ability to commercialize any products, services or technologies we may develop and any other
technologies covered by the asserted third-party patents and any adverse ruling or perception of an adverse ruling in defending ourselves could have a
material adverse impact on our cash position and stock price. If we are found to infringe, misappropriate, or otherwise violate a third party’s intellectual
property rights, and we are unsuccessful in demonstrating that such rights are invalid or unenforceable, we may be required to pay substantial damages,
including treble damages and attorneys’ fees for willful infringement; obtain one or more licenses from third parties in order to continue developing and
marketing our products, services and technology, which may not be available on commercially reasonable terms (if at all) or may be non-exclusive, thereby
giving our competitors and other third parties access to the same technologies licensed to us; pay substantial royalties and other fees; and redesign any
infringing tests or other activities, which may be impossible or require substantial time and monetary expenditure; or be prohibited from commercializing
certain tests, all of which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Where we collaborate with third parties in the development of technology, our collaborators may not properly maintain or defend our intellectual
property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or
proprietary information. Further, collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential
liability. Also, we may be obligated under our agreements with our collaborators, licensors, customers, suppliers, and others to indemnify and hold them
harmless for damages arising from intellectual property infringement by us.
If we cannot license rights to use technologies on reasonable terms, we may not be able to commercialize new services or products in
the future.
In the future, we may identify additional third-party intellectual property we may need to license in order to engage in our business, including to
develop or commercialize new products or services. However, such licenses may not be available on acceptable terms, or at all. Even if such licenses are
available, we may be required to pay the licensor substantial royalties based on sales of our products and services. Such royalties are a component of the
cost of our products or services and may affect the margins on our products and services. In addition, such licenses may be nonexclusive, which could give
our competitors access to the same intellectual property licensed to us. If we are unable to enter into the necessary licenses on acceptable terms or at all, if
any necessary licenses are subsequently terminated, if our licensors fail to abide by the terms of the licenses, if our licensors fail to prevent infringement by
third parties, or if the licensed patents or other rights are found to be invalid or unenforceable, our business, financial condition, results of operations, and
prospects could be materially and adversely affected.
If licenses to third-party intellectual property rights are or become required for us to engage in our business, the rights may be non-exclusive,
which could give our competitors access to the same technology or intellectual property rights licensed to us. Moreover, we could encounter delays in the
introduction of tests while we attempt to develop alternatives. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could
prevent us from commercializing tests, which could materially affect our ability to grow and thus adversely affect our business and financial condition.
Developments or uncertainty in the patent statute, patent case law, or U.S. Patent and Trademark Office (“USPTO”), rules and
regulations may impact the validity, scope or enforceability of our patent rights, thereby impairing our ability to protect our services and
products.
Our patent rights, their associated costs, and the enforcement or defense of such patent rights may be affected by developments or uncertainty in
the patent statute, patent case law, or USPTO rules and regulations.
The standards applied by the USPTO and foreign patent offices in granting patents are not always applied uniformly or predictably. For example,
there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology patents. As such, we do not know
the degree of future protection that we will have on our technologies, products, and services. While we will endeavor to try to protect our technologies,
products, and services with intellectual property rights such as patents, as appropriate, the process of obtaining patents is time-consuming, expensive, and
sometimes unpredictable.
In addition, the patent position of companies engaged in the development and commercialization of diagnostic tests is particularly uncertain.
Various courts, including the Supreme Court have rendered decisions that affect the scope of patentability of certain inventions or discoveries relating to
certain diagnostic tests and related methods. These decisions state, among other things, that a patent claim that recites an abstract idea, natural
phenomenon or a law of nature (for example, the relationship between particular genetic variants and cancer) are not themselves patentable. Precisely what
constitutes a law of nature or abstract idea is uncertain, and it is possible that certain aspects of genetic diagnostic tests would be considered natural laws.
Accordingly, the evolving case law in the U.S. may adversely affect our ability to obtain patents and may facilitate third-party challenges to any owned or
licensed patents. The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the U.S., and we may
encounter difficulties in protecting and defending such rights in foreign jurisdictions. The legal systems of many other countries do not favor the enforcement
of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of
our patents in such countries. Proceedings to defend or enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts
and attention from other aspects of our business.
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Patent terms may be inadequate to protect our competitive position for an adequate amount of time.
Patents have a limited lifespan. In the U.S., the natural expiration of a patent is generally 20 years after its first effective non-provisional filing date.
Although various extensions may be available, the life of a patent, and the protection it affords, is limited. Even if patents covering our technologies,
products, and services are obtained, once the patent life has expired, we may be open to competition from competitive products or services. Our issued
patents will expire on dates ranging from 2033 to 2038, subject to any patent extensions that may be available for such patents. If patents are issued on our
pending patent applications, the resulting patents are projected to expire on dates ranging from 2033 to 2042. In addition, although upon issuance in the
U.S., a patent’s life can be increased based on certain delays caused by the USPTO, this increase can be reduced or eliminated based on certain delays
caused by the patent applicant during patent prosecution. If we do not have sufficient patent life to protect our technologies, products and services, our
competitive position, business, financial condition, results of operations, and prospects will be adversely affected.
If we are not able to obtain and enforce patent protection for any services or products we develop and for our technologies, or if the
scope of patent protection obtained is not sufficiently broad, our competitors and other third parties could develop and commercialize
products, services and technology similar or identical to ours, and our ability to successfully commercialize our products, services, and
technologies may be adversely affected.
We have applied, and we intend to continue applying, for patents covering such aspects of our technologies as we deem appropriate. However,
the patent process is expensive, time consuming, and complex, and we may choose not to, or we may not be able to, apply for patents on certain aspects of
our services, products, and other technologies in a timely fashion, at a reasonable cost, in all jurisdictions or at all, and any potential patent coverage we
obtain may not be sufficient to prevent substantial competition.
Moreover, the patent position of biotechnology companies can be highly uncertain because it involves complex legal and factual questions for
which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to
date in the U.S. or elsewhere. Courts frequently render opinions in the biotechnology field that may affect the patentability of certain inventions or
discoveries, including opinions that may affect the patentability of methods for analyzing nucleic acid sequences.
Others may independently develop similar or alternative technologies or design around technologies for which we may not be able to obtain patent
protection. In addition, any patent applications we file may be challenged and may not result in issued patents or may be invalidated, rendered
unenforceable or narrowed in scope after they are issued, and there is no guarantee any of our issued patents include or will include claims that are
sufficiently broad to cover our products, services, and other technologies or to provide meaningful protection from our competitors. Consequently, we do not
know whether any of our platform advances, products, services, and other technologies will be protectable or remain protected by valid and enforceable
patents. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative technologies, services, or products
in a non-infringing manner.
Even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property, provide exclusivity for our
technologies, products, and services, or prevent others from designing around our claims. Any finding that our patents or applications are invalid,
unpatentable, or unenforceable could harm our ability to prevent others from practicing the related technology, and a finding that others have inventorship or
ownership rights to our patents and applications could require us to obtain certain rights to practice related technologies, which may not be available on
favorable terms, if at all. If we initiate lawsuits to protect or enforce our patents, or litigate against third-party claims, which would be expensive, and, if we
lose, we may lose some of our intellectual property rights. Furthermore, these lawsuits may divert the attention of our management and technical personnel.
Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects.
Once granted, patents may remain open to opposition, interference, re-examination, post-grant review, inter partes review, nullification or
derivation action in court or before patent offices or similar proceedings for a given period after allowance or grant, during which time third parties can raise
objections against such initial grant. In the course of such proceedings, which may continue for a protracted period of time, the patent owner may be
compelled to limit the scope of the granted claims thus attacked, or may lose the granted claims altogether. An adverse determination in any such
proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology, services, or products
and compete directly with us, without payment to us, or result in our inability to commercialize our products, services, and technologies without infringing
third-party patent rights. Such proceedings also may result in substantial cost and require significant time from our scientists and management, even if the
eventual outcome is favorable to us. If the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the
outcome, it could dissuade companies from collaborating with us to license, develop or commercialize current or future products, services, or technologies.
In addition, there can be no assurance that:
•
•
•
•
others will not or may not be able to make, use, offer to sell, or sell tests that are the same as or similar to our products or services but that
are not covered by the claims of the patents that we own or license;
we or our future licensors or collaborators are the first to make the inventions covered by each of our issued patents and pending patent
applications that we own or license;
we or our future licensors or collaborators are the first to file patent applications covering certain aspects of our inventions;
others will not independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual
property rights;
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•
•
•
•
•
•
a third party may not challenge our patents and, if challenged, a court would hold that our patents are valid, enforceable, and infringed;
any issued patents that we own or may license will provide us with any competitive advantages, or will not be challenged by third parties;
we may develop or in-license additional proprietary technologies that are patentable;
pending patent applications that we own or may license will lead to issued patents;
the patents of others will not have a material or adverse effect on our business, financial condition, results of operations, and prospects; and
our competitors do not conduct research and development activities in countries where we do not have enforceable patent rights and then
use the information learned from such activities to develop competitive products or services for sale in our major commercial markets.
The issuance of a patent is not conclusive as to its inventorship, scope, validity, or enforceability. Some of our patents or patent applications may
be challenged at a future point in time in opposition, derivation, reexamination, inter partes review, post-grant review, or interference proceedings. Any
successful opposition to these patents or any other patents owned by or, if applicable in the future, licensed to us could deprive us of rights necessary for the
practice of our technologies or the successful commercialization of any products, services, or technologies that we may develop, which could lead to
increased competition to our business and harm our business. Since patent applications in the U.S. and most other countries are confidential for a period of
time after filing, we cannot be certain that we or our licensors were the first to file any patent application related to our technologies, products, or services.
Furthermore, an interference proceeding can be provoked by a third party or instituted by the USPTO to determine who was the first to invent any of the
subject matter covered by the patent claims of our applications for any application with an effective filing date before March 16, 2013.
Where we obtain licenses from or collaborate with third parties, in some circumstances, we may not have the right to control the preparation, filing,
and prosecution of patent applications, or to maintain the patents, covering technology that we license from third parties. We may also require the
cooperation of our licensors and collaborators to enforce any licensed patent rights, and such cooperation may not be provided. Therefore, these patents
and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. Moreover, if we do obtain necessary
licenses, we will likely have obligations under those licenses, and any failure to satisfy those obligations could give our licensor the right to terminate the
license. Termination of a necessary license could have a material adverse impact on our business.
It is also possible that we fail to file patent applications covering inventions made in the course of development and commercialization activities
before a competitor or another third party files a patent application covering, or publishes information disclosing, a similar, independently-developed
invention. Such competitor’s patent application may pose obstacles to our ability to obtain or limit the scope of patent protection we may obtain. Although we
enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development
output, such as our employees, collaborators, contract manufacturers, consultants, advisors, and other third parties, any of these parties may breach the
agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. In addition, publications of
discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not
published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we or our licensors were the first to make the
inventions claimed in our owned or licensed patents or pending patent applications, or were the first to file for patent protection of such inventions. To
determine the priority of these inventions, we have participated, are participating and may in the future have to participate, in interference proceedings,
derivation proceedings, inter partes review proceedings, or other post-grant proceedings declared by the USPTO or a foreign patent office that have
resulted, and could in the future result, in substantial cost to us. The outcome of such proceedings is uncertain. No assurance can be given that other patent
applications will not have priority over our patent applications. In addition, changes to the patent laws of the U.S. allow for various post-grant opposition
proceedings, such as inter partes review proceedings, providing additional methods for others to challenge our patents. An unfavorable outcome could
require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing
party does not offer us a license on commercially reasonable terms or at all, or if a non-exclusive license is offered and our competitors gain access to the
same technology. Furthermore, if third parties bring these proceedings against our patents, we could experience significant costs and management
distraction.
We are involved in legal proceedings to defend and enforce our intellectual property rights and may in the future become involved in
other lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming, and
unsuccessful.
Our intellectual property rights involve complex factual, scientific and legal questions. We operate in an industry characterized by significant
intellectual property litigation. Even though we may believe that we have a valid patent on a particular technology, others may infringe our patents or the
patents of our licensing partners. For example, we have filed complaints in the U.S. District Court for the District of Colorado against Foresight for patent
infringement (see the section titled “Contingencies” in Note 9 to our unaudited condensed consolidated financial statements). Further, Foresight has filed
inter partes review petitions with the USPTO in an effort to invalidate five of the seven patents that we are asserting against Foresight, and has alleged that it
will file additional inter partes review petitions with the USPTO in an effort to invalidate the two other patents that we are asserting against Foresight. The
USPTO has issued decisions granting inter partes reviews of four of the patents we are asserting against Foresight; the USPTO has yet to issue a decision
regarding whether it will institute an inter partes review of the fifth patent. In addition, our patents or the patents of our licensors may become
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involved in inventorship, priority, or validity disputes. To counter or defend against such claims can be expensive and time consuming. In an infringement
proceeding, a court may refuse to stop the other party from using the technology at issue on the grounds that our owned and in-licensed patents do not
cover the technology in question. Further, in such proceedings, the defendant could counterclaim that our asserted patent covering our services or product is
invalid or unenforceable, and the court may agree that our asserted patent is invalid or unenforceable. In patent litigation in the U.S., defendant
counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several
statutory requirements, including lack of novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that
someone connected with the prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution.
Third parties may also raise similar claims before administrative bodies in the U.S. or abroad, even outside the context of litigation. Such mechanisms
include re-examination, post grant review, inter partes review, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such
proceedings could result in revocation or amendment to our patents in such a way that they no longer cover our services or product or the services or
products of our competitors. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question,
for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. An adverse
result in any litigation or other proceeding could put one or more of our owned or in-licensed patents at risk of being invalidated or interpreted narrowly. Such
a loss of patent protection could have a material adverse impact on our business. Furthermore, because of the substantial amount of discovery required in
connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of
litigation.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims have caused and may continue to cause us
to incur significant expenses and could distract our personnel from their normal responsibilities. In addition, there could be public announcements of the
results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it
could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses
and reduce the resources available for development activities or any future sales, marketing, or distribution activities. We may not have sufficient financial or
other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or
proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios.
Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to
compete in the marketplace.
If we are unable to protect the confidentiality of our trade secrets and know-how, our business and competitive position would be
harmed.
We seek protection for certain aspects of our technologies, products, and services through the filing of patents, registration of copyrights, and use
of non-disclosure agreements. In addition, we also rely on trade secrets and proprietary know-how protection for our confidential and proprietary information,
and we have taken security measures to protect this information. These measures, however, may not provide adequate protection for our trade secrets,
know-how, or other confidential information. Among other things, we seek to protect our trade secrets, know-how, and confidential information by entering
into confidentiality agreements with parties who have access to them, such as our employees, collaborators, contract manufacturers, consultants, advisors,
and other third parties. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade
secrets or proprietary technology and processes. Moreover, there can be no assurance that any confidentiality agreements that we have with our employees,
consultants, or other third parties will provide meaningful protection for our trade secrets, know-how, and confidential information or will provide adequate
remedies in the event of unauthorized use or disclosure of such information. Despite these efforts, any of these parties may breach the agreements and
disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Monitoring
unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary technologies will be effective.
Accordingly, there also can be no assurance that our trade secrets or know-how will not otherwise become known or be independently developed by
competitors.
Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive, and time-consuming, and the
outcome is unpredictable. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of
our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently
developed by a competitor, our competitive position would be materially and adversely harmed.
Trade secrets and know-how can be difficult to protect as trade secrets and know-how will over time be disseminated within the industry through
independent development, the publication of journal articles, and the movement of personnel skilled in the art from company to company or academic to
industry scientific positions. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would
have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. Because
from time to time we expect to rely on third parties in the development, manufacture and distribution of our products and provision of our services, we must,
at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable,
material transfer agreements, license agreements, collaboration agreements, supply agreements, consulting agreements, or other similar agreements with
our advisors, employees, collaborators, licensors, suppliers, third-party contractors, and consultants prior to beginning research or disclosing proprietary
information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets and
know-how. Despite the contractual provisions employed when working with third parties, the need to share trade secrets, know-how, and other confidential
information increases the risk that such trade secrets and know-how become known by our competitors, are inadvertently incorporated into the technology of
others, or are disclosed or used in violation of
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these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or
know-how, or other unauthorized use or disclosure would impair our competitive position and may have an adverse effect on our business and results of
operations.
In addition, these agreements typically restrict the ability of our advisors, employees, collaborators, licensors, suppliers, third-party contractors,
and consultants to publish data potentially relating to our trade secrets or know-how, although our agreements may contain certain limited publication rights.
Despite our efforts to protect our trade secrets and know-how, our competitors may discover our trade secrets or know-how, either through breach of our
agreements with third parties, independent development, or publication of information by any of our third-party collaborators. A competitor’s discovery of our
trade secrets or know-how would impair our competitive position and have a material adverse impact on our business.
We may not be able to enforce our intellectual property rights throughout the world.
Filing, prosecuting, maintaining, defending, and enforcing patents on our products, services, and technologies in all countries throughout the world
would be prohibitively expensive, and our intellectual property rights in some countries outside the U.S. can be less extensive than those in the U.S.
Competitors may use our technologies in jurisdictions where we have not sought or obtained patent protection to develop their own products and services
and, further, may export otherwise infringing products to territories where we have patent protection or licenses but enforcement is not as strong as that in
the U.S. These services and products may compete with our services and products, and our patents or other intellectual property rights may not be effective
or sufficient to prevent them from competing. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws
of the U.S., and many companies have encountered significant challenges in establishing and enforcing their proprietary rights outside of the U.S. These
challenges can be caused by the absence or inconsistency of the application of rules and methods for the establishment and enforcement of intellectual
property rights outside of the U.S. In addition, the legal systems of some countries, particularly developing countries, do not favor the enforcement of patents
and other intellectual property protection, especially those relating to healthcare. This could make it difficult for us to stop the infringement of our patents, if
obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries, including EU countries, India, Japan, and
China, have compulsory licensing laws under which a patent owner may be compelled under specified circumstances to grant licenses to third parties. In
addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these
countries, patents may provide limited or no benefit given that we may have limited remedies available if patents are infringed or if we are compelled to grant
a license to a third party, which could materially diminish the value of those patents and limit our potential revenue opportunities. Furthermore, patent
protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes.
Accordingly, we have chosen and in the future may choose not to seek patent protection in certain countries, and we will not have the benefit of patent
protection in such countries.
Proceedings to defend or enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from
other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in
the law and legal decisions by courts in the U.S. and foreign countries may affect our ability to obtain adequate protection for our products, services and
other technologies and the enforcement of intellectual property. Any of the foregoing could have a material adverse effect on our competitive position,
business, financial condition, results of operations, and prospects.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and
other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-
compliance with these requirements.
The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and
other provisions during the patent application and prosecution process. Periodic maintenance fees, renewal fees, annuity fees, and various other
governmental fees on patents and/or applications will be due to be paid to the USPTO and various other governmental patent agencies outside of the U.S. in
several stages over the lifetime of the patents and/or applications. We employ reputable professionals and rely on such third parties to help us comply with
these requirements and effect payment of these fees with respect to the patents and patent applications that we own. Noncompliance events that could
result in abandonment or lapse of a patent or patent application include failure to respond to official communications within prescribed time limits, non-
payment of fees and failure to properly legalize and submit formal documents. In many cases, an inadvertent lapse can be cured by payment of a late fee or
by other means in accordance with the applicable rules. However, there are situations in which noncompliance has resulted or can result in abandonment or
lapse of a patent or patent application, resulting in loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the
market earlier than would otherwise have been the case, which could have a material adverse effect on our competitive position, business, financial
condition, results of operations, and prospects.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or
misappropriated trade secrets.
We employ individuals who were previously employed or otherwise engaged with universities or genetic testing, diagnostic or other healthcare
companies, including our competitors or potential competitors.
Although we have policies to ensure that our employees and consultants do not use the proprietary information or know-how of others in their
work for us, we may be subject to claims that we or our employees or consultants have inadvertently or otherwise used or disclosed intellectual property,
including trade secrets or other proprietary information, of a former employer or other third parties. Further,
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we may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in
developing our intellectual property. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying
monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation
could result in substantial costs and be a distraction to management and other employees. Such claims could have a material adverse effect on our
business, financial condition, results of operations, and prospects.
In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual
property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in
fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the
assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to
determine the ownership of what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial
condition, results of operations, and prospects.
Our use of “open source” software could subject our proprietary software to general release, adversely affect our ability to sell our
products and services, and subject us to possible litigation.
A portion of the products, services or technologies licensed, developed, and/or distributed by us incorporate so-called “open source” software and
we may incorporate open source software into other products, services or technologies in the future. Such open source software is generally licensed by its
authors or other third parties under open source licenses. Some open source licenses contain requirements that we disclose source code for modifications
we make to the open source software and that we license such modifications to third parties at no cost. In some circumstances, distribution of our software in
connection with open source software could require that we disclose and license some or all of our proprietary code in that software, as well as distribute our
products or technologies or provide our services that use particular open source software at no cost to the user. We monitor our use of open source software
in an effort to avoid uses in a manner that would require us to disclose or grant licenses under our proprietary source code; however, there can be no
assurance that such efforts will be successful. Open source license terms are often ambiguous and such use could inadvertently occur. There is little legal
precedent governing the interpretation of many of the terms of these licenses, and the potential impact of these terms on our business may result in
unanticipated obligations regarding our products and technologies. Companies that incorporate open source software into their products have, in the past,
faced claims seeking enforcement of open source license provisions and claims asserting ownership of open source software incorporated into their
products. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of an open
source license, we could incur significant legal costs defending ourselves against such allegations. In the event such claims were successful, we could be
subject to significant damages or be enjoined from the distribution of our products or provision of our services. In addition, if we combine our proprietary
software with open source software in certain ways, under some open source licenses, we could be required to release the source code of our proprietary
software, which could substantially help our competitors develop products and services that are similar to or better than ours and otherwise adversely affect
our business. These risks could be difficult to eliminate or manage, and, if not addressed, could have a material adverse effect on our business, financial
condition, and results of operations.
If we fail to comply with our obligations under license or technology agreements with third parties, we may be required to pay damages
and we could lose license rights that are critical to our business.
We license certain intellectual property that is important to our business, and, in the future, we may enter into additional agreements that provide
us with licenses to valuable intellectual property or technology. For example, our agreements with third parties, such as Illumina, include certain non-
exclusive license rights that are essential to the operation of our business as it is currently conducted. If we fail to comply with any of the obligations under
our license agreements, we may be required to pay damages and the licensor may have the right to terminate the license. Termination by the licensor would
cause us to lose valuable rights, and could prevent us from selling our products and services, or inhibit our ability to commercialize future products and
services. Our business would suffer if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensors fail to
enforce licensed patents against infringing third parties, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to
enter into necessary licenses on acceptable terms. In addition, our rights to certain technologies, including those of Illumina, are licensed to us on a non-
exclusive basis. The owners of these non-exclusively licensed technologies are therefore free to license them to third parties, including our competitors, on
terms that may be superior to those offered to us, which could place us at a competitive disadvantage. Moreover, our licensors may own or control
intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or
otherwise violating the licensor’s rights.
We may be subject to claims challenging the inventorship of our patents and other intellectual property.
We, or our licensors, may be subject to claims that former employees, collaborators, or other third parties have an interest in our patents, trade
secrets, or other intellectual property as an inventor or co-inventor. For example, we, or our licensors, may have inventorship disputes arise from conflicting
obligations of employees, consultants, or others who are involved in developing our products, services, or technologies. Litigation may be necessary to
defend against these and other claims challenging inventorship or our licensors’ ownership of our owned or in-licensed patents, trade secrets, or other
intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such
as exclusive ownership of, or right to use, intellectual property that is important to our products, services, or technologies. Even if we are successful in
defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing
could have a material adverse effect on our business, financial condition, results of operations, and prospects.
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If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of
interest and our business may be adversely affected.
Our trademarks or trade names may be challenged, infringed, circumvented, or declared generic or determined to be infringing on other marks.
We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these names, which we need for name
recognition by potential partners or customers in our markets of interest. During trademark registration proceedings, we may receive rejections. Although we
would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable
agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered
trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. If we are
unable to establish brand name recognition based on our trademarks and trade names, we may not be able to compete effectively and our business may be
adversely affected.
Financial and Market Risks and Risks Related to Owning Our Common Stock
Our inability to raise additional capital on acceptable terms in the future may limit our ability to continue to operate our business and
further expand our operations.
We may seek to raise additional capital through equity offerings, debt financings, collaborations, or licensing arrangements to continue executing
on our long-term business plan. Additional funding may not be available to us on acceptable terms, or at all.
The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, dilution to our stockholders
would result. Any equity securities issued may also provide for rights, preferences, or privileges senior to those of holders of our common stock. In addition,
the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. If we raise
funds by issuing debt securities, those debt securities would have rights, preferences, and privileges senior to those of holders of our common stock. The
terms of debt securities issued or borrowings pursuant to a credit agreement, if available, could impose significant restrictions on our operations. The
incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in
restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license
intellectual property rights, and other operating restrictions that could adversely affect our ability to conduct our business. In the event that we enter into
collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms. These agreements may require that we relinquish
or license to a third party on unfavorable terms our rights to tests we otherwise would seek to develop or commercialize ourselves, or reserve certain
opportunities for future potential arrangements when we might be able to achieve more favorable terms.
If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and
development programs or sales and marketing initiatives. Our ability to raise additional capital may be adversely impacted by potential worsening global
economic conditions and the recent disruption to and volatility in the credit and financial markets in the U.S. and worldwide resulting from macroeconomic
conditions, actual or perceived changes in interest rates and inflation, geopolitical conflicts (including the Russia-Ukraine war, the state of war between Israel
and Hamas and the risk of a larger regional conflict). In addition, we may have to work with a partner on one or more aspects of our tests or market
development programs, which could lower the economic value of those tests or programs to us. While we believe our existing cash, cash equivalents and
short-term investments will be sufficient to meet our anticipated cash requirements for at least the next 12 months, rising costs and interest rates due to
inflation or other economic conditions may cause our capital expenditures and operating expenses to increase more than expected, and we cannot assure
you that we will generate sufficient revenue from commercial sales to adequately fund our operating needs or achieve or sustain profitability. If we are unable
to raise additional funding on acceptable terms, or at all, or if we consume our existing capital more quickly than expected, it could negatively impact our
ability to retain and attract employees and our competitive position, business, financial condition, results of operations, and prospects will be adversely
affected.
The market price of our common stock may be volatile or may decline steeply or suddenly regardless of our operating performance, we
may not be able to meet investor or analyst expectations, and you may lose all or part of your investment.
The market price of our common stock may fluctuate or decline significantly in response to numerous factors, many of which are beyond our
control, including:
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actual or anticipated fluctuations in our operating results;
failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;
issuance of new or updated research reports by securities analysts or changed recommendations for our stock;
competition from existing tests or new tests that may emerge;
announcements by us or our competitors relating to significant acquisitions, strategic partnerships, joint ventures, collaborations, capital
commitments, or by or pertaining to our customers, particularly the VA MVP and Natera, as our largest customers;
the timing and amount of our investments in the growth of our business;
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actual or anticipated changes in regulatory oversight of our business or issues we may face with regulators;
additions or departures of key management or other personnel;
inability to obtain additional funding;
sales of our common stock by us or our stockholders in the future;
disputes or other developments related to our intellectual property or other matters, including litigation;
health epidemics or pandemics, geopolitical conflicts, inflation, global supply chain issues, regional or national economic slowdowns,
recessions, depressions or other economic downturns; and
other general economic, industry, and market conditions, including factors unrelated to our operating performance or the operating
performance of our competitors.
In addition, the stock market in general, and the market for life sciences companies in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance of those companies, including in connection with the COVID-19
pandemic, global supply chain challenges, inflation and fears of economic recession, which have resulted in depressed stock prices for many companies
notwithstanding the lack of a fundamental change in their underlying business models or prospects. Broad market and industry factors may seriously affect
the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall
market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This
litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Moreover, because of these fluctuations, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely
on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of
industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any
forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our
common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue or
earnings forecasts that we may provide.
Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock.
Our quarterly results of operations, including our revenue, gross margin, profitability, and cash flows, may vary significantly in the future, and
period-to-period comparisons of our operating results may not be meaningful. Accordingly, our quarterly results should not be relied upon as an indication of
future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control. For example,
Natera and other large customers are not obliged to deliver tissue samples or other specimens to us at any particular time or at all. The rate at which we
receive tissue samples or other specimens can vary dramatically from quarter to quarter, and is difficult or impossible for us to accurately forecast. Our
receipt and processing of tissue samples and other specimens from our customers leads to our recognition of revenue, and as such the variable rates of
delivery of customer samples will lead to variations in our revenue from quarter to quarter. For example, we often see fluctuations in receipt and processing
of samples and revenue in the fourth quarter due, in part, to the concentration of holidays in late November and in December, and some of our
biopharmaceutical customers have fiscal years ending in December, which we believe may impact the timing of samples or payments provided by such
customers. Fluctuations in quarterly results may adversely impact the value of our common stock. Factors that may cause fluctuations in our quarterly
financial results include, without limitation, those listed elsewhere in this “Risk Factors” section. We also may face competitive pricing pressures, and we may
not be able to maintain our pricing in the future, which would adversely affect our operating results.
Unstable market, economic and geo-political conditions may have serious adverse consequences on our business, financial condition
and stock price.
The global credit and financial markets have experienced extreme volatility and disruptions in the past. These disruptions can result in severely
diminished liquidity and credit availability, increases in inflation, declines in consumer confidence, declines in economic growth, increases in unemployment
rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in
economic conditions will not occur, including actual or perceived changes in interest rates and inflation. Our general business strategy may be adversely
affected by any such economic downturn, volatile business environment, higher inflation, or continued unpredictable and unstable market conditions. If the
current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. Our portfolio
of corporate and government bonds could also be adversely impacted. Failure to secure any necessary financing in a timely manner and on favorable terms
could have a material adverse effect on our operations, growth strategy, financial performance and stock price and could require us to delay or abandon
development or commercial initiatives. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not
survive an economic downturn or rising inflation, which could directly affect our ability to attain our operating goals on schedule and on budget.
Other international and geo-political events could also have a serious adverse impact on our business. For instance, in February 2022, Russia
initiated military action against Ukraine and the two countries are now at war. In addition, in October 2023, Hamas attacked Israel which provoked a state of
war, and there is a risk of a larger conflict. In response, the United States and certain other countries imposed significant sanctions and trade actions against
Russia and could impose further sanctions, trade restrictions, and other retaliatory
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actions. While we cannot predict the broader consequences, the conflict and retaliatory and counter-retaliatory actions could continue to affect, and
potentially materially adversely affect, global trade, currency exchange rates, inflation, regional economies, and the global economy, which in turn may
increase our costs, disrupt our supply chain, impair our ability to raise or access additional capital when needed on acceptable terms, if at all, or otherwise
adversely affect our business, financial condition, and results of operations.
Adverse developments affecting the financial services industry could adversely affect our current and projected business operations
and our financial condition and results of operations.
Adverse developments that affect financial institutions, such as events involving liquidity that are rumored or actual, have in the past and may in
the future lead to bank failures and market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the
California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Similarly, on
March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. In addition, on May 1, 2023, the FDIC seized First Republic
Bank and sold its assets to JPMorgan Chase & Co.
Although we assess our banking relationships as we believe necessary or appropriate, our access to cash in amounts adequate to finance or
capitalize our current and projected future business operations could be significantly impaired by factors that affect the financial institutions with which we
have banking relationships. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations
under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets,
or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could also include factors involving
financial markets or the financial services industry generally. The results of events or concerns that involve one or more of these factors could include a
variety of material and adverse impacts on our current and projected business operations and our financial condition and results of operations. These could
include, but may not be limited to, delayed access to deposits or other financial assets or the uninsured loss of deposits or other financial assets; or
termination of cash management arrangements and/or delays in accessing or actual loss of funds subject to cash management arrangements.
In addition, widespread investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing
terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources,
thereby making it more difficult for us to acquire financing on acceptable terms or at all. Any decline in available funding or access to our cash and liquidity
resources could, among other risks, adversely impact our ability to meet our operating expenses, financial obligations or fulfill our other obligations, result in
breaches of our financial and/or contractual obligations or result in violations of federal or state wage and hour laws. Any of these impacts, or any other
impacts resulting from the factors described above or other related or similar factors not described above, could have material adverse impacts on our
liquidity and our current and/or projected business operations and financial condition and results of operations.
We maintain our cash at financial institutions, often in balances that exceed federally insured limits.
We maintain the majority of our cash and cash equivalents in accounts at banking institutions in the United States that we believe are of high
quality. Cash held in these accounts often exceed the FDIC insurance limits. If such banking institutions were to fail, we could lose all or a portion of amounts
held in excess of such insurance limitations. As noted above, the FDIC took control of SVB, Signature Bank, Silvergate Capital Corp and First Republic Bank
in the first half of 2023. While we did have an account at SVB, we were able to recover all of our deposits when the FDIC stepped in and allowed us to
transfer funds held at SVB to another bank without incurring any losses. In the event of failure of any of the financial institutions where we maintain our cash
and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or
delay in accessing these funds could adversely affect our business and financial position.
Insiders may exercise significant control over our company and will be able to influence corporate matters.
Acting together, our directors, executive officers and their affiliates, and holders of greater than five percent of our outstanding common stock are
able to exercise significant influence over our management and affairs and matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. This concentration of ownership
may have the effect of delaying or preventing a third party from acquiring control of our company and could adversely affect the market price of our common
stock and may not be in the best interests of our other stockholders.
Future sales of shares by existing stockholders, or the perception that such sales could occur, could cause our stock price to decline.
Sales of a substantial number of shares of our common stock into the public market, including sales by members of our management or board of
directors or entities affiliated with such members, could occur at any time. These sales, or the perception in the market that the holders of a large number of
shares intend to sell shares, could reduce the market price of our common stock and could impair our ability to raise capital through the sale of additional
equity or equity-related securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common stock. As of
December 31, 2023, we had 50,480,694 shares of common stock outstanding, all of which shares were eligible as of such date for sale in the public market,
subject in some cases to the volume limitations and manner of sale and other requirements under Rule 144. In addition, upon issuance, shares of common
stock subject to outstanding options under our stock option plans as of December 31, 2023 will become eligible for sale in the public market in the future,
subject to certain legal and contractual limitations. Moreover, certain holders of shares of our common stock have the right to
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require us to register these shares under the Securities Act pursuant to an investors’ rights agreement. If our existing stockholders sell substantial amounts
of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse effect on the market price of our
common stock.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your
investment will depend on appreciation of the value of our common stock.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and
expansion of our business, and we do not expect to pay any cash dividends on our common stock in the foreseeable future. In addition, our ability to pay
cash dividends on our capital stock is limited by our credit agreement and may be prohibited or limited by the terms of any future debt financing
arrangement. As a result, any investment returns on our common stock will depend upon increases in the value for our common stock, which are not certain.
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans
and under our at-the-market facility, could result in additional dilution of the percentage ownership of our stockholders and could cause
the stock price of our common stock to decline.
In the future, we may sell common stock, rights to purchase common stock, convertible securities, or other equity securities in one or more
transactions at prices and in a manner we determine from time to time. We also expect to issue common stock to employees, directors, and consultants
pursuant to our equity incentive plans. If we sell common stock, rights to purchase common stock, convertible securities, or other equity securities in
subsequent transactions, or common stock is issued pursuant to equity incentive plans, investors may be materially diluted. In addition, new investors in
such subsequent transactions could gain rights, preferences, and privileges senior to those of holders of our common stock.
If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research
about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that equity research analysts publish about us and our
business. We do not control these analysts or the content and opinions included in their reports. Securities analysts may elect not to provide research
coverage of our company, and such lack of research coverage may adversely affect the market price of our common stock. The price of our common stock
could also decline if one or more equity research analysts downgrade our common stock or issue other unfavorable commentary or cease publishing reports
about us or our business. If one or more equity research analysts cease coverage of our company, we could lose visibility in the market, which in turn could
cause our stock price to decline.
Holders of our common stock could be adversely affected if we issue preferred stock.
Pursuant to our amended and restated certificate of incorporation, our board of directors is authorized to issue up to 10,000,000 shares of
preferred stock without any action on the part of our stockholders. Our board of directors will also have the power, without stockholder approval, to set the
terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to
dividends or in the event of a dissolution, liquidation, or winding up, and other terms. In the event that we issue preferred stock in the future that has
preferences over our common stock with respect to payment of dividends or upon our liquidation, dissolution, or winding up, or if we issue preferred stock
that is convertible into our common stock at greater than a one-to-one ratio, the voting and other rights of the holders of our common stock or the market
price of our common stock could be adversely affected.
Our ability to use net operating losses to offset future taxable income may be subject to limitations.
As of December 31, 2023, we had federal and state net operating loss carryforwards of approximately $285.5 million and approximately $274.7
million, respectively. Certain of our federal and state net operating loss carryforwards will begin to expire, if not utilized, beginning in 2031. These net
operating loss carryforwards could expire unused and be unavailable to offset future taxable income. Under the Tax Cuts and Jobs Act, as modified by the
CARES Act, federal net operating losses incurred in tax years beginning in 2018 and thereafter may be carried forward indefinitely, but the deductibility of
such federal net operating losses for tax years beginning after 2020 is limited. It is uncertain if and to what extent various states will conform to the Tax Cuts
and Jobs Act, as modified by the CARES Act. In addition, under Sections 382 and 383 of the Code, and corresponding provisions of state law, if a
corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year
period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (including certain tax credits) to
offset its post-change income or taxes may be limited. We have experienced ownership changes in the past, and we may experience ownership changes in
the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability
to use our net operating loss carryforwards is materially limited, it could harm our future operating results by effectively increasing our future tax obligations.
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Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a
merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could depress the trading price of
our common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our
company may deem advantageous. These provisions include the following:
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establish a classified board of directors so that not all members of our board of directors are elected at one time;
authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;
permit the board of directors to establish the number of directors and fill any vacancies and newly-created directorships;
provide that directors may only be removed for cause;
require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
eliminate the ability of our stockholders to call special meetings of stockholders;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws;
restrict the forum for certain litigation against us to Delaware; and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon
by stockholders at annual stockholder meetings.
Any provision of our amended and restated certificate of incorporation or amended and restated bylaws, or Delaware law that has the effect of
delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and
could also affect the price that some investors are willing to pay for our common stock.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal
district courts of the U.S. will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit
our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the
following types of actions or proceedings under Delaware statutory or common law:
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any derivative action or proceeding brought on our behalf;
any action asserting a breach of fiduciary duty;
any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of
incorporation, or our amended and restated bylaws; and
any action asserting a claim against us that is governed by the internal-affairs doctrine.
This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities
Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction
to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts,
among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the U.S. will be the
exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that
such choice of forum provisions are facially valid, a stockholder may nonetheless seek to bring a claim in a venue other than those designated in the
exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our
amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions,
and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or
our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find
either exclusive forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur
further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.
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The requirements of being a public company consume substantial resources, may result in litigation and may divert management’s
attention.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the
Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing
requirements of The Nasdaq Global Market and other applicable securities rules and regulations. Complying with these rules and regulations has increased
and will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly and increase demand on our
systems and resources, particularly in the event we no longer qualify as a “smaller reporting company” as defined in the Exchange Act. The Exchange Act
requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. The Sarbanes-Oxley Act
requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are required to
disclose changes made in our internal control and procedures on a quarterly basis. In order to maintain and, if required, improve our disclosure controls and
procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result,
management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may be
required to hire additional employees or engage outside consultants to comply with these requirements, which will increase our costs and expenses.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public
companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations, and standards are
subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new
guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and
standards, and this investment will result in increased general and administrative expenses and a diversion of management’s time and attention from
revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us
and our business may be adversely affected. By disclosing information in this document and in filings required of a public company, our business and
financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If
those claims are successful, our business could be seriously harmed. Even if the claims do not result in litigation or are resolved in our favor, the time and
resources needed to resolve them could divert our management’s resources and seriously harm our business.
As a public company, it may be increasingly expensive for us to obtain director and officer liability insurance and, in the future, we may be required
to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain
qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.
In addition, as a result of our disclosure obligations as a public company, we have reduced strategic flexibility as compared to our competitors that
are privately-held companies, and are under pressure to focus on short-term results, which may materially and adversely affect our ability to achieve long-
term profitability.
We are a smaller reporting company, and any decision on our part to avail ourselves of certain reduced reporting and disclosure
requirements applicable to smaller reporting companies could make our common stock less attractive to investors.
We are a “smaller reporting company” as defined in the Exchange Act. We intend to take advantage of exemptions from various reporting
requirements applicable to other public companies that are not smaller reporting companies, including scaled disclosure on executive compensation.
We cannot predict if investors will find our common stock less attractive if we choose to rely on any of the exemptions afforded smaller reporting
companies. If some investors find our common stock less attractive because we rely on any of these exemptions, there may be a less active trading market
for our common stock and the market price of our common stock may be more volatile.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We have implemented disclosure controls and procedures designed to provide reasonable assurance that information we must disclose in reports
we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized, and reported within
the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well-conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple
errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an
unauthorized override of the controls. As a result, because of these inherent limitations in our control system, misstatements or omissions due to error or
fraud may occur and may not be detected, which could result in failures to file required reports in a timely manner and filing reports containing incorrect
information. Any of these outcomes could result in SEC enforcement actions, monetary fines or other penalties, damage to our reputation, and harm to our
financial condition.
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If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting
may be adversely affected.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports and, together with adequate disclosure
controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their
implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404(a) of the
Sarbanes-Oxley Act, or any testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial
reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other
areas for further attention or improvement. Inferior internal control over financial reporting could also cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading price of our common stock.
We are a non-accelerated filer. For so long as we remain a non-accelerated filer, our independent registered public accounting firm will not be
required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. An independent
assessment of the effectiveness of our internal control over financial reporting could detect problems that our management’s assessment might not.
Undetected material weaknesses in our internal control over financial reporting could lead to financial statement restatements and require us to incur the
expense of remediation.
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Item 1B. Unresolved Staff Comments.
Not applicable.
Item 1C. Cybersecurity
Risk Management and Strategy
We have implemented and maintain various information security processes designed to identify, assess and manage material risks from
cybersecurity threats to our critical computer networks, third party hosted services, communications systems, hardware and software, and our critical data,
including intellectual property, confidential information that is proprietary, strategic or competitive in nature, personal information, and Personal Health
Information (“PHI”) (collectively, “Information Systems and Data”).
The board of director’s audit committee and the internal cybersecurity team help identify, assess and manage the Company’s cybersecurity threats
and risks, including through the use of our risk register. Our internal cybersecurity team includes our information security function, security management,
engineering operations, legal, risk management and third-party service providers. Our cybersecurity team identifies and assesses risks from cybersecurity
threats by monitoring and evaluating our threat environment and Personalis’ risk profile using various methods including, for example: using manual and
automated tools, conducting scans of the threat environment, evaluating our and our industry’s risk profile, evaluating threats reported to us, conducting
threat assessments, employee reporting, and regular reviews and internal and external audits.
Depending on the environment, we implement and maintain various technical, physical, and organizational measures, processes, standards and
policies designed to manage and mitigate material risks from cybersecurity threats to our Information Systems and Data, including, for example: incident
response plan, incident detection and response, disaster recovery and business continuity plans, risk assessments, network security controls, access
controls, user management, asset management, hardware and data segregation, system monitoring and regular reviews.
Our assessment and management of material risks from cybersecurity threats are integrated into our overall risk management processes. For
example, cybersecurity risk is addressed as a component of our enterprise risk management program and identified in our risk register. Additionally, the
cybersecurity team monitors activity on a continual basis and works with security management to prioritize our risk profile and mitigate cybersecurity threats
that are more likely to lead to a material impact to our business on a monthly basis; executive management evaluates material risks from cybersecurity
threats against our overall business objectives on a periodic basis and reports to the audit committee of the board of directors, which evaluates our overall
enterprise risk periodically.
We use third-party service providers to assist us from time to time to identify, assess, and manage material risks from cybersecurity threats,
including for example cybersecurity consultants, threat intelligence service providers, and professional services firms.
We use third-party service providers to perform a variety of functions throughout our business, including, but not limited to infrastructure support
and maintenance, supply chain resources, contracting services and software integrations. These vendors are reviewed as part of our vendor management
program, including the management of cybersecurity risks associated with our use of these providers. Depending on the nature of the services provided, the
sensitivity of the Information Systems and Data at issue, and the identity of the provider, our vendor management process may involve different levels of
assessment designed to help identify cybersecurity risks associated with a provider and impose contractual obligations related to cybersecurity on the
provider.
For a description of the risks from cybersecurity threats that may materially affect the Company and how they may do so, see our risk factors
under Part I, Item1A. Risk Factors in this Annual Report on Form 10-K, including “If our information technology systems or data, or those of third parties
upon which we rely, are or were compromised, we could experience adverse consequences resulting from such compromise, including but not limited to
regulatory investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; loss of
customers or sales; and other adverse consequences.”
Governance
Our board of directors addresses our cybersecurity risk management as part of its general oversight function. The board of directors’ audit
committee is responsible for overseeing the Company’s cybersecurity risk management processes.
Our cybersecurity risk assessment and management processes are implemented and maintained by certain of our management, including the
Vice President of Informatics, who has more than 20 years of experience in information technology and oversees the Informatics department which includes
the Company’s hardware, software, help desk, and cybersecurity team.
The Vice President of Informatics reports to our Chief Financial Officer and is responsible for hiring appropriate personnel, helping to integrate
cybersecurity risk considerations into our overall risk management strategy, and communicating key priorities to relevant personnel. The Vice President of
Informatics is responsible for approving budgets, helping prepare for cybersecurity incidents, approving cybersecurity processes, and reviewing security
assessments and other security-related reports.
Our cybersecurity incident response and vulnerability management processes are designed to escalate certain cybersecurity incidents to
members of management depending on the circumstances, including the internal cybersecurity team and others, depending
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on severity. The cybersecurity team works with our incident response team to help the company mitigate and remediate cybersecurity incidents of which they
are notified. In addition, our incident response processes include reporting to the audit committee of the board of directors for certain cybersecurity incidents.
The board of directors receives periodic updates from certain members of the cybersecurity team concerning the Company’s significant
cybersecurity threats and risk and the processes we have implemented to address them. The audit committee and board also have access to various
reports, summaries or presentations related to cybersecurity threats, risk and mitigation.
Item 2. Properties.
Our corporate headquarters is located in Fremont, California, and comprise 100,000 square feet of space, pursuant to a lease that expires in
2036. The lease includes two options to extend the term for a period of five-years per option, at prevailing market rates. This facility is used for our CLIA-
certified and CAP-accredited laboratory operations, research and development, and corporate functions.
We also lease 31,280 square feet of space in Menlo Park, California, pursuant to a lease that expires in 2027. This facility was previously used for
laboratory operations and our former corporate headquarters. We are actively marketing the space for sublease.
We believe that our facilities are sufficient to meet our current and foreseeable future needs. We also believe we will be able to obtain additional
space, as needed, on commercially reasonable terms.
Item 3. Legal Proceedings.
See the disclosure under the heading "Contingencies" in Note 11 to our consolidated financial statements.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is listed on The Nasdaq Global Market under the symbol “PSNL.”
Holders
As of February 22, 2024, there were approximately 60 holders of record of our common stock. The actual number of stockholders is greater than
this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other
nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have not declared or paid any cash dividend on our common stock. We intend to retain any future earnings and do not expect to pay cash
dividends in the foreseeable future. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on then-
existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our
board of directors may deem relevant.
Item 6. [Reserved]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated
financial statements and accompanying 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 “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 elsewhere in
this Annual Report on Form 10-K.
Overview
We develop and market advanced cancer genomic tests and analytics. Our tests and analytics are used by pharmaceutical companies for
translational research, biomarker discovery, the development of personalized cancer therapies, and we expect in the near future, for clinical trial enrollment.
Our advanced tests are used by physicians to detect cancer recurrence, monitor cancer evolution, and uncover insights for therapy selection. We also
provide sequencing and data analysis services to support population sequencing initiatives.
Today, our products are routinely used by many of the largest oncology-focused pharmaceutical companies for analysis of patient samples in their
clinical trials and drug development programs. Our advanced genomic sequencing and analytics also support the development of personalized cancer
vaccines and other next-generation cancer immunotherapies. For example, we are providing genomic testing to Moderna, Inc. ("Moderna") in its ongoing
clinical trials evaluating a personalized cancer vaccine. In addition, we partner with diagnostics companies by providing our advanced tumor profiling and
analysis capabilities as an input to their products. More recently, we launched new diagnostic offerings for the clinical setting and, in November 2023,
entered into an agreement with Tempus AI, Inc. (formerly known as Tempus Labs, Inc., and referred to herein as "Tempus") to commercialize NeXT Personal
Dx in the clinical diagnostics market. Finally, we have also pursued non-cancer related business opportunities, specifically within the population sequencing
market, by providing whole genome sequencing ("WGS") services under contract with the U.S. Department of Veterans Affairs Million Veteran Program ("VA
MVP").
As part of one of our new strategies for 2023 and beyond, we are working with a growing number of leading cancer centers and world-class
academic research institutions to build and publish the clinical evidence-base to support our products and our key indications, as well as to obtain
reimbursement coverage from Medicare and other payors. Because of the ultra-high analytical sensitivity of our technology, we are initially focusing on three
indications: breast cancer, lung cancer, and immunotherapy (IO) monitoring. We have collaborations with Cancer Research UK, University College London,
and the Francis Crick Institute (the TRACERx study); The Royal Marsden; the Vall d'Hebron Institute of Oncology (VHIO); Duke University; the Dana-Farber
Cancer Institute; University Medical Center Hamburg-Eppendorf (also known as UKE); and Criterium and the Academic Breast Cancer Consortium that will
focus on building the evidence-base for our technology and these indications. If the key opinion leaders ("KOLs") we are collaborating with have a positive
experience using our products, we are optimistic this will support broader use of our products by other KOLs, as well as clinicians in the future.
Our work in oncology is underpinned by our experience and capacity for next-generation sequencing at scale. We have the capacity to sequence
and analyze over 300 trillion bases of DNA per week in our facility. We believe that our capacity is already larger than most cancer genomics companies, and
we continue to build automation and other infrastructure to scale further as demand increases. To date, we have sequenced more than 385,000 human
samples, of which more than 175,000 were whole human genomes.
2023 Highlights
Total revenue increased 13%, or $8.4 million, during 2023 compared to 2022, primarily driven by higher revenue from enterprise sales and pharma
tests. Revenue from enterprise sales was $31.7 million in 2023 compared to $26.6 million in 2022, an increase of 19%. Revenue from pharma tests was
$31.9 million in 2023 compared to $29.6 million in 2022, an increase of 8%.
Key business accomplishments and financial updates in 2023 and early 2024 include:
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Received Medicare coverage for NeXT Dx.
Amended Natera agreement to extend volume commitments through the end of 2024.
Signed key partnership agreement with Tempus to commercialize NeXT Personal Dx in clinics or with oncologists.
Established a partnership with Myriad to market ImmunoID NeXT.
Completed the NeXT Personal Dx (LDT) early access launch.
Presented compelling early-stage lung cancer clinical MRD data with TRACERx for NeXT Personal.
Signed commercial agreement with Moderna to leverage NeXT platform in personalized mRNA cancer vaccine clinical trials.
Reduced cash burn through headcount reduction of nearly 50%, resulting in an estimated $35 million in annual cost savings. Continued
efforts to reduce expenses across the board.
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Factors Affecting Our Performance
We believe there are several important factors that we expect to impact our operating performance and results of operations, including:
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The continued development of the market for genomic-based tests. Our performance depends on the willingness of pharmaceutical
companies, enterprise customers, and oncologists to continue to seek more comprehensive molecular information to develop more
efficacious cancer therapies.
Increasing adoption of our products and solutions by existing customers. Our performance depends on our ability to retain and
broaden adoption with existing customers. Because our technology is novel, some customers begin using our products by initiating pilot
studies involving a small number of samples to gain experience with our service. As a result, historically a significant portion of our revenue
has come from existing customers. We believe that our ability to convert initial pilots into larger orders from existing customers has the
potential to drive substantial long-term revenue. We expect there may be some variation 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 engage 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 products. 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 products.
Our revenue and cost are affected by the volume of samples we receive from customers from period to period. The timing and size
of sample shipments received after orders have been placed is variable. Since sample shipments can be large, and are often received from a
third party, the timing of arrival can be difficult to predict over the short term. Although our long-term performance is not affected, we see
quarter-to-quarter volatility due to these factors. Samples arriving later than expected may not be processed in the quarter proposed and
result in 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 is critical to establish and maintain our leading position. We have invested significantly in our NeXT platform,
introducing new products and additional capabilities. We are also collaborating with KOLs to support the clinical utility of our products. We
believe this work is critical to gaining customer adoption and expect our investments in these efforts to continue.
Leverage our operational infrastructure. We have invested significantly 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 products. We expect to grow our revenue and spread our costs over a larger volume of services.
Components of Operating Results
Revenue
We derive our revenue from sales of advanced sequencing and analytics to the following four customer types:
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Pharma tests and services includes sales of testing services and data analytics for clinical trials and research to pharmaceutical companies
in support of their drug development programs.
Enterprise sales includes sales of tumor profiling and diagnostic tests directly to another business as an input to their products. Revenue
from our partnership with Natera to provide advanced tumor analysis for use in Natera's MRD test currently makes up substantially all of the
revenue in this category.
Population sequencing includes sales of genomic sequencing services and data analytics to support large-scale genetic research
programs. All of the revenue in this category is from our partnership with the VA MVP.
Other includes sales of genomic tests and analytics to universities and non-profits. This category also includes sales of diagnostics tests
ordered by healthcare providers for cancer patients, which was insignificant for periods presented.
Our ability to increase revenue will depend on our ability to further increase sales to these groups of customers, expand our customer base within
each group, and expand our business in the clinical diagnostics market. To do this, we are developing a growing set of state-of-the-art services and products;
advancing our operational infrastructure; building our regulatory credentials; focusing our marketing efforts on large pharmaceutical companies; building and
publishing the clinical evidence-base to support our products and our key indications, as well as to obtain reimbursement coverage from Medicare and other
payors; and seeking additional partnerships such
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as ours with Natera. We sell through a small direct sales force. In late 2023, we entered into an agreement with Tempus to commercialize NeXT Personal Dx
in the clinical diagnostics market and will be leveraging Tempus' significantly larger sales force.
We have one reportable segment from the sale of sequencing and data analysis services. Most 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 variability in our gross margins over the medium-term due to fluctuations in customer mix and volume, investments in newer sequencing platforms
and new capabilities such as automation of laboratory workflows, processing of diagnostic tests for the clinical market while we work to secure
reimbursement, and costs related to our new Fremont facility. Over the long-term, we anticipate higher gross margins as growing revenue leads to
economies of scale.
Research and Development Expenses
Research and development expenses consist of costs incurred for the research and development of our services and products and costs related
to conducting studies and collaborations with partners to validate the clinical utility of our offerings. The expenses primarily consist of personnel costs
(salaries, bonuses, stock-based compensation, payroll taxes, and benefits); laboratory supplies and consumables; costs of processing samples for research,
product development, collaborations and studies; 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.
We expense our research and development costs in the period in which they are incurred. We expect research and development expenses to
decrease as a result of our reductions in workforce initiated in 2023 and our closure of operations in China.
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.
Selling, general and administrative expenses have decreased significantly since the completion of our first quarter 2023 reduction in workforce.
We expect expenses to remain around this lower level over the next couple of years.
Lease Impairment
We recognized an impairment loss for operating lease right-of-use assets as a result of the change in use of our Menlo Park facility during the
third quarter of 2023.
Restructuring and Other Charges
Restructuring and other charges consists of charges in connection with our two reductions in workforce initiated in 2023 and charges in connection
with the closure of our China operations.
Interest Income and Interest Expense
Interest income consists primarily of interest earned on our cash and cash equivalents and short-term investments. Interest expense is the
recognition of imputed interest on noninterest bearing loans.
Other Income (Expense), Net
Other income (expense), net consists primarily of charges related to the issuance and remeasurement of warrants to Tempus during the year
ended December 31, 2023. Otherwise, other income (expense), net consists primarily of foreign currency exchange gains and losses.
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Trend 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.
Consolidated Statements of Operations:
Revenue
Costs and expenses
Cost of revenue
Research and development
Selling, general and administrative
Lease impairment
Restructuring and other charges
Total costs and expenses
Loss from operations
Interest income
Interest expense
Loss on debt extinguishment
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Net loss per share, basic and diluted
Weighted-average shares outstanding, basic and diluted
Cash and cash equivalents, and short-term investments
Working capital
Total assets
Total debt
Long-term obligations
Total liabilities
Total stockholders' equity
Results of Operations
2023
Year Ended December 31,
2021
(in thousands, except share and per share data)
2020
2022
2019
$
73,481 $
65,047 $
85,494 $
78,648 $
65,207
55,273
64,776
49,726
5,565
8,077
183,417
(109,936 )
5,901
(110 )
—
(4,068 )
(108,213 )
83
(108,296 ) $
51,697
64,912
63,969
—
—
180,578
(115,531 )
2,396
(201 )
—
61
(113,275 )
40
(113,315 ) $
53,837
49,312
47,698
—
—
150,847
(65,353 )
367
(184 )
—
(42 )
(65,212 )
14
(65,226 ) $
58,534
28,568
33,692
—
—
120,794
(42,146 )
949
(2 )
—
(24 )
(41,223 )
57
(41,280 ) $
43,127
22,418
22,080
—
—
87,625
(22,418 )
1,620
(1,133 )
(1,704 )
(1,440 )
(25,075 )
9
(25,084 )
(2.25 ) $
48,175,201
(2.48 ) $
45,704,805
(1.49 ) $
43,886,730
(1.20 ) $
34,374,903
(1.39 )
18,011,470
$
$
2023
2022
December 31,
2021
(in thousands)
2020
2019
$
114,179 $
99,510
225,099
2,880
48,424
95,658
129,441
167,658 $
166,568
292,700
2,596
41,430
74,561
218,139
287,064 $
286,918
396,528
3,494
54,914
86,227
310,301
203,290 $
180,083
244,842
—
9,261
49,897
194,945
128,289
89,616
157,291
—
639
50,601
106,690
This section generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and
year-to-year comparisons between 2022 and 2021 that are not included in this Annual Report on 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, 2022, filed with the SEC on
February 23, 2023, which is incorporated by reference herein.
Revenue
The following table shows revenue by customer type (in thousands):
Pharma tests and services
Enterprise sales
Population sequencing
Other
Total revenue
2023
Years Ended December 31,
2022
2021
$
$
31,904 $
31,729
9,412
436
73,481 $
59
29,552 $
26,641
8,443
411
65,047 $
30,282
8,774
45,671
767
85,494
Change
2023 vs 2022
8%
19%
11%
6%
13%
2022 vs 2021
(2%)
204%
(82%)
(46%)
(24%)
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The following table shows customers that made up at least 10% of total revenue in each year presented:
Natera, Inc.
VA MVP
Merck & Co., Inc.
* Less than 10% of revenue
Pharma tests and services
2023
43%
13%
*
Year Ended December 31,
2022
41%
13%
11%
2021
10%
53%
*
Revenue from pharma tests and services increased 8%, or $2.4 million, in 2023. Growth from new customers drove the revenue increase.
Notably, three customers that were either new in 2023 or 2022, accounted for an increase of $3.8 million in revenue as these customers selected our
advanced genomic tests for their clinical trials and research projects. Additionally, revenue from one of our customers developing personalized cancer
therapies increased by $2.3 million. Those increases were partially offset by decreases in revenue from multiple customers due to non-recurring projects and
variability in timing and spending levels on clinical trial projects in general.
Enterprise sales
Revenue from enterprise sales increased 19%, or $5.1 million, in 2023. This was due to an increase in the volume of samples we tested for
Natera, partially offset by lower selling prices. The number of samples we processed for Natera increased by over 55% in 2023.
We amended our agreement with Natera during the fourth quarter of 2023 to extend minimum volume commitments through the end of 2024.
Previously, Natera's volume commitments extended only through the first quarter of 2024. In addition, we plan to introduce a lower-cost version of our exome
product offering for Natera in the first half of 2024 in order to support their price requirements, and we expect our total revenue from Natera in 2024 to
decline, due to the lower prices.
Population sequencing
Population sequencing revenue is made up entirely of sales to the VA MVP. The increase in revenue was driven by an increase in samples we
tested, which offset a nearly 50% reduction in selling prices in 2023 as compared to 2022.
Revenue recognized each period is also impacted by timing of our fulfillment of samples under each annual task order. Our annual task orders
received in 2023, 2022, and 2021 were $7.5 million, $10.0 million, and $9.7 million, respectively. 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 from the VA MVP up or down to complement sample
volumes from other customers, which can vary from period to period. As of the end of 2023, our remaining unfulfilled task orders amounted to $7.4 million,
which we expect to recognize as revenue within the next 12 months.
Costs and Expenses
Cost of revenue
Research and development
Selling, general and administrative
Lease impairment
Restructuring and other charges
Total costs and expenses
Cost of revenue
2023
Year Ended December 31,
2022
(in thousands)
55,273 $
64,776
49,726
5,565
8,077
183,417 $
51,697 $
64,912
63,969
—
—
180,578 $
$
$
2021
2023 vs 2022
2022 vs 2021
Change
53,837
49,312
47,698
—
—
150,847
7%
(0%)
(22%)
NM
NM
2%
(4%)
32%
34%
NM
NM
20%
The increase in cost of revenue of 7%, or $3.6 million, was primarily due to higher revenue levels (revenue increased 13% over the same period),
partially offset by dedication of more laboratory resources to support sample processing required for clinical evidence generation, which is a non-revenue
generating activity and thus reported as R&D expense. Specific components of the increase were a $4.9 million increase in direct material costs due to
higher revenue levels, a $2.0 million increase in facilities and equipment costs (partly due to movement of our laboratory from our prior Menlo Park facility to
the new Fremont facility), and a $2.0 million increase in laboratory supplies and consumables (enterprise customer orders require more supplies to process
as compared to other customer categories); partially offset by a $5.3 million decrease in shared laboratory costs due to greater usage of our laboratory
capacity for R&D activities.
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Research and development
Research and development expenses remained flat in 2023 as compared to 2022. Increases in costs associated with clinical evidence generation
and collaborations, and increases in facility costs (as a result of the R&D function moving into our Fremont facility during 2023), were offset by cost savings
from our reductions in workforce initiated in 2023.
Specific offsetting components of research and development expense include a $5.0 million increase in sample processing costs incurred in our
laboratory for product development, collaborations, and clinical evidence generation, and a $2.2 million increase in facilities costs; offset by a $7.3 million
decrease in personnel-related costs driven by our reductions in workforce.
Selling, general and administrative
The decrease in selling, general and administrative expenses of 22%, or $14.2 million was primarily due to cost savings from our reductions in
workforce initiated in 2023.
Specific components of the decrease were a $11.7 million decrease in personnel-related costs driven by our reductions in workforce, a $5.1 million
decrease in facilities costs as a result of the R&D function and additional lab teams moving into our Fremont facility and consequently receiving a share of
such facility costs that were previously allocated to SG&A, and a $1.5 million decrease in professional services; partially offset by a $2.9 million increase in
depreciation of office-related fixtures and furniture (driven by our Fremont headquarters), a $1.0 million increase in software and subscriptions costs, and a
$0.2 million increase in marketing costs such as trade shows expenses.
Lease impairment
During the third quarter of 2023, we completed the move of our laboratory operations from our Menlo Park facility to our Fremont facility and
began actively marketing the Menlo Park space for sublease. Accordingly, we evaluated the ongoing value of the operating lease right-of-use asset
associated with the Menlo Park facility. Based on this evaluation, we determined that the right-of-use asset with a carrying amount of $6.7 million was no
longer recoverable and was impaired and wrote it down to its estimated fair value of $1.1 million, which resulted in a noncash impairment loss of $5.6 million.
Estimated fair value was based on expected future sublease cash flows (with the assistance of a third-party real estate broker), net of brokerage
commissions and estimated tenant incentives, discounted at a market rate of return on similar assets. The estimation of fair value also included expected
downtime prior to the commencement of a future sublease.
Restructuring and other charges
During 2023, we initiated two rounds of workforce reductions to reduce our cash burn and increase operating efficiencies. Combined, our
headcount was reduced by almost 50% from 2022 levels. We also closed our China operations.
The $8.1 million in restructuring and other charges recognized in 2023 is comprised of $7.5 million in one-time employee termination benefits
(including costs related to termination of our former China employees) and $0.6 million of other noncash charges (primarily asset disposals and impairments
in connection with the closure of our China operations).
Interest Income, Interest Expense and Other Income (Expense), Net
Interest income
Interest expense
Other income (expense), net
Total
Interest income and interest expense
2023
Year Ended December 31,
2022
(in thousands)
$
$
5,901 $
(110 )
(4,068 )
1,723 $
2,396
(201 )
61
2,256
$
$
2021
2023 vs 2022
2022 vs 2021
Change
367
(184 )
(42 )
141
146%
(45%)
NM
553%
9%
NM
The increase in interest income was due to increased yields on our investments. Interest expense is the recognition of imputed interest on
noninterest bearing loans.
Other income (expense), net
In connection with our November 2023 agreement with Tempus, we issued two warrants to purchase, in the aggregate, up to 9,218,800 shares of
our common stock. If Tempus acquires any shares of common stock directly from us other than by exercising the warrants, then the total number of shares
issuable upon exercise of the warrants will be reduced by such shares. Because the number of shares issuable upon settlement are subject to adjustment,
the warrants are classified as liability instruments and are subject to remeasurement at each balance sheet date, with changes in fair value recognized as
other income (expense). Additionally, since the initial fair value of the warrants of $6.9 million exceeded the total proceeds received from Tempus of $6
million, a loss of $0.9 million was immediately recognized within other income (expense).
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Fair value of the warrants increased by $3.1 million as of December 31, 2023. The increase in fair value, plus the immediate loss of $0.9 million
recognized upon issuance, resulted in a $4.0 million expense recognized in other income (expense), net during the year ended December 31, 2023.
During 2022 and 2021, other income (expense), net consisted mainly of foreign currency remeasurements.
Liquidity and Capital Resources
The following table presents selected financial information (in thousands):
Cash and cash equivalents, and short-term investments
Property and equipment, net
Contract liabilities
Working capital
$
2023
114,179 $
57,366
7,216
99,510
December 31,
2022
167,658 $
61,935
1,264
166,568
2021
287,064
19,650
3,982
286,918
From our inception through December 31, 2023, 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, $89.6 million from issuance of redeemable
convertible preferred stock, $3.5 million in net proceeds from our ATM facility (see Note 2, Summary of Significant Accounting Policies), as well as cash from
operations and debt financings. As of December 31, 2023, we had cash and cash equivalents of $57.0 million and short-term investments of $57.2 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 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, 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 sales agreement prospectus in December 2023 pursuant to which we may offer and sell up to $50.0 million of shares of our
common stock through our ATM facility. 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 investments portfolio is primarily invested in highly rated securities, with the primary objective of minimizing the potential risk of
principal loss. Our investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer.
As of December 31, 2023, cash and cash equivalents held by foreign subsidiaries was $1.2 million, most of which was held by our China
subsidiary. During the first half of 2023, we closed our China operations and, in February 2024, we completed the dissolution of the China entity and
repatriated all cash that was held at the entity back to our headquarters.
Cash Flows
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
2023
Year Ended December 31,
2022
2021
$
(56,258 ) $
13,099
11,031
(70,233 ) $
52,537
1,366
(70,828 )
(60,069 )
169,700
The $14.0 million decrease in cash used in operating activities during 2023 as compared to 2022 was primarily due to lower spend on operating
expenses (particularly lower payroll expenses after our reductions in workforce initiated in 2023), higher customer deposits received (mostly in connection
with our agreement with Moderna to support its ongoing clinical trials evaluating a personalized cancer vaccine), and efficient management of working
capital; partially offset by lower landlord contributions received during 2023 versus 2022 in connection with our Fremont facility build-out.
The $39.4 million decrease in cash provided by investing activities during 2023 as compared to 2022 was due to significantly lower net proceeds
from short-term investment maturities, partially offset by a $39.0 million reduction in capital expenditures.
The $9.7 million increase in cash provided by financing activities during 2023 as compared to 2022 was driven by $6 million in proceeds from
issuance of warrants to Tempus and $3.5 million in net proceeds from sales of common stock under our ATM facility, both of which did not occur during 2022.
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Material Cash Requirements
Our material cash requirements in the short- and long-term consist primarily of variable costs of revenue, operating expenditures, capital
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 $114.2 million as of December 31, 2023, as well as anticipated cash receipts from customers. To fund our material cash
requirements in the short- and long-term, we may also 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.
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.
We currently expect spending in this area to increase in 2024 relative to 2023 to support expected higher levels of revenue.
Operating expenditures. Our primary use of cash relates to employee compensation, 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
decrease our spend in these areas as a result of our workforce reductions initiated in 2023. On a long-term basis, we manage future cash requirements
relative to our long-term business plans.
Capital expenditures. Capital expenditures are expected to decrease from 2023 levels as we have completed significant laboratory capacity
additions. Going forward, our capital expenditures are expected to consist primarily of laboratory equipment and computer equipment. We currently expect
capital expenditures to be approximately $1 million in 2024 and between $4 million to $6 million in each of the years 2025 and 2026.
Property leases. Our noncancelable operating lease payments were $78.6 million as of December 31, 2023. 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. As of December 31, 2023, we have an outstanding noninterest bearing loan that was used to finance the purchase of equipment for our
laboratory. We owe a total of $2.5 million, with half of that amount owed in 2024 and the other half in 2025. Additionally, we had an outstanding noninterest
bearing loan that was used to finance the purchase of internal use software licenses and related ongoing support. We will make a payment of $0.4 million in
September 2024 to pay off this loan. Further discussion of this loan can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial
Statements in Note 6, “Loans.”
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our 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, leases, and common
stock warrants 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 or rebates.
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Accordingly, all of the transaction price, net of any discounts, is allocated to one performance obligation. Therefore, upon delivery of the services, there are
no remaining performance obligations.
Leases
Lease liabilities are recognized at the present value of the fixed lease payments, reduced by landlord incentives, using a discount rate based on
our current borrowing rate at the lease commencement date (the incremental borrowing rate), unless the rate implicit in the lease is readily determinable.
In August 2021, we entered into a 13.5-year lease for our new corporate headquarters in Fremont, California. 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.
In September 2022, the lease commencement date for our new facility in Fremont, California was delayed from the original intended date due to
delays in the completion of the work necessary for us to move into the facility, which resulted in a reassessment of the lease term and consequently a
remeasurement of the lease liability and corresponding adjustment to the carrying amount of the right-of-use asset based on an updated incremental
borrowing rate. We estimated our incremental borrowing rate by using the same method described above and concluded that the incremental borrowing rate
for the remeasured lease was 10.5%. The lease reassessment resulted in a $12.9 million reduction to right-of-use assets in 2022. The increase in our
estimated borrowing rate between August 2021 and September 2022 mostly reflects the higher interest rate environment in 2022 as compared to 2021.
During the third quarter of 2023, we completed the move of our laboratory operations from our Menlo Park facility to our Fremont facility and
began actively marketing the Menlo Park space for sublease. Accordingly, we evaluated the ongoing value of the operating lease right-of-use asset
associated with the Menlo Park facility. Based on this evaluation, we determined that the right-of-use asset with a carrying amount of $6.7 million was no
longer recoverable and was impaired and wrote it down to its estimated fair value of $1.1 million, which resulted in a noncash impairment loss of $5.6 million.
Estimated fair value was based on expected future sublease cash flows (with the assistance of a third-party real estate broker), net of brokerage
commissions and estimated tenant incentives, discounted at a market rate of return on similar assets. The estimation of fair value also included expected
downtime prior to the commencement of a future sublease.
Common Stock Warrants
In November 2023, we entered into an agreement with Tempus to commercialize NeXT Personal Dx in the clinical diagnostics market. In
connection with this agreement, we issued to Tempus two warrants to purchase, in the aggregate, up to 9,218,800 shares of our common stock. If Tempus
acquires any shares of common stock directly from us other than by exercising the warrants, then the total number of shares issuable upon exercise of the
warrants will be reduced by such shares. Because the number of shares issuable upon settlement are subject to adjustment, the warrants are classified as
liability instruments and are subject to remeasurement at each balance sheet date, with changes in fair value recognized as other income (expense).
The Black-Scholes option-pricing model was used to estimate fair value of the warrants issued to Tempus at the date of issuance, November 28,
2023, and at each subsequent balance sheet date. Estimating fair value using the Black-Scholes option-pricing model requires a number of assumptions.
Changes in the assumptions can materially affect the fair value and ultimately how much other income (or expense) is recognized. The inputs generally
require analysis to develop.
•
•
•
•
Expected Term—The expected term assumption represents the contractual period of each of the two warrants.
Expected Volatility—Expected volatility was based on the Company's actual historical volatility over the expected terms of the warrants.
Expected Dividend Yield—The Black-Scholes option-pricing valuation model calls for 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 warrants.
Recent Accounting Pronouncements
See the sections titled “Summary of Significant Accounting Policies—Recent Accounting Pronouncements” in Note 2 to our consolidated financial
statements for additional information.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company”, we are not required to provide the information under this item.
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Item 8. Financial Statements and Supplementary Data.
PERSONALIS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Note 1. Company and Nature of Business
Note 2. Summary of Significant Accounting Policies
Note 3. Revenue
Note 4. Balance Sheet Details
Note 5. Fair Value Measurements
Note 6. Loans
Note 7. Leases
Note 8. Tempus Agreement
Note 9. Restructuring and Other Charges
Note 10. Stock-Based Compensation
Note 11. Commitments and Contingencies
Note 12. Basic and Diluted Net Loss Per Common Share
Note 13. Income Taxes
Reports of Independent Registered Public Accounting Firms
(BDO USA, P.C., PCAOB ID: 243; Deloitte & Touche LLP, PCAOB ID: 34)
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69
70
71
71
76
77
78
79
79
81
82
83
86
87
88
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Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventory and other deferred costs
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
Accrued and other current liabilities
Contract liabilities
Short-term warrant liability
Total current liabilities
Long-term operating lease liabilities
Long-term warrant liability
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 11)
Stockholders’ equity
PERSONALIS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2023
December 31, 2022
$
$
$
$
56,984 $
57,195
17,730
10,474
4,361
146,744
57,366
17,852
3,137
225,099 $
14,920 $
23,941
3,288
5,085
47,234
38,321
4,942
5,161
95,658
89,128
78,530
16,642
8,591
6,808
199,699
61,935
26,480
4,586
292,700
12,854
19,013
1,264
—
33,131
41,041
—
389
74,561
—
—
5
598,364
(222 )
(468,706 )
129,441
225,099 $
5
579,456
(912 )
(360,410 )
218,139
292,700
Preferred stock, $0.0001 par value — 10,000,000 shares authorized; none issued
Common stock, $0.0001 par value — 200,000,000 shares authorized; 50,480,694 and
46,707,084 shares issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
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Revenue
Costs and expenses
Cost of revenue
Research and development
Selling, general and administrative
Lease impairment
Restructuring and other charges
Total costs and expenses
Loss from operations
Interest income
Interest expense
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
PERSONALIS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
2023
Year Ended December 31,
2022
2021
$
73,481 $
65,047 $
85,494
55,273
64,776
49,726
5,565
8,077
183,417
(109,936 )
5,901
(110 )
(4,068 )
(108,213 )
83
51,697
64,912
63,969
—
—
180,578
(115,531 )
2,396
(201 )
61
(113,275 )
40
$
$
(108,296 ) $
(113,315 ) $
(2.25 ) $
(2.48 ) $
53,837
49,312
47,698
—
—
150,847
(65,353 )
367
(184 )
(42 )
(65,212 )
14
(65,226 )
(1.49 )
48,175,201
45,704,805
43,886,730
Net loss per share, basic and diluted
Weighted-average shares outstanding, basic and diluted
See notes to consolidated financial statements.
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Table of Contents
PERSONALIS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment
Change in unrealized gain (loss) on available-for-sale debt securities
Comprehensive loss
2023
Year Ended December 31,
2022
2021
$
(108,296 ) $
(113,315 ) $
(65,226 )
19
671
$
(107,606 ) $
(277 )
(469 )
(114,061 ) $
49
(237 )
(65,414 )
See notes to consolidated financial statements.
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Table of Contents
PERSONALIS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Additional
Common Stock
Paid-In
Balance—December 31, 2020
Proceeds from follow-on offering, net of offering costs
Proceeds from exercise of stock options
Proceeds from ESPP
Restricted stock units vested
Stock-based compensation
Foreign currency translation adjustment
Unrealized loss on available-for-sale debt securities
Net loss
Balance—December 31, 2021
Proceeds from exercise of stock options
Proceeds from ESPP
Restricted stock units vested
Stock-based compensation
Foreign currency translation adjustment
Unrealized loss on available-for-sale debt securities
Net loss
Shares
39,105,54
8 $
4,542,500
862,056
128,289
266,119
—
—
—
—
44,904,51
2
488,187
416,514
897,871
—
—
—
—
46,707,08
Accumulate
d
Other
Comprehens
ive
Income
(Loss)
Accumulate
d
Total
Stockholder
s'
Deficit
Equity
Amount
Capital
4 $ 376,788 $
161,916
—
2,096
—
2,380
—
—
—
14,378
—
—
—
—
—
—
—
4
1
—
—
—
—
—
—
557,558
1,010
1,455
—
19,433
—
—
—
22 $ (181,869 ) $ 194,945
161,916
—
2,096
—
2,380
—
—
—
14,378
—
49
49
(237 )
(237 )
(65,226 )
—
—
—
—
—
—
—
—
(65,226 )
(166 )
—
—
—
—
(277 )
(469 )
—
(247,095 )
—
—
—
—
—
—
(113,315 )
310,301
1,011
1,455
—
19,433
(277 )
(469 )
(113,315 )
Balance—December 31, 2022
4
5
579,456
(912 )
(360,410 )
218,139
Proceeds from sales of common stock under ATM
facility, net of commissions
Proceeds from exercise of stock options
Proceeds from ESPP
Restricted stock units vested
Stock-based compensation
Foreign currency translation adjustment
Unrealized gain on available-for-sale debt securities
Net loss
1,935,214
8
999,194
839,194
—
—
—
—
50,480,69
—
—
—
—
—
—
—
—
3,513
—
1,344
—
14,051
—
—
—
—
—
—
—
—
—
19
671
—
—
—
—
—
(108,296 )
3,513
—
1,344
—
14,051
19
671
(108,296 )
Balance—December 31, 2023
4 $
5 $ 598,364 $
(222 ) $ (468,706 ) $ 129,441
See notes to consolidated financial statements
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PERSONALIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
2023
Year Ended December 31,
2022
2021
$
(108,296 ) $
(113,315 ) $
(65,226 )
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense
Depreciation and amortization
Noncash operating lease cost
Noncash charges related to liability classified Tempus Warrants
Amortization of premium (discount) on short-term investments
Noncash restructuring and other charges
Noncash lease impairment expense
Other
Changes in operating assets and liabilities
Accounts receivable
Inventory and other deferred costs
Prepaid expenses and other assets
Accounts payable
Accrued and other current liabilities
Contract liabilities
Operating lease liabilities
Other long-term liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchases of available-for-sale debt securities
Proceeds from maturities of available-for-sale debt securities
Proceeds from sales of available-for-sale debt securities
Purchases of property and equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from public offerings, net of underwriting discounts and commissions
Payments of costs related to public offerings
Proceeds from sales of common stock under ATM facility, net of commissions
Proceeds from issuance of Tempus Warrants
Proceeds from loans
Repayments of loans
Proceeds from exercise of equity awards
Net cash provided by financing activities
Effect of exchange rates on cash, cash equivalents and restricted cash
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
$
14,051
11,296
1,859
4,027
(2,000 )
3,605
5,565
153
(1,088 )
(1,934 )
3,748
5,178
742
5,952
894
(10 )
(56,258 )
(103,945 )
127,955
—
(10,911 )
13,099
—
—
3,513
6,000
3,438
(3,264 )
1,344
11,031
(16 )
(32,144 )
90,918
58,774 $
19,433
8,432
4,446
—
57
—
—
103
1,825
(2,982 )
484
3,089
(1,479 )
(2,718 )
12,811
(419 )
(70,233 )
(121,490 )
223,923
—
(49,896 )
52,537
—
—
—
—
1,194
(2,293 )
2,465
1,366
(127 )
(16,457 )
107,375
90,918 $
14,378
6,014
2,950
—
2,031
—
—
169
(12,118 )
29
(2,658 )
(1,457 )
3,365
(17,052 )
(962 )
(291 )
(70,828 )
(267,128 )
213,083
5,059
(11,083 )
(60,069 )
162,258
(342 )
—
—
5,167
(1,857 )
4,474
169,700
47
38,850
68,525
107,375
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets:
Cash and cash equivalents
Restricted cash, included in other long-term assets
$
Total cash, cash equivalents and restricted cash
$
56,984 $
1,790
58,774 $
89,128 $
1,790
90,918 $
105,585
1,790
107,375
Supplemental cash flow information:
Cash paid for interest
Cash paid for income taxes, net of refunds
Acquisition of property and equipment included in accounts payable and accrued liabilities
$
— $
64
104
— $
47
3,917
—
39
3,006
See notes to consolidated financial statements.
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Note 1. Company and Nature of Business
PERSONALIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Personalis, Inc. (the "Company" or "Personalis") develops and markets advanced genomic tests and analytics for precision oncology and
personalized testing. The Company also provides sequencing and data analysis services to support population sequencing initiatives. Genomic tests are
sold primarily to pharmaceutical companies, biopharmaceutical companies, diagnostics companies, universities, non-profits, and government entities, while
services for population sequencing initiatives are sold primarily to government entities. The principal markets for the Company’s services are in the United
States and Europe.
The Company is expanding its business model to offer genomic tests directly to cancer patients in a clinical setting. However, revenue generated
from clinical customers was not significant for any periods presented in these consolidated financial statements.
The Company was incorporated in Delaware in February 2011 and began operations in September 2011. The Company formed a wholly owned
subsidiary, Personalis (UK) Ltd., in August 2013 and a wholly owned subsidiary, Shanghai Personalis Biotechnology Co., Ltd., which is referred to as
“Personalis (Shanghai) Ltd” herein, in October 2020. During the first half of 2023, the Company terminated its operations in China and the Company
completed the process of dissolving the Personalis (Shanghai) Ltd entity in February 2024. Refer to Note 9 for further information. The Company operates
and manages its business as one reportable operating segment, which is the sale of sequencing and data analysis services.
The Company has incurred losses to date and expects to incur additional losses for the foreseeable future. The Company continues to invest the
majority of its resources in the development and growth of its business, including investments in product development and studies to prove the clinical
validity and utility of the Company's tests. The Company’s activities have been financed to date primarily through the sale of its equity securities and cash
from operations.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding annual reporting. The
consolidated financial statements include the accounts of Personalis, Inc. and its wholly owned subsidiaries, Personalis (UK) Ltd. and Personalis (Shanghai)
Ltd. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the reporting period. The estimates include, but are not limited to, revenue recognition, useful
lives assigned to long-lived assets, discount rates for lease accounting, the valuation of stock options, the valuation of common stock warrants, provisions for
income taxes, and fair value of lease right-of-use assets. Actual results could differ from these estimates, and such differences could be material to the
Company’s consolidated financial position and results of operations.
Follow-On and At-the-Market Equity Offerings
In January 2021, the Company completed a follow-on equity offering in which it issued and sold 4,542,500 shares of its common stock at a public
offering price of $38.00 per share. The Company received net proceeds of $162.3 million after deducting underwriting discounts and commissions.
In December 2021, the Company entered into an At-the-Market ("ATM") Sales Agreement (the “Sales Agreement”) with BTIG, LLC (“BTIG”) under
which it may offer and sell its common stock from time to time through BTIG as its sales agent. The Sales Agreement initially capped the amount of common
stock that could be sold under the Sales Agreement to $100.0 million. In December 2023, the Sales Agreement was amended to, among other things,
remove the maximum dollar amount of common stock that can be sold under the Sales Agreement. BTIG will use commercially reasonable efforts to sell the
Company’s common stock from time to time, based upon instructions from the Company (including any price, time or size limits or other customary
parameters or conditions the Company may impose). The Company will pay BTIG a commission of up to 3% of the gross sales proceeds of any common
stock sold through BTIC under the Sales Agreement. The Company is not obligated to make any sales of common stock under the Sales Agreement.
During 2023, the Company issued and sold 1,935,214 shares of its common stock at a weighted-average price of $1.85 per share under the Sales
Agreement and received $3.5 million in proceeds, net of commissions.
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Concentration of Credit Risk and Other Risks and Uncertainties
The Company is subject to credit risk from its portfolio of cash and cash equivalents. The Company’s cash and cash equivalents are deposited
with high-quality financial institutions. Deposits at these institutions may, at times, exceed federally insured limits. Management believes these financial
institutions are financially sound and, accordingly, that minimal credit risk exists.
The Company also invests in investment‑grade debt instruments and has policy limits for the amount it can invest in any one type of security,
except for securities issued or guaranteed by the U.S. government. The goals of the Company’s investment policy are as follows: preservation of principal;
liquidity of investments sufficient to meet cash flow requirements; avoidance of inappropriate concentration and credit risk; competitive after‑tax rate of
returns; and fiduciary control of cash and investments. Under its investment policy, the Company limits the amounts invested in such securities by credit
rating, maturity, investment type, and issuer. As a result, management believes that these financial instruments do not expose the Company to any
significant concentrations of credit risk.
The Company purchases various reagents and sequencing materials from sole source suppliers. Any extended interruption in the supply of these
materials could result in the Company’s inability to secure sufficient materials to conduct business and meet customer demand.
The Company routinely assesses the creditworthiness of its customers and does not require collateral. Historically, the Company has not
experienced significant credit losses from accounts receivable. Multiple customers have provided more than 10% of total revenue in the periods presented,
or accounted for more than 10% of accounts receivable at each respective balance sheet date, as follows:
Natera, Inc.
VA MVP
Merck & Co., Inc.
GSK plc
Pfizer Inc.
* Less than 10% of revenue or accounts receivable
Revenue Recognition
Revenue
Year Ended December 31,
2022
41%
13%
11%
*
*
2023
43%
13%
*
*
*
2021
10%
53%
*
*
*
Accounts Receivable
December 31,
2023
36%
*
*
*
*
2022
43%
*
*
12%
10%
The Company applies the revenue recognition guidance in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”).
The Company derives revenue from the sale of sequencing and data analysis services. Contracts are in the form of a combination of signed
agreements, statements of work, and/or purchase orders. The Company accounts for a contract with a customer when there is approval and commitment
from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and it is probable that the
Company will collect substantially all of the consideration to which it will be entitled.
The sequencing and data analysis services are the only distinct services that meet the definition of a performance obligation and are accounted
for as one performance obligation under Topic 606. Revenue is recognized at a point in time when test results are transferred to the customer. The Company
has elected to exclude all sales and value added taxes from the measurement of the transaction price.
Standard payment terms are typically 90 days or less from the invoice date, but may vary. In instances where the timing of revenue recognition
differs from the timing of invoicing, the Company does not assess whether a contract has a significant financing component if the expectation at contract
inception is such that the period between payment by the customer and the transfer of the promised services to the customer will be one year or less. After
assessing each of its revenue-generating arrangements to determine whether a significant financing component exists, the Company concluded that a
significant financing component does not exist in any of its arrangements. The primary purpose of the Company's invoicing terms is to provide customers
with simplified and predictable ways of purchasing services and to provide payment protection for the Company.
Practical Expedients and Exemptions
As a practical expedient, the Company recognizes the incremental costs of obtaining contracts, such as sales commissions, as an expense when
incurred since the amortization period of the asset the Company otherwise would have recognized is one year or less. Sales commissions are recorded
within selling, general and administrative expenses in the consolidated statements of operations.
Cost of Revenue
Cost of revenue consists of raw materials costs, personnel costs (salaries, bonuses, benefits, payroll taxes, and stock-based compensation),
laboratory supplies and consumables, depreciation and maintenance on equipment, and allocated facilities and information technology (“IT”) costs.
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Research and Development Expenses
The Company charges research and development costs to expenses as incurred, including lab and automation development costs. The expenses
primarily consist of personnel costs (salaries, bonuses, stock-based compensation, payroll taxes, and benefits); laboratory supplies and consumables; costs
of processing samples for research, product development, collaborations, and studies; depreciation and maintenance on equipment; and allocated facilities
and IT costs.
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. The Company determines 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. The Company determines the fair value of restricted stock unit awards using the closing
market price of the Company’s common stock on the date of grant. 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, the Company’s 2019 Employee Stock Purchase Plan (the “ESPP”) is deemed to be a compensatory plan and therefore is included in stock-
based compensation expense.
Inputs used in Black-Scholes option-pricing models to measure fair value of options are summarized as follows:
Expected Term. The expected term is calculated using the simplified method, which is available if there is insufficient historical data about exercise
patterns and post-vesting employment termination behavior. The simplified method is based on the vesting period and the contractual term for each grant, or
for each vesting tranche for awards with graded vesting. The midpoint of the vesting date and the contractual expiration date is used as the expected term
under this method. For awards with multiple vesting tranches, the assumed period for each tranche is computed separately and then averaged together to
determine the expected term for the award.
Expected Volatility. The Company used an average historical stock price volatility of a peer group of publicly traded companies to be
representative of its expected future stock price volatility, as sufficient trading history for the Company's common stock does not yet exist. For purposes of
identifying these peer companies, the Company considered the industry, stage of development, size, and financial leverage of potential comparable
companies. For each grant, the Company measured historical volatility over a period equivalent to the expected term.
Risk-Free Interest Rate. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with
remaining terms equivalent to the expected term of a stock award.
Expected Dividend Rate. The Company has not paid and does not anticipate paying any dividends in the near future. Accordingly, estimated
dividend yield is zero.
Foreign Currency Translation
The Company considers the functional currencies of its foreign subsidiaries to be the local currency. Assets and liabilities recorded in foreign
currencies are translated at the exchange rate as of the balance sheet date, and costs and expenses are translated at average exchange rates in effect
during the period. Equity transactions are translated using historical exchange rates. The effects of foreign currency translation adjustments are recorded as
a separate component of accumulated other comprehensive income (loss) in the consolidated balance sheets.
Comprehensive Loss
Comprehensive loss includes all changes in equity (net assets) during the period from nonowner sources. Comprehensive loss consists of net
loss, cumulative translation adjustments, and unrealized gains or losses on available-for-sale debt securities.
Income Taxes
The Company uses the asset and liability method under ASC Topic 740, Income Taxes, in accounting for income taxes. Deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expenses or benefits are the result of
changes in the deferred tax assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets where it is more likely
than not that the deferred tax assets will not be realized.
ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC Topic 740 provides that a tax
benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon audit, including resolutions of
any related appeals or litigation processes, based on the technical merits of the position. ASC Topic 740 also provides guidance on measurement,
derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated
statements of operations. Accrued interest and penalties are included within the related liability line in the consolidated balance sheets.
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Undistributed earnings of foreign subsidiaries are assumed to be indefinitely reinvested and, accordingly, no U.S. income taxes have been
provided thereon.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities at the time of purchase of three months or less. Cash equivalents
include bank demand deposits and money market accounts that invest primarily in cash, U.S. Treasury bills, notes, and other obligations issued or
guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, and repurchase agreements secured by such obligations
or cash. Cash equivalents also include commercial paper and U.S. Treasury bills, which are marketable debt securities recorded at fair value and accounted
for in the same manner as other marketable debt securities described below.
Short-term Investments
Investments in marketable debt securities are classified as available-for-sale and recorded at fair value. Investments with original maturities of
greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one
year are also classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is
available for current operations. Short-term investments primarily consist of U.S. Treasury notes, U.S. Treasury bills, commercial paper, and U.S.
government agency bonds.
Any discount or premium arising at purchase is accreted or amortized to interest income or expense. Unrealized gains and losses are included in
accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses are reported in other income (expense), net. When
securities are sold, any associated unrealized gain or loss initially recorded as a separate component of stockholders’ equity is reclassified out of
stockholders’ equity on a specific-identification basis and recorded in earnings for the period. If an available-for-sale debt security's fair value is less than its
amortized cost basis, the Company evaluates whether the decline is the result of a credit loss, in which case an impairment is recorded through an
allowance for credit losses.
Fair Value Measurements
Financial assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The hierarchy below lists three levels of fair value
based on the extent to which inputs used in measuring fair value are observable in the market. Observable inputs reflect market data obtained from
independent sources while unobservable inputs reflect market assumptions made by the reporting entity.
The three-level hierarchy for the inputs to valuation techniques used to measure fair value is briefly summarized as follows:
Level 1 — Unadjusted quoted prices in active markets that are accessible to the reporting entity at the measurement date for identical assets and
liabilities.
Level 2 — Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for
substantially the full term of the asset or liability. Level 2 inputs include the following:
•
•
•
•
Quoted prices for similar assets and liabilities in active markets.
Quoted prices for identical or similar assets or liabilities in markets that are not active.
Observable inputs other than quoted prices that are used in the valuation of the assets or liabilities (e.g., interest rate and yield curve quotes
at commonly quoted intervals).
Inputs that are derived principally from or are corroborated by observable market data by correlation or other means.
Level 3 — Unobservable inputs for the assets or liabilities (i.e., supported by little or no market activity). Level 3 inputs include management’s own
assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when
determining fair value.
Accounts Receivable, Net
Trade accounts receivable are recorded at the invoiced amount and are noninterest bearing. The Company maintains an allowance for credit
losses, consisting of known specific troubled accounts as well as an amount based on overall estimated potential uncollectible accounts receivable based on
historical experience and review of their current credit quality. Expected credit losses are recorded as selling, general and administrative expenses in the
consolidated statements of operations.
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Inventory and Other Deferred Costs
Inventory consists of raw materials and supplies used to fulfill customer contracts and the Company's research and development activities, and is
valued at the lower of cost or net realizable value. Cost is determined using actual costs, on a first-in, first-out basis. Other deferred costs relate to materials
consumed and work performed on customer orders that have yet to be completed and recognized as revenue and cost of revenue. Other deferred costs are
also comprised of direct labor and overhead costs incurred.
Property and Equipment, Net
Property and equipment are recorded at cost, less accumulated depreciation and amortization, and are depreciated on a straight-line basis over
the estimated useful lives of the related assets, which is generally three to five years for computer equipment, two years for software, three years for furniture
and equipment, and five years for machinery and equipment. Leasehold improvements are amortized over the shorter of the lease term or the estimated
useful life of the related asset. Upon retirement or sale, the cost and related accumulated depreciation and amortization are removed from the consolidated
balance sheet, and the resulting gain or loss is reflected in the consolidated statements of operations. Maintenance and repairs that are not considered
improvements and do not extend the useful lives of the assets are charged to expense as incurred.
Construction-in-process assets consist primarily of laboratory equipment and computer equipment that have not yet been placed in service. These
assets are stated at cost and are not depreciated. Once the assets are placed into service, assets are reclassified to the appropriate asset class based on
their nature and depreciated in accordance with the useful lives above.
Leases
The Company categorizes leases with contractual terms longer than 12 months as either operating or finance leases. Finance leases are
generally those leases that allow the Company to substantially utilize or pay for the entire asset over its estimated life. All other leases are categorized as
operating leases. As of December 31, 2023, the Company had no finance leases.
Certain lease contracts include obligations to pay for other services, such as maintenance. The Company elected to account for these other
services as a component of the lease (i.e., the Company elected the practical expedient not to separate lease and non-lease components).
Lease liabilities are recognized at the present value of the fixed lease payments using a discount rate based on the Company’s current borrowing
rate at the lease commencement date, adjusted for various factors including level of collateralization and term (the “incremental borrowing rate”), unless the
rate implicit in the lease is readily determinable. The current portion of lease liabilities is included in “Accrued and other current liabilities.” Lease assets are
recognized based on the initial present value of the fixed lease payments plus any direct costs from executing the leases and any lease prepayments. Lease
assets are presented as “Operating lease right-of-use assets” as a long-term asset. Leasehold improvements are capitalized at cost and amortized over the
lesser of their expected useful life or the lease term. Costs associated with operating lease assets are recognized on a straight-line basis within operating
expenses over the term of the lease.
The Company has made an accounting policy election not to recognize right-of-use assets and lease liabilities that arise from leases with a term of
12 months or less. Fixed lease payments are recognized as an expense on a straight-line basis over the lease term. Variable lease costs are amounts owed
by us to a lessor that are not fixed, such as reimbursement for common area maintenance, operating expenses, utilities, or other costs that are subject to
fluctuation from period to period. The Company has also elected to include expenses related to leases with a term of one month or less in the short-term
lease cost disclosure.
Warrant Liability
Changes in fair value of liability classified warrants are recognized within "Other income (expense), net" in the consolidated statements of
operations. Warrant liabilities are classified as short-term or long-term based on their remaining contractual periods. Cash proceeds in connection with the
issuance of warrants for the Company's common stock are presented as financing activities in the consolidated statements of cash flows.
Recent Accounting Pronouncements
New Accounting Pronouncements Adopted
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected
losses to estimate credit losses on certain types of financial instruments, including trade receivables. The accounting update also made minor changes to the
impairment model for available-for-sale debt securities. The Company adopted the new guidance as of the beginning of the first quarter of 2023 by means of
a cumulative-effect adjustment to opening retained earnings. The adoption did not have a significant impact on the consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances
transparency about income tax information through improvements to income tax disclosures primarily related to the rate
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reconciliation and income taxes paid information. The guidance will be effective for the Company's annual period ending December 31, 2025. The Company
is currently evaluating the impact of the new guidance on its income tax disclosures.
Note 3. Revenue
The Company disaggregates revenue by the following four customer types:
•
•
•
•
Pharma tests and services includes sales of testing services and data analytics for clinical trials and research to pharmaceutical companies
in support of their drug development programs. Contracts typically contemplate a single project and involve a range of tests and analytics to
fulfill the requirements of each particular project.
Enterprise sales includes sales of tumor profiling and diagnostic tests directly to another business as an input to their products. The
Company is typically contracted to deliver specified tests and analytics in high volume over time. Revenue from the Company's partnership
with Natera to provide advanced tumor analysis for use in Natera's MRD test makes up substantially all of the revenue in this category.
Population sequencing includes sales of genomic sequencing services and data analytics to support large-scale genetic research
programs. The Company is typically contracted to perform whole genome sequencing and provide data that can be used for analysis across
a large volume of samples. All of the revenue within this category is from the Company's partnership with the VA MVP.
Other includes sales of genomic tests and analytics to universities and non-profits. Other also includes sales of diagnostics tests ordered by
healthcare providers for cancer patients, which was insignificant for periods presented.
The following table presents revenue disaggregated by customer type (in thousands):
Pharma tests and services
Enterprise sales
Population sequencing
Other
Total revenue
2023
Year Ended December 31,
2022
2021
31,904 $
31,729
9,412
436
73,481 $
29,552 $
26,641
8,443
411
65,047 $
30,282
8,774
45,671
767
85,494
$
$
Revenue from countries outside of the United States, based on the billing addresses of customers, represented 10%, 9%, and 8% of the
Company’s revenue for the years ended December 31, 2023, 2022 and 2021, respectively.
Contract Assets and Liabilities
The opening and closing balances of receivables and contract liabilities from contracts with customers are shown below (in thousands). Contract
assets were immaterial for all periods presented.
Opening balances:
Accounts receivable, net
Short-term contract liabilities
Long-term contract liabilities (included in other long-term liabilities)
Total contract liabilities
Closing balances:
Accounts receivable, net
Short-term contract liabilities
Long-term contract liabilities (included in other long-term liabilities)
Total contract liabilities
$
$
$
$
December 31,
2023
2022
16,642 $
18,468
1,264 $
—
1,264
3,982
—
3,982
17,730 $
16,642
3,288 $
3,928
7,216
1,264
—
1,264
Amounts collected in advance of services being provided are deferred as contract liabilities in the consolidated balance sheets. The associated
revenue is recognized, and the contract liability is reduced, as the services are subsequently performed. As of December 31, 2023, amounts related to
unfulfilled services under contracts with an original expected duration of more than one year was $5.7 million. The Company expects to recognize
approximately $1.8 million of this amount in the next 12 months, and the remaining $3.9 million in the 12 months after that. Revenue recognized that was
included in the contract liability balance at the beginning of each reporting period was $0.4 million, $3.5 million, and $19.1 million for the years ended
December 31, 2023, 2022, and 2021, respectively.
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Note 4. Balance Sheet Details
Inventory and other deferred costs consist of the following (in thousands):
Raw materials
Other deferred costs
Total inventory and other deferred costs
Property and equipment, net consists of the following (in thousands):
Machinery and equipment
Computer equipment
Computer software
Furniture and fixtures
Construction in progress
Leasehold improvements
Total
Less: accumulated depreciation and amortization
Property and equipment, net
December 31,
2023
2022
5,661 $
4,813
10,474 $
6,384
2,207
8,591
December 31,
2023
2022
27,809 $
17,923
2,961
2,045
3,485
40,811
95,034
(37,668 )
57,366 $
21,537
17,803
3,010
2,152
3,989
40,370
88,861
(26,926 )
61,935
$
$
$
$
Depreciation and amortization expense for the years ended December 31, 2023, 2022, and 2021 was $11.3 million, $8.4 million, and $6.0 million,
respectively.
Restricted cash. The Company’s restricted cash is pledged as collateral for a standby letter of credit related to a property lease. The balance of
restricted cash was $1.8 million as of December 31, 2023 and 2022, and is included in other long-term assets.
Accrued and other current liabilities consist of the following (in thousands):
Accrued compensation
Operating lease liabilities
Loans—current portion (Note 6)
Accrued liabilities
Employee ESPP contributions
Customer deposits
Accrued taxes
Total accrued and other current liabilities
December 31,
2023
2022
12,816 $
7,761
1,646
858
311
512
37
23,941 $
9,008
5,391
2,218
1,700
543
30
123
19,013
$
$
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Note 5. Fair Value Measurements
The following tables show financial assets and liabilities measured at fair value on a recurring basis and the level of inputs used in such
measurements as of December 31, 2023 and 2022 (in thousands):
Assets
Cash and cash equivalents:
Cash
Money market funds
Commercial paper
U.S. agency securities
U.S. government securities
Total cash and cash equivalents
Short-term investments:
Commercial paper
U.S. agency securities
U.S. government securities
Total short-term investments
Total assets measured at fair value
Assets
Cash and cash equivalents:
Cash
Money market funds
Commercial paper
U.S. government securities
Total cash and cash equivalents
Short-term investments:
Commercial paper
U.S. agency securities
U.S. government securities
Total short-term investments
Total assets measured at fair value
Adjusted Cost
Unrealized
Gains
December 31, 2023
Unrealized
Losses
Fair Value
Fair Value
Level
$
$
3,649 $
14,968
34,416
1,985
1,983
57,001
495
1,976
54,720
57,191
114,192 $
— $
—
—
1
—
1
—
—
7
7
8 $
— $
—
(18 )
—
—
(18 )
—
—
(3 )
(3 )
(21 ) $
3,649
14,968
34,398
1,986
1,983
56,984
495
1,976
54,724
57,195
114,179
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Adjusted Cost
Unrealized
Gains
December 31, 2022
Unrealized
Losses
Fair Value
Fair Value
Level
$
$
5,615 $
31,401
47,135
4,991
89,142
13,097
9,445
56,658
79,200
168,342 $
— $
—
—
1
1
—
—
1
1
2 $
— $
—
(15 )
—
(15 )
(51 )
(105 )
(515 )
(671 )
(686 ) $
5,615
31,401
47,120
4,992
89,128
13,046
9,340
56,144
78,530
167,658
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
Marketable debt securities at December 31, 2023 have maturities due in less than 12 months. No security has been in a continuous unrealized
loss position for more than 12 months and the Company does not consider any of its marketable debt securities to be impaired.
Tempus Warrants
The Black-Scholes option-pricing model was used to estimate fair value of the warrants issued to Tempus AI, Inc. (formerly known as Tempus
Labs, Inc., and referred to herein as "Tempus") at the date of issuance, November 28, 2023, and at each subsequent balance sheet date. Assumptions used
are listed below, which are Level 3 fair value inputs. Expected term is equal to the remaining contractual periods of each of the two warrants. Expected
volatility was based on the Company's actual historical volatility over the expected terms of the warrants. The risk-free interest rate was based on the U.S.
Treasury yield curve over the expected term of the warrants. Refer to Note 8 for further information about the warrants issued to Tempus.
Expected term (in years)
Volatility
Risk-free interest rate
Dividend yield
Total fair value of Tempus Warrants (in thousands)
As of November 28, 2023 As of December 31, 2023
1.09 - 2.09
99.04 - 105.44%
4.73 - 5.21%
–%
1.00 - 2.00
102.55 - 108.46%
4.23 - 4.79%
–%
$
6,942 $
10,027
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The following table sets forth a summary of the changes in fair value of the Company's Level 3 financial instruments (in thousands):
Balance — December 31, 2022
Initial fair value of warrant liabilities upon issuance
Change in fair value
Balance — December 31, 2023
Note 6. Loans
Amounts outstanding under loans are as follows (in thousands):
Principal
Less: unamortized discount
Total carrying amount
Less: current portion (included in accrued and other current liabilities)
Long-term portion (included in other long-term liabilities)
Equipment and Software Loans
Warrant
Liabilities
$
$
December 31,
2023
2022
$
$
2,904 $
(24 )
2,880
(1,646 )
1,234 $
—
6,942
3,085
10,027
2,730
(134 )
2,596
(2,218 )
378
In April 2021, the Company entered into a secured payment agreement with a financing entity to finance the purchase of $2.4 million of internal
use software licenses and related software maintenance from a vendor. The financing entity and vendor are not related. The Company repaid the financed
amount in three equal payments of $0.8 million in May 2021, May 2022, and May 2023. The payment agreement was noninterest bearing and the Company
concluded that such interest rate (zero) did not represent fair and adequate compensation to the financing entity for the use of the related funds. Accordingly,
the Company approximated the rate at which it could obtain financing of a similar nature from other sources at the date of the transaction. The resulting
imputed interest rate was 7% and was used to establish the present value of the payment agreement. The discount is recognized as interest expense in the
consolidated statements of operations over the life of the payment agreement.
The Company entered into two more secured payment agreements in April 2021 and July 2022, with the same financing entity, to finance the
purchase of $3.1 million of computer hardware and related hardware maintenance and $1.3 million of internal use software licenses and related ongoing
support, respectively. The Company is required to pay three equal payments of $1.0 million in July 2021, June 2022, and June 2023 for the first agreement,
and three equal payments of $0.4 million in September 2022, September 2023, and September 2024 for the second agreement. The nature of these
agreements and resulting accounting treatment are the same as the payment agreement described in the preceding paragraph, except the imputed interest
rate was 9% for the July 2022 agreement.
The total initial present value of the payment agreements was $6.4 million and presented as proceeds from loans in the financing activities section
of the consolidated statements of cash flows. Such proceeds were used to purchase equipment, software, and related maintenance and are reflected as
cash outflows in the investing and operating activities sections. Repayments are presented as financing cash outflows. Interest expense was $0.1 million for
the year ended December 31, 2023 and $0.2 million for each of the years ended December 31, 2022 and 2021.
Lab Equipment Loan
In November 2023, the Company purchased lab equipment from one of its main vendors for $3.4 million. Extended payment terms were provided
to the Company through a financial solutions partner of the vendor. Terms included a 30% down payment and 24 equal monthly payments for the remaining
balance, with such monthly payments commencing in January 2024, and no interest or financing charges. Title for the lab equipment transferred immediately
upon delivery to the Company. The financial solutions partner retains a security interest until payoff is complete at the end of 2025. The purchase price for
the lab equipment was equal to the cash price and thus the impact of imputing interest would have been de minimis.
The total financed amount of $3.4 million is presented as proceeds from loans in the financing activities section of the consolidated statements of
cash flows. Such amounts were used to purchase lab equipment and are reflected as cash outflows in the investing activities section. Repayments, including
both the down payment and future monthly payments, are presented as financing cash outflows.
Note 7. Leases
In 2021, the Company entered into a noncancelable operating lease for approximately 100,000 square feet in Fremont, California used for
laboratory operations and its corporate headquarters. The lease term is 13.5 years and commenced in October 2022. The Company gained early access to
the premises for the purpose of constructing and installing tenant improvements, for which the landlord
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contributed $15.1 million. Such contributions were accounted for as lease incentives and are recognized as reductions to lease expense over the lease term.
The lease expires at the end of March 2036 and includes two options to extend the term for a period of five-years per option at market rates. The Company
determined the extension options are not reasonably certain to be exercised. The lease includes escalating rent payments.
The Company has a noncancelable operating lease expiring in November 2027 for 31,280 square feet in Menlo Park, California previously used
for laboratory operations and its former corporate headquarters. The lease includes escalating rent payments. In 2021, the Company expanded the leased
premises by an additional 14,710 square feet of space (the “Expansion Lease”). The Expansion Lease expired at the end of December 2022 and was not
extended. The Company moved all laboratory operations to the Fremont facility during the third quarter of 2023 and is actively marketing the vacated Menlo
Park space for sublease.
The Company has noncancelable operating leases for data center space expiring between 2025 and 2026. The leases include renewal options
that the Company determined are not reasonably certain to be exercised. During 2023, the data center operator agreed to terminate a portion of the lease at
no cost. The Company remeasured the remaining lease liability and derecognized $0.6 million of operating lease liabilities and right-of-use assets.
The Company had an operating lease for laboratory space in Shanghai, China that was terminated early upon both parties' approval during 2023.
The early termination did not result in any material penalties or charges in the Company's consolidated statements of operations. Separately, the Company
also has various other short-term leases.
As of December 31, 2023, operating leases had a weighted-average remaining lease term of 10.4 years and a weighted-average discount rate of
10.5%. Discount rates are based on estimates of the Company's incremental borrowing rate, as the discount rates implicit in the leases cannot be readily
determined. Future lease payments under operating leases as of December 31, 2023 were as follows (in thousands):
2024
2025
2026
2027
2028
2029 and thereafter
Total future minimum lease payments
Less: imputed interest
Present value of future minimum lease payments
Less: current portion of operating lease liability (included in accrued and other current liabilities)
Long-term operating lease liabilities
$
$
Amount
8,134
8,057
7,230
7,189
5,215
42,798
78,623
(32,541 )
46,082
(7,761 )
38,321
Cash paid for operating lease liabilities, included in cash flows from operating activities in the consolidated statements of cash flows, for the years
ended December 31, 2023, 2022, and 2021 was $6.0 million, $4.4 million, and $3.3 million, respectively. Right-of-use assets obtained in exchange for new
operating lease liabilities during the years ended December 31, 2023, 2022, and 2021 were $1.3 million, $3.1 million, and $46.5 million, respectively.
Components of lease cost were as follows (in thousands):
Lease cost
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
2023
Year Ended December 31,
2022
2021
$
$
6,793 $
198
1,828
8,819 $
8,530 $
122
1,411
10,063 $
5,009
364
1,152
6,525
During the year ended December 31, 2023, the Company also recorded a $5.6 million impairment loss for operating lease right-of-use assets as a
result of the change in use of the Menlo Park office.
Lease Impairment
During 2023, the Company completed the move of its laboratory operations from its Menlo Park facility to its Fremont facility and began actively
marketing the Menlo Park space for sublease. Accordingly, the Company evaluated the ongoing value of the operating lease right-of-use asset associated
with the Menlo Park facility. Based on this evaluation, the Company determined that the right-of-use asset with a carrying amount of $6.7 million was no
longer recoverable and was impaired and wrote it down to its estimated fair value of $1.1 million, which resulted in a noncash impairment loss of $5.6 million.
Estimated fair value was based on expected future sublease cash flows (with the assistance of a third-party real estate broker), net of brokerage
commissions and estimated tenant incentives,
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discounted at a market rate of return on similar assets. The estimation of fair value also included expected downtime prior to the commencement of a future
sublease.
Note 8. Tempus Agreement
Overview
On November 25, 2023, the Company entered into a Commercialization and Reference Laboratory Agreement (the “Tempus Agreement”) with
Tempus pursuant to which Tempus will market the Company's Personal Dx test in the United States and the Company will conduct development activities to
analytically validate the test in breast cancer, lung cancer and immuno-oncology monitoring indications. The Company will perform tests ordered by patients
through Tempus and the Company will bill such patients or payors.
In consideration of the Company performing development activities, Tempus will pay the Company fees of up to $12 million (the "Market
Development Fees"), consisting of an activation fee of $3 million, a first milestone fee of $3 million (upon achievement of a specified clinical validation), and
a second milestone fee payable in six quarterly installments totaling $6 million (subject to achieving two additional clinical validations). If the Company does
not achieve the second milestone by June 2024, Tempus may withhold installment payments, and Tempus will have the right to terminate the Tempus
Agreement or convert it to a non-exclusive arrangement. Upon termination or conversion, the Company will refund to Tempus fees received other than the
activation fee, subject to certain reductions.
The Company will compensate Tempus for the fair market value of order requisition services (Tempus will enable its base of ordering providers to
order the Personalis test and provide specimen collection and procurement support) and results delivery services (Tempus will provide results delivery
services from test completion to report delivery) on a per-test basis. In addition, the parties will perform co-promotion activities and the Company will
compensate Tempus for the fair market value of promotional and commercialization services provided by Tempus in an amount up to $9.6 million.
The Tempus Agreement also grants Tempus access to initial and longitudinal genomic data derived from performance of the tests and Tempus will
have the right to use such data. If Tempus licenses such data to a third party and Tempus recognizes revenue from such license, Tempus will pay the
Company a percentage of its gross revenues attributable to such license that is in the range of 10 to 20 percent. Such revenue share shall be payable during
the term of the agreement and for 10 years thereafter.
Additionally, in consideration of Tempus' obligations to the Company under the agreement, on November 28, 2023, the Company issued warrants
to Tempus. See "Tempus Warrants" section further below for discussion.
Pursuant to the agreement, the Company will not allow another third party to market the test in such indications and Tempus will not market
another tumor-informed molecular residual disease test for use in such indications (whether its own or that of a third party), in each case subject to certain
exceptions. These exclusivity obligations terminate on December 31, 2027, to the extent they do not expire earlier. In addition, each party has the right to
convert the Tempus Agreement to a non-exclusive arrangement upon the occurrence of certain specified events.
The term of the Tempus Agreement is five years, which may be extended for successive one-year terms. Either party may terminate the Tempus
Agreement for convenience upon 18 months prior written notice. Tempus may terminate the agreement if the Company does not achieve the second
milestone by a specified date.
Impact of Tempus Agreement on the Consolidated Financial Statements
The Company had achieved the first clinical validation milestone at the time of entering the Tempus Agreement and was therefore entitled to
Market Development Fees of $6 million, consisting of the first milestone fee of $3 million and the activation fee of $3 million. These proceeds of $6 million
were received in 2023 and allocated to the Tempus Warrants (described below). Except for receipt of the proceeds and issuance of the warrants, there were
no other activities under the Tempus Agreement that impacted the Company's consolidated balance sheets or consolidated statements of operations for
periods presented.
Tempus Warrants
In consideration of Tempus’ obligations to Personalis under the agreement, on November 28, 2023, the Company issued to Tempus (1) a warrant
to purchase up to 4,609,400 shares of Personalis common stock at an exercise price per share of $1.50, with an expiration date of December 31, 2024 (the
“First Warrant”), and (2) a warrant to purchase up to 4,609,400 shares of Personalis common stock at an exercise price per share of $2.50, with an
expiration date of December 31, 2025 (the “Second Warrant” and, together with the First Warrant, the “Tempus Warrants”). The Tempus Warrants are
exercisable for cash at any time prior to the applicable expiration date, may be net exercised in certain circumstances, and will be automatically net
exercised in connection with a change of control of Personalis if the value ascribed to the consideration to be paid for one share of common stock is greater
than the applicable exercise price. If Tempus acquires any shares of common stock directly from the Company other than by exercising the Warrants (any
such shares, “Non-Warrant Shares”), then the total number of shares issuable upon exercise of the Tempus Warrants will be reduced by the Non-Warrant
Shares on a share-for-share basis, proportionally between the First Warrant and the Second Warrant based on how many shares are then underlying the
Warrants. Subject to limited exceptions, neither the warrants nor any interest therein may be transferred or assigned without the prior written consent of
Personalis.
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Because the number of shares issuable upon settlement are subject to adjustment if Tempus acquires Non-Warrant Shares, the Tempus Warrants
are classified as liability instruments and are subject to remeasurement at each balance sheet date, with changes in fair value recognized as Other Income
(Expense) in the consolidated statements of operations. Fair value of the two warrants were estimated at the date of issuance, November 28, 2023, using
the Black-Scholes option-pricing model. Since the initial fair value of $6.9 million exceeded the total proceeds from Tempus of $6 million, a loss of $0.9
million was immediately recognized within Other Income (Expense). None of the remaining Market Development Fees of $6 million were allocated to the
warrants as such proceeds are contingent upon the Company achieving additional clinical validation milestones.
See Note 5 Fair Value Measurements for discussion of inputs used in the measurement of the Tempus Warrants as well as the remeasurement at
December 31, 2023. Fair value of the Tempus Warrants increased by $3.1 million as of December 31, 2023. The increase in fair value, plus the immediate
loss of $0.9 million recognized upon issuance, resulted in a $4.0 million expense recognized in Other Income (Expense) in the consolidated statements of
operations during the year ended December 31, 2023.
Note 9. Restructuring and Other Charges
Costs related to the Company's reductions in workforce and closure of its China operations are included within Restructuring and Other Charges
in the consolidated statements of operations. A reconciliation of the beginning and ending related liability balances, included within Accrued and Other
Current Liabilities in the consolidated balance sheets, is as follows (in thousands):
Restructuring liability balance—December 31, 2022
Costs incurred and charged to expense
Costs paid or otherwise settled
Restructuring liability balance—December 31, 2023
Restructuring
$
$
— $
7,467
(4,338 )
3,129 $
One-time
employee
termination
benefits
Other costs
(primarily China
asset disposals
and impairments)
Total restructuring
and other charges
—
8,077
(4,948 )
3,129
— $
610
(610 )
— $
In January 2023, the Company initiated a reduction in workforce to reduce operating costs and improve operating efficiency. The workforce
reduction affected nearly 100 employees and was substantially completed during the first quarter of 2023. The Company recognized $3.1 million in one-time
employee termination benefits in connection with the reduction in workforce, comprising separation pay and healthcare benefits payable in cash, all of which
were paid by the end of the second quarter of 2023.
In December 2023, the Company initiated a second reduction in workforce to further reduce operating costs and improve operating efficiency. The
workforce reduction affected approximately 60 employees and will be completed during the first quarter of 2024. The Company recognized $4.0 million in
one-time employee termination benefits in connection with the reduction in workforce, comprising separation pay and healthcare benefits payable in cash.
Approximately $3.1 million of such expenses were unpaid as of December 31, 2023 and are expected to be paid during the first quarter of 2024. The
Company does not expect to incur any material additional costs in connection with the second reduction in workforce.
Closure of China Operations
During the first half of 2023, the Company terminated its operations in China with the objective of streamlining international operations and
reducing operating costs. The disposal does not qualify for reporting as a discontinued operation because it does not represent a strategic shift that has or
will have a major effect on our operations and financial results. The Company completed the process of dissolving the Personalis (Shanghai) Ltd entity in
February 2024.
Expenses of $0.9 million were recognized in connection with closure activities, of which $0.3 million was related to one-time employee termination
benefits for the Company's 12 former employees located in China and were payable in cash. Substantially all of the terminations were completed during the
first quarter of 2023, along with the related cash outlays. The remaining $0.6 million in expenses were comprised primarily of noncash charges, including
losses on disposal of fixed assets and impairments of other assets.
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Note 10. Stock-Based Compensation
The Company maintains the following equity incentive plans:
2011 Equity Incentive Plan
In 2011, the Company established its 2011 Equity Incentive Plan (the “2011 Plan”) that provided for the granting of stock options to employees and
nonemployees of the Company. Under the 2011 Plan, the Company had the ability to issue incentive stock options (“ISOs”), nonstatutory stock options
(“NSOs”), stock appreciation rights, restricted stock awards, and restricted stock unit awards (“RSUs”). Options under the 2011 Plan could be granted for
periods of up to 10 years. The ISOs could be granted at a price per share not less than the fair value at the date of grant.
2019 Equity Incentive Plan
The Company’s board of directors adopted and the Company’s stockholders approved the 2019 Equity Incentive Plan (the “2019 Plan”) in May
2019 and June 2019, respectively. The 2019 Plan became effective in June 2019 in connection with the Company’s IPO, and no further grants were made
under the 2011 Plan. Shares reserved and remaining available for issuance under the 2011 Plan were added to the 2019 Plan reserve upon its
effectiveness.
The 2019 Plan provides for the grant of ISOs, NSOs, stock appreciation rights, restricted stock awards, RSUs, performance-based stock awards,
and other forms of equity compensation. Additionally, the 2019 Plan provides for the grant of performance cash awards. ISOs may be granted only to the
Company’s employees and to any of the Company’s parent or subsidiary corporation’s employees. All other awards may be granted to employees, including
officers, and to non-employee directors and consultants of the Company and any of the Company’s affiliates. The exercise price of a stock option generally
cannot be less than 100% of the fair market value of the Company’s common stock on the date of grant. Options under the 2019 Plan may be granted for
periods of up to 10 years.
2020 Inducement Plan
The Compensation Committee of the Company’s board of directors adopted the 2020 Inducement Plan (the “Inducement Plan”) in May 2020,
which became effective upon adoption. The Inducement Plan was adopted without stockholder approval, as permitted by the Nasdaq Stock Market rules.
The Inducement Plan provides for the grant of equity-based awards, including NSOs, stock appreciation rights, restricted stock awards, RSUs, performance-
based stock awards, and other forms of equity compensation, and its terms are substantially similar to the stockholder-approved 2019 Plan. In accordance
with relevant Nasdaq Listing Rules, awards under the Inducement Plan may only be made to individuals not previously employees or non-employee
directors of the Company (or following such individuals’ bona fide period of non-employment with the Company), as an inducement material to the
individuals' entry into employment with the Company.
2019 Employee Stock Purchase Plan
The Company’s board of directors adopted and the Company’s stockholders approved the 2019 Employee Stock Purchase Plan (the “ESPP”) in
May 2019 and June 2019, respectively. Subject to any plan limitations, the ESPP allows eligible employees to contribute, normally through payroll
deductions, up to 15% of their earnings for the purchase of the Company’s common stock at a discounted price per share. The price at which common stock
is purchased under the ESPP is equal to 85% of the fair market value of the Company’s common stock on the first or last day of the offering period,
whichever is lower. The ESPP provides for separate six-month offering periods beginning on May 1 and November 1 of each year.
Shares of common stock available for issuance under the Company’s equity incentive plans at December 31, 2023 were as follows:
Outstanding stock awards
Reserved for future award grants
Reserved for future ESPP
Total common stock reserved for stock awards
83
December 31, 2023
7,059,412
5,239,303
83,756
12,382,471
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Stock Option Activity
A summary of the Company’s stock option activity (excluding performance-based stock option activity summarized further below) for the years
ended December 31, 2023, 2022, and 2021 is as follows:
(in thousands, except share and per share data)
Balance—December 31, 2020
Options granted
Options exercised
Options forfeited or expired
Balance—December 31, 2021
Options granted
Options exercised
Options forfeited or expired
Balance—December 31, 2022
Options granted
Options exercised
Options forfeited or expired
Balance—December 31, 2023
Options vested and exercisable as of December 31, 2023
Outstanding Options
Number of
Shares
Weighted-
Average
Exercise Price
4,948,306 $
1,026,276
(862,056 )
(110,107 )
5,002,419 $
1,429,295
(488,187 )
(492,395 )
5,451,132 $
2,638,500
(8 )
(2,284,038 )
5,805,586 $
3,103,913 $
7.10
21.26
2.43
13.88
10.66
4.80
2.07
10.57
9.90
2.61
2.44
7.84
7.40
9.69
Weighted-
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
6.71 $
146,044
6.89 $
28,308
5.31 $
7
6.90 $
5.57 $
64
1
Options granted to new hires generally vest over a four-year period, with 25% vesting at the end of one year and the remaining vesting monthly
thereafter. Options granted as merit awards generally vest monthly over a three- or four-year period.
The aggregate intrinsic value of unexercised stock options is calculated as the difference between the closing price of the Company’s common
stock of $2.10 on December 31, 2023 and the exercise prices of the underlying stock options. Out-of-the money stock options are excluded from aggregate
intrinsic value.
The weighted-average grant date fair value of options granted was $1.81, $3.21, and $13.14 per share for the years ended December 31, 2023,
2022, and 2021, respectively. As of December 31, 2023, the unrecognized stock-based compensation of unvested options was $7.2 million, which is
expected to be recognized over a weighted-average period of 2.02 years.
Valuation of Stock Options
The Company estimated the fair value of stock options (excluding performance-based stock options discussed below) using the Black-Scholes
option-pricing model. Fair value of stock options is recognized as compensation expense on a straight-line basis over the requisite service periods of the
awards. Fair value of stock options was estimated using the following range of assumptions:
Expected term (in years)
Volatility
Risk-free interest rate
Dividend yield
2023
5.50 - 6.08
Year Ended December 31,
2022
5.50 - 6.08
78.47 - 79.31%
68.37 - 77.68%
3.47 - 4.66%
–%
1.62 - 4.23%
–%
2021
5.50 - 6.27
67.97 - 69.90%
0.62 - 1.39%
–%
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Performance-Based Stock Option Activity
Performance-based stock options granted to the Company's then Chief Executive Officer in 2020, and vested in the same year due to fulfillment of
the performance condition, expired at the end of 2023. A summary of the Company’s performance-based stock option activity for the years ended December
31, 2023, 2022 and 2021 is as follows:
(in thousands, except share and per share data)
Balance—December 31, 2020
No activities
Balance—December 31, 2021
No activities
Balance—December 31, 2022
Options expired
Balance—December 31, 2023
RSU Activity and Valuation
Outstanding Performance-Based Options
Number of
Shares
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual
Term (in
years)
Aggregate
Intrinsic
Value
421,000 $
5.10
9.21 $
13,266
—
421,000 $
5.10
8.21 $
3,861
—
421,000 $
(421,000 )
—
5.10
5.10
1.00 $
—
A summary of the Company’s RSU activity for the years ended December 31, 2023, 2022 and 2021 is as follows:
(in thousands, except share and per share data)
Balance—December 31, 2020
RSUs granted
RSUs vested
RSUs forfeited
Balance—December 31, 2021
RSUs granted
RSUs vested
RSUs forfeited
Balance—December 31, 2022
RSUs granted
RSUs vested
RSUs forfeited
Balance—December 31, 2023
Unvested Restricted Stock Units
Weighted-
Average
Grant Date
Fair Value
Number of
Shares
Aggregate
Fair Value
619,218 $
1,387,656
(266,119 )
(61,059 )
1,679,696 $
2,071,201
(897,871 )
(231,544 )
2,621,482 $
24,500
(839,194 )
(552,962 )
1,253,826 $
10.41 $
18.05
10.93
18.45
16.35 $
4.86
11.74
10.94
9.33 $
2.18
9.91
8.89
8.99 $
22,670
5,521
23,969
3,189
5,191
1,520
2,633
The Company grants RSUs to employees to receive shares of the Company’s common stock. The RSUs awarded are subject to the individual’s
continued service to the Company through each applicable vesting date. RSUs granted to new hires generally vest annually over a four-year period. RSUs
granted as merit awards generally vest semi-annually over a three- or four-year period. The Company accounts for the fair value of RSUs using the closing
market price of the Company’s common stock on the date of grant.
The aggregate fair value of unvested RSUs is calculated using the closing price of the Company’s common stock of $2.10 on December 31, 2023.
As of December 31, 2023, the unrecognized stock-based compensation cost of unvested RSUs was $9.5 million, which is expected to be recognized over a
weighted-average period of 1.87 years.
The Company’s default tax withholding method for RSUs is the sell-to-cover method, in which shares with a market value equivalent to the tax
withholding obligation are sold on behalf of the holder of the RSUs upon vesting and settlement to cover the tax withholding liability and the cash proceeds
from such sales are remitted by the Company to taxing authorities.
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ESPP Activity and Valuation
During the years ended December 31, 2023, 2022 and 2021, 999,194, 416,514, and 128,289 shares of common stock were purchased under the
ESPP, respectively. The fair value of stock purchase rights granted under the ESPP was estimated using the following range of assumptions:
Expected term (in years)
Volatility
Risk-free interest rate
Dividend yield
Fair value
Stock-based Compensation Expense
2023
0.5
Year Ended December 31,
2022
0.49 - 0.5
69.23 - 84.88%
82.35 - 112.07%
5.14 - 5.51%
–%
$0.33 - $0.91
1.49 - 4.58%
–%
$1.26 - $2.23
2021
0.49
55.92 - 74.88%
0.04 - 0.06%
–%
$6.30 - $8.21
The following is a summary of stock-based compensation expense by function (in thousands):
Cost of revenue
Research and development
Selling, general and administrative
Total stock-based compensation expense
2023
Year Ended December 31,
2022
2021
1,761 $
4,870
7,420
14,051 $
1,922 $
5,256
12,255
19,433 $
1,414
4,064
8,900
14,378
$
$
The following is a summary of stock-based compensation expense by award type (in thousands):
Stock options
RSUs
ESPP
Total stock-based compensation expense
Note 11. Commitments and Contingencies
Contingencies
2023
Year Ended December 31,
2022
2021
5,746 $
7,539
766
14,051 $
8,560 $
9,990
883
19,433 $
8,585
4,765
1,028
14,378
$
$
On August 2, 2022, the Company filed a complaint in the U.S. District Court for the District of Colorado (the "District Court") against Foresight
Diagnostics Inc. (“Foresight”) for patent infringement. The complaint is based on the Company’s U.S. Patent No. 10,450,611 (the “’611 Patent”), entitled
“Personalized Genetic Testing,” our U.S. Patent No. 11,299,783 (the “’783 Patent”), entitled “Methods and Systems For Genetic Analysis,” and our U.S.
Patent No. 11,384,394 (the “’394 Patent”), entitled “Methods and Systems for Genetic Analysis.” The ‘611 Patent was granted on October 22, 2019, and
relates to methods for personalized genetic testing by performance of sequencing assays on biological samples. The ‘783 Patent was granted on April 12,
2022, and relates to methods for sample processing and data analysis by performance of sequencing assays on biological samples that can aid in the
diagnosis, monitoring, treatment, and prevention of one or more diseases. The ‘394 Patent was granted on July 12, 2022, and relates to methods for sample
processing and analysis to aid in the diagnosis, monitoring, treatment, and prevention of disease. On August 17, 2022, the Company filed an amended
complaint for patent infringement against Foresight. The amended complaint added our U.S. Patent No. 11,408,033 (the “’033 Patent”), entitled “Methods
and Systems for Genetic Analysis.” The ‘033 Patent was granted on August 9, 2022, and relates to methods for sample processing and analysis to aid in the
diagnosis, monitoring, treatment, and prevention of disease. The Company is seeking remedies including injunctive relief, damages and costs. On October
12, 2022, Foresight filed its answer and counterclaims in the matter, seeking declaratory judgment and alleging that its solid tumor recurrence test does not
infringe the Company’s asserted patents and that the claims of our asserted patents are invalid and/or unenforceable. On November 2, 2022, the Company
filed its answer to Foresight’s counterclaims. The Company intends to vigorously defend against these counterclaims.
Between November 30, 2022 and February 10, 2023, inclusive, Foresight filed four inter partes review petitions with the USPTO, seeking to
invalidate the four patents that we are asserting against Foresight in our first patent infringement action. Also on November 30, 2022, Foresight filed a motion
to stay our first patent infringement action in the District Court pending the resolution of the inter partes review proceedings that Foresight has requested. On
January 24, 2023, the District Court granted Foresight’s motion to stay. On June 13, 2023, the USPTO issued decisions granting inter partes reviews of the
'394 and '033 Patents. On August 8, 2023, the USPTO issued decisions granting inter partes reviews of the '611 and '783 Patents.
On June 26, 2023, the Company filed a second complaint in the District Court against Foresight for patent infringement. The complaint is based on
the Company’s U.S. Patent No. 11,584,968 (the “’968 Patent”), entitled “Methods For Using Mosaicism in Nucleic Acids Sampled Distal to Their Origin,” our
U.S. Patent No. 11,649,507 (the “’507 Patent”), entitled “Methods for Using Mosaicism in
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Nucleic Acids Sampled Distal to Their Origin,” and our U.S. Patent No. 11,643,685 (the “’685 Patent”), entitled “Methods and Systems For Genetic Analysis.”
The ’968 Patent was granted on February 21, 2023, and relates to methods for improving detection and monitoring of human diseases. The ’507 Patent was
granted on May 16, 2023, and relates to methods for detection and monitoring of human disease by providing spatial or developmental localization of
mutations within the body which is used in monitoring states of health in tissues of the body. The ’685 Patent was granted on May 9, 2023, and relates to
methods for sample processing and analysis to aid in the diagnosis, monitoring, treatment, and prevention of disease. The Company is seeking remedies
including injunctive relief, damages and costs. On August 10, 2023, Foresight filed a motion to dismiss the Company’s second complaint. On August 31,
2023, the Company filed a response to Foresight’s motion and also filed an amended complaint. On September 6, 2023, the District Court denied Foresight’s
motion as moot in light of the Company’s amended complaint. On September 14, 2023, Foresight filed its answer and counterclaims in the matter, seeking
declaratory judgment and alleging that its solid tumor recurrence test does not infringe the Company’s asserted patents in the Company’s second patent
infringement action and that the Company’s asserted patents in that action are invalid and/or unenforceable. On October 5, 2023, the Company filed its
answer to Foresight’s counterclaims. The Company intends to vigorously defend against these counterclaims.
On October 20, 2023, Foresight filed a motion to consolidate the Company’s two patent infringement actions in the District Court, and if
consolidated, to maintain the stay as to all of the Company’s asserted patents pending the resolution of the first four inter partes review proceedings and the
three additional inter partes review petitions that Foresight has alleged it will file as soon as it is permitted by statute to do so, seeking to invalidate the three
patents that the Company is asserting against Foresight in the Company’s second patent infringement action. The Company filed its opposition to Foresight’s
motion to consolidate and stay the infringement actions on November 8, 2023. On November 22, 2023, Foresight filed its fifth inter partes review petition with
the USPTO, seeking to invalidate the ’968 Patent that we are asserting against Foresight in our second patent infringement action. On January 23, 2024, the
District Court granted Foresight’s motion to consolidate and stay our two infringement actions against Foresight. The USPTO has yet to issue a decision
regarding whether it will institute an inter partes review of our ’968 Patent.
Litigation is inherently unpredictable, and, except for events that have already occurred, it is too early in the foregoing proceedings to predict the
outcome of these proceedings, or any impact they may have on us. As such, the estimated financial effect associated with this complaint cannot be made as
of the date of filing of this Annual Report on Form 10-K. Litigation is a significant ongoing expense with an uncertain outcome and may in the future be a
material expense for us. Management believes this investment is important to protect our intellectual property position, even recognizing the uncertainty of
the outcome.
The Company is also subject to claims and assessments from time to time in the ordinary course of business. Accruals for litigation and loss
contingencies are reflected in the consolidated financial statements based on management’s assessment, including the advice of legal counsel, of the
expected outcome of litigation or other dispute resolution proceedings and/or the expected resolution of contingencies. Liabilities for estimated losses are
accrued if the potential losses from any claims or legal proceedings are considered probable and the amounts can be reasonably estimated. Significant
judgment is required in both the determination of probability of loss and the determination as to whether the amount can be reasonably estimated. Accruals
are based only on information available at the time of the assessment due to the uncertain nature of such matters. As additional information becomes
available, management reassesses potential liabilities related to pending claims and litigation and may revise its previous estimates, which could materially
affect the Company’s consolidated results of operations in a given period. Except for the matter described in the first four paragraphs of this Note 11, as of
December 31, 2023, the Company was not involved in any material legal proceedings.
Indemnification
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and
provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against
the Company in the future, but that have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to
its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.
Note 12. Basic and Diluted Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the
period. Diluted net loss per common share is computed using net loss and the weighted-average number of common shares outstanding plus potentially
dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of outstanding stock options,
assumed release of outstanding RSUs, assumed issuance of common stock under the ESPP, and the assumed exercise of Tempus Warrants. The Company
incurred net losses in the periods presented, and as a result, potential common shares from stock options, RSUs, ESPP issuances, and the Tempus
Warrants were not included in the diluted shares used to calculate net loss per share, as their inclusion would have been anti-dilutive.
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The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except
share and per share amounts):
Net loss
Weighted-average common shares outstanding—basic and diluted
Net loss per common share—basic and diluted
2023
Year Ended December 31,
2022
(108,296 ) $
(113,315 ) $
48,175,201
45,704,805
(2.25 ) $
(2.48 ) $
2021
(65,226 )
43,886,730
(1.49 )
$
$
The following table sets forth the potentially dilutive shares excluded from the computation of diluted net loss per common share because their
effect was anti-dilutive:
Tempus Warrants
Options to purchase common stock
Unvested RSUs
ESPP
Total
Note 13. Income Taxes
2023
Year Ended December 31,
2022
9,218,800
5,805,586
1,253,826
513,881
16,792,093
—
5,872,132
2,621,482
627,740
9,121,354
2021
—
5,423,419
1,679,696
87,367
7,190,482
For financial reporting purposes, loss before income taxes includes the following components (in thousands):
Domestic
Foreign
Loss before income taxes
Provision for Income Taxes
The provision for income taxes consists of the following (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Foreign
Total deferred
Provision for income taxes
2023
Year Ended December 31,
2022
2021
(106,833 ) $
(1,380 )
(108,213 ) $
(113,558 ) $
283
(113,275 ) $
(65,415 )
203
(65,212 )
2023
Year Ended December 31,
2022
2021
(9 ) $
3
35
29
54
54
83 $
— $
5
66
71
(31 )
(31 )
40 $
—
—
43
43
(29 )
(29 )
14
$
$
$
$
Income tax provision related to continuing operations differ from the amounts computed by applying the statutory income tax rate of 21% to pretax
loss as follows:
Expected tax (benefit) at federal statutory rate
Effect of:
State taxes
Change in valuation allowance
Stock-based compensation
Research and development credit
Other
Effective tax rate
2023
(21%)
(7%)
26%
3%
(3%)
2%
–%
Year Ended December 31,
2022
(21%)
(6%)
28%
1%
(2%)
–%
–%
2021
(21%)
(9%)
36%
(3%)
(3%)
–%
–%
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Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax
assets for federal and state income taxes are as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Research and development credits
Capitalized research and development
Deferred revenue
Accruals and reserves
Stock-based compensation
Operating lease liabilities
Other intangibles
Other
Total gross deferred tax assets
Less: valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Property and equipment
Operating lease right-of-use assets
Total deferred tax liabilities
Net deferred tax assets
December 31,
2023
2022
83,983 $
22,669
22,089
362
2,883
4,614
13,124
209
132
150,065
(144,861 )
5,204
(113 )
(5,084 )
(5,197 )
7 $
72,408
16,824
11,972
38
1,914
5,197
13,455
267
236
122,311
(114,483 )
7,828
(108 )
(7,659 )
(7,767 )
61
$
$
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Because of the
Company’s lack of U.S. earnings history, the net U.S. deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased
by $30.4 million and $32.9 million during the years ended December 31, 2023 and 2022, respectively.
Net Operating Loss and Tax Credit Carryforwards
As of December 31, 2023, the Company had a net operating loss carryforward for federal income tax purposes of $285.5 million, of which $86.1
million is subject to expiration beginning in 2031. The Company had a total state net operating loss carryforward of $274.7 million, which will begin to expire
in 2031. Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change in
ownership” provisions of the Internal Revenue Code of 1986 (specifically Section 382), as amended, and similar state provisions. The Company performed a
Section 382 analysis through December 31, 2023 and determined that ownership changes occurred in the year 2011 and again in 2020. The ownership
changes identified had no significant impact on federal and state net operating losses. The annual limitations may result in the expiration of net operating
losses and credits before utilization in the future.
As of December 31, 2023, the Company has federal credits of $12.2 million, which will begin to expire in 2031 and state research credits of $10.5
million, which have no expiration date. These tax credits are subject to the same limitations discussed above. The Company determined that the ownership
changes identified above had no significant impact on federal and state research credits.
Unrecognized Tax Benefits
The Company has incurred net operating losses since inception and does not have any significant unrecognized tax benefits. The Company’s
policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of
operations. If the Company is eventually able to recognize its uncertain positions, the effective tax rate would be reduced. The Company currently has a full
valuation allowance against its net deferred tax assets, which would impact the timing of the effective tax rate benefit should any of these uncertain tax
positions be favorably settled in the future. Any adjustments to the Company’s uncertain tax positions would result in an adjustment of net operating loss or
tax credit carryforwards rather than resulting in a cash outlay.
The Company files U.S. federal income tax returns and various state income tax returns. Because of net operating losses and research credit
carryovers, substantially all the Company’s tax years remain open to examination.
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The Company has the following activity relating to unrecognized tax benefits (in thousands):
Beginning balance
Gross increase—tax position in prior periods
Gross increase—tax position in current period
Ending balance
December 31,
2023
2022
4,240 $
162
1,299
5,701 $
3,066
-
1,174
4,240
$
$
Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next 12 months due to tax
examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the
results of published tax cases or other similar activities, the Company does not anticipate any significant changes to unrecognized tax benefits over the next
12 months. During the years ended December 31, 2023, 2022, and 2021, no interest or penalties were required to be recognized relating to unrecognized
tax benefits.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Personalis, Inc.
Fremont, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Personalis, Inc. and subsidiaries (the “Company”) as of December 31, 2023, the related
consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2023, and the results of its operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the consolidated
financial statements; and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for Tempus Agreement and Tempus Warrants
As described in Note 8 to the consolidated financial statements, the Company entered into a Commercialization and Reference Laboratory Agreement (the
“Tempus Agreement”) with Tempus Labs, Inc. (“Tempus”) in November 2023. In connection with the Tempus Agreement, the Company issued warrants to
purchase shares of the Company’s common stock to Tempus (“Tempus Warrants”). As of December 31, 2023, the Company received $6 million of cash
proceeds from Tempus. The Tempus Warrants are classified as liability instruments, and the $6 million of proceeds were allocated to the Tempus Warrants.
We identified the evaluation of (i) the financial statement classification of the Tempus Warrants, and (ii) allocation of the proceeds among the elements of the
Tempus Agreement and the Tempus Warrants as a critical audit matter. Our principal considerations included the existence of accounting complexities
related to such evaluation and significant judgments involved in the interpretation of the terms of the agreements and in the application of appropriate
accounting guidance. Auditing these elements required challenging and complex auditor judgment due to the nature and extent of audit effort required,
including the extent of specialized skills or knowledge needed.
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The primary procedures we performed to address this critical audit matter included:
•
•
Reviewing and analyzing: (i) the terms of the Tempus Agreement and Tempus Warrants, and (ii) the Company’s application of the relevant
accounting literature including the allocation of the proceeds received to the Tempus Warrants.
Utilizing personnel with specialized skills and knowledge to assist in: (i) evaluating relevant terms of the Tempus Agreement and Tempus
Warrants in relation to the appropriate accounting literature, and (ii) assessing the appropriateness of the conclusions reached by the
Company.
/s/ BDO USA, P.C.
We have served as the Company's auditor since 2023.
San Jose, California
February 28, 2024
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Personalis, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Personalis, Inc. and subsidiaries (the "Company") as of December 31, 2022, the related
consolidated statements of operations, comprehensive loss, stockholder's equity and cash flows, for each of the two years in the period ended December
31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for each of the two years in the
period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Austin, Texas
February 23, 2023
We began serving as the Company’s auditor in 2018. In 2023 we became the predecessor auditor.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer ("CEO") and chief financial officer ("CFO") has evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange
Act), as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our CEO and CFO have concluded that as of
December 31, 2023, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us
in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow
timely decisions regarding required disclosures.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of
the 1934 Act. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2023 based on criteria
established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a
result of this assessment, management concluded that, as of December 31, 2023, our internal control over financial reporting was effective in providing
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles in the United States of America.
Our independent registered accounting firm is not required to issue an attestation report on our internal control over financial reporting for so long
as we qualify as a non-accelerated filer.
Changes in Internal Control
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule
13a-15(f) of the Exchange Act. An evaluation was also performed under the supervision and with the participation of our management, including our CEO
and our CFO, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over
financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving
their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial
reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and
can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Except for the principal occupation, business experience, and education of each of our executive officers and directors set forth further below, the
information required by this Item is set forth under the headings “Executive Officers,” “Security Ownership of Certain Beneficial Owners and Management,”
“Delinquent Section 16(a) Reports,” “Corporate Governance and Board of Directors Matters,” and “Proposal No. 1 Election of Directors—Information About
Our Continuing Directors” in the Company’s 2024 Proxy Statement to be filed with the SEC within 120 days after December 31, 2023 in connection with the
solicitation of proxies for the Company’s 2024 annual meeting of stockholders, and is incorporated herein by reference.
Our board of directors has adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees, which is available
on our website (investors.personalis.com) under "Corporate Governance." We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K
regarding amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics by posting such information on the website address and
location specified above.
The principal occupation, business experience, and education of each of our executive officers and directors are set forth below.
Executive Officers
Christopher Hall. Mr. Hall has served as our Chief Executive Officer and President since March 2023 and before that served as our Senior Vice
President and Head, Diagnostics Business upon joining our company in October 2022. Mr. Hall has also served as a member of the Board of Directors since
March 2023. From October 2020 to July 2022, Mr. Hall served as Chief Executive Officer of Naring Health, Inc., a medical research services company. From
February 2010 to July 2019, Mr. Hall served as President, Chief Operating Officer, and Chief Commercial Officer at Veracyte, Inc., a publicly traded global
diagnostics company. Mr. Hall holds a B.A. in Political Science and Economics from DePauw University and an M.B.A. from Harvard Business School.
Aaron Tachibana. Mr. Tachibana has served as our Chief Financial Officer since March 2019 and has also served as our Chief Operating Officer
since March 2023. From December 2022 to March 2023, Mr. Tachibana served as our interim Chief Executive Officer. From August 2015 to September
2018, Mr. Tachibana served as Chief Financial Officer at Lumentum Holdings Inc., a designer and manufacturer of optical and photonic products. From
November 2013 to July 2015, Mr. Tachibana served as Vice President, Finance and Corporate Controller at JDS Uniphase Corp., subsequently renamed
Viavi Solutions Inc., a network test, measurement, and assurance technology company. From March 2010 to October 2013, Mr. Tachibana served as Chief
Financial Officer at Pericom Semiconductor Corp., a supplier of high-performance connectivity and timing solutions. Mr. Tachibana holds a B.S. in Business
Administration and Finance from San Jose State University.
Richard Chen, M.D., M.S. Dr. Chen has served as our Chief Medical Officer since November 2011 (previously designated Chief Scientific Officer).
In March 2023, Dr. Chen was promoted to Executive Vice President, R&D, in addition to his role as Chief Medical Officer. Since September 2011, Dr. Chen
has served on the clinical faculty at Stanford University School of Medicine. In August 1997, Dr. Chen co-founded Ingenuity Systems, a genomic data
software company. Dr. Chen holds a B.S. in Computer Science from Stanford University, an M.S. in Medical Informatics from Stanford University School of
Medicine, and an M.D. from Stanford University School of Medicine.
Stephen Moore. Mr. Moore has served as our Vice President and General Counsel since April 2020 and as Corporate Secretary since May 2020.
From October 2014 to April 2020, Mr. Moore served as General Counsel and Corporate Secretary at Pacific Biosciences of California, Inc., a publicly traded
advanced genomics company. From January 2010 to October 2014, Mr. Moore served in other roles at Pacific Biosciences of California, Inc., including
Associate General Counsel and Senior Director of Commercial Legal Affairs, and Vice President, Legal Affairs. From June 2007 to December 2009, Mr.
Moore served as General Counsel and Corporate Secretary at Navigenics, Inc., a consumer genomics company. From January 1999 to June 2007, Mr.
Moore held various positions at Affymetrix, Inc., a microarray company, including Associate General Counsel. Mr. Moore holds a B.A. in Political Science
from San Jose State University and a J.D. from University of California, Davis.
Independent Directors
Olivia K. Bloom. Ms. Bloom has served on our Board of Directors since March 2022. In September 2023, after a 29-year career with Geron
Corporation, a publicly traded clinical stage biopharmaceutical company, Ms. Bloom retired as Executive Vice President, Chief Financial Officer and
Treasurer. During that tenure, Ms. Bloom held several financial management positions, Chief Accounting Officer and Controller, as well as lead several
operational functions, including purchasing, information technology and investor relations. Ms. Bloom started her career in public accounting at KPMG
International Limited and became a Certified Public Accountant in 1994. Ms. Bloom holds a B.S. in Business Administration from the University of California,
Berkeley. Ms. Bloom was selected to serve on our Board of Directors because of her expertise in finance, accounting, and corporate governance and her
experience as a senior female executive working for and with publicly-traded life science companies.
A. Blaine Bowman. Mr. Bowman has served on our Board of Directors since May 2019. Beginning in 2006, Mr. Bowman served on the board of
directors of Solexa, Inc., a DNA sequencing company, until its sale to Illumina, Inc., a publicly traded biotechnology
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company and leader in DNA sequencing in January 2007, after which Mr. Bowman continued to serve on the board of directors of Illumina, Inc. until May
2018. From March 1977 to August 2005, Mr. Bowman served in various roles at Dionex Corporation, a publicly traded manufacturer of analytical
instruments, including Chairman of the board of directors, President, and Chief Executive Officer, and he served on the board of directors until its sale to
Thermo Fisher Scientific Inc. in May 2011. From July 2012 to December 2015, Mr. Bowman served on the board of directors of Altera Corporation, a publicly
traded programmable logic devices company. Mr. Bowman holds a B.S. in Physics from Brigham Young University and an M.B.A. from the Stanford
Graduate School of Business. Mr. Bowman was selected to serve on our Board of Directors because of his experience in executive roles and his experience
serving on the boards of directors of various instrumentation and biotechnology companies.
Karin Eastham. Ms. Eastham has served on our Board of Directors since September 2019. Ms. Eastham has served on the board of Veracyte,
Inc., a publicly traded genomic diagnostics company, since December 2012. Ms. Eastham previously served as a member of the board of directors of Nektar
Therapeutics, Inc., a publicly traded biopharmaceutical company, from September 2018 to June 2023; Geron Corporation, a publicly traded clinical stage
biopharmaceutical company, from March 2009 to May 2023; and Illumina, Inc., a publicly traded biotechnology company and leader in DNA sequencing,
from August 2004 to May 2019. From May 2004 to September 2008, Ms. Eastham served as Executive Vice President and Chief Operating Officer, and as a
member of the Board of Trustees, of the Burnham Institute for Medical Research, a non-profit corporation engaged in biomedical research. Ms. Eastham
holds a B.S. in Accounting and an M.B.A. from Indiana University and is a Certified Public Accountant (inactive). Ms. Eastham was selected to serve on our
Board of Directors because of her expertise in financial and operations management and experience serving on the boards of publicly-traded life science
companies.
Woodrow A. Myers, Jr., M.D. Dr. Myers has served on our Board of Directors since March 2021. Dr. Myers serves as an Advisor to Lightspeed
Venture Partners Inc., to the SCAN Group and to eHealth Inc. From May 2007 to December 2018, Dr. Myers served on the board of directors of Express
Scripts Inc., a publicly traded health care company. From January 2018 to February 2019, Dr. Myers served as Chief Medical Officer and Chief Healthcare
Strategist for Blue Cross Blue Shield of Arizona. He has also served as the Chief Medical Officer of Wellpoint Health Networks and Director of Healthcare
Management for the Ford Motor Company. In the public sector he has served as the Health Commissioner of New York City and the State of Indiana. Since
December 2015, Dr. Myers has served as Managing Director of Myers Ventures LLC, a healthcare consulting company. Dr. Myers holds a B.S. in Biology
from Stanford University, an M.B.A. from Stanford Graduate School of Business, and an M.D. from Harvard Medical School. Dr. Myers was selected to serve
on our Board of Directors because of his extensive experience in the healthcare industry, including in government and health policy roles.
Lonnie Shoff. Ms. Shoff has served on our Board of Directors since August 2022. Ms. Shoff has served as President of Antech and Sound
Diagnostics, a business unit of Mars Petcare, since April 2020. From September 2016 to April 2020, Ms. Shoff served as President of the Clinical
Diagnostics Division at Thermo Fisher Scientific Inc. From September 2009 to May 2016, Ms. Shoff held various positions at Henry Schein, a publicly traded
health care product distributor, including Chief Executive Officer of the Global Animal Health and Strategic Partnership Group and President of the Global
Healthcare Specialty Group. Ms. Shoff also held positions of increasing responsibility including the Senior Vice President & General Manager of Molecular
Diagnostic and Applied Science at Roche, a Swiss multinational healthcare company, from August 1988 to September 2009. Ms. Shoff holds a B.S. in
Biology from Purdue University.
Kenneth J. Widder, M.D. Mr. Widder has served on our Board of Directors since June 2023. Dr. Widder currently serves on the boards of
QuidelOrtho Corporation and Evoke Pharma, Inc. and has over 40 years of experience working with biomedical companies, having previously served as a
founder, director and/or CEO of Sydnexis, Inc., OrphoMed, Inc., Sytera, Inc., NovaCardia, Inc., Santarus, Inc., and Molecular Biosystems Inc., and as a
general partner at LVP Life Science Ventures (formerly Latterell Venture Partners) and Windamere Venture Partners. He holds an MD from Northwestern
University and trained in pathology at Duke University.
Item 11. Executive Compensation.
The information required by this Item is set forth under the headings “Director Compensation,” “Executive Compensation,” and “Compensation
Committee Interlocks and Insider Participation” in the Company’s 2024 Proxy Statement to be filed with the SEC within 120 days after December 31, 2023,
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is set forth under the headings “Equity Compensation Plans at December 31, 2023” and “Security Ownership
of Certain Beneficial Owners and Management” in the Company’s 2024 Proxy Statement to be filed with the SEC within 120 days after December 31, 2023,
and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is set forth under the headings “Corporate Governance and Board of Directors Matters” and “Transactions
with Related Persons and Indemnification” in the Company’s 2024 Proxy Statement to be filed with the SEC within 120 days after December 31, 2023, and is
incorporated herein by reference.
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Item 14. Principal Accountant Fees and Services.
The information required by this Item is set forth under the headings “Principal Accountant Fees and Services” and “Pre-Approval Procedures”
under the proposal “Ratification of Selection of Independent Registered Public Accounting Firm” in the Company’s 2024 Proxy Statement to be filed with the
SEC within 120 days after December 31, 2023, and is incorporated herein by reference.
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Item 15. Exhibits, Financial Statement Schedules.
(a) Financial Statements and Schedules
PART IV
The financial statements are set forth under Item 8 of this Annual Report on Form 10-K, as indexed below. Financial statement schedules have
been omitted since they either are not required, not applicable, or the information is otherwise included.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms
(b) Exhibits
98
Page
66
67
68
69
70
71
91
Table of Contents
Exhibit
Number
Description
Amended and Restated Certificate of Incorporation of the Registrant.
Amended and Restated Bylaws of the Registrant.
Description of Securities of Personalis, Inc.
Form of Common Stock Certificate of the Registrant.
Warrant to Purchase Shares of Common Stock of Personalis, Inc., dated
November 28, 2023, and expiring December 31, 2024 (the “First Warrant”).
Incorporated by Reference
Form
8-K
8-K
10-K
S-1/A
8-K
File No.
001-38943
001-38943
001-38943
333-231703
001-38943
Exhibit
3.1
3.1
4.1
4.1
4.1
Filing Date
6/24/2019
10/31/2022
2/25/2021
6/7/2019
11/28/2023
Warrant to Purchase Shares of Common Stock of Personalis, Inc., dated
8-K
001-38943
4.2
11/28/2023
November 28, 2023, and expiring December 31, 2025 (the “Second
Warrant”).
Personalis, Inc. 2011 Equity Incentive Plan, as amended, and forms of
S-1
333-231703
10.1
5/23/2019
agreements thereunder.
Personalis, Inc. 2019 Equity Incentive Plan and forms of agreements
S-1/A
333-231703
10.2
6/7/2019
thereunder.
Personalis, Inc. 2019 Employee Stock Purchase Plan.
Personalis, Inc. 2020 Inducement Plan, as amended.
Form of RSU Award Agreement under 2020 Inducement Plan.
Form of Option Agreement under 2020 Inducement Plan.
Form of Indemnification Agreement entered into by and between the
Registrant and each director and executive officer.
S-1/A
333-231703
10.3
6/7/2019
S-1/A
333-231703
10.4
6/7/2019
Amended and Restated Non-Employee Director Compensation Policy,
10-Q
001-38943
10.1
5/3/2023
3.1
3.2
4.1
4.2
4.3
4.4
10.1#
10.2#
10.3#
10.4#*
10.5#*
10.6#*
10.7#
10.8#
10.9#
8-K
8-K
8-K
001-38943
10.1
3/8/2023
001-38943
10.2
3/8/2023
001-38943
10.3
3/8/2023
dated March 2, 2023.
Amended and Restated Employment Agreement dated March 7, 2023,
between the Company and Aaron Tachibana.
10.10#
Amended and Restated Offer Letter, dated March 7, 2023, between the
Company and Christopher Hall.
10.11#
Amended and Restated Employment Agreement dated March 8, 2023,
between the Company and Richard Chen.
10.12#*
Second Amended and Restated Executive Severance Agreement, dated
10.13#*
10.14#*
September 25, 2023, between the Company and Christopher Hall.
Third Amended and Restated Executive Severance Agreement, dated
September 25, 2023, between the Company and Aaron Tachibana.
Third Amended and Restated Executive Severance Agreement, dated
September 25, 2023, between the Company and Richard Chen.
10.15#*
Second Amended and Restated Executive Severance Agreement, dated
10.16Ω‡
10.17
10.18
10.19
10.20
10.21
10.22
September 18, 2023, between the Company and Stephen Moore.
Commercialization and Reference Laboratory Agreement, between
Personalis, Inc. and Tempus AI, Inc. (f/k/a Tempus Labs, Inc.), dated
November 25, 2023.
Lease, by and between MENLO PREHC I, LLC, MENLO PREPI I, LLC,
TPI INVESTORS 9, LLC and the Registrant, dated February 2, 2015.
8-K
001-38943
10.1
11/28/2023
S-1
333-231703
10.9
5/23/2019
First Amendment to Lease, by and between MENLO PREPI I, LLC and TPI
10-Q
001-38943
10.1
8/6/2020
INVESTORS 9, LLC and the Registrant, dated April 8, 2020.
Lease, by and between Ardenwood Ventures I, LLC and the Registrant,
10-Q
001-38943
10.1
11/4/2021
dated August 25, 2021.
Amendment No. 1 to Lease, by and between Ardenwood Ventures I, LLC
10-K
001-38943
10.16
2/24/2022
and the Registrant, dated December 8, 2021.
Amendment No. 2 to Lease, by and between Ardenwood Ventures I, LLC
10-Q
001-38943
10.1
8/3/2022
and the Registrant, dated June 9, 2022.
Amendment No. 3 to Lease, by and between Ardenwood Ventures I, LLC
10-K
001-38943
10.19
2/23/2023
and the Registrant, dated December 19, 2022.
10.23‡
Contract No. 36C24E22D0031, by and between the U.S. Department of
10-Q
001-38943
10.1
11/2/2022
Veterans Affairs and the Registrant, dated September 30, 2022.
21.1
23.1
Subsidiaries of the Registrant as of December 31, 2023.
Consent of Independent Registered Public Accounting Firm.
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23.2
24.1
31.1
Consent of Independent Registered Public Accounting Firm.
Power of Attorney (included on the Signatures page of this Annual Report
on Form 10-K).
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and
32.1†
32.2†
97#*
101*
15d-14(a) under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Incentive Compensation Recoupment Policy.
Inline XBRL Document Set for the consolidated financial statements and
accompanying notes in Part II, Item 8, “Financial Statements and
Supplementary Data” of this Annual Report on Form 10-K.
104*
Inline XBRL for the cover page of this Annual Report on Form 10-K,
included in the Exhibit 101 Inline XBRL Document Set.
#
*
†
Indicates management contract or compensatory plan or arrangement.
Filed herewith.
The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the Securities and Exchange
Commission and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such
filing.
Ω Pursuant to Item 601(b)(10)(iv) of Regulation S-K promulgated by the SEC, certain portions of this exhibit have been redacted because the Company customarily and
actually treats such omitted information as private or confidential and because such omitted information is not material.
‡ Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K because such schedules and exhibits do not contain information which is
material to an investment or voting decision or which is not otherwise disclosed in the filed agreements. The Company will furnish the omitted schedules and exhibits to
the SEC upon request by the SEC.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 28, 2024
Personalis, Inc.
By:
/s/ Aaron Tachibana
Aaron Tachibana
Chief Financial Officer and Chief Operating Officer
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Christopher Hall and
Aaron Tachibana, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities
and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Name and Signature
/s/ Christopher Hall
Christopher Hall
/s/ Aaron Tachibana
Aaron Tachibana
/s/ A. Blaine Bowman
A. Blaine Bowman
/s/ Karin Eastham
Karin Eastham
/s/ Kenneth Widder
Kenneth J. Widder, M.D.
/s/ Lonnie Shoff
Lonnie Shoff
/s/ Olivia Bloom
Olivia Bloom
/s/ Woodrow A. Myers, Jr.
Woodrow A. Myers, Jr., M.D.
Title
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer and Chief Operating Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
101
Date
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
PERSONALIS, INC.
2020 INDUCEMENT PLAN
Exhibit 10.4
ADOPTED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS: MAY 4, 2020
AMENDED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS: APRIL 25, 2023
1.
GENERAL.
(a)Eligible Award Recipients. The only persons eligible to receive grants of Awards under this Plan are individuals who satisfy
the standards for inducement grants under Nasdaq Marketplace Rule 5635(c)(4) or 5635(c)(3), if applicable, and the related guidance under
Nasdaq IM 5635-1. A person who previously served as an Employee or Director will not be eligible to receive Awards under the Plan, other
than following a bona fide period of non-employment. Persons eligible to receive grants of Awards under this Plan are referred to in this Plan
as “Eligible Employees.” These Awards must be approved by either a majority of the Company’s “Independent Directors” (as such term is
defined in Nasdaq Marketplace Rule 5605(a)(2)) or the Company’s compensation committee, provided such committee comprises solely
Independent Directors (the “Independent Compensation Committee”) in order to comply with the exemption from the stockholder approval
requirement for “inducement grants” provided under Rule 5635(c)(4) of the Nasdaq Marketplace Rules. Nasdaq Marketplace Rule 5635(c)(4)
and the related guidance under Nasdaq IM 5635-1 (together with any analogous rules or guidance effective after the date hereof, the
“Inducement Award Rules”).
(b)Available Awards. The Plan provides for the grant of the following Awards: (i) Options, (ii) Stock Appreciation Rights, (iii)
Restricted Stock Awards, (iv) Restricted Stock Unit Awards, (v) Performance Stock Awards, and (vi) Other Stock Awards. All Options shall
be Nonstatutory Stock Options.
(c) Purpose. The Plan, through the grant of Awards, is intended to provide (i) an inducement material for certain individuals to
enter into employment with the Company within the meaning of Rule 5635(c)(4) of the Nasdaq Marketplace Rules, (ii) incentives for such
persons to exert maximum efforts for the success of the Company and any Affiliate and (iii) a means by which Eligible Employees may be
given an opportunity to benefit from increases in value of the Common Stock.
2.
ADMINISTRATION.
(a)Administration by Board. The Board will administer the Plan; provided, however, that Awards may only be granted by either
(i) a majority of the Company’s Independent Directors or (ii) the Independent Compensation Committee. Subject to those constraints and the
other constraints of the Inducement Award Rules, the Board may delegate some of its powers of administration of the Plan to a Committee or
Committees, as provided in Section 2(c).
(b)Powers of Board. The Board will have the power, subject to, and within the limitations of, the express provisions of the Plan
and the Inducement Award Rules:
(i)
To determine: (A) who will be granted Awards; (B) when and how each Award will be granted; (C) what type of
Award will be granted; (D) the provisions of each Award (which need not be identical), including when a person will be permitted to exercise
or otherwise receive cash or Common Stock under the Award; (E) the number of shares of Common Stock subject to, or the cash value of, an
Award; and (F) the Fair Market Value applicable to an Award; provided, however, that Awards may only be granted by either (i) a majority of
the Company’s Independent Directors or (ii) the Independent Compensation Committee.
regulations for administration of the Plan and Awards. The Board, in the exercise of these powers,
(ii)
To construe and interpret the Plan and Awards granted under it, and to establish, amend and revoke rules and
1.
may correct any defect, omission or inconsistency in the Plan or in any Award Agreement, in a manner and to the extent it will deem
necessary or expedient to make the Plan or Award fully effective.
(iii) To settle all controversies regarding the Plan and Awards granted under it.
or shares of Common Stock may be issued in settlement thereof).
(iv) To accelerate, in whole or in part, the time at which an Award may be exercised or vest (or the time at which cash
To suspend or terminate the Plan at any time. Except as otherwise provided in the Plan or an Award Agreement,
suspension or termination of the Plan will not materially impair a Participant’s rights under the Participant’s then-outstanding Award without
the Participant’s written consent, except as provided in subsection (viii) below.
(v)
(vi) To amend the Plan in any respect the Board deems necessary or advisable, including, without limitation, by
adopting amendments relating to certain nonqualified deferred compensation under Section 409A of the Code and/or to ensure the Plan or
Awards granted under the Plan are exempt from, or compliant with, the requirements for nonqualified deferred compensation under Section
409A of the Code, subject to the limitations, if any, of applicable law. Except as provided in Section 9(a) relating to Capitalization
Adjustments, if required by applicable law or listing requirements, the Company shall seek stockholder approval for any amendment of the
Plan. Except as otherwise provided in the Plan or an Award Agreement, no amendment of the Plan will materially impair a Participant’s
rights under an outstanding Award without the Participant’s written consent.
Plan intended to satisfy the requirements of Rule 16b-3.
(vii) To submit any amendment to the Plan for stockholder approval, including, but not limited to, amendments to the
(viii) To approve forms of Award Agreements for use under the Plan and to amend the terms of any one or more Awards,
including, but not limited to, amendments to provide terms more favorable to the Participant than previously provided in the Award
Agreement, subject to any specified limits in the Plan that are not subject to Board discretion; provided, however, that a Participant’s rights
under any Award will not be impaired by any such amendment unless (A) the Company requests the consent of the affected Participant, and
(B) such Participant consents in writing. Notwithstanding the foregoing, (1) a Participant’s rights will not be deemed to have been impaired
by any such amendment if the Board, in its sole discretion, determines that the amendment, taken as a whole, does not materially impair the
Participant’s rights, and (2) subject to the limitations of applicable law, if any, the Board may amend the terms of any one or more Awards
without the affected Participant’s consent (A) to clarify the manner of exemption from, or to bring the Award into compliance with, Section
409A of the Code; or (B) to comply with other applicable laws or listing requirements.
the best interests of the Company and that are not in conflict with the provisions of the Plan or Awards.
(ix) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote
(x)
To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by
Eligible Employees who are foreign nationals or employed outside the United States (provided that Board approval will not be necessary for
immaterial modifications to the Plan or any Award Agreement that are required for compliance with the laws of the relevant foreign
jurisdiction).
(c) Delegation to Committee.
(i)
General. The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If
administration of the Plan is delegated to a Committee, the Committee will have, in connection with the administration of the Plan, the
powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee of
the Committee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board will
thereafter be construed as being to the Committee or subcommittee, as applicable). Any delegation of administrative powers
2.
will be reflected in resolutions, not inconsistent with the provisions of the Plan, adopted from time to time by the Board or Committee (as
applicable). The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the
Board some or all of the powers previously delegated.
accordance with Rule 16b-3.
(ii) Rule 16b-3 Compliance. The Committee may consist solely of two or more Non-Employee Directors in
(d)Effect of Board’s Decision. All determinations, interpretations and constructions made by the Board in good faith will not be
subject to review by any person and will be final, binding and conclusive on all persons.
(e) Repricing; Cancellation and Re-Grant of Awards. Neither the Board nor any Committee will have the authority to reduce the
exercise, purchase or strike price of any outstanding Option or SAR, unless the stockholders of the Company have approved such an action
within twelve (12) months prior to such an event.
3.
SHARES SUBJECT TO THE PLAN.
(a)Share Reserve. Subject to Section 9(a) relating to Capitalization Adjustments, the aggregate number of shares of Common
Stock that may be issued pursuant to Awards will not exceed 1,350,000 shares. Shares may be issued in connection with a merger or
acquisition as permitted by Nasdaq Marketplace Rule 5635(c) or, if applicable NYSE Listed Company Manual Section 303A.08, AMEX
Company Guide Section 711 or other applicable rule, and such issuance will not reduce the number of shares available for issuance under the
Plan.
(b)Reversion of Shares to the Share Reserve. If an Award or any portion thereof (i) expires or otherwise terminates without all of
the shares covered by such Award having been issued or (ii) is settled in cash (i.e., the Participant receives cash rather than stock), such
expiration, termination or settlement will not reduce (or otherwise offset) the number of shares of Common Stock that may be available for
issuance under the Plan. If any shares of Common Stock issued pursuant to an Award are forfeited back to or repurchased by the Company
because of the failure to meet a contingency or condition required to vest such shares in the Participant, then the shares that are forfeited or
repurchased will revert to and again become available for issuance under the Plan. Any shares reacquired by the Company in satisfaction of
tax withholding obligations on an Award or as consideration for the exercise or purchase price of an Award will again become available for
issuance under the Plan.
(c) Source of Shares. The stock issuable under the Plan will be shares of authorized but unissued or reacquired Common Stock,
including shares repurchased by the Company on the open market or otherwise.
4.
ELIGIBILITY.
(a)Eligibility for Specific Awards. Awards may only be granted to persons who are Eligible Employees described in Section 1(a)
of the Plan, where the Award is an inducement material to the individual’s entering into employment with the Company or an Affiliate within
the meaning of Rule 5635(c)(4) of the Nasdaq Marketplace Rules or is otherwise permitted pursuant to Rule 5635(c) of the Nasdaq
Marketplace Rules, provided, however, that Awards may not be granted to Eligible Employees who are providing Continuous Service only to
any “parent” of the Company, as such term is defined in Rule 405 of the Securities Act, unless (i) the stock underlying such Awards is treated
as “service recipient stock” under Section 409A of the Code (for example, because the Awards are granted pursuant to a corporate transaction
such as a spin off transaction), (ii) the Company, in consultation with its legal counsel, has determined that such Awards are otherwise
exempt from Section 409A of the Code, or (iii) the Company, in consultation with its legal counsel, has determined that such Awards comply
with the distribution requirements of Section 409A of the Code.
(b)Approval Requirements. All Awards must be granted either by a majority of the Company’s independent directors or the
Independent Compensation Committee.
3.
5.
PROVISIONS RELATING TO OPTIONS AND STOCK APPRECIATION RIGHTS.
Each Option or SAR will be in such form and will contain such terms and conditions as the Board deems appropriate. All Options
will be Nonstatutory Stock Options at the time of grant. The provisions of separate Options or SARs need not be identical; provided,
however, that each Award Agreement will conform to (through incorporation of provisions hereof by reference in the applicable Award
Agreement or otherwise) the substance of each of the following provisions:
(a)Term. No Option or SAR will be exercisable after the expiration of 10 years from the date of its grant or such shorter period
specified in the Award Agreement.
(b)Exercise Price. The exercise or strike price of each Option or SAR will be not less than 100% of the Fair Market Value of the
Common Stock subject to the Option or SAR on the date the Award is granted. Notwithstanding the foregoing, an Option or SAR may be
granted with an exercise or strike price lower than 100% of the Fair Market Value of the Common Stock subject to the Award if such Award
is granted pursuant to an assumption of or substitution for another option or stock appreciation right pursuant to a Corporate Transaction and
in a manner consistent with the provisions of Section 409A of the Code. Each SAR will be denominated in shares of Common Stock
equivalents.
(c) Purchase Price for Options. The purchase price of Common Stock acquired pursuant to the exercise of an Option may be paid,
to the extent permitted by applicable law and as determined by the Board in its sole discretion, by any combination of the methods of
payment set forth below. The Board will have the authority to grant Options that do not permit all of the following methods of payment (or
otherwise restrict the ability to use certain methods) and to grant Options that require the consent of the Company to use a particular method
of payment. The permitted methods of payment are as follows:
(i)
by cash, check, bank draft or money order payable to the Company;
pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the
issuance of the stock subject to the Option, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable
instructions to pay the aggregate exercise price to the Company from the sales proceeds;
(ii)
(iii)
by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock;
(iv)
by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Common
Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise
price; provided, however, that the Company will accept a cash or other payment from the Participant to the extent of any remaining balance
of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued. Shares of Common Stock will no
longer be subject to an Option and will not be exercisable thereafter to the extent that (A) shares issuable upon exercise are used to pay the
exercise price pursuant to the “net exercise,” (B) shares are delivered to the Participant as a result of such exercise, and (C) shares are
withheld to satisfy tax withholding obligations; or
Agreement.
(v)
in any other form of legal consideration that may be acceptable to the Board and specified in the applicable Award
(d)Exercise and Payment of a SAR. To exercise any outstanding SAR, the Participant must provide written notice of exercise to
the Company in compliance with the provisions of the Stock Appreciation Right Agreement evidencing such SAR. The appreciation
distribution payable on the exercise of a SAR will be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value
(on the date of the exercise of the SAR) of a number of shares of Common Stock equal to the number of Common Stock equivalents in which
the Participant is vested under such SAR, and with respect to which the Participant is exercising the SAR on such date, over (B) the
4.
aggregate strike price of the number of Common Stock equivalents with respect to which the Participant is exercising the SAR on such date.
The appreciation distribution may be paid in Common Stock, in cash, in any combination of the two or in any other form of consideration, as
determined by the Board and contained in the Award Agreement evidencing such SAR.
(e) Transferability of Options and SARs. The Board may, in its sole discretion, impose such limitations on the transferability of
Options and SARs as the Board will determine. In the absence of such a determination by the Board to the contrary, the following
restrictions on the transferability of Options and SARs will apply:
(i)
Restrictions on Transfer. An Option or SAR will not be transferable except by will or by the laws of descent and
distribution (or pursuant to subsections (ii) and (iii) below), and will be exercisable during the lifetime of the Participant only by the
Participant. The Board may permit transfer of the Option or SAR in a manner that is not prohibited by applicable tax and securities laws.
Except as explicitly provided in the Plan, neither an Option nor a SAR may be transferred for consideration.
(ii) Domestic Relations Orders. Subject to the approval of the Board or a duly authorized Officer, an Option or SAR
may be transferred pursuant to the terms of a domestic relations order, official marital settlement agreement or other divorce or separation
instrument.
(iii) Beneficiary Designation. Subject to the approval of the Board or a duly authorized Officer, a Participant may, by
delivering written notice to the Company, in a form approved by the Company (or the designated broker), designate a third party who, on the
death of the Participant, will thereafter be entitled to exercise the Option or SAR and receive the Common Stock or other consideration
resulting from such exercise. In the absence of such a designation, upon the death of the Participant the executor or administrator of the
Participant’s estate will be entitled to exercise the Option or SAR and receive the Common Stock or other consideration resulting from such
exercise. However, the Company may prohibit designation of a beneficiary at any time, including due to any conclusion by the Company that
such designation would be inconsistent with the provisions of applicable laws.
(f) Vesting Generally. The total number of shares of Common Stock subject to an Option or SAR may vest and become
exercisable in periodic installments that may or may not be equal. The Option or SAR may be subject to such other terms and conditions on
the time or times when it may or may not be exercised (which may be based on the satisfaction of Performance Goals or other criteria) as the
Board may deem appropriate. The vesting provisions of individual Options or SARs may vary. The provisions of this Section(f) are subject
to any Option or SAR provisions governing the minimum number of shares of Common Stock as to which an Option or SAR may be
exercised.
(g)Termination of Continuous Service. Except as otherwise provided in the applicable Award Agreement or other agreement
between the Participant and the Company, if a Participant’s Continuous Service terminates (other than for Cause and other than upon the
Participant’s death or Disability), the Participant may exercise his or her Option or SAR (to the extent that the Participant was entitled to
exercise such Award as of the date of termination of Continuous Service) within the period of time ending on the earlier of (i) the date that is
90 days following the termination of the Participant’s Continuous Service (or such longer or shorter period specified in the applicable Award
Agreement) and (ii) the expiration of the term of the Option or SAR as set forth in the Award Agreement. If, after termination of Continuous
Service, the Participant does not exercise his or her Option or SAR (as applicable) within the applicable time frame, the Option or SAR will
terminate.
(h)Extension of Termination Date. If the exercise of an Option or SAR following the termination of the Participant’s Continuous
Service (other than for Cause and other than upon the Participant’s death or Disability) would be prohibited at any time solely because the
issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option or SAR will
terminate on the earlier of (i) the expiration of a total period of time (that need not be consecutive) equal to the applicable post-termination
exercise period after the termination of the Participant’s Continuous Service during which the exercise of the Option or SAR would not be in
violation of such registration requirements, and (ii) the expiration of the term of the Option or SAR as set forth in the
5.
applicable Award Agreement. In addition, unless otherwise provided in a Participant’s Award Agreement, if the sale of any Common Stock
received on exercise of an Option or SAR following the termination of the Participant’s Continuous Service (other than for Cause) would
violate the Company’s insider trading policy, then the Option or SAR will terminate on the earlier of (i) the expiration of a period of months
(that need not be consecutive) equal to the applicable post-termination exercise period after the termination of the Participant’s Continuous
Service during which the sale of the Common Stock received upon exercise of the Option or SAR would not be in violation of the
Company’s insider trading policy, or (ii) the expiration of the term of the Option or SAR as set forth in the applicable Award Agreement.
(i) Disability of Participant. Except as otherwise provided in the applicable Award Agreement or other agreement between the
Participant and the Company, if a Participant’s Continuous Service terminates as a result of the Participant’s Disability, the Participant may
exercise his or her Option or SAR (to the extent that the Participant was entitled to exercise such Option or SAR as of the date of termination
of Continuous Service), but only within such period of time ending on the earlier of (i) the date 12 months following such termination of
Continuous Service (or such longer or shorter period specified in the Award Agreement), and (ii) the expiration of the term of the Option or
SAR as set forth in the Award Agreement. If, after termination of Continuous Service, the Participant does not exercise his or her Option or
SAR within the applicable time frame, the Option or SAR (as applicable) will terminate.
(j) Death of Participant. Except as otherwise provided in the applicable Award Agreement or other agreement between the
Participant and the Company, if (i) a Participant’s Continuous Service terminates as a result of the Participant’s death, or (ii) the Participant
dies within the period (if any) specified in the Award Agreement for exercisability after the termination of the Participant’s Continuous
Service for a reason other than death, then the Option or SAR may be exercised (to the extent the Participant was entitled to exercise such
Option or SAR as of the date of death) by the Participant’s estate, by a person who acquired the right to exercise the Option or SAR by
bequest or inheritance or by a person designated to exercise the Option or SAR upon the Participant’s death, but only within the period
ending on the earlier of (i) the date 18 months following the date of death (or such longer or shorter period specified in the Award
Agreement), and (ii) the expiration of the term of such Option or SAR as set forth in the Award Agreement. If, after the Participant’s death,
the Option or SAR is not exercised within the applicable time frame, the Option or SAR (as applicable) will terminate.
(k)Termination for Cause. Except as explicitly provided otherwise in a Participant’s Award Agreement or other individual written
agreement between the Company and the Participant, if a Participant’s Continuous Service is terminated for Cause, the Option or SAR will
terminate immediately upon such Participant’s termination of Continuous Service, and the Participant will be prohibited from exercising his
or her Option or SAR from and after the time of such termination of Continuous Service.
(l) Non-Exempt Employees. If an Option or SAR is granted to an Employee who is a non-exempt employee for purposes of the
Fair Labor Standards Act of 1938, as amended, the Option or SAR will not be first exercisable for any shares of Common Stock until at least
six months following the date of grant of the Option or SAR (although the Award may vest prior to such date). Consistent with the provisions
of the Worker Economic Opportunity Act, (i) if such non-exempt Employee dies or suffers a Disability, (ii) upon a Corporate Transaction in
which such Option or SAR is not assumed, continued, or substituted, (iii) upon a Change in Control, or (iv) upon the Participant’s retirement
(as such term may be defined in the Participant’s Award Agreement in another agreement between the Participant and the Company, or, if no
such definition, in accordance with the Company’s then current employment policies and guidelines), the vested portion of any Options and
SARs may be exercised earlier than six months following the date of grant. The foregoing provision is intended to operate so that any
income derived by a non-exempt employee in connection with the exercise or vesting of an Option or SAR will be exempt from his or her
regular rate of pay. To the extent permitted and/or required for compliance with the Worker Economic Opportunity Act to ensure that any
income derived by a non-exempt employee in connection with the exercise, vesting or issuance of any shares under any other Award will be
exempt from the employee’s regular rate of pay, the provisions of this Section 5(l) will apply to all Awards and are hereby incorporated by
reference into such Award Agreements.
6.
6.
PROVISIONS OF AWARDS OTHER THAN OPTIONS AND SARS.
(a)Restricted Stock Awards. Each Restricted Stock Award Agreement will be in such form and will contain such terms and
conditions as the Board will deem appropriate. To the extent consistent with the Company’s bylaws, at the Board’s election, shares of
Common Stock may be (x) held in book entry form subject to the Company’s instructions until any restrictions relating to the Restricted
Stock Award lapse; or (y) evidenced by a certificate, which certificate will be held in such form and manner as determined by the Board. The
terms and conditions of Restricted Stock Award Agreements may change from time to time, and the terms and conditions of separate
Restricted Stock Award Agreements need not be identical. Each Restricted Stock Award Agreement will conform to (through incorporation
of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
Consideration. A Restricted Stock Award may be awarded in consideration for (A) cash, check, bank draft or
money order payable to the Company, (B) past or future services to the Company or an Affiliate, or (C) any other form of legal consideration
that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
(i)
forfeiture to the Company in accordance with a vesting schedule to be determined by the Board.
(ii) Vesting. Shares of Common Stock awarded under the Restricted Stock Award Agreement may be subject to
(iii) Termination of Participant’s Continuous Service. If a Participant’s Continuous Service terminates, the Company
may receive through a forfeiture condition or a repurchase right any or all of the shares of Common Stock held by the Participant that have
not vested as of the date of termination of Continuous Service under the terms of the Restricted Stock Award Agreement.
(iv) Transferability. Rights to acquire shares of Common Stock under the Restricted Stock Award Agreement will be
transferable by the Participant only upon such terms and conditions as are set forth in the Restricted Stock Award Agreement, as the Board
will determine in its sole discretion, so long as Common Stock awarded under the Restricted Stock Award Agreement remains subject to the
terms of the Restricted Stock Award Agreement.
subject to the same vesting and forfeiture restrictions as apply to the shares subject to the Restricted Stock Award to which they relate.
(v)
Dividends. A Restricted Stock Award Agreement may provide that any dividends paid on Restricted Stock will be
(b)Restricted Stock Unit Awards. Each Restricted Stock Unit Award Agreement will be in such form and will contain such terms
and conditions as the Board will deem appropriate. The terms and conditions of Restricted Stock Unit Award Agreements may change from
time to time, and the terms and conditions of separate Restricted Stock Unit Award Agreements need not be identical. Each Restricted Stock
Unit Award Agreement will conform to (through incorporation of the provisions hereof by reference in the Agreement or otherwise) the
substance of each of the following provisions:
(i)
Consideration. At the time of grant of a Restricted Stock Unit Award, the Board will determine the consideration,
if any, to be paid by the Participant upon delivery of each share of Common Stock subject to the Restricted Stock Unit Award. The
consideration to be paid (if any) by the Participant for each share of Common Stock subject to a Restricted Stock Unit Award may be paid in
any form of legal consideration that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
conditions to the vesting of the Restricted Stock Unit Award as it, in its sole discretion, deems appropriate.
(ii) Vesting. At the time of the grant of a Restricted Stock Unit Award, the Board may impose such restrictions on or
7.
(iii) Payment. A Restricted Stock Unit Award may be settled by the delivery of shares of Common Stock, their cash
equivalent, any combination thereof or in any other form of consideration, as determined by the Board and contained in the Restricted Stock
Unit Award Agreement.
(iv) Additional Restrictions. At the time of the grant of a Restricted Stock Unit Award, the Board, as it deems
appropriate, may impose such restrictions or conditions that delay the delivery of the shares of Common Stock (or their cash equivalent)
subject to a Restricted Stock Unit Award to a time after the vesting of such Restricted Stock Unit Award.
(v)
Dividend Equivalents. Dividend equivalents may be credited in respect of shares of Common Stock covered by a
Restricted Stock Unit Award, as determined by the Board and contained in the Restricted Stock Unit Award Agreement. At the sole
discretion of the Board, such dividend equivalents may be converted into additional shares of Common Stock covered by the Restricted
Stock Unit Award in such manner as determined by the Board. Any additional shares covered by the Restricted Stock Unit Award credited
by reason of such dividend equivalents will be subject to all of the same terms and conditions of the underlying Restricted Stock Unit Award
Agreement to which they relate.
(vi) Termination of Participant’s Continuous Service. Except as otherwise provided in the applicable Restricted
Stock Unit Award Agreement, such portion of the Restricted Stock Unit Award that has not vested will be forfeited upon the Participant’s
termination of Continuous Service.
(c) Performance Awards.
(i)
Performance Stock Awards. A Performance Stock Award is an Award that is payable (including that may be
granted, may vest or may be exercised) contingent upon the attainment during a Performance Period of certain Performance Goals. A
Performance Stock Award may, but need not, require the Participant’s completion of a specified period of Continuous Service. The length of
any Performance Period, the Performance Goals to be achieved during the Performance Period, and the measure of whether and to what
degree such Performance Goals have been attained will be conclusively determined by the Board or Committee, in its sole discretion. In
addition, to the extent permitted by applicable law and the applicable Award Agreement, the Board (or Committee, as the case may be) may
determine that cash may be used in payment of Performance Stock Awards.
(ii) Discretion. A majority of the Company’s Independent Directors or the Independent Compensation Committee
retains the discretion to adjust or eliminate the compensation or economic benefit due upon attainment of Performance Goals and to define
the manner of calculating the Performance Criteria it selects to use for a Performance Period. Partial achievement of the specified criteria
may result in the payment or vesting corresponding to the degree of achievement as specified in the Award Agreement.
(d)Other Stock Awards. Other forms of Stock Awards valued in whole or in part by reference to, or otherwise based on, Common
Stock, including the appreciation in value thereof (e.g., options or stock rights with an exercise price or strike price less than 100% of the Fair
Market Value of the Common Stock at the time of grant) may be granted either alone or in addition to Awards provided for under Section 5
and the preceding provisions of this Section 6. Subject to the provisions of the Plan, a majority of the Company’s Independent Directors or
the Independent Compensation Committee will have sole and complete authority to determine the persons to whom and the time or times at
which such Other Stock Awards will be granted, the number of shares of Common Stock (or the cash equivalent thereof) to be granted
pursuant to such Other Stock Awards and all other terms and conditions of such Other Stock Awards.
7.
COVENANTS OF THE COMPANY.
(a)Availability of Shares. The Company will keep available at all times the number of shares of Common Stock reasonably
required to satisfy then-outstanding Awards.
8.
(b)Securities Law Compliance. The Company will seek to obtain from each regulatory commission or agency, as necessary, such
authority as may be required to grant Awards and to issue and sell shares of Common Stock upon exercise or vesting of the Awards;
provided, however, that this undertaking will not require the Company to register under the Securities Act, or other securities or applicable
laws, the Plan, any Award or any Common Stock issued or issuable pursuant to any such Award. If, after reasonable efforts and at a
reasonable cost, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company
deems necessary or advisable for the lawful issuance and sale of Common Stock under the Plan, the Company will be relieved from any
liability for failure to issue and sell Common Stock upon exercise or vesting of such Awards unless and until such authority is obtained. A
Participant will not be eligible for the grant of an Award or the subsequent issuance of cash or Common Stock pursuant to the Award if such
grant or issuance would be in violation of any applicable law.
(c) No Obligation to Notify or Minimize Taxes. The Company will have no duty or obligation to any Participant to advise such
holder as to the tax treatment or time or manner of exercising such Award. Furthermore, the Company will have no duty or obligation to
warn or otherwise advise such holder of a pending termination or expiration of an Award or a possible period in which the Award may not be
exercised. The Company has no duty or obligation to minimize the tax consequences of an Award to the holder of such Award.
8. MISCELLANEOUS.
(a)Use of Proceeds from Sales of Common Stock. Proceeds from the sale of shares of Common Stock pursuant to Awards will
constitute general funds of the Company.
(b)Corporate Action Constituting Grant of Awards. Corporate action constituting a grant by the Company of an Award to any
Participant will be deemed completed as of the date of such corporate action, unless otherwise determined by the Board, regardless of when
the instrument, certificate, or letter evidencing the Award is communicated to, or actually received or accepted by, the Participant. In the
event that the corporate records (e.g., Board consents, resolutions or minutes) documenting the corporate action constituting the grant contain
terms (e.g., exercise price, vesting schedule or number of shares) that are inconsistent with those in the Award Agreement or related grant
documents as a result of a clerical error in the papering of the Award Agreement or related grant documents, the corporate records will
control and the Participant will have no legally binding right to the incorrect term in the Award Agreement or related grant documents.
(c) Stockholder Rights. No Participant will be deemed to be the holder of, or to have any of the rights of a holder with respect to,
any shares of Common Stock subject to an Award unless and until (i) such Participant has satisfied all requirements for exercise of, or the
issuance of shares of Common Stock under, the Award pursuant to its terms, and (ii) the issuance of the Common Stock subject to such
Award has been entered into the books and records of the Company.
(d)No Employment or Other Service Rights. Nothing in the Plan, any Award Agreement or any other instrument executed
thereunder or in connection with any Award granted pursuant thereto will confer upon any Participant any right to continue to serve the
Company or an Affiliate in the capacity in effect at the time the Award was granted or will affect the right of the Company or an Affiliate to
terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to
the terms of such Consultant’s agreement with the Company or an Affiliate, or (iii) the service of a Director pursuant to the bylaws of the
Company or an Affiliate, and any applicable provisions of the corporate law of the state or foreign jurisdiction in which the Company or the
Affiliate is domiciled or incorporated, as the case may be.
(e) Change in Time Commitment. In the event a Participant’s regular level of time commitment in the performance of his or her
services for the Company and any Affiliates is reduced (for example, and without limitation, if the Participant is an Employee of the
Company and the Employee has a change in status from a full-time Employee to a part-time Employee or takes an extended leave of
absence) after the date of grant of any Award to the Participant, the Board has the right in its sole discretion to (x) make a corresponding
reduction in the number of shares or cash amount subject to any portion of such Award that is scheduled to vest or become payable after the
date of such change
9.
in time commitment, and (y) in lieu of or in combination with such a reduction, extend the vesting or payment schedule applicable to such
Award. In the event of any such reduction, the Participant will have no right with respect to any portion of the Award that is so reduced or
extended.
(f) Investment Assurances. The Company may require a Participant, as a condition of exercising or acquiring Common Stock
under any Award, (i) to give written assurances satisfactory to the Company as to the Participant’s knowledge and experience in financial and
business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced
in financial and business matters and that such Participant is capable of evaluating, alone or together with the purchaser representative, the
merits and risks of exercising the Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is
acquiring Common Stock subject to the Award for the Participant’s own account and not with any present intention of selling or otherwise
distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, will be inoperative if
(A) the issuance of the shares upon the exercise or acquisition of Common Stock under the Award has been registered under a then currently
effective registration statement under the Securities Act, or (B) as to any particular requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon
advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate
in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.
(g)Withholding Obligations. Unless prohibited by the terms of an Award Agreement, the Company may, in its sole discretion,
satisfy any federal, state or local tax withholding obligation relating to an Award by any of the following means or by a combination of such
means: (i) causing the Participant to tender a cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock
issued or otherwise issuable to the Participant in connection with the Award; provided, however, that no shares of Common Stock are
withheld with a value exceeding the maximum amount of tax required to be withheld by law (or such lesser amount as may be necessary to
avoid classification of the Award as a liability for financial accounting purposes); (iii) withholding cash from an Award settled in cash; (iv)
withholding payment from any amounts otherwise payable to the Participant; or (v) by such other method as may be set forth in the Award
Agreement.
(h)Electronic Delivery. Any reference herein to a “written” agreement or document will include any agreement or document
delivered electronically, filed publicly at www.sec.gov (or any successor website thereto) or posted on the Company’s intranet (or other
shared electronic medium controlled by the Company to which the Participant has access).
(i) Deferrals. To the extent permitted by applicable law, the Board, in its sole discretion, may determine that the delivery of
Common Stock or the payment of cash, upon the exercise, vesting or settlement of all or a portion of any Award may be deferred and may
establish programs and procedures for deferral elections to be made by Participants. Deferrals by Participants will be made in accordance
with Section 409A of the Code. Consistent with Section 409A of the Code, the Board may provide for distributions while a Participant is still
an employee or otherwise providing services to the Company. The Board is authorized to make deferrals of Awards and determine when, and
in what annual percentages, Participants may receive payments, including lump sum payments, following the Participant’s termination of
Continuous Service, and implement such other terms and conditions consistent with the provisions of the Plan and in accordance with
applicable law.
(j) Compliance with Section 409A of the Code. Unless otherwise expressly provided for in an Award Agreement, the Plan and
Award Agreements will be interpreted to the greatest extent possible in a manner that makes the Plan and the Awards granted hereunder
exempt from Section 409A of the Code, and, to the extent not so exempt, in compliance with Section 409A of the Code. If the Board
determines that any Award granted hereunder is not exempt from and is therefore subject to Section 409A of the Code, the Award Agreement
evidencing such Award will incorporate the terms and conditions necessary to avoid the consequences specified in Section 409A(a)(1) of the
Code, and to the extent an Award Agreement is silent on terms necessary for compliance, such terms are hereby incorporated by reference
into the Award Agreement. Notwithstanding anything to the contrary in this Plan (and unless the Award Agreement specifically provides
otherwise), if the shares of Common Stock are publicly traded,
10.
and if a Participant holding an Award that constitutes “deferred compensation” under Section 409A of the Code is a “specified employee” for
purposes of Section 409A of the Code, no distribution or payment of any amount that is due because of a “separation from service” (as
defined in Section 409A of the Code without regard to alternative definitions thereunder) will be issued or paid before the date that is six
months following the date of such Participant’s “separation from service” (as defined in Section 409A of the Code without regard to
alternative definitions thereunder) or, if earlier, the date of the Participant’s death, unless such distribution or payment can be made in a
manner that complies with Section 409A of the Code, and any amounts so deferred will be paid in a lump sum on the day after such six
month period elapses, with the balance paid thereafter on the original schedule.
(k)Clawback/Recovery. All Awards granted under the Plan will be subject to recoupment in accordance with any clawback policy
that the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the
Company’s securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other
applicable law. In addition, the Board may impose such other clawback, recovery or recoupment provisions in an Award Agreement as the
Board determines necessary or appropriate, including but not limited to a reacquisition right in respect of previously acquired shares of
Common Stock or other cash or property upon the occurrence of an event constituting Cause. No recovery of compensation under such a
clawback policy will be an event giving rise to a right to resign for “good reason” or “constructive termination” (or similar term) under any
agreement with the Company.
9.
ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.
(a)Capitalization Adjustments. In the event of a Capitalization Adjustment, the Board will appropriately and proportionately
adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to Section 3(a); and (ii) the class(es) and number of
securities and price per share of stock subject to outstanding Awards. The Board will make such adjustments, and its determination will be
final, binding and conclusive.
(b)Dissolution. Except as otherwise provided in the Award Agreement, in the event of a Dissolution of the Company, all
outstanding Awards (other than Awards consisting of vested and outstanding shares of Common Stock not subject to a forfeiture condition or
the Company’s right of repurchase) will terminate immediately prior to the completion of such Dissolution, and the shares of Common Stock
subject to the Company’s repurchase rights or subject to a forfeiture condition may be repurchased or reacquired by the Company
notwithstanding the fact that the holder of such Award is providing Continuous Service; provided, however, that the Board may, in its sole
discretion, cause some or all Awards to become fully vested, exercisable and/or no longer subject to repurchase or forfeiture (to the extent
such Awards have not previously expired or terminated) before the Dissolution is completed but contingent on its completion.
(c) Transaction. The following provisions shall apply to Awards in the event of a Transaction unless otherwise provided in the
instrument evidencing the Award or any other written agreement between the Company or any Affiliate and the Participant or unless
otherwise expressly provided by the Board at the time of grant of an Award. In the event of a Transaction, then, notwithstanding any other
provision of the Plan, the Board shall take one or more of the following actions with respect to Awards, contingent upon the closing or
completion of the Transaction:
arrange for the surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent
company) to assume or continue the Award or to substitute a similar stock award for the Award (including, but not limited to, an award to
acquire the same consideration paid to the stockholders of the Company pursuant to the Transaction);
(i)
arrange for the assignment of any reacquisition or repurchase rights held by the Company in respect of Common
Stock issued pursuant to the Award to the surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent
company);
(ii)
exercised) to a date prior to the effective time of such Transaction as the Board shall determine
(iii)
accelerate the vesting, in whole or in part, of the Award (and, if applicable, the time at which the Award may be
11.
(or, if the Board shall not determine such a date, to the date that is five days prior to the effective date of the Transaction), with such Award
terminating if not exercised (if applicable) at or prior to the effective time of the Transaction;
respect to the Award;
(iv)
arrange for the lapse, in whole or in part, of any reacquisition or repurchase rights held by the Company with
time of the Transaction, in exchange for such cash consideration, if any, as the Board, in its sole discretion, may consider appropriate; and
(v)
cancel or arrange for the cancellation of the Award, to the extent not vested or not exercised prior to the effective
(vi) make a payment, in such form as may be determined by the Board equal to the excess, if any, of (A) the value of the
property the Participant would have received upon the exercise of the Award immediately prior to the effective time of the Transaction, over
(B) any exercise price payable by such holder in connection with such exercise. For clarity, this payment may be zero ($0) if the value of the
property is equal to or less than the exercise price. Payments under this provision may be delayed to the same extent that payment of
consideration to the holders of Common Stock in connection with the Transaction is delayed as a result of escrows, earn outs, holdbacks or
other contingencies.
The Board need not take the same action or actions with respect to all Awards or portions thereof or with respect to all Participants.
The Board may take different actions with respect to the vested and unvested portions of an Award.
(d)Change in Control. An Award may be subject to additional acceleration of vesting and exercisability upon or after a Change in
Control as may be provided in the Award Agreement for such Award or as may be provided in any other written agreement between the
Company or any Affiliate and the Participant.
10. TERMINATION OR SUSPENSION OF THE PLAN.
The Board may suspend or terminate the Plan at any time. No Awards may be granted under the Plan while the Plan is suspended or
after it is terminated.
11. EFFECTIVE DATE OF THE PLAN.
The Plan will come into existence on the Effective Date.
12. CHOICE OF LAW.
The law of the State of Delaware will govern all questions concerning the construction, validity and interpretation of this Plan,
without regard to that state’s conflict of laws rules.
13. DEFINITIONS. As used in the Plan, the following definitions will apply to the capitalized terms indicated below:
(a)“Affiliate” means, at the time of determination, any “parent” or “subsidiary” of the Company as such terms are defined in Rule
405 of the Securities Act. The Board will have the authority to determine the time or times at which “parent” or “subsidiary” status is
determined within the foregoing definition.
(b)“Award” means an Option, a Stock Appreciation Right, a Restricted Stock Award, a Restricted Stock Unit Award, a Performance
Stock Award or an Other Stock Award.
(c) “Award Agreement” means a written agreement between the Company and a Participant evidencing the terms and conditions of
an Award.
12.
(d)“Board” means the Board of Directors of the Company.
(e) “Capitalization Adjustment” means any change that is made in, or other events that occur with respect to, the Common Stock
subject to the Plan or subject to any Award after the Effective Date without the receipt of consideration by the Company through merger,
consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash
dividend, stock split, reverse stock split liquidating dividend, combination of shares, exchange of shares, change in corporate structure or any
similar equity restructuring transaction, as that term is used in Statement of Financial Accounting Standards Board Accounting Standards
Codification Topic 718 (or any successor thereto). Notwithstanding the foregoing, the conversion of any convertible securities of the
Company will not be treated as a Capitalization Adjustment.
(f) “Cause” shall have the meaning ascribed to such term in any written agreement between the Participant and the Company
defining such term and, in the absence of such agreement, such term means, with respect to a Participant, the occurrence of any of the
following events: (i) such Participant’s commission of any felony or any crime involving fraud, dishonesty or moral turpitude under the laws
of the United States or any state thereof; (ii) such Participant’s attempted commission of, or participation in, a fraud or act of dishonesty
against the Company; (iii) such Participant’s intentional, material violation of any contract or agreement between the Participant and the
Company or of any statutory duty owed to the Company; (iv) such Participant’s unauthorized use or disclosure of the Company’s confidential
information or trade secrets; or (v) such Participant’s gross misconduct. The determination that a termination of the Participant’s Continuous
Service is either for Cause or without Cause shall be made by the Company, in its sole discretion. Any determination by the Company that
the Continuous Service of a Participant was terminated with or without Cause for the purposes of outstanding Awards held by such
Participant shall have no effect upon any determination of the rights or obligations of the Company or such Participant for any other purpose.
(g)“Change in Control” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of
the following events:
(i)
any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing
more than 50% of the combined voting power of the Company’s then outstanding securities other than by virtue of a merger, consolidation or
similar transaction. Notwithstanding the foregoing, a Change in Control will not be deemed to occur (A) on account of the acquisition of
securities of the Company directly from the Company, (B) on account of the acquisition of securities of the Company by an investor, any
affiliate thereof or any other Exchange Act Person that acquires the Company’s securities in a transaction or series of related transactions the
primary purpose of which is to obtain financing for the Company through the issuance of equity securities, (C) on account of the acquisition
of securities of the Company by any individual who is, on the IPO Date, either an executive officer or a Director (either, an “IPO Investor”)
and/or any entity in which an IPO Investor has a direct or indirect interest (whether in the form of voting rights or participation in profits or
capital contributions) of more than 50% (collectively, the “IPO Entities”) or on account of the IPO Entities continuing to hold shares that
come to represent more than 50% of the combined voting power of the Company’s then outstanding securities as a result of the conversion of
any class of the Company’s securities into another class of the Company’s securities having a different number of votes per share pursuant to
the conversion provisions set forth in the Company’s Amended and Restated Certificate of Incorporation; or (D) solely because the level of
Ownership held by any Exchange Act Person (the “Subject Person”) exceeds the designated percentage threshold of the outstanding voting
securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding,
provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by
the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the
repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject
Person over the designated percentage threshold, then a Change in Control will be deemed to occur;
(ii)
there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company
and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately
prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than 50% of the combined
outstanding voting power of the surviving
13.
Entity in such merger, consolidation or similar transaction or (B) more than 50% of the combined outstanding voting power of the parent of
the surviving Entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their
Ownership of the outstanding voting securities of the Company immediately prior to such transaction; provided, however, that a merger,
consolidation or similar transaction will not constitute a Change in Control under this prong of the definition if the outstanding voting
securities representing more than 50% of the combined voting power of the surviving Entity or its parent are owned by the IPO Entities;
(iii)
there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the
consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the
consolidated assets of the Company and its Subsidiaries to an Entity, more than 50% of the combined voting power of the voting securities of
which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the outstanding voting
securities of the Company immediately prior to such sale, lease, license or other disposition; provided, however, that a sale, lease, exclusive
license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries will not constitute a
Change in Control under this prong of the definition if the outstanding voting securities representing more than 50% of the combined voting
power of the acquiring Entity or its parent are owned by the IPO Entities;
Company, or a complete dissolution or liquidation of the Company will otherwise occur, except for a liquidation into a parent corporation; or
(iv)
the stockholders of the Company approve or the Board approves a plan of complete dissolution or liquidation of the
(v)
individuals who, on the date the Plan is adopted by the Board, are members of the Board (the “Incumbent Board”)
cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the appointment or election (or
nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent
Board then still in office, such new member will, for purposes of this Plan, be considered as a member of the Incumbent Board.
Notwithstanding the foregoing definition or any other provision of the Plan, the term Change in Control will not include a sale of
assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company and the definition of
Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant will
supersede the foregoing definition with respect to Awards subject to such agreement; provided, however, that if no definition of Change in
Control or any analogous term is set forth in such an individual written agreement, the foregoing definition will apply.
(h)“Code” means the Internal Revenue Code of 1986, as amended, including any applicable regulations and guidance thereunder.
(i) “Committee” means a committee of one or more Independent Directors to whom authority has been delegated by the Board in
accordance with Section 2(c).
(j) “Common Stock” means the common stock of the Company having one vote per share.
(k)“Company” means Personalis, Inc., a Delaware corporation.
(l) “Consultant” means any person, including an advisor, who is (i) engaged by the Company or an Affiliate to render consulting or
advisory services and is compensated for such services, or (ii) serving as a member of the board of directors of an Affiliate and is
compensated for such services. However, service solely as a Director, or payment of a fee for such service, will not cause a Director to be
considered a “Consultant” for purposes of the Plan. Notwithstanding the foregoing, a person is treated as a Consultant under this Plan only if
a Form S-8 Registration Statement under the Securities Act is available to register either the offer or the sale of the Company’s securities to
such person.
14.
(m)“Continuous Service” means that the Participant’s service with the Company or an Affiliate, whether as an Employee, Director
or Consultant, is not interrupted or terminated. A change in the capacity in which the Participant renders service to the Company or an
Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there
is no interruption or termination of the Participant’s service with the Company or an Affiliate, will not terminate a Participant’s Continuous
Service; provided, however, that if the Entity for which a Participant is rendering services ceases to qualify as an Affiliate, as determined by
the Board, in its sole discretion, such Participant’s Continuous Service will be considered to have terminated on the date such Entity ceases to
qualify as an Affiliate. To the extent permitted by law, the Board or the chief executive officer of the Company, in that party’s sole
discretion, may determine whether Continuous Service will be considered interrupted in the case of (i) any leave of absence approved by the
Board or chief executive officer, including sick leave, military leave or any other personal leave, or (ii) transfers between the Company, an
Affiliate, or their successors. Notwithstanding the foregoing, a leave of absence will be treated as Continuous Service for purposes of vesting
in an Award only to such extent as may be provided in the Company’s leave of absence policy, in the written terms of any leave of absence
agreement or policy applicable to the Participant, or as otherwise required by law.
(n)“Corporate Transaction” means the consummation, in a single transaction or in a series of related transactions, of any one or
more of the following events:
consolidated assets of the Company and its Subsidiaries;
(i)
a sale or other disposition of all or substantially all, as determined by the Board, in its sole discretion, of the
(ii)
(iii)
a sale or other disposition of more than 50% of the outstanding securities of the Company;
a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or
a merger, consolidation or similar transaction following which the Company is the surviving corporation but the
shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by
virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.
(iv)
(o)“Director” means a member of the Board. Directors are not eligible to receive Awards under the Plan with respect to their
service in such capacity.
(p)“Disability” means, with respect to a Participant, the inability of such Participant to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be
expected to last for a continuous period of not less than 12 months, as provided in Sections 22(e)(3) and 409A(a)(2)(c)(i) of the Code, and
will be determined by the Board on the basis of such medical evidence as the Board deems warranted under the circumstances.
(q)“Dissolution” means when the Company, after having executed a certificate of dissolution with the State of Delaware (or other
applicable state), has completely wound up its affairs. Conversion of the Company into a Limited Liability Company (or any other pass-
through entity) will not be considered a “Dissolution” for purposes of the Plan.
(r) “Effective Date” means May 4, 2020.
(s) “Employee” means any person employed by the Company or an Affiliate. However, service solely as a Director, or payment of
a fee for such services, will not cause a Director to be considered an “Employee” for purposes of the Plan.
(t) “Entity” means a corporation, partnership, limited liability company or other entity.
15.
(u)“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
(v)“Exchange Act Person” means any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the
Exchange Act), except that “Exchange Act Person” will not include (i) the Company or any Subsidiary of the Company, (ii) any employee
benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to a registered public
offering of such securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same
proportions as their Ownership of stock of the Company; or (v) any natural person, Entity or “group” (within the meaning of Section 13(d) or
14(d) of the Exchange Act) that, as of the IPO Date, is the Owner, directly or indirectly, of securities of the Company representing more than
50% of the combined voting power of the Company’s then outstanding securities.
(w)“Fair Market Value” means, as of any date, the value of the Common Stock determined as follows:
(i)
If the Common Stock is listed on any established stock exchange or traded on any established market, the Fair
Market Value of a share of Common Stock will be, unless otherwise determined by the Board, the closing sales price for such stock as quoted
on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the date of
determination, as reported in a source the Board deems reliable.
determination, then the Fair Market Value will be the closing selling price on the last preceding date for which such quotation exists.
(ii) Unless otherwise provided by the Board, if there is no closing sales price for the Common Stock on the date of
good faith and in a manner that complies with Section 409A of the Code.
(iii)
In the absence of such markets for the Common Stock, the Fair Market Value will be determined by the Board in
(x)“IPO Date” means the date of the underwriting agreement between the Company and the underwriter(s) managing the initial
public offering of the Common Stock, pursuant to which the Common Stock is priced for the initial public offering.
(y)“Non-Employee Director” means a Director who either (i) is not a current employee or officer of the Company or an Affiliate,
does not receive compensation, either directly or indirectly, from the Company or an Affiliate for services rendered as a consultant or in any
capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K
promulgated pursuant to the Securities Act (“Regulation S-K”)), does not possess an interest in any other transaction for which disclosure
would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship for which disclosure would be required
pursuant to Item 404(b) of Regulation S-K; or (ii) is otherwise considered a “non-employee director” for purposes of Rule 16b-3.
(z) “Nonstatutory Stock Option” means any option granted pursuant to Section 5 of the Plan that does not qualify as an “incentive
stock option” within the meaning of Section 422 of the Code.
(aa)“Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act.
(bb)“Option” means a Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant to the Plan.
(cc)“Option Agreement” means a written agreement between the Company and an Optionholder evidencing the terms and
conditions of an Option grant. Each Option Agreement will be subject to the terms and conditions of the Plan.
16.
(dd)“Optionholder” means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who
holds an outstanding Option.
(ee)“Other Stock Award” means an award based in whole or in part by reference to the Common Stock which is granted pursuant
to the terms and conditions of Section 6(d).
(ff)“Other Stock Award Agreement” means a written agreement between the Company and a holder of an Other Stock Award
evidencing the terms and conditions of an Other Stock Award grant. Each Other Stock Award Agreement will be subject to the terms and
conditions of the Plan.
(gg)“Own,” “Owned,” “Owner,” “Ownership” means a person or Entity will be deemed to “Own,” to have “Owned,” to be the
“Owner” of, or to have acquired “Ownership” of securities if such person or Entity, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to
such securities.
(hh)“Participant” means a person to whom an Award is granted pursuant to the Plan or, if applicable, such other person who holds
an outstanding Award.
(ii)“Performance Criteria” means the one or more criteria that a majority of the Company’s Independent Directors or the
Independent Compensation Committee will select for purposes of establishing the Performance Goals for a Performance Period. The
Performance Criteria that will be used to establish such Performance Goals may be based on any one of, or combination of, the following as
determined by a majority of the Company’s Independent Directors or the Independent Compensation Committee: (i) earnings (including
earnings per share and net earnings); (ii) earnings before interest, taxes and depreciation; (iii) earnings before interest, taxes, depreciation and
amortization; (iv) total stockholder return; (v) return on equity or average stockholder’s equity; (vi) return on assets, investment, or capital
employed; (vii) stock price; (viii) margin (including gross margin); (ix) income (before or after taxes); (x) operating income; (xi) operating
income after taxes; (xii) pre-tax profit; (xiii) operating cash flow; (xiv) sales or revenue targets; (xv) increases in revenue or product revenue;
(xvi) expenses and cost reduction goals; (xvii) improvement in or attainment of working capital levels; (xviii) economic value added (or an
equivalent metric); (xix) market share; (xx) cash flow; (xxi) cash flow per share; (xxii) share price performance; (xxiii) debt reduction; (xxiv)
customer satisfaction; (xxv) stockholders’ equity; (xxvi) capital expenditures; (xxvii) debt levels; (xxviii) operating profit or net operating
profit; (xxix) workforce diversity; (xxx) growth of net income or operating income; (xxxi) billings; (xxxii) implementation or completion of
projects or processes; (xxxiii) financing; (xxxiv) regulatory milestones; (xxxv) stockholder liquidity; (xxvi) corporate governance and
compliance; (xxxvii) product commercialization; (xxxviii) intellectual property; (xxxix) personnel matters; (xl) progress of internal research
or clinical programs; (xli) progress of partnered programs; (xlii) partner satisfaction; (xliii) budget management; (xliv) clinical achievements;
(xlv) completing phases of a clinical study (including the treatment phase); (xlvi) announcing or presenting preliminary or final data from
clinical studies; in each case, whether on particular timelines or generally; (xlvii) timely completion of clinical trials; (xlviii) submission of
Device Master File(s) and other regulatory achievements; (xlix) partner or collaborator achievements; (l) internal controls, including those
related to the Sarbanes-Oxley Act of 2002; (li) research progress, including the development of programs; (lii) investor relations, analysts and
communication; (liii) manufacturing achievements (including obtaining particular yields from manufacturing runs and other measurable
objectives related to process development activities); (liv) strategic partnerships or transactions (including in-licensing and out-licensing of
intellectual property; (lv) establishing relationships with commercial entities with respect to the marketing, distribution and sale of the
Company’s products and services (including with group purchasing organizations, distributors and other vendors); (lvi) supply chain
achievements (including establishing relationships with manufacturers, suppliers and other services providers of the Company’s products and
services); (lvii) co-development, co-marketing, profit sharing, joint venture or other similar arrangements; (lviii) individual performance
goals; (lix) corporate development and planning goals; and (lx) other measures of performance selected by a majority of the Company’s
Independent Directors or the Independent Compensation Committee.
(jj)“Performance Goals” means, for a Performance Period, the one or more goals established by a majority of the Company’s
Independent Directors or the Independent Compensation Committee for the Performance
17.
Period based upon the Performance Criteria. Performance Goals may be based on a Company-wide basis, with respect to one or more
business units, divisions, Affiliates, or business segments, and in either absolute terms or relative to the performance of one or more
comparable companies or the performance of one or more relevant indices. Unless specified otherwise by a majority of the Company’s
Independent Directors or the Independent Compensation Committee (i) in the Award Agreement at the time the Award is granted or (ii) in
such other document setting forth the Performance Goals at the time the Performance Goals are established, a majority of the Company’s
Independent Directors or the Independent Compensation Committee will appropriately make adjustments in the method of calculating the
attainment of Performance Goals for a Performance Period as follows: (1) to exclude restructuring and/or other nonrecurring charges; (2) to
exclude exchange rate effects; (3) to exclude the effects of changes to generally accepted accounting principles; (4) to exclude the effects of
any statutory adjustments to corporate tax rates; (5) to exclude the effects of any items that are unusual in nature or occur infrequently as
determined under generally accepted accounting principles; (6) to exclude the dilutive effects of acquisitions or joint ventures; (7) to assume
that any business divested by the Company achieved performance objectives at targeted levels during the balance of a Performance Period
following such divestiture; (8) to exclude the effect of any change in the outstanding shares of common stock of the Company by reason of
any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of
shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends; (9) to exclude the
effects of stock based compensation and the award of bonuses under the Company’s bonus plans; (10) to exclude costs incurred in connection
with potential acquisitions or divestitures that are required to be expensed under generally accepted accounting principles; (11) to exclude the
goodwill and intangible asset impairment charges that are required to be recorded under generally accepted accounting principles; and (12) to
exclude the effect of any other unusual, non-recurring gain or loss or other extraordinary item. In addition, a majority of the Company’s
Independent Directors or the Independent Compensation Committee retains the discretion to adjust or eliminate the compensation or
economic benefit due upon attainment of Performance Goals and to define the manner of calculating the Performance Criteria it selects to use
for such Performance Period. Partial achievement of the specified criteria may result in the payment or vesting corresponding to the degree of
achievement as specified in the Award Agreement.
(kk)“Performance Period” means the period of time selected by a majority of the Company’s Independent Directors or the
Independent Compensation Committee over which the attainment of one or more Performance Goals will be measured for the purpose of
determining a Participant’s right to and the payment of an Award. Performance Periods may be of varying and overlapping duration, at the
sole discretion of a majority of the Company’s Independent Directors or the Independent Compensation Committee.
(ll)“Performance Stock Award” means an Award granted under the terms and conditions of Section 6(c)(i).
(mm) “Plan” means this Personalis, Inc. 2020 Inducement Plan, as it may be amended.
(nn)“Restricted Stock Award” means an award of shares of Common Stock which is granted pursuant to the terms and conditions
of Section 6(a).
(oo)“Restricted Stock Award Agreement” means a written agreement between the Company and a holder of a Restricted Stock
Award evidencing the terms and conditions of a Restricted Stock Award grant. Each Restricted Stock Award Agreement will be subject to
the terms and conditions of the Plan.
(pp) “Restricted Stock Unit Award” means a right to receive shares of Common Stock which is granted pursuant to the terms and
conditions of Section 6(b).
(qq)“Restricted Stock Unit Award Agreement” means a written agreement between the Company and a holder of a Restricted
Stock Unit Award evidencing the terms and conditions of a Restricted Stock Unit Award grant. Each Restricted Stock Unit Award
Agreement will be subject to the terms and conditions of the Plan.
(rr)“Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to
time.
18.
(ss)“Securities Act” means the Securities Act of 1933, as amended.
(tt)“Stock Appreciation Right” or “SAR” means a right to receive the appreciation on Common Stock that is granted pursuant to
the terms and conditions of Section 5.
(uu)“Stock Appreciation Right Agreement” means a written agreement between the Company and a holder of a Stock
Appreciation Right evidencing the terms and conditions of a Stock Appreciation Right grant. Each Stock Appreciation Right Agreement will
be subject to the terms and conditions of the Plan.
(vv) “Subsidiary” means, with respect to the Company, (i) any corporation of which more than 50% of the outstanding capital stock
having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of
any other class or classes of such corporation will have or might have voting power by reason of the happening of any contingency) is at the
time, directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity in which the Company
has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than 50%.
(ww)“Transaction” means a Corporate Transaction or a Change in Control.
19.
Exhibit 10.5
PERSONALIS, INC.
RESTRICTED STOCK UNIT GRANT NOTICE
(2020 INDUCEMENT PLAN)
Personalis, Inc. (the “Company”), pursuant to its 2020 Inducement Plan (the “Plan”), hereby awards to Participant a Restricted Stock Unit Award for the
number of shares of the Company’s Common Stock (“Restricted Stock Units”) set forth below (the “Award”). The Award is subject to all of the terms and
conditions as set forth in this notice of grant (this “Restricted Stock Unit Grant Notice”), and in the Plan and the Restricted Stock Unit Award Agreement
(the “Award Agreement”), both of which are attached hereto and incorporated herein in their entirety. Capitalized terms not explicitly defined herein shall
have the meanings set forth in the Plan or the Award Agreement. In the event of any conflict between the terms in this Restricted Stock Unit Grant Notice
or the Award Agreement and the Plan, the terms of the Plan shall control.
Participant:
Date of Grant:
Vesting Commencement Date:
Number of Restricted Stock Units:
Vesting Schedule: __________________, subject to Participant’s Continuous Service through each such vesting date.
Issuance Schedule:
Subject to any Capitalization Adjustment, one share of Common Stock (or its cash equivalent, at the discretion of the Company)
will be issued for each Restricted Stock Unit that vests at the time set forth in Section 6 of the Award Agreement.
Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Restricted Stock Unit Grant Notice, the
Award Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Restricted Stock Unit Grant Notice, the Award
Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the acquisition of the Common Stock pursuant
to the Award specified above and supersede all prior oral and written agreements on the terms of this Award, with the exception, if applicable, of (i)
restricted stock unit awards or options previously granted and delivered to Participant, (ii) the written employment agreement, offer letter or other written
agreement entered into between the Company and Participant specifying the terms that should govern this specific Award, and (iii) any compensation
recovery policy that is adopted by the Company or is otherwise required by applicable law.
By accepting this Award, Participant acknowledges having received and read the Restricted Stock Unit Grant Notice, the Award Agreement and the Plan
and agrees to all of the terms and conditions set forth in these documents. Participant consents to receive Plan documents by electronic delivery and to
participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the
Company.
PERSONALIS, INC. PARTICIPANT
By:
Signature Signature
Title:
Date:
Date:
ATTACHMENTS:
Award Agreement and 2020 Inducement Plan
ATTACHMENT I
PERSONALIS, INC.
2020 INDUCEMENT PLAN
RESTRICTED STOCK UNIT AWARD AGREEMENT
Pursuant to the Restricted Stock Unit Grant Notice (the “Grant Notice”) and this Restricted Stock Unit Award Agreement (the
“Agreement”), Personalis, Inc. (the “Company”) has awarded you (“Participant”) a Restricted Stock Unit Award (the “Award”) pursuant to
the Company’s 2020 Inducement Plan (the “Plan”) for the number of Restricted Stock Units/shares indicated in the Grant Notice. The Award
is granted in compliance with Nasdaq Listing Rule 5635(c)(4) as a material inducement to you entering into employment with the Company.
Capitalized terms not explicitly defined in this Agreement or the Grant Notice shall have the same meanings given to them in the Plan. The
terms of your Award, in addition to those set forth in the Grant Notice, are as follows.
1. GRANT OF THE AWARD. This Award represents the right to be issued on a future date one (1) share of Common Stock for each
Restricted Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment under Section 3 below) as indicated in the Grant
Notice. As of the Date of Grant, the Company will credit to a bookkeeping account maintained by the Company for your benefit (the
“Account”) the number of Restricted Stock Units/shares of Common Stock subject to the Award. Notwithstanding the foregoing, the
Company reserves the right to issue you the cash equivalent of Common Stock, in part or in full satisfaction of the delivery of Common
Stock in connection with the vesting of the Restricted Stock Units, and, to the extent applicable, references in this Agreement and the Grant
Notice to Common Stock issuable in connection with your Restricted Stock Units will include the potential issuance of its cash equivalent
pursuant to such right. This Award was granted in consideration of your services to the Company.
2. VESTING. Subject to the limitations contained herein, your Award will vest, if at all, in accordance with the vesting schedule
provided in the Grant Notice. Vesting will cease upon the termination of your Continuous Service and the Restricted Stock Units credited to
the Account that were not vested on the date of such termination will be forfeited at no cost to the Company and you will have no further
right, title or interest in or to such Award or the shares of Common Stock to be issued in respect of such portion of the Award.
3. NUMBER OF SHARES. The number of Restricted Stock Units subject to your Award may be adjusted from time to time for
Capitalization Adjustments, as provided in the Plan. Any additional Restricted Stock Units, shares, cash or other property that becomes
subject to the Award pursuant to this Section 3, if any, shall be subject, in a manner determined by the Board, to the same forfeiture
restrictions, restrictions on transferability, and time and manner of delivery as applicable to the other Restricted Stock Units and shares
covered by your Award. Notwithstanding the provisions of this Section 3, no fractional shares or rights for fractional shares of Common
Stock shall be created pursuant to this Section 3. Any fraction of a share will be rounded down to the nearest whole share.
4. SECURITIES LAW COMPLIANCE. You may not be issued any Common Stock under your Award unless the shares of Common Stock
underlying the Restricted Stock Units are either (i) then registered under the Securities Act, or (ii) the Company has determined that such
issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other applicable laws
and regulations governing the Award, and you shall not receive such Common Stock if the Company determines that such receipt would not
be in material compliance with such laws and regulations.
5. TRANSFER RESTRICTIONS. Prior to the time that shares of Common Stock have been delivered to you, you may not transfer,
pledge, sell or otherwise dispose of this Award or the shares issuable in respect of your Award, except as expressly provided in this Section 5.
For example, you may not use shares that may be issued in respect of your Restricted Stock Units as security for a loan. The restrictions on
transfer set forth herein will lapse upon delivery to you of shares in respect of your vested Restricted Stock Units.
1
Death. Your Award is transferable by will and by the laws of descent and distribution. At your death, vesting of
your Award will cease and your executor or administrator of your estate shall be entitled to receive, on behalf of your estate, any Common
Stock or other consideration that vested but was not issued before your death.
(a)
(b) Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee,
and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer your
right to receive the distribution of Common Stock or other consideration hereunder, pursuant to a domestic relations order, marital settlement
agreement or other divorce or separation instrument as permitted by applicable law that contains the information required by the Company to
effectuate the transfer. You are encouraged to discuss the proposed terms of any division of this Award with the Company General Counsel
prior to finalizing the domestic relations order or marital settlement agreement to verify that you may make such transfer, and if so, to help
ensure the required information is contained within the domestic relations order or marital settlement agreement.
6. DATE OF ISSUANCE.
(a)
The issuance of shares in respect of the Restricted Stock Units is intended to comply with Treasury Regulations
Section 1.409A-1(b)(4) and will be construed and administered in such a manner. Subject to the satisfaction of the Withholding Obligation
set forth in Section 11 of this Agreement, in the event one or more Restricted Stock Units vests, the Company shall issue to you one (1) share
of Common Stock for each Restricted Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment under Section 3
above, and subject to any different provisions in the Grant Notice). Each issuance date determined by this paragraph is referred to as an
“Original Issuance Date”.
(b)
following business day. In addition, if:
If the Original Issuance Date falls on a date that is not a business day, delivery shall instead occur on the next
(i) the Original Issuance Date does not occur (1) during an “open window period” applicable to you, as
determined by the Company in accordance with the Company’s then-effective policy on trading in Company securities, or (2) on a date when
you are otherwise permitted to sell shares of Common Stock on an established stock exchange or stock market (including but not limited to
under a previously established written trading plan that meets the requirements of Rule 10b5-1 under the Exchange Act and was entered into
in compliance with the Company's policies (a “10b5-1 Arrangement”)), and
(ii) either (1) a Withholding Obligation does not apply, or (2) the Company decides, prior to the Original
Issuance Date, (A) not to satisfy the Withholding Obligation by withholding shares of Common Stock from the shares otherwise due, on the
Original Issuance Date, to you under this Award, and (B) not to permit you to enter into a “same day sale” commitment with a broker-dealer
pursuant to Section 11 of this Agreement (including but not limited to a commitment under a 10b5-1 Arrangement) and (C) not to permit you
to pay your Withholding Obligation in cash,
then the shares that would otherwise be issued to you on the Original Issuance Date will not be delivered on such Original Issuance
Date and will instead be delivered on the first business day when you are not prohibited from selling shares of the Company’s Common
Stock in the open public market, but in no event later than December 31 of the calendar year in which the Original Issuance Date occurs (that
is, the last day of your taxable year in which the Original Issuance Date occurs), or, if and only if permitted in a manner that complies with
Treasury Regulations Section 1.409A-1(b)(4), no later than the date that is the 15th day of the third calendar month of the applicable year
following the year in which the shares of Common Stock under this Award are no longer subject to a “substantial risk of forfeiture” within
the meaning of Treasury Regulations Section 1.409A-1(d).
Company.
(c)
The form of delivery (e.g., a stock certificate or electronic entry evidencing such shares) shall be determined by the
2
7. DIVIDENDS. You shall receive no benefit or adjustment to your Award with respect to any cash dividend, stock dividend or other
distribution that does not result from a Capitalization Adjustment; provided, however, that this sentence will not apply with respect to any
shares of Common Stock that are delivered to you in connection with your Award after such shares have been delivered to you.
8. RESTRICTIVE LEGENDS. The shares of Common Stock issued in respect of your Award shall be endorsed with appropriate legends
as determined by the Company.
9. EXECUTION OF DOCUMENTS. You hereby acknowledge and agree that the manner selected by the Company by which you indicate
your consent to your Grant Notice is also deemed to be your execution of your Grant Notice and of this Agreement. You further agree that
such manner of indicating consent may be relied upon as your signature for establishing your execution of any documents to be executed in
the future in connection with your Award.
10.AWARD NOT A SERVICE CONTRACT.
(a)
Nothing in this Agreement (including, but not limited to, the vesting of your Award or the issuance of the shares in
respect of your Award), the Plan or any covenant of good faith and fair dealing that may be found implicit in this Agreement or the Plan
shall: (i) confer upon you any right to continue in the employ or service of, or affiliation with, the Company or an Affiliate; (ii) constitute any
promise or commitment by the Company or an Affiliate regarding the fact or nature of future positions, future work assignments, future
compensation or any other term or condition of employment or affiliation; (iii) confer any right or benefit under this Agreement or the Plan
unless such right or benefit has specifically accrued under the terms of this Agreement or Plan; or (iv) deprive the Company of the right to
terminate you at will and without regard to any future vesting opportunity that you may have.
(b)
By accepting this Award, you acknowledge and agree that the right to continue vesting in the Award pursuant to the
vesting schedule provided in the Grant Notice may not be earned unless (in addition to any other conditions described in the Grant Notice
and this Agreement) you continue as an employee, director or consultant at the will of the Company and affiliate, as applicable (not through
the act of being hired, being granted this Award or any other award or benefit) and that the Company has the right to reorganize, sell, spin-out
or otherwise restructure one or more of its businesses or Affiliates at any time or from time to time, as it deems appropriate (a
“reorganization”). You acknowledge and agree that such a reorganization could result in the termination of your Continuous Service, or the
termination of Affiliate status of your employer and the loss of benefits available to you under this Agreement, including but not limited to,
the termination of the right to continue vesting in the Award. You further acknowledge and agree that this Agreement, the Plan, the
transactions contemplated hereunder and the vesting schedule set forth herein or any covenant of good faith and fair dealing that may be
found implicit in any of them do not constitute an express or implied promise of continued engagement as an employee or consultant for the
term of this Agreement, for any period, or at all, and shall not interfere in any way with the Company’s right to terminate your Continuous
Service at any time, with or without your cause or notice, or to conduct a reorganization.
11.WITHHOLDING OBLIGATION.
(a) On each vesting date, and on or before the time you receive a distribution of the shares of Common Stock in respect
of your Restricted Stock Units, and at any other time as reasonably requested by the Company in accordance with applicable tax laws, you
hereby authorize any required withholding from the Common Stock issuable to you and/or otherwise agree to make adequate provision,
including in cash, for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any
Affiliate that arise in connection with your Award (the “Withholding Obligation”).
(b) By accepting this Award, you acknowledge and agree that the Company or any Affiliate may, in its sole discretion,
satisfy all or any portion of the Withholding Obligation relating to your Restricted Stock Units by any of the following means or by a
combination of such means: (i) causing you to pay any portion of the Withholding Obligation in cash; (ii) withholding from any
compensation otherwise payable to you by the Company;
3
(iii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to you in connection with the
Award with a Fair Market Value (measured as of the date shares of Common Stock are issued pursuant to Section 6) equal to the amount of
such Withholding Obligation; provided, however, that the number of such shares of Common Stock so withheld will not exceed the amount
necessary to satisfy the Withholding Obligation using the maximum statutory withholding rates for federal, state, local and foreign tax
purposes, including payroll taxes, that are applicable to supplemental taxable income; and provided, further, that to the extent necessary to
qualify for an exemption from application of Section 16(b) of the Exchange Act, if applicable, such share withholding procedure will be
subject to the express prior approval of the Board or the Company’s Compensation Committee; and/or (iv) permitting or requiring you to
enter into a “same day sale” commitment, if applicable, with a broker-dealer that is a member of the Financial Industry Regulatory Authority
(a “FINRA Dealer”), pursuant to this authorization and without further consent, whereby you irrevocably elect to sell a portion of the shares
to be delivered in connection with your Restricted Stock Units to satisfy the Withholding Obligation and whereby the FINRA Dealer
irrevocably commits to forward the proceeds necessary to satisfy the Withholding Obligation directly to the Company and/or its Affiliates.
Unless the Withholding Obligation is satisfied, the Company shall have no obligation to deliver to you any Common Stock or any other
consideration pursuant to this Award.
(c) In the event the Withholding Obligation arises prior to the delivery to you of Common Stock or it is determined after
the delivery of Common Stock to you that the amount of the Withholding Obligation was greater than the amount withheld by the Company,
you agree to indemnify and hold the Company harmless from any failure by the Company to withhold the proper amount.
12.TAX CONSEQUENCES. The Company has no duty or obligation to minimize the tax consequences to you of this Award and shall
not be liable to you for any adverse tax consequences to you arising in connection with this Award. You are hereby advised to consult with
your own personal tax, financial and/or legal advisors regarding the tax consequences of this Award and by signing the Grant Notice, you
have agreed that you have done so or knowingly and voluntarily declined to do so. You understand that you (and not the Company) shall be
responsible for your own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement.
13.UNSECURED OBLIGATION. Your Award is unfunded, and as a holder of a vested Award, you shall be considered an unsecured
creditor of the Company with respect to the Company’s obligation, if any, to issue shares or other property pursuant to this Agreement. You
shall not have voting or any other rights as a stockholder of the Company with respect to the shares to be issued pursuant to this Agreement
until such shares are issued to you pursuant to Section 6 of this Agreement. Upon such issuance, you will obtain full voting and other rights
as a stockholder of the Company. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be
construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other person.
14.NOTICES. Any notice or request required or permitted hereunder shall be given in writing (including electronically) and will be
deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the
United States mail, postage prepaid, addressed to you at the last address you provided to the Company. The Company may, in its sole
discretion, decide to deliver any documents related to participation in the Plan and this Award by electronic means or to request your consent
to participate in the Plan by electronic means. By accepting this Award, you consent to receive such documents by electronic delivery and to
participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated
by the Company.
15.HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement or to affect the meaning of this Agreement.
16.MISCELLANEOUS.
(a)
The rights and obligations of the Company under your Award shall be transferable by the
4
Company to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable
by, the Company’s successors and assigns.
determination of the Company to carry out the purposes or intent of your Award.
(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole
the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.
(c)
You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain
governmental agencies or national securities exchanges as may be required.
(d)
This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any
All obligations of the Company under the Plan and this Agreement shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.
(e)
17.GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a
part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be
promulgated and adopted pursuant to the Plan. Your Award (and any compensation paid or shares issued under your Award) is subject to
recoupment in accordance with The Dodd–Frank Wall Street Reform and Consumer Protection Act and any implementing regulations
thereunder, any clawback policy adopted by the Company and any compensation recovery policy otherwise required by applicable law. No
recovery of compensation under such a clawback policy will be an event giving rise to a right to voluntarily terminate employment upon a
resignation for “good reason,” or for a “constructive termination” or any similar term under any plan of or agreement with the Company.
18.EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Award subject to this Agreement shall not be included as
compensation, earnings, salaries, or other similar terms used when calculating benefits under any employee benefit plan (other than the Plan)
sponsored by the Company or any Affiliate except as such plan otherwise expressly provides. The Company expressly reserves its rights to
amend, modify, or terminate any or all of the employee benefit plans of the Company or any Affiliate.
19.SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful
or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or
invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a
manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.
20.OTHER DOCUMENTS. You hereby acknowledge receipt or the right to receive a document providing the information required by
Rule 428(b)(1) promulgated under the Securities Act. In addition, you acknowledge receipt of the Company’s policy permitting certain
individuals to sell shares only during certain "window" periods and the Company's insider trading policy, in effect from time to time.
21.AMENDMENT. This Agreement may not be modified, amended or terminated except by an instrument in writing, signed by you
and by a duly authorized representative of the Company. Notwithstanding the foregoing, this Agreement may be amended solely by the
Board by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to you, and
provided that, except as otherwise expressly provided in the Plan, no such amendment materially adversely affecting your rights hereunder
may be made without your written consent. Without limiting the foregoing, the Board reserves the right to change, by written notice to you,
the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the Award as a result of any
change in applicable laws or regulations or any future law, regulation,
5
ruling, or judicial decision, provided that any such change shall be applicable only to rights relating to that portion of the Award which is then
subject to restrictions as provided herein.
22.COMPLIANCE WITH SECTION 409A OF THE CODE. This Award is intended to be exempt from the application of Section 409A of the
Code, including but not limited to by reason of complying with the “short-term deferral” rule set forth in Treasury Regulation Section
1.409A-1(b)(4) and any ambiguities herein shall be interpreted accordingly. Notwithstanding the foregoing, if it is determined that the Award
fails to satisfy the requirements of the short-term deferral rule and is otherwise not exempt from, and determined to be deferred compensation
subject to Section 409A of the Code, this Award shall comply with Section 409A to the extent necessary to avoid adverse personal tax
consequences and any ambiguities herein shall be interpreted accordingly. If it is determined that the Award is deferred compensation subject
to Section 409A and you are a “Specified Employee” (within the meaning set forth in Section 409A(a)(2)(B)(i) of the Code) as of the date of
your “Separation from Service” (as defined in Section 409A), then the issuance of any shares that would otherwise be made upon the date of
your Separation from Service or within the first six (6) months thereafter will not be made on the originally scheduled date(s) and will instead
be issued in a lump sum on the date that is six (6) months and one day after the date of the Separation from Service, with the balance of the
shares issued thereafter in accordance with the original vesting and issuance schedule set forth above, but if and only if such delay in the
issuance of the shares is necessary to avoid the imposition of adverse taxation on you in respect of the shares under Section 409A of the
Code. Each installment of shares that vests is intended to constitute a “separate payment” for purposes of Treasury Regulation Section
1.409A-2(b)(2).
* * * * *
This Restricted Stock Unit Award Agreement shall be deemed to be signed by the Company and the Participant upon the signing by the
Participant of the Restricted Stock Unit Grant Notice to which it is attached.
6
ATTACHMENT II
2020 INDUCEMENT PLAN
1
PERSONALIS, INC.
STOCK OPTION GRANT NOTICE
(2020 INDUCEMENT PLAN)
Exhibit 10.6
Personalis, Inc. (the “Company”), pursuant to its 2020 Inducement Plan (the “Plan”), hereby grants to Optionholder an option to purchase the number of
shares of the Company’s Common Stock set forth below. This option is subject to all of the terms and conditions as set forth in this Stock Option Grant
Notice, in the Option Agreement, the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety. Capitalized
terms not explicitly defined herein but defined in the Plan or the Option Agreement will have the same definitions as in the Plan or the Option Agreement.
If there is any conflict between the terms in this Stock Option Grant Notice and the Plan, the terms of the Plan will control.
Optionholder:
Date of Grant:
Vesting Commencement Date:
Number of Shares Subject to Option:
Exercise Price (Per Share):
Total Exercise Price:
Expiration Date:
Type of Grant: Nonstatutory Stock Option
Exercise Schedule:
Same as Vesting Schedule
Vesting Schedule: ______________, subject to Optionholder’s Continuous Service as of each such date
Payment:
By one or a combination of the following items (described in the Option Agreement):
By cash, check, bank draft or money order payable to the Company
Pursuant to a Regulation T Program if the shares are publicly traded
By delivery of already-owned shares if the shares are publicly traded
Subject to the Company’s consent at the time of exercise, by a “net exercise” arrangement
1.
Additional Terms/Acknowledgements: Optionholder acknowledges receipt of, and understands and agrees to, this Stock Option Grant Notice, the Option
Agreement and the Plan. Optionholder acknowledges and agrees that this Stock Option Grant Notice and the Option Agreement may not be modified,
amended or revised except as provided in the Plan. Optionholder further acknowledges that as of the Date of Grant, this Stock Option Grant Notice, the
Option Agreement, and the Plan set forth the entire understanding between Optionholder and the Company regarding this option award and supersede all
prior oral and written agreements, promises and/or representations on that subject with the exception of, if applicable, (i) equity awards previously granted
and delivered to Optionholder, (ii) any compensation recovery policy that is adopted by the Company or is otherwise required by applicable law and (iii)
any written employment agreement, severance agreement, offer letter or other written agreement entered into between the Company and Participant
specifying the terms that should govern this specific option. By accepting this option, Optionholder consents to receive such documents by electronic
delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated
by the Company.
PERSONALIS, INC.
OPTIONHOLDER:
By:
Title:
Date:
Signature
Signature
Date:
ATTACHMENTS: Option Agreement, 2020 Inducement Plan and Notice of Exercise
ATTACHMENT I
PERSONALIS, INC.
OPTION AGREEMENT
(2020 INDUCEMENT PLAN)
(NONSTATUTORY STOCK OPTION)
Pursuant to your Stock Option Grant Notice (“Grant Notice”) and this Option Agreement, Personalis, Inc. (the “Company”) has
granted you an option under its 2020 Inducement Plan (the “Plan”) to purchase the number of shares of the Company’s Common Stock
indicated in your Grant Notice at the exercise price indicated in your Grant Notice. The option is granted to you effective as of the date of
grant set forth in the Grant Notice (the “Date of Grant”). The option is granted in compliance with Nasdaq Listing Rule 5635(c)(4) as a
material inducement to you entering into employment with the Company. If there is any conflict between the terms in this Option Agreement
and the Plan, the terms of the Plan will control. Capitalized terms not explicitly defined in this Option Agreement or in the Grant Notice but
defined in the Plan will have the same definitions as in the Plan.
The details of your option, in addition to those set forth in the Grant Notice and the Plan, are as follows:
1. VESTING. Subject to the provisions contained herein, your option will vest as provided in your Grant Notice. Vesting will cease
upon the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price
per share in your Grant Notice will be adjusted for Capitalization Adjustments.
3. EXERCISE RESTRICTION FOR NON-EXEMPT EMPLOYEES. If you are an Employee eligible for overtime compensation under the Fair
Labor Standards Act of 1938, as amended (that is, a “Non-Exempt Employee”), and except as otherwise provided in the Plan, you may not
exercise your option until you have completed at least six (6) months of Continuous Service measured from the Date of Grant, even if you
have already been an employee for more than six (6) months. Consistent with the provisions of the Worker Economic Opportunity Act, you
may exercise your option as to any vested portion prior to such six (6) month anniversary in the case of (i) your
2
death or disability, (ii) a Corporate Transaction in which your option is not assumed, continued or substituted, (iii) a Change in Control or (iv)
your termination of Continuous Service on your “retirement” (as defined in the Company’s benefit plans).
4. METHOD OF PAYMENT. You must pay the full amount of the exercise price for the shares you wish to exercise. You may pay the
exercise price in cash or by check, bank draft or money order payable to the Company or in any other manner permitted by your Grant
Notice, which may include one or more of the following:
(a)
Provided that at the time of exercise the Common Stock is publicly traded, pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash
(or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales
proceeds. This manner of payment is also known as a “broker-assisted exercise”, “same day sale”, or “sell to cover”.
(b)
Provided that at the time of exercise the Common Stock is publicly traded, by delivery to the Company (either by
actual delivery or attestation) of already-owned shares of Common Stock that are owned free and clear of any liens, claims, encumbrances or
security interests, and that are valued at Fair Market Value on the date of exercise. “Delivery” for these purposes, in the sole discretion of the
Company at the time you exercise your option, will include delivery to the Company of your attestation of ownership of such shares of
Common Stock in a form approved by the Company. You may not exercise your option by delivery to the Company of Common Stock if
doing so would violate the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock.
(c)
Subject to the consent of the Company at the time of exercise, by a “net exercise” arrangement pursuant to which
the Company will reduce the number of shares of Common Stock issued upon exercise of your option by the largest whole number of shares
with a Fair Market Value that does not exceed the aggregate exercise price. You must pay any remaining balance of the aggregate exercise
price not satisfied by the “net exercise” in cash or other permitted form of payment. Shares of Common Stock will no longer be outstanding
under your option and will not be exercisable thereafter if those shares (i) are used to pay the exercise price pursuant to the “net exercise,” (ii)
are delivered to you as a result of such exercise, and (iii) are withheld to satisfy your tax withholding obligations.
5. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock.
6. SECURITIES LAW COMPLIANCE. In no event may you exercise your option unless the shares of Common Stock issuable upon
exercise are then registered under the Securities Act or, if not registered, the Company has determined that your exercise and the issuance of
the shares would be exempt from the registration requirements of the Securities Act. The exercise of your option also must comply with all
other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such
exercise would not be in material compliance with such laws and regulations (including any restrictions on exercise required for compliance
with Treas. Reg. 1.401(k)-1(d)(3), if applicable).
7. TERM. You may not exercise your option before the Date of Grant or after the expiration of the option’s term. The term of your
option expires, subject to the provisions of Section 5(h) of the Plan, upon the earliest of the following:
(a)
immediately upon the termination of your Continuous Service for Cause;
(b)
three (3) months after the termination of your Continuous Service for any reason other than Cause, your Disability
or your death (except as otherwise provided in Section 7(d) below); provided, however, that if during any part of such three (3) month period
your option is not exercisable solely because of the condition set forth in the section above regarding “Securities Law Compliance,” your
option will not expire until the earlier of the Expiration Date or until it has been exercisable for an aggregate period of three (3) months after
the termination of your Continuous Service; provided further, if during any part of such three (3) month period, the sale of any Common
3
Stock received upon exercise of your option would violate the Company’s insider trading policy, then your option will not expire until the
earlier of the Expiration Date or until it has been exercisable for an aggregate period of three (3) months after the termination of your
Continuous Service during which the sale of the Common Stock received upon exercise of your option would not be in violation of the
Company’s insider trading policy. Notwithstanding the foregoing, if (i) you are a Non-Exempt Employee, (ii) your Continuous Service
terminates within six (6) months after the Date of Grant, and (iii) you have vested in a portion of your option at the time of your termination
of Continuous Service, your option will not expire until the earlier of (x) the later of (A) the date that is seven (7) months after the Date of
Grant, and (B) the date that is three (3) months after the termination of your Continuous Service, and (y) the Expiration Date;
provided in Section 7(d)) below;
(c)
twelve (12) months after the termination of your Continuous Service due to your Disability (except as otherwise
after your Continuous Service terminates for any reason other than Cause;
(d)
eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months
the Expiration Date indicated in your Grant Notice; or
the day before the tenth (10th) anniversary of the Date of Grant.
(e)
(f)
8. EXERCISE.
(a)
You may exercise the vested portion of your option (and the unvested portion of your option if your Grant Notice so
permits) during its term by (i) delivering a Notice of Exercise (in a form designated by the Company) or completing such other documents
and/or procedures designated by the Company for exercise and (ii) paying the exercise price and any applicable withholding taxes to the
Company’s Secretary, stock plan administrator, or such other person as the Company may designate, together with such additional documents
as the Company may then require.
(b)
By exercising your option you agree that, as a condition to any exercise of your option, the Company may require
you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising
by reason of (i) the exercise of your option, (ii) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are
subject at the time of exercise, or (iii) the disposition of shares of Common Stock acquired upon such exercise.
9. TRANSFERABILITY. Except as otherwise provided in this Section 9, your option is not transferable, except by will or by the laws
of descent and distribution, and is exercisable during your life only by you.
Certain Trusts. Upon receiving written permission from the Board or its duly authorized designee, you may
transfer your option to a trust if you are considered to be the sole beneficial owner (determined under Section 671 of the Code and applicable
state law) while the option is held in the trust. You and the trustee must enter into transfer and other agreements required by the Company.
(a)
(b) Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee,
and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer your
option pursuant to the terms of a domestic relations order, official marital settlement agreement or other divorce or separation instrument as
permitted by Treasury Regulation 1.421-1(b)(2) that contains the information required by the Company to effectuate the transfer. You are
encouraged to discuss the proposed terms of any division of this option with the Company prior to finalizing the domestic relations order or
marital settlement agreement to help ensure the required information is contained within the domestic relations order or marital settlement
agreement.
may, by delivering written notice to the Company, in a form approved by the Company and
(c)
Beneficiary Designation. Upon receiving written permission from the Board or its duly authorized designee, you
4
any broker designated by the Company to handle option exercises, designate a third party who, on your death, will thereafter be entitled to
exercise this option and receive the Common Stock or other consideration resulting from such exercise. In the absence of such a designation,
your executor or administrator of your estate will be entitled to exercise this option and receive, on behalf of your estate, the Common Stock
or other consideration resulting from such exercise.
10.OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option will be
deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the
Company or an Affiliate to continue your employment. In addition, nothing in your option will obligate the Company or an Affiliate, their
respective stockholders, boards of directors, officers or employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.
11.WITHHOLDING OBLIGATIONS.
(a)
At the time you exercise your option, in whole or in part, and at any time thereafter as requested by the Company,
you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for
(including by means of a “same day sale” pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board
to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the
Company or an Affiliate, if any, which arise in connection with the exercise of your option.
(b) Upon your request and subject to approval by the Company, and compliance with any applicable legal conditions or
restrictions, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your
option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in
excess of the maximum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid classification of
your option as a liability for financial accounting purposes). Notwithstanding the filing of such election, shares of Common Stock shall be
withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to
you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole
responsibility.
(c)
You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are
satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company will
have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow
provided for herein, if applicable, unless such obligations are satisfied.
12.TAX CONSEQUENCES. You hereby agree that the Company does not have a duty to design or administer the Plan or its other
compensation programs in a manner that minimizes your tax liabilities. You will not make any claim against the Company, or any of its
Officers, Directors, Employees or Affiliates related to tax liabilities arising from your option or your other compensation. In particular, you
acknowledge that this option is exempt from Section 409A of the Code only if the exercise price per share specified in the Grant Notice is at
least equal to the “fair market value” per share of the Common Stock on the Date of Grant and there is no other impermissible deferral of
compensation associated with the option.
13.NOTICES. Any notices provided for in your option or the Plan will be given in writing (including electronically) and will be
deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the
United States mail, postage prepaid, addressed to you at the last address you provided to the Company. The Company may, in its sole
discretion, decide to deliver any documents related to participation in the Plan and this option by electronic means or to request your consent
to participate in the Plan by electronic means. By accepting this option, you consent to receive such documents by electronic delivery and to
participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated
by the Company.
5
14.GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a
part of your option, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be
promulgated and adopted pursuant to the Plan. If there is any conflict between the provisions of your option and those of the Plan, the
provisions of the Plan will control. In addition, your option (and any compensation paid or shares issued under your option) is subject to
recoupment in accordance with The Dodd–Frank Wall Street Reform and Consumer Protection Act and any implementing regulations
thereunder, any clawback policy adopted by the Company and any compensation recovery policy otherwise required by applicable law.
15.OTHER DOCUMENTS. You hereby acknowledge receipt of and the right to receive a document providing the information required
by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt of the
Company’s policy permitting certain individuals to sell shares only during certain “window” periods and the Company’s insider trading
policy, in effect from time to time.
16.EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of this option will not be included as compensation, earnings, salaries,
or other similar terms used when calculating your benefits under any employee benefit plan sponsored by the Company or any Affiliate,
except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the
Company’s or any Affiliate’s employee benefit plans.
17.VOTING RIGHTS. You will not have voting or any other rights as a stockholder of the Company with respect to the shares to be
issued pursuant to this option until such shares are issued to you. Upon such issuance, you will obtain full voting and other rights as a
stockholder of the Company. Nothing contained in this option, and no action taken pursuant to its provisions, will create or be construed to
create a trust of any kind or a fiduciary relationship between you and the Company or any other person.
18.SEVERABILITY. If all or any part of this Option Agreement or the Plan is declared by any court or governmental authority to be
unlawful or invalid, such unlawfulness or invalidity will not invalidate any portion of this Option Agreement or the Plan not declared to be
unlawful or invalid. Any Section of this Option Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible,
be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining
lawful and valid.
19.MISCELLANEOUS.
The rights and obligations of the Company under your option will be transferable to any one or more persons or
entities, and all covenants and agreements hereunder will inure to the benefit of, and be enforceable by the Company’s successors and
assigns.
(a)
determination of the Company to carry out the purposes or intent of your option.
(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole
the advice of counsel prior to executing and accepting your option, and fully understand all provisions of your option.
(c)
You acknowledge and agree that you have reviewed your option in its entirety, have had an opportunity to obtain
governmental agencies or national securities exchanges as may be required.
(d)
This Option Agreement will be subject to all applicable laws, rules, and regulations, and to such approvals by any
All obligations of the Company under the Plan and this Option Agreement will be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.
(e)
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This Option Agreement will be deemed to be signed by you upon the signing by you of the Stock Option Grant Notice to which it is
attached.
*
*
*
ATTACHMENT II
2020 INDUCEMENT PLAN
ATTACHMENT III
NOTICE OF EXERCISE
PERSONALIS, INC.
Date of Exercise: _______________
This constitutes notice to Personalis, Inc. (the “Company”) under my stock option that I elect to purchase the below number of
shares of Common Stock of the Company (the “Shares”) for the price set forth below.
Type of option:
Nonstatutory
Stock option dated:
_______________
Number of Shares as
to which option is
exercised:
Certificates to be
issued in name of:
Total exercise price:
Cash payment delivered
herewith:
_______________
_______________
$______________
$______________
Value of ________ Shares delivered herewith:
$______________
Value of ________ Shares pursuant to net
exercise:
$______________
Regulation T Program (cashless exercise):
$______________
7
By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the Personalis, Inc.
2020 Inducement Plan, and (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if
any, relating to the exercise of this option.
Very truly yours,
8
Exhibit 10.12
PERSONALIS, INC.
SECOND AMENDED AND RESTATED EXECUTIVE SEVERANCE AGREEMENT
This Second Amended and Restated Executive Severance Agreement (the “Agreement”) effective as of September 25, 2023,
amends, supersedes and restates in its entirety that certain First Amended and Restated Executive Severance Agreement by and between
Christopher Hall (“Executive”) and Personalis, Inc. (the “Company”) dated March 7, 2023. This Agreement is intended to provide
Executive with certain benefits described herein upon the occurrence of specific events.
RECITALS
A.The Company’s Board of Directors (the “Board”) believes it is in the best interests of the Company and its shareholders to
retain Executive and provide incentives to Executive to continue in the service of the Company.
B.The Board further believes that it is imperative to provide Executive with certain benefits upon termination of Executive’s
employment, which benefits are intended to provide Executive with financial security and sufficient income and encouragement to
Executive to remain with the Company.
C.To accomplish the foregoing objectives, the Board has directed the Company, upon execution of this Agreement by Executive,
to agree to the terms provided in this Agreement.
Now therefore, in consideration of the mutual promises, covenants and agreements contained herein, the parties hereto agree as
follows:
1.At-Will Employment. Executive’s employment is at-will, which means that the Company may terminate Executive’s
employment at any time, with or without Cause or advance notice. Similarly, Executive may resign Executive’s employment at any time,
with or without advance notice, and with or without Good Reason. Executive shall not receive any compensation of any kind, including,
without limitation, equity award vesting acceleration and severance benefits, following Executive’s last day of employment with the
Company, except as expressly provided herein.
2.
Benefits Upon Termination of Employment.
(a) Termination in Connection with or Following a Change in Control. If Executive’s employment is terminated
without Cause (as defined below) (and other than as a result of Executive’s death or disability), or Executive resigns for Good Reason (as
defined below), in either case within twelve (12) months after the effective date of a Change in Control (as defined below), and provided
such termination constitutes a “separation from service” (within the meaning of Treasury Regulation Section 1.409A-1(h), such
termination a “Separation from Service”), and provided further that Executive signs and allows to become effective a general release of
all claims in favor of the Company in a form provided by the Company (the “Release”), within sixty (60) days after Executive’s
Separation from Service (the date that the Release becomes effective and may no longer be revoked by Executive is referred to as the
“Release Date”), then the Company shall provide Executive with the following severance benefits (the “Change in Control Separation
Benefits”):
(i)The Company shall pay Executive cash severance in an amount equal to twelve (12) months of Executive’s
then-current base salary, ignoring any decrease in base salary that forms the basis for Good Reason, less all applicable withholdings and
deductions, paid on the Company’s first
regular payroll date following the Release Date.
(ii)The Company shall pay Executive further cash severance in an amount equal to one hundred percent
(100%) of Executive’s target annual bonus for the year in which the Change in Control is consummated, less all applicable withholdings
and deductions, paid on the Company’s first regular payroll date following the Release Date.
(iii)Should Executive timely elect to continue Executive’s medical, dental and/or vision insurance benefits
pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) or any analogous provisions of applicable state
law, the Company shall pay Executive’s COBRA premiums for Executive and Executive’s eligible dependents (“COBRA Premiums”) for
a period of twelve (12) months following Executive’s Separation from Service (the “Change in Control Benefits Payment Period”) or, if
earlier, the date upon which Executive obtains coverage under a medical plan by a subsequent employer. The Company’s obligation to pay
any COBRA Premiums will be subject to the then-current requirements of COBRA and any other laws affecting the payment of COBRA
premiums by the Company. Notwithstanding the foregoing, if the Company determines, in its sole discretion, that the Company cannot
provide the COBRA Premiums without potentially incurring financial costs or penalties under applicable law, the Company shall in lieu
thereof pay Executive a taxable cash amount, which payment shall be made regardless of whether Executive elects health care
continuation coverage (the “Health Care Benefit Payment”). The Health Care Benefit Payment shall be paid in monthly installments on
the same schedule that the COBRA Premiums would otherwise have been paid to the insurer. The Health Care Benefit Payment shall be
equal to the amount that the Company would have otherwise paid for COBRA Premiums (which amount shall be calculated based on the
premium for the first month of COBRA coverage), and shall be paid until the earlier of: (i) the date the Change in Control Benefits
Payment Period expires or (ii) the date upon which Executive obtains coverage under a medical plan by a subsequent employer.
(iv)The Company shall accelerate the vesting of each of Executive’s then-outstanding unvested equity
compensation awards, effective immediately prior to such Separation from Service. In the event any such awards are based upon
performance of the Company and/or of Executive, such awards shall be vested at their respective target levels.
(b) Termination Not in Connection with or Following a Change in Control. If Executive’s employment is
terminated without Cause (and other than as a result of Executive’s death or disability), or Executive resigns for Good Reason, in either
case at any time that is not within twelve (12) months after a Change in Control, and provided such termination constitutes a Separation
from Service, and provided Executive signs and allows to become effective the Release within sixty (60) days after Executive’s Separation
from Service, then the Company shall provide Executive with the following severance benefits (collectively with the Change in Control
Separation Benefits, the “Separation Benefits”):
(i)The Company shall pay Executive cash severance in an amount equal to twelve (12) months of Executive’s
then current base salary, less all applicable withholdings and deductions, paid in a lump sum on the Company’s first regular payroll date
after the Release Date.
(ii)Should Executive timely elect to continue Executive’s medical, dental and/or vision insurance benefits
pursuant to COBRA, the Company shall pay the COBRA Premiums for a period of twelve (12) months following the effective date of
Executive’s Separation from Service (the “Benefits Payment Period”) or, if earlier, the date upon which Executive obtains coverage under
a medical plan by a subsequent employer. The Company’s obligation to pay any COBRA Premiums will be subject to the then-current
requirements of COBRA and any other laws affecting the payment of COBRA premiums
2
by the Company. Notwithstanding the foregoing, if the Company determines, in its sole discretion, that it cannot provide the COBRA
Premiums without potentially incurring financial costs or penalties under applicable law, the Company shall in lieu thereof pay Executive
the Health Care Benefit Payment in monthly installments on the same schedule that the COBRA Premiums would otherwise have been
paid to the insurer, which shall be paid until the earlier of: (i) the date the Benefits Payment Period expires or (ii) the date upon which
Executive obtains coverage under a medical plan by a subsequent employer.
3.
Limitations and Conditions on Separation Benefits
(a) Release Prior to Payment of Benefits. Prior to the payment or provision of any of the Separation Benefits,
Executive shall execute, and allow to become effective, the Release not later than sixty (60) days following Executive’s Separation from
Service. Such Release shall specifically relate to all of Executive’s rights and claims in existence at the time of such execution and shall
confirm Executive’s continuing obligations to the Company (including but not limited to obligations under any confidentiality and/or non-
solicitation agreement with the Company). No Separation Benefits will be paid prior to the Release Date.
(b)
Income and Employment Taxes. Executive agrees that Executive shall be responsible for any applicable taxes of
any nature (including any penalties or interest that may apply to such taxes) that the Company reasonably determines apply to any
payment made hereunder, that Executive’s receipt of any benefit hereunder is conditioned on Executive’s satisfaction of any applicable
withholding or similar obligations that apply to such benefit, and that any cash payment owed hereunder will be reduced to satisfy any
such withholding or similar obligations that may apply.
(c) Compliance with Section 409A. It is intended that each installment of the payments and benefits provided for in
this Agreement is a separate “payment” for purposes of Treasury Regulation Section 1.409A-2(b)(2)(i). For the avoidance of doubt, it is
intended that Separation Benefits set forth in this Agreement satisfy, to the greatest extent possible, the exemptions from, or comply with,
the application of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and Treasury Regulations 1.409A-1(b)
(4), 1.409A-1(b)(5) and 1.409A-1(b)(9) (together, with any state law of similar effect, “Section 409A”). However, if the Company (or, if
applicable, the successor entity thereto) determines that the Separation Benefits provided under this Agreement constitute “deferred
compensation” under Section 409A and Executive is, on the date of his or her Separation from Service, a “specified employee” of the
Company or any successor entity thereto, as such term is defined in Section 409A(a)(2)(B)(i) of the Code (a “Specified Employee”), then,
solely to the extent necessary to avoid the incurrence of the adverse personal tax consequences under Section 409A, the timing of the
Separation Benefits described herein, as applicable, shall be delayed as follows: on the earlier to occur of (i) the date that is six (6) months
and one (1) business day after Executive’s Separation from Service, (ii) the date of Executive’s death, or (iii) such earlier date as permitted
under Section 409A without the imposition of adverse taxation (such earlier date, the “Delayed Initial Payment Date”). Upon the Delayed
Initial Payment Date, the Company (or the successor entity thereto, as applicable) shall pay to Executive a lump sum amount equal to the
applicable benefit that Executive would otherwise have received through the Delayed Initial Payment Date if the commencement of the
payment of the benefit had not been so delayed pursuant to this Section 3(c), and any remaining payments due shall be paid as otherwise
provided herein. No interest shall be due on any amounts so deferred. If the Separation Benefits are not covered by one or more
exemptions from the application of Section 409A and the Release could become effective in the calendar year following the calendar year
in which Executive has a Separation from Service, the Release will not be deemed effective any earlier than the Release Date. To the
extent that any provision of this Agreement is ambiguous as to its exemption or compliance with Section 409A, the provision will be read
in such a manner so that all payments hereunder are exempt from Section 409A to the maximum permissible extent. To the extent any
payment under this Agreement may be classified as a “short-term deferral” within the meaning of
3
Section 409A, such payment shall be deemed a short-term deferral, even if it may also qualify for an exemption from Section 409A under
another provision of Section 409A. With respect to reimbursements or in-kind benefits provided to Executive hereunder (or otherwise)
that are not exempt from Section 409A, the following rules shall apply: (i) the amount of expenses eligible for reimbursement, or in-kind
benefits provided, during any one of Executive’s taxable years shall not affect the expenses eligible for reimbursement, or in-kind benefit
to be provided in any other taxable year, (ii) in the case of any reimbursements of eligible expenses, reimbursement shall be made on or
before the last day of Executive’s taxable year following the taxable year in which the expense was incurred, and (iii) the right to
reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit.
(d) Related Matters. Executive further acknowledges and agrees that as a condition to receipt of any Separation
Benefits (i) Executive must comply with Executive’s obligations under Executive’s Employee Confidential Information and Invention
Assignment Agreement; and (ii) resign from all Company and or affiliate positions, including membership on any Board (unless otherwise
requested by the Company).
(e) Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume the obligations
under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a succession. The terms of this Agreement and all of
Executive’s rights hereunder and thereunder shall inure to the benefit of, and be enforceable by, Executive’s personal or legal
representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
(f) Notice. Notices and all other communications contemplated by this Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested
and postage prepaid. Mailed notices to Executive shall be addressed to Executive at the home address which Executive most recently
communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and
all notices shall be directed to the attention of its Chief Executive Officer.
4.
Definitions.
(a) Cause. For purposes of this Agreement, “Cause”, as determined by the Board acting in good faith and based on
information then known to it, shall mean the occurrence of one or more of the following: (i) Executive’s gross negligence or knowing and
willful action which is or is likely to be materially injurious to the Company; (ii) any intentional act by Executive in connection with his
responsibilities as an employee constituting fraud or a felony crime; (iii) Executive’s consistent failure to report for work or perform his
duties as directed by the Company’s Board of Directors; (iv) persistent or repeated material breach of this Agreement or any agreement
between Executive and the Company; (v) Executive becoming disqualified from holding office through his own act or omission; (vi) an
unauthorized use or disclosure by the Executive of the Company’s confidential information or trade secrets, which use or disclosure causes
material harm to the Company; or (vii) a material failure by the Executive to comply with the Company’s written policies or rules which is
or is likely to be materially injurious to the Company.
transaction or series of transactions that results in any of the following:
(b) Change in Control. For purposes of this Agreement, “Change in Control” means the consummation of a
immediately following which the stockholders of the Company
(i)a merger, consolidation or similar corporate transaction involving (directly or indirectly) the Company and,
4
immediately prior thereto do not own, directly or indirectly, outstanding voting securities representing more than fifty percent (50%) of the
combined outstanding voting power of the surviving entity in such merger, consolidation or similar corporate transaction or more than
fifty percent (50%) of the combined outstanding voting power of the parent of the surviving entity in such merger, consolidation or similar
corporate transaction; or
over a period of not more than twelve (12) months.
(ii)a sale or other disposition of all or substantially all of the consolidated assets of the Company that occurs
However, a Change in Control will not include (1) any consolidation or merger effected exclusively to change the domicile of the
Company, or (2) any transaction or series of transactions principally for bona fide equity financing purposes in which cash is received by
the Company or any successor or indebtedness of the Company is cancelled or converted or a combination thereof. In addition, no
transaction will be a Change in Control unless it is also “change in ownership of a corporation” or “change in ownership of a substantial
portion of a corporation’s assets” as defined under in Treasury Regulations Sections 1.409A-3(i)(5)(v) and (vii) without regard to any
alternative definitions thereunder.
(c) Good Reason. For purposes of this Agreement, “Good Reason” for Executive’s resignation of his or her
employment will exist following the occurrence of any of the following without Executive’s written consent: (i) a material reduction in
Executive’s base salary, which the parties agree is a reduction of at least ten percent (10%) of Executive’s base salary (provided, however,
that such reduction will not be considered Good Reason if made in connection with an across-the-board salary reduction affecting all
members of management); (ii) a material reduction in Executive’s duties, responsibilities and/or authority, provided, however, that a
change in job position (including a change in title) after or in connection with a Change in Control shall not be deemed a “material
reduction” in and of itself unless Executive’s new duties are materially reduced from Executive’s prior duties; (iii) a relocation of
Executive’s principal place of employment to a place that increases Executive’s one-way commute by more than fifty (50) miles as
compared to Executive’s then-current principal place of employment immediately prior to such relocation; or (iv) a material breach by the
Company of this Agreement. In order to resign for Good Reason, Executive must provide written notice to the Board within thirty (30)
days after the first occurrence of the event giving rise to Good Reason setting forth the basis for Executive’s resignation, allow the
Company at least thirty (30) days from receipt of such written notice to cure such event, and if such event is not reasonably cured within
such period, Executive must resign from all positions Executive then holds with the Company not later than thirty (30) days after the
expiration of the cure period or the date of notification to Executive that the Company will not so cure. Executive understands and agrees
that the requirement for Executive’s performance of services within twenty (20) miles of Palo Alto, California does not give rise to Good
Reason.
5.
Parachute Payments.
(a)
If any payment or benefit (including payments and benefits pursuant to this Agreement) that Executive would
receive in connection with a Change in Control from the Company or otherwise (“Transaction Payment”) would (i) constitute a
“parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed
by Section 4999 of the Code (the “Excise Tax”), then the Company shall cause to be determined, before any amounts of the Transaction
Payment are paid to Executive, which of the following two alternative forms of payment would result in Executive’s receipt, on an after-
tax basis, of the greater amount of the Transaction Payment notwithstanding that all or some portion of the Transaction Payment may be
subject to the Excise Tax: (1) payment in full of the entire amount of the Transaction Payment (a “Full Payment”), or (2) payment of only
a part of the Transaction Payment so that Executive receives the largest payment possible without the imposition of the Excise Tax (a
“Reduced Payment”). For purposes of determining whether to make a Full
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Payment or a Reduced Payment, the Company shall cause to be taken into account all applicable federal, state and local income and
employment taxes and the Excise Tax (all computed at the highest applicable marginal rate, net of the maximum reduction in federal
income taxes which could be obtained from a deduction of such state and local taxes). If a Reduced Payment is made, (x) Executive shall
have no rights to any additional payments and/or benefits constituting the Transaction Payment, and (y) reduction in payments and/or
benefits shall occur in the manner that results in the greatest economic benefit to Executive as determined in this paragraph (the
“Reduction Method”). If more than one method of reduction will result in the same economic benefit, the portions of the Transaction
Payment shall be reduced pro rata (the “Pro Rata Reduction Method”).
(b) Notwithstanding any provision of subsection (a) above to the contrary, if the Reduction Method or the Pro Rata
Reduction Method would result in any portion of the Transaction Payment being subject to taxes pursuant to Section 409A that would not
otherwise be subject to taxes pursuant to Section 409A, then the Reduction Method and/or the Pro Rata Reduction Method, as the case
may be, shall be modified so as to avoid the imposition of taxes pursuant to Section 409A as follows: (i) as a first priority, the modification
shall preserve to the greatest extent possible, the greatest economic benefit for Executive as determined on an after-tax basis; (ii) as a
second priority, Transaction Payments that are contingent on future events (e.g., being terminated without Cause), shall be reduced (or
eliminated) before Transaction Payments that are not contingent on future events; and (iii) as a third priority, Transaction Payments that
are "deferred compensation" within the meaning of Section 409A shall be reduced (or eliminated) before Transaction Payments that are
not deferred compensation within the meaning of Section 409A.
(c) The professional firm engaged by the Company for general tax purposes or the Company’s corporate law firm as
of the day prior to the effective date of the Change in Control shall make all determinations required to be made under this Section 5. If the
professional firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in
Control, the Company shall appoint a nationally recognized independent registered public accounting firm to make the determinations
required hereunder. The Company shall bear all expenses with respect to the determinations by such professional firm required to be made
hereunder.
(d) The professional firm engaged to make the determinations hereunder shall provide its calculations, together with
detailed supporting documentation, to the Company and Executive within fifteen (15) calendar days after the date on which Executive’s
right to a Transaction Payment is triggered or such other time as reasonably requested by the Company or Executive. If the professional
firm determines that no Excise Tax is payable with respect to the Transaction Payment, either before or after the application of the
Reduced Amount, it shall furnish the Company and Executive with detailed supporting calculations of its determinations that no Excise
Tax will be imposed with respect to such Transaction Payment. Any good faith determinations of the professional firm made hereunder
shall be final, binding and conclusive upon the Company and Executive.
6.Other Employment Terms and Conditions. The employment relationship between the parties shall be governed by the
general employment policies and procedures of the Company, including those relating to the protection of confidential information and
assignment of inventions; provided, however, that when the terms of this Agreement differ from or are in conflict with the Company’s
general employment policies or procedures, this Agreement shall control.
7.
Dispute Resolution.
(a)Executive and the Company agree that any and all disputes, claims, or causes of action, in
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law or equity, including but not limited to statutory claims, arising from or relating to the enforcement, breach, performance, or
interpretation of this Agreement, Executive’s employment with the Company, or the termination of Executive’s employment, shall be
resolved pursuant to the Federal Arbitration Act, 9 U.S.C. § 1-16 (“FAA”), to the fullest extent permitted by law, by final, binding and
confidential arbitration conducted by JAMS or its successor, under JAMS’ then applicable rules and procedures for employment disputes
before a single arbitrator (available upon request and also currently available at http://www.jamsadr.com/rules- employment-arbitration/),
in San Jose, California. Executive acknowledges that by agreeing to this arbitration procedure, both Executive and the Company
waive the right to resolve any such dispute through a trial by jury or judge or administrative proceeding.
(b)All claims, disputes, or causes of action under this arbitration agreement, whether by Executive or the Company, must be
brought in an individual capacity, and shall not be brought as a plaintiff (or claimant) or class member in any purported class or
representative proceeding, nor joined or consolidated with the claims of any other person or entity. The arbitrator may not consolidate the
claims of more than one person or entity, and may not preside over any form of representative or class proceeding. To the extent that the
preceding sentences regarding class claims or proceedings are found to violate applicable law or are otherwise found unenforceable, any
claim(s) alleged or brought on behalf of a class shall proceed in a court of law rather than by arbitration.
(c)This arbitration agreement shall not apply to any action or claim that cannot be subject to mandatory arbitration as a matter of
law, to the extent such claims are not permitted by applicable law(s) to be submitted to mandatory arbitration and the applicable law(s) are
not preempted by the Federal Arbitration Act or otherwise invalid (collectively, the “Excluded Claims”). In the event Executive intends to
bring multiple claims, including one of the Excluded Claims listed above, the Excluded Claims may be filed with a court, while any other
claims will remain subject to mandatory arbitration. Executive will have the right to be represented by legal counsel at any arbitration
proceeding.
(d)Questions of whether a claim is subject to arbitration under this agreement shall be decided by the arbitrator. Likewise,
procedural questions which grow out of the dispute and bear on the final disposition are also matters for the arbitrator. The arbitrator shall:
(i) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief as would otherwise be
permitted by law; and (ii) issue a written statement signed by the arbitrator regarding the disposition of each claim and the relief, if any,
awarded as to each claim, the reasons for the award, and the arbitrator’s essential findings and conclusions on which the award is based.
The arbitrator shall be authorized to award all relief that Executive or the Company would be entitled to seek in a court of law. The
Company shall pay all JAMS arbitration fees in excess of the administrative fees that Executive would be required to pay if the dispute
were decided in a court of law. Nothing in this arbitration agreement is intended to prevent either Executive or the Company from
obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. Any awards or orders in
such arbitrations may be entered and enforced as judgments in the federal and state courts of any competent jurisdiction.
8.
Miscellaneous Provisions.
(a) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment contemplated by this
Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that
Executive may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver
or discharge is agreed to in writing and signed by Executive and by an authorized officer of the Company (other than Executive). No
waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be
considered a
7
waiver of any other condition or provision or of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether
express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the
subject matter hereof. This Agreement supersedes any agreement (or portion thereof) concerning similar subject matter dated prior to the
date of this Agreement, and by execution of this Agreement both parties agree that any such predecessor agreement (or portion thereof)
shall be deemed null and void. For the avoidance of doubt, the parties agree that this Agreement does not supersede the provisions of
Executive’s Offer Letter that do not address termination or severance benefits or Executive’s Employee Confidential Information and
Invention Assignment Agreement with the Company.
(d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by
the laws of the State of California without reference to conflict of laws provisions, and the parties hereto submit to the exclusive
jurisdiction of the state and federal courts of the State of California.
(e) Severability. If any term or provision of this Agreement or the application thereof to any circumstance shall, in
any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the
extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this
Agreement or the application of such terms and provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be substituted therefor to carry out, insofar as may be valid and
enforceable, the intent and purpose of the invalid or unenforceable term or provision.
connection with the execution of this Agreement.
(f) Legal Fees and Expenses. The parties shall each bear their own expenses, legal fees and other fees incurred in
(g) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be
made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation)
bankruptcy, garnishment, attachment or other creditor’s process, and any action in violation of this Section 8(g) shall be void.
all of which together will constitute one and the same instrument.
(h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but
[REMAINDER OF THIS PAGE LEFT BLANK – SIGNATURE PAGE TO FOLLOW]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written
above.
/s/ Chris Hall
Chris Hall
Address: 6600 Dumbarton Circle
Fremont, CA 94555
Date: 9/27/2023
PERSONALIS, INC.
/s/ Stephen Moore
By: Stephen Moore
Title: Vice President, General Counsel and Secretary
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Exhibit 10.13
THIRD AMENDED AND RESTATED EXECUTIVE SEVERANCE AGREEMENT
PERSONALIS, INC.
This Third Amended and Restated Executive Severance Agreement (the “Agreement”), effective as of September 25,
2023, amends, supersedes and restates in its entirety that certain Second Amended and Restated Executive Severance Agreement
by and between Aaron Tachibana (“Executive”) and Personalis, Inc. (the “Company”) dated March 7, 2023. This Agreement is
intended to provide Executive with certain benefits described herein upon the occurrence of specific events.
RECITALS
A. The Company’s Board of Directors (the “ Board”) believes it is in the best interests of the Company and its
shareholders to retain Executive and provide incentives to Executive to continue in the service of the Company.
B. The Board further believes that it is imperative to provide Executive with certain benefits upon termination of
Executive’s employment, which benefits are intended to provide Executive with financial security and sufficient income and
encouragement to Executive to remain with the Company.
C. To accomplish the foregoing objectives, the Board has directed the Company, upon execution of this Agreement by
Executive, to agree to the terms provided in this Agreement.
Now therefore, in consideration of the mutual promises, covenants and agreements contained herein, the parties hereto agree
as follows:
1. At-Will Employment. Executive’s employment is at-will, which means that the Company may terminate
Executive’s employment at any time, with or without Cause or advance notice. Similarly, Executive may resign Executive’s
employment at any time, with or without advance notice, and with or without Good Reason. Executive shall not receive any
compensation of any kind, including, without limitation, equity award vesting acceleration and severance benefits, following
Executive’s last day of employment with the Company, except as expressly provided herein.
2. Benefits Upon Termination of Employment.
(a) Termination in Connection with or Following a Change in Control. If Executive’s employment is
terminated without Cause (as defined below) (and other than as a result of Executive’s death or disability), or Executive resigns
for Good Reason (as defined below), in either case within twelve (12) months after the effective date of a Change in Control (as
defined below), and provided such termination constitutes a “separation from service” (within the meaning of Treasury
Regulation Section 1.409A-1(h), such termination a “Separation from Service”), and provided further that Executive signs and
allows to become effective a general release of all claims in favor of the Company in a form provided by the Company (the
“Release”), within sixty (60) days after Executive’s Separation from Service (the date that the Release becomes effective and
1
may no longer be revoked by Executive is referred to as the “Release Date”), then the Company shall provide Executive with the
following severance benefits (the “Change in Control Separation Benefits”):
(i) The Company shall pay Executive cash severance in an amount equal to twelve (12) months of
Executive’s then-current base salary, ignoring any decrease in base salary that forms the basis for Good Reason, less all
applicable withholdings and deductions, paid on the Company’s first regular payroll date following the Release Date.
(ii) The Company shall pay Executive further cash severance in an amount equal to one hundred
percent (100%) of Executive’s target annual bonus for the year in which the Change in Control is consummated, less all
applicable withholdings and deduction, paid on the Company’s first regular payroll date following the Release Date.
(iii)Should Executive timely elect to continue Executive’s medical, dental and/or vision insurance
benefits pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) or any analogous provisions of
applicable state law, the Company shall pay Executive’s COBRA premiums for Executive and Executive’s eligible dependents
(“COBRA Premiums”) for a period of twelve (12) months following Executive’s Separation from Service (the “Change in
Control Benefits Payment Period”) or, if earlier, the date upon which Executive obtains coverage under a medical plan by a
subsequent employer. The Company’s obligation to pay any COBRA Premiums will be subject to the then-current requirements
of COBRA and any other laws affecting the payment of COBRA premiums by the Company. Notwithstanding the foregoing, if
the Company determines, in its sole discretion, that the Company cannot provide the COBRA Premiums without potentially
incurring financial costs or penalties under applicable law, the Company shall in lieu thereof pay Executive a taxable cash
amount, which payment shall be made regardless of whether Executive elects health care continuation coverage (the “Health
Care Benefit Payment”). The Health Care Benefit Payment shall be paid in monthly installments on the same schedule that the
COBRA Premiums would otherwise have been paid to the insurer. The Health Care Benefit Payment shall be equal to the
amount that the Company would have otherwise paid for COBRA Premiums (which amount shall be calculated based on the
premium for the first month of COBRA coverage), and shall be paid until the earlier of: (i) the date the Change in Control
Benefits Payment Period expires or (ii) the date upon which Executive obtains coverage under a medical plan by a subsequent
employer.
(iv)The Company shall accelerate the vesting of each of Executive’s then-outstanding unvested equity
compensation awards, effective immediately prior to such Separation from Service. In the event any such awards are based upon
performance of the Company and/or of Executive, such awards shall be vested at their respective target levels.
(b) Termination Not in Connection with or Following a Change in Control. If Executive’s employment is
terminated without Cause (and other than as a result of Executive’s death or disability), or Executive resigns for Good Reason, in
either case at any time that is not within twelve (12) months after a Change in Control, and provided such termination constitutes
a Separation from Service, and provided Executive signs and allows to become effective the Release within sixty (60) days after
Executive’s Separation from Service, then the Company shall provide
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Executive with the following severance benefits (collectively with the Change in Control Separation Benefits, the “Separation
Benefits”):
(i) The Company shall pay Executive cash severance in an amount equal to nine (9) months of
Executive’s then current base salary, less all applicable withholdings and deductions, paid in a lump sum on the Company’s first
regular payroll date after the Release Date.
(ii) Should Executive timely elect to continue Executive’s medical, dental and/or vision insurance
benefits pursuant to COBRA, the Company shall pay the COBRA Premiums for a period of nine (9) months following the
effective date of Executive’s Separation from Service (the “Benefits Payment Period”) or, if earlier, the date upon which
Executive obtains coverage under a medical plan by a subsequent employer. The Company’s obligation to pay any COBRA
Premiums will be subject to the then-current requirements of COBRA and any other laws affecting the payment of COBRA
premiums by the Company. Notwithstanding the foregoing, if the Company determines, in its sole discretion, that it cannot
provide the COBRA Premiums without potentially incurring financial costs or penalties under applicable law, the Company shall
in lieu thereof pay Executive the Health Care Benefit Payment in monthly installments on the same schedule that the COBRA
Premiums would otherwise have been paid to the insurer, which shall be paid until the earlier of: (i) the date the Benefits
Payment Period expires or (ii) the date upon which Executive obtains coverage under a medical plan by a subsequent employer.
3. Limitations and Conditions on Separation Benefits
(a) Release Prior to Payment of Benefits. Prior to the payment or provision of any of the Separation
Benefits, Executive shall execute, and allow to become effective, the Release not later than sixty (60) days following Executive’s
Separation from Service. Such Release shall specifically relate to all of Executive’s rights and claims in existence at the time of
such execution and shall confirm Executive’s continuing obligations to the Company (including but not limited to obligations
under any confidentiality and/or non-solicitation agreement with the Company). No Separation Benefits will be paid prior to the
Release Date.
(b)
Income and Employment Taxes. Executive agrees that Executive shall be responsible for any
applicable taxes of any nature (including any penalties or interest that may apply to such taxes) that the Company reasonably
determines apply to any payment made hereunder, that Executive’s receipt of any benefit hereunder is conditioned on Executive’s
satisfaction of any applicable withholding or similar obligations that apply to such benefit, and that any cash payment owed
hereunder will be reduced to satisfy any such withholding or similar obligations that may apply.
(c) Compliance with Section 409A. It is intended that each installment of the payments and benefits
provided for in this Agreement is a separate “payment” for purposes of Treasury Regulation Section 1.409A-2(b)(2)(i). For the
avoidance of doubt, it is intended that Separation Benefits set forth in this Agreement satisfy, to the greatest extent possible, the
exemptions from, or comply with, the application of Section 409A of the Internal Revenue Code of 1986, as amended (the
“Code”) and Treasury Regulations 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9) (together, with any state law of similar
effect, “Section 409A”). However, if the
3
Company (or, if applicable, the successor entity thereto) determines that the Separation Benefits provided under this Agreement
constitute “deferred compensation” under Section 409A and Executive is, on the date of his or her Separation from Service, a
“specified employee” of the Company or any successor entity thereto, as such term is defined in Section 409A(a)(2)(B)(i) of the
Code (a “Specified Employee”), then, solely to the extent necessary to avoid the incurrence of the adverse personal tax
consequences under Section 409A, the timing of the Separation Benefits described herein, as applicable, shall be delayed as
follows: on the earlier to occur of (i) the date that is six (6) months and one (1) business day after Executive’s Separation from
Service, (ii) the date of Executive’s death, or (iii) such earlier date as permitted under Section 409A without the imposition of
adverse taxation (such earlier date, the “Delayed Initial Payment Date”). Upon the Delayed Initial Payment Date, the Company
(or the successor entity thereto, as applicable) shall pay to Executive a lump sum amount equal to the applicable benefit that
Executive would otherwise have received through the Delayed Initial Payment Date if the commencement of the payment of the
benefit had not been so delayed pursuant to this Section 3(c), and any remaining payments due shall be paid as otherwise
provided herein. No interest shall be due on any amounts so deferred. If the Separation Benefits are not covered by one or more
exemptions from the application of Section 409A and the Release could become effective in the calendar year following the
calendar year in which Executive has a Separation from Service, the Release will not be deemed effective any earlier than the
Release Date. To the extent that any provision of this Agreement is ambiguous as to its exemption or compliance with Section
409A, the provision will be read in such a manner so that all payments hereunder are exempt from Section 409A to the maximum
permissible extent. To the extent any payment under this Agreement may be classified as a “short-term deferral” within the
meaning of Section 409A, such payment shall be deemed a short-term deferral, even if it may also qualify for an exemption from
Section 409A under another provision of Section 409A. With respect to reimbursements or in-kind benefits provided to
Executive hereunder (or otherwise) that are not exempt from Section 409A, the following rules shall apply: (i) the amount of
expenses eligible for reimbursement, or in-kind benefits provided, during any one of Executive’s taxable years shall not affect the
expenses eligible for reimbursement, or in-kind benefit to be provided in any other taxable year, (ii) in the case of any
reimbursements of eligible expenses, reimbursement shall be made on or before the last day of Executive’s taxable year
following the taxable year in which the expense was incurred, and (iii) the right to reimbursement or in-kind benefits shall not be
subject to liquidation or exchange for another benefit.
(d) Related Matters. Executive further acknowledges and agrees that as a condition to receipt of any
Separation Benefits (i) Executive must comply with Executive’s obligations under Executive’s Employee Confidential
Information and Invention Assignment Agreement; and (ii) resign from all Company and or affiliate positions, including
membership on any Board (unless otherwise requested by the Company).
(e)
Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease,
merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume
the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner
and to the same extent as the Company would be required to perform such obligations in the absence of a succession. The terms
of this Agreement and all of Executive’s rights hereunder and thereunder
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shall inure to the benefit of, and be enforceable by, Executive’s personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
(f)
Notice. Notices and all other communications contemplated by this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed notices to Executive shall be addressed to Executive at the home address which
Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be
addressed to its corporate headquarters, and all notices shall be directed to the attention of its Chief Executive Officer.
4. Definitions.
(a) Cause. For purposes of this Agreement, “Cause”, as determined by the Board acting in good faith and
based on information then known to it, shall mean the occurrence of one or more of the following: (i) Executive’s gross
negligence or knowing and willful action which is or is likely to be materially injurious to the Company; (ii) any intentional act
by Executive in connection with his responsibilities as an employee constituting fraud or a felony crime; (iii) Executive’s
consistent failure to report for work or perform his duties as directed by the Company’s Board of Directors; (iv) persistent or
repeated material breach of this Agreement or any agreement between Executive and the Company; (v) Executive becoming
disqualified from holding office through his own act or omission; (vi) an unauthorized use or disclosure by the Executive of the
Company’s confidential information or trade secrets, which use or disclosure causes material harm to the Company; or (vii) a
material failure by the Executive to comply with the Company’s written policies or rules which is or is likely to be materially
injurious to the Company.
a transaction or series of transactions that results in any of the following:
(b) Change in Control. For purposes of this Agreement, “Change in Control” means the consummation of
(i) a merger, consolidation or similar corporate transaction involving (directly or indirectly) the
Company and, immediately following which the stockholders of the Company immediately prior thereto do not own, directly or
indirectly, outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of
the surviving entity in such merger, consolidation or similar corporate transaction or more than fifty percent (50%) of the
combined outstanding voting power of the parent of the surviving entity in such merger, consolidation or similar corporate
transaction; or
occurs over a period of not more than twelve (12) months.
(ii) a sale or other disposition of all or substantially all of the consolidated assets of the Company that
However, a Change in Control will not include (1) any consolidation or merger effected exclusively to change the domicile of the
Company, or (2) any transaction or series of transactions principally for bona fide equity financing purposes in which cash is
received by the Company or any successor or indebtedness of the Company is cancelled or converted or a combination thereof.
In addition, no transaction will be a Change in Control unless it is also “change in ownership of a
5
corporation” or “change in ownership of a substantial portion of a corporation’s assets” as defined under in Treasury Regulations
Sections 1.409A-3(i)(5)(v) and (vii) without regard to any alternative definitions thereunder.
(c) Good Reason. For purposes of this Agreement, “Good Reason” for Executive’s resignation of his or her
employment will exist following the occurrence of any of the following without Executive’s written consent: (i) a material
reduction in Executive’s base salary, which the parties agree is a reduction of at least ten percent (10%) of Executive’s base salary
(provided, however, that such reduction will not be considered Good Reason if made in connection with an across-the-board
salary reduction affecting all members of management); (ii) a material reduction in Executive’s duties, responsibilities and/or
authority, provided, however, that a change in job position (including a change in title) after or in connection with a Change in
Control shall not be deemed a “material reduction” in and of itself unless Executive’s new duties are materially reduced from
Executive’s prior duties; (iii) a relocation of Executive’s principal place of employment to a place that increases Executive’s one-
way commute by more than fifty (50) miles as compared to Executive’s then-current principal place of employment immediately
prior to such relocation; or (iv) a material breach by the Company of this Agreement. In order to resign for Good Reason,
Executive must provide written notice to the Board within thirty (30) days after the first occurrence of the event giving rise to
Good Reason setting forth the basis for Executive’s resignation, allow the Company at least thirty (30) days from receipt of such
written notice to cure such event, and if such event is not reasonably cured within such period, Executive must resign from all
positions Executive then holds with the Company not later than thirty (30) days after the expiration of the cure period or the date
of notification to Executive that the Company will not so cure. Executive understands and agrees that the requirement for
Executive’s performance of services within twenty (20) miles of Palo Alto, California does not give rise to Good Reason.
5. Parachute Payments.
(a)
If any payment or benefit (including payments and benefits pursuant to this Agreement) that Executive
would receive in connection with a Change in Control from the Company or otherwise (“Transaction Payment”) would (i)
constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the
excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Company shall cause to be determined, before any
amounts of the Transaction Payment are paid to Executive, which of the following two alternative forms of payment would result
in Executive’s receipt, on an after-tax basis, of the greater amount of the Transaction Payment notwithstanding that all or some
portion of the Transaction Payment may be subject to the Excise Tax: (1) payment in full of the entire amount of the Transaction
Payment (a “Full Payment”), or (2) payment of only a part of the Transaction Payment so that Executive receives the largest
payment possible without the imposition of the Excise Tax (a “Reduced Payment”). For purposes of determining whether to
make a Full Payment or a Reduced Payment, the Company shall cause to be taken into account all applicable federal, state and
local income and employment taxes and the Excise Tax (all computed at the highest applicable marginal rate, net of the
maximum reduction in federal income taxes which could be obtained from a deduction of such state and local taxes). If a
Reduced Payment is made, (x) Executive shall have no rights to any additional payments and/or benefits constituting the
Transaction Payment, and (y) reduction in payments and/or benefits shall occur in the manner that results in the greatest
economic benefit to Executive as determined in this paragraph (the
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“Reduction Method”). If more than one method of reduction will result in the same economic benefit, the portions of the
Transaction Payment shall be reduced pro rata (the “Pro Rata Reduction Method”).
(b) Notwithstanding any provision of subsection (a) above to the contrary, if the Reduction Method or the Pro
Rata Reduction Method would result in any portion of the Transaction Payment being subject to taxes pursuant to Section 409A
that would not otherwise be subject to taxes pursuant to Section 409A, then the Reduction Method and/or the Pro Rata Reduction
Method, as the case may be, shall be modified so as to avoid the imposition of taxes pursuant to Section 409A as follows: (i) as a
first priority, the modification shall preserve to the greatest extent possible, the greatest economic benefit for Executive as
determined on an after-tax basis; (ii) as a second priority, Transaction Payments that are contingent on future events (e.g., being
terminated without Cause), shall be reduced (or eliminated) before Transaction Payments that are not contingent on future events;
and (iii) as a third priority, Transaction Payments that are "deferred compensation" within the meaning of Section 409A shall be
reduced (or eliminated) before Transaction Payments that are not deferred compensation within the meaning of Section 409A.
(c)
The professional firm engaged by the Company for general tax purposes or the Company’s corporate law
firm as of the day prior to the effective date of the Change in Control shall make all determinations required to be made under
this Section 5. If the professional firm so engaged by the Company is serving as accountant or auditor for the individual, entity
or group effecting the Change in Control, the Company shall appoint a nationally recognized independent registered public
accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the
determinations by such professional firm required to be made hereunder.
(d)
The professional firm engaged to make the determinations hereunder shall provide its calculations,
together with detailed supporting documentation, to the Company and Executive within fifteen (15) calendar days after the date
on which Executive’s right to a Transaction Payment is triggered or such other time as reasonably requested by the Company or
Executive. If the professional firm determines that no Excise Tax is payable with respect to the Transaction Payment, either
before or after the application of the Reduced Amount, it shall furnish the Company and Executive with detailed supporting
calculations of its determinations that no Excise Tax will be imposed with respect to such Transaction Payment. Any good faith
determinations of the professional firm made hereunder shall be final, binding and conclusive upon the Company and Executive.
6. Other Employment Terms and Conditions. The employment relationship between the parties shall be governed by
the general employment policies and procedures of the Company, including those relating to the protection of confidential
information and assignment of inventions; provided, however, that when the terms of this Agreement differ from or are in
conflict with the Company’s general employment policies or procedures, this Agreement shall control.
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7. Dispute Resolution.
(a) Executive and the Company agree that any and all disputes, claims, or causes of action, in law or equity, including but
not limited to statutory claims, arising from or relating to the enforcement, breach, performance, or interpretation of this
Agreement, Executive’s employment with the Company, or the termination of Executive’s employment, shall be resolved
pursuant to the Federal Arbitration Act, 9 U.S.C. § 1-16 (“FAA”), to the fullest extent permitted by law, by final, binding and
confidential arbitration conducted by JAMS or its successor, under JAMS’ then applicable rules and procedures for employment
disputes before a single arbitrator (available upon request and also currently available at http://www.jamsadr.com/rules-
employment-arbitration/), in San Jose, California. Executive acknowledges that by agreeing to this arbitration procedure,
both Executive and the Company waive the right to resolve any such dispute through a trial by jury or judge or
administrative proceeding.
(b) All claims, disputes, or causes of action under this arbitration agreement, whether by Executive or the Company, must
be brought in an individual capacity, and shall not be brought as a plaintiff (or claimant) or class member in any purported class
or representative proceeding, nor joined or consolidated with the claims of any other person or entity. The arbitrator may not
consolidate the claims of more than one person or entity, and may not preside over any form of representative or class
proceeding. To the extent that the preceding sentences regarding class claims or proceedings are found to violate applicable law
or are otherwise found unenforceable, any claim(s) alleged or brought on behalf of a class shall proceed in a court of law rather
than by arbitration.
(c) This arbitration agreement shall not apply to any action or claim that cannot be subject to mandatory arbitration as a
matter of law, to the extent such claims are not permitted by applicable law(s) to be submitted to mandatory arbitration and the
applicable law(s) are not preempted by the Federal Arbitration Act or otherwise invalid (collectively, the “Excluded Claims”). In
the event Executive intends to bring multiple claims, including one of the Excluded Claims listed above, the Excluded Claims
may be filed with a court, while any other claims will remain subject to mandatory arbitration. Executive will have the right to
be represented by legal counsel at any arbitration proceeding.
(d) Questions of whether a claim is subject to arbitration under this agreement shall be decided by the arbitrator.
Likewise, procedural questions which grow out of the dispute and bear on the final disposition are also matters for the arbitrator.
The arbitrator shall: (i) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief
as would otherwise be permitted by law; and (ii) issue a written statement signed by the arbitrator regarding the disposition of
each claim and the relief, if any, awarded as to each claim, the reasons for the award, and the arbitrator’s essential findings and
conclusions on which the award is based. The arbitrator shall be authorized to award all relief that Executive or the Company
would be entitled to seek in a court of law. The Company shall pay all JAMS arbitration fees in excess of the administrative fees
that Executive would be required to pay if the dispute were decided in a court of law. Nothing in this arbitration agreement is
intended to prevent either Executive or the Company from obtaining injunctive relief in court to prevent irreparable harm pending
the conclusion of any such arbitration. Any awards or orders in such arbitrations may be entered and enforced as judgments in
the federal and state courts of any competent jurisdiction.
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8. Miscellaneous Provisions.
(a) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment
contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that Executive may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the
modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of the Company
(other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this
Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or
provision at another time.
(c) Whole Agreement. No agreements, representations or understandings (whether oral or written and
whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party
with respect to the subject matter hereof. This Agreement supersedes any agreement (or portion thereof) concerning similar
subject matter dated prior to the date of this Agreement, and by execution of this Agreement both parties agree that any such
predecessor agreement (or portion thereof) shall be deemed null and void. For the avoidance of doubt, the parties agree that this
Agreement does not supersede the provisions of Executive’s Offer Letter that do not address termination or severance benefits or
Executive’s Employee Confidential Information and Invention Assignment Agreement with the Company.
(d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be
governed by the laws of the State of California without reference to conflict of laws provisions, and the parties hereto submit to
the exclusive jurisdiction of the state and federal courts of the State of California.
(e)
Severability. If any term or provision of this Agreement or the application thereof to any circumstance
shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such
jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to
which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefor to carry out,
insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision.
incurred in connection with the execution of this Agreement.
(f)
Legal Fees and Expenses. The parties shall each bear their own expenses, legal fees and other fees
(g) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall
not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor’s process, and any action in violation of this Section
8(g) shall be void.
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original, but all of which together will constitute one and the same instrument.
(h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written above.
/s/ Aaron Tachibana
Aaron Tachibana
Address: 763 Sunshine Drive
Los Altos, CA 94024
Date: 1/5/2024
PERSONALIS, INC.
/s/ Stephen Moore
By: Stephen Moore
Title: Vice President, General Counsel and Secretary
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THIRD AMENDED AND RESTATED EXECUTIVE SEVERANCE AGREEMENT
PERSONALIS, INC.
Exhibit 10.14
This Third Amended and Restated Executive Severance Agreement (the “Agreement”), effective as of September 25,
2023, amends, supersedes and restates in its entirety that certain Second Amended and Restated Executive Severance Agreement
by and between Dr. Richard Chen (“Executive”) and Personalis, Inc. (the “Company”) dated March 7, 2023. This Agreement is
intended to provide Executive with certain benefits described herein upon the occurrence of specific events.
RECITALS
A. The Company’s Board of Directors (the “ Board”) believes it is in the best interests of the Company and its
shareholders to retain Executive and provide incentives to Executive to continue in the service of the Company.
B. The Board further believes that it is imperative to provide Executive with certain benefits upon termination of
Executive’s employment, which benefits are intended to provide Executive with financial security and sufficient income and
encouragement to Executive to remain with the Company.
C. To accomplish the foregoing objectives, the Board has directed the Company, upon execution of this Agreement by
Executive, to agree to the terms provided in this Agreement.
Now therefore, in consideration of the mutual promises, covenants and agreements contained herein, the parties hereto agree
as follows:
1. At-Will Employment. Executive’s employment is at-will, which means that the Company may terminate
Executive’s employment at any time, with or without Cause or advance notice. Similarly, Executive may resign Executive’s
employment at any time, with or without advance notice, and with or without Good Reason. Executive shall not receive any
compensation of any kind, including, without limitation, equity award vesting acceleration and severance benefits, following
Executive’s last day of employment with the Company, except as expressly provided herein.
2. Benefits Upon Termination of Employment.
(a) Termination in Connection with or Following a Change in Control. If Executive’s employment is
terminated without Cause (as defined below) (and other than as a result of Executive’s death or disability), or Executive resigns
for Good Reason (as defined below), in either case within twelve (12) months after the effective date of a Change in Control (as
defined below), and provided such termination constitutes a “separation from service” (within the meaning of Treasury
Regulation Section 1.409A-1(h), such termination a “Separation from Service”), and provided further that Executive signs and
allows to become effective a general release of all claims in favor of the Company in a form provided by the Company (the
“Release”), within sixty (60) days after Executive’s Separation from Service (the date that the Release becomes effective and
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may no longer be revoked by Executive is referred to as the “Release Date”), then the Company shall provide Executive with the
following severance benefits (the “Change in Control Separation Benefits”):
(i) The Company shall pay Executive cash severance in an amount equal to twelve (12) months of
Executive’s then-current base salary, ignoring any decrease in base salary that forms the basis for Good Reason, less all
applicable withholdings and deductions, paid on the Company’s first regular payroll date following the Release Date.
(ii) The Company shall pay Executive further cash severance in an amount equal to one hundred
percent (100%) of Executive’s target annual bonus for the year in which the Change in Control is consummated, less all
applicable withholdings and deductions, paid on the Company’s first regular payroll date following the Release Date.
(iii)Should Executive timely elect to continue Executive’s medical, dental and/or vision insurance
benefits pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) or any analogous provisions of
applicable state law, the Company shall pay Executive’s COBRA premiums for Executive and Executive’s eligible dependents
(“COBRA Premiums”) for a period of twelve (12) months following Executive’s Separation from Service (the “Change in
Control Benefits Payment Period”) or, if earlier, the date upon which Executive obtains coverage under a medical plan by a
subsequent employer. The Company’s obligation to pay any COBRA Premiums will be subject to the then-current requirements
of COBRA and any other laws affecting the payment of COBRA premiums by the Company. Notwithstanding the foregoing, if
the Company determines, in its sole discretion, that the Company cannot provide the COBRA Premiums without potentially
incurring financial costs or penalties under applicable law, the Company shall in lieu thereof pay Executive a taxable cash
amount, which payment shall be made regardless of whether Executive elects health care continuation coverage (the “Health
Care Benefit Payment”). The Health Care Benefit Payment shall be paid in monthly installments on the same schedule that the
COBRA Premiums would otherwise have been paid to the insurer. The Health Care Benefit Payment shall be equal to the
amount that the Company would have otherwise paid for COBRA Premiums (which amount shall be calculated based on the
premium for the first month of COBRA coverage), and shall be paid until the earlier of: (i) the date the Change in Control
Benefits Payment Period expires or (ii) the date upon which Executive obtains coverage under a medical plan by a subsequent
employer.
(iv)The Company shall accelerate the vesting of each of Executive’s then-outstanding unvested equity
compensation awards, effective immediately prior to such Separation from Service. In the event any such awards are based upon
performance of the Company and/or of Executive, such awards shall be vested at their respective target levels.
(b) Termination Not in Connection with or Following a Change in Control. If Executive’s employment is
terminated without Cause (and other than as a result of Executive’s death or disability), or Executive resigns for Good Reason, in
either case at any time that is not within twelve (12) months after a Change in Control, and provided such termination constitutes
a Separation from Service, and provided Executive signs and allows to become effective the Release within sixty (60) days after
Executive’s Separation from Service, then the Company shall provide
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Executive with the following severance benefits (collectively with the Change in Control Separation Benefits, the “Separation
Benefits”):
(i) The Company shall pay Executive cash severance in an amount equal to nine (9) months of
Executive’s then current base salary, less all applicable withholdings and deductions, paid in a lump sum on the Company’s first
regular payroll date after the Release Date.
(ii) Should Executive timely elect to continue Executive’s medical, dental and/or vision insurance
benefits pursuant to COBRA, the Company shall pay the COBRA Premiums for a period of nine (9) months following the
effective date of Executive’s Separation from Service (the “Benefits Payment Period”) or, if earlier, the date upon which
Executive obtains coverage under a medical plan by a subsequent employer. The Company’s obligation to pay any COBRA
Premiums will be subject to the then-current requirements of COBRA and any other laws affecting the payment of COBRA
premiums by the Company. Notwithstanding the foregoing, if the Company determines, in its sole discretion, that it cannot
provide the COBRA Premiums without potentially incurring financial costs or penalties under applicable law, the Company shall
in lieu thereof pay Executive the Health Care Benefit Payment in monthly installments on the same schedule that the COBRA
Premiums would otherwise have been paid to the insurer, which shall be paid until the earlier of: (i) the date the Benefits
Payment Period expires or (ii) the date upon which Executive obtains coverage under a medical plan by a subsequent employer.
3. Limitations and Conditions on Separation Benefits
(a) Release Prior to Payment of Benefits. Prior to the payment or provision of any of the Separation
Benefits, Executive shall execute, and allow to become effective, the Release not later than sixty (60) days following Executive’s
Separation from Service. Such Release shall specifically relate to all of Executive’s rights and claims in existence at the time of
such execution and shall confirm Executive’s continuing obligations to the Company (including but not limited to obligations
under any confidentiality and/or non-solicitation agreement with the Company). No Separation Benefits will be paid prior to the
Release Date.
(b)
Income and Employment Taxes. Executive agrees that Executive shall be responsible for any
applicable taxes of any nature (including any penalties or interest that may apply to such taxes) that the Company reasonably
determines apply to any payment made hereunder, that Executive’s receipt of any benefit hereunder is conditioned on Executive’s
satisfaction of any applicable withholding or similar obligations that apply to such benefit, and that any cash payment owed
hereunder will be reduced to satisfy any such withholding or similar obligations that may apply.
(c) Compliance with Section 409A. It is intended that each installment of the payments and benefits
provided for in this Agreement is a separate “payment” for purposes of Treasury Regulation Section 1.409A-2(b)(2)(i). For the
avoidance of doubt, it is intended that Separation Benefits set forth in this Agreement satisfy, to the greatest extent possible, the
exemptions from, or comply with, the application of Section 409A of the Internal Revenue Code of 1986, as amended (the
“Code”) and Treasury Regulations 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9) (together, with any state law of similar
effect, “Section 409A”). However, if the
3
Company (or, if applicable, the successor entity thereto) determines that the Separation Benefits provided under this Agreement
constitute “deferred compensation” under Section 409A and Executive is, on the date of his or her Separation from Service, a
“specified employee” of the Company or any successor entity thereto, as such term is defined in Section 409A(a)(2)(B)(i) of the
Code (a “Specified Employee”), then, solely to the extent necessary to avoid the incurrence of the adverse personal tax
consequences under Section 409A, the timing of the Separation Benefits described herein, as applicable, shall be delayed as
follows: on the earlier to occur of (i) the date that is six (6) months and one (1) business day after Executive’s Separation from
Service, (ii) the date of Executive’s death, or (iii) such earlier date as permitted under Section 409A without the imposition of
adverse taxation (such earlier date, the “Delayed Initial Payment Date”). Upon the Delayed Initial Payment Date, the Company
(or the successor entity thereto, as applicable) shall pay to Executive a lump sum amount equal to the applicable benefit that
Executive would otherwise have received through the Delayed Initial Payment Date if the commencement of the payment of the
benefit had not been so delayed pursuant to this Section 3(c), and any remaining payments due shall be paid as otherwise
provided herein. No interest shall be due on any amounts so deferred. If the Separation Benefits are not covered by one or more
exemptions from the application of Section 409A and the Release could become effective in the calendar year following the
calendar year in which Executive has a Separation from Service, the Release will not be deemed effective any earlier than the
Release Date. To the extent that any provision of this Agreement is ambiguous as to its exemption or compliance with Section
409A, the provision will be read in such a manner so that all payments hereunder are exempt from Section 409A to the maximum
permissible extent. To the extent any payment under this Agreement may be classified as a “short-term deferral” within the
meaning of Section 409A, such payment shall be deemed a short-term deferral, even if it may also qualify for an exemption from
Section 409A under another provision of Section 409A. With respect to reimbursements or in-kind benefits provided to
Executive hereunder (or otherwise) that are not exempt from Section 409A, the following rules shall apply: (i) the amount of
expenses eligible for reimbursement, or in-kind benefits provided, during any one of Executive’s taxable years shall not affect the
expenses eligible for reimbursement, or in-kind benefit to be provided in any other taxable year, (ii) in the case of any
reimbursements of eligible expenses, reimbursement shall be made on or before the last day of Executive’s taxable year
following the taxable year in which the expense was incurred, and (iii) the right to reimbursement or in-kind benefits shall not be
subject to liquidation or exchange for another benefit.
(d) Related Matters. Executive further acknowledges and agrees that as a condition to receipt of any
Separation Benefits (i) Executive must comply with Executive’s obligations under Executive’s Employee Confidential
Information and Invention Assignment Agreement; and (ii) resign from all Company and or affiliate positions, including
membership on any Board (unless otherwise requested by the Company).
(e)
Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease,
merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume
the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner
and to the same extent as the Company would be required to perform such obligations in the absence of a succession. The terms
of this Agreement and all of Executive’s rights hereunder and thereunder
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shall inure to the benefit of, and be enforceable by, Executive’s personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
(f)
Notice. Notices and all other communications contemplated by this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed notices to Executive shall be addressed to Executive at the home address which
Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be
addressed to its corporate headquarters, and all notices shall be directed to the attention of its Chief Executive Officer.
4. Definitions.
(a) Cause. For purposes of this Agreement, “Cause”, as determined by the Board acting in good faith and
based on information then known to it, shall mean the occurrence of one or more of the following: (i) Executive’s gross
negligence or knowing and willful action which is or is likely to be materially injurious to the Company; (ii) any intentional act
by Executive in connection with his responsibilities as an employee constituting fraud or a felony crime; (iii) Executive’s
consistent failure to report for work or perform his duties as directed by the Company’s Board of Directors; (iv) persistent or
repeated material breach of this Agreement or any agreement between Executive and the Company; (v) Executive becoming
disqualified from holding office through his own act or omission; (vi) an unauthorized use or disclosure by the Executive of the
Company’s confidential information or trade secrets, which use or disclosure causes material harm to the Company; or (vii) a
material failure by the Executive to comply with the Company’s written policies or rules which is or is likely to be materially
injurious to the Company.
a transaction or series of transactions that results in any of the following:
(b) Change in Control. For purposes of this Agreement, “Change in Control” means the consummation of
(i) a merger, consolidation or similar corporate transaction involving (directly or indirectly) the
Company and, immediately following which the stockholders of the Company immediately prior thereto do not own, directly or
indirectly, outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of
the surviving entity in such merger, consolidation or similar corporate transaction or more than fifty percent (50%) of the
combined outstanding voting power of the parent of the surviving entity in such merger, consolidation or similar corporate
transaction; or
occurs over a period of not more than twelve (12) months.
(ii) a sale or other disposition of all or substantially all of the consolidated assets of the Company that
However, a Change in Control will not include (1) any consolidation or merger effected exclusively to change the domicile of the
Company, or (2) any transaction or series of transactions principally for bona fide equity financing purposes in which cash is
received by the Company or any successor or indebtedness of the Company is cancelled or converted or a combination thereof.
In addition, no transaction will be a Change in Control unless it is also “change in ownership of a
5
corporation” or “change in ownership of a substantial portion of a corporation’s assets” as defined under in Treasury Regulations
Sections 1.409A-3(i)(5)(v) and (vii) without regard to any alternative definitions thereunder.
(c) Good Reason. For purposes of this Agreement, “Good Reason” for Executive’s resignation of his or her
employment will exist following the occurrence of any of the following without Executive’s written consent: (i) a material
reduction in Executive’s base salary, which the parties agree is a reduction of at least ten percent (10%) of Executive’s base salary
(provided, however, that such reduction will not be considered Good Reason if made in connection with an across-the-board
salary reduction affecting all members of management); (ii) a material reduction in Executive’s duties, responsibilities and/or
authority, provided, however, that a change in job position (including a change in title) after or in connection with a Change in
Control shall not be deemed a “material reduction” in and of itself unless Executive’s new duties are materially reduced from
Executive’s prior duties; (iii) a relocation of Executive’s principal place of employment to a place that increases Executive’s one-
way commute by more than fifty (50) miles as compared to Executive’s then-current principal place of employment immediately
prior to such relocation; or (iv) a material breach by the Company of this Agreement. In order to resign for Good Reason,
Executive must provide written notice to the Board within thirty (30) days after the first occurrence of the event giving rise to
Good Reason setting forth the basis for Executive’s resignation, allow the Company at least thirty (30) days from receipt of such
written notice to cure such event, and if such event is not reasonably cured within such period, Executive must resign from all
positions Executive then holds with the Company not later than thirty (30) days after the expiration of the cure period or the date
of notification to Executive that the Company will not so cure. Executive understands and agrees that the requirement for
Executive’s performance of services within twenty (20) miles of Palo Alto, California does not give rise to Good Reason.
5. Parachute Payments.
(a)
If any payment or benefit (including payments and benefits pursuant to this Agreement) that Executive
would receive in connection with a Change in Control from the Company or otherwise (“Transaction Payment”) would (i)
constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the
excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Company shall cause to be determined, before any
amounts of the Transaction Payment are paid to Executive, which of the following two alternative forms of payment would result
in Executive’s receipt, on an after-tax basis, of the greater amount of the Transaction Payment notwithstanding that all or some
portion of the Transaction Payment may be subject to the Excise Tax: (1) payment in full of the entire amount of the Transaction
Payment (a “Full Payment”), or (2) payment of only a part of the Transaction Payment so that Executive receives the largest
payment possible without the imposition of the Excise Tax (a “Reduced Payment”). For purposes of determining whether to
make a Full Payment or a Reduced Payment, the Company shall cause to be taken into account all applicable federal, state and
local income and employment taxes and the Excise Tax (all computed at the highest applicable marginal rate, net of the
maximum reduction in federal income taxes which could be obtained from a deduction of such state and local taxes). If a
Reduced Payment is made, (x) Executive shall have no rights to any additional payments and/or benefits constituting the
Transaction Payment, and (y) reduction in payments and/or benefits shall occur in the manner that results in the greatest
economic benefit to Executive as determined in this paragraph (the
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“Reduction Method”). If more than one method of reduction will result in the same economic benefit, the portions of the
Transaction Payment shall be reduced pro rata (the “Pro Rata Reduction Method”).
(b) Notwithstanding any provision of subsection (a) above to the contrary, if the Reduction Method or the Pro
Rata Reduction Method would result in any portion of the Transaction Payment being subject to taxes pursuant to Section 409A
that would not otherwise be subject to taxes pursuant to Section 409A, then the Reduction Method and/or the Pro Rata Reduction
Method, as the case may be, shall be modified so as to avoid the imposition of taxes pursuant to Section 409A as follows: (i) as a
first priority, the modification shall preserve to the greatest extent possible, the greatest economic benefit for Executive as
determined on an after-tax basis; (ii) as a second priority, Transaction Payments that are contingent on future events (e.g., being
terminated without Cause), shall be reduced (or eliminated) before Transaction Payments that are not contingent on future events;
and (iii) as a third priority, Transaction Payments that are "deferred compensation" within the meaning of Section 409A shall be
reduced (or eliminated) before Transaction Payments that are not deferred compensation within the meaning of Section 409A.
(c)
The professional firm engaged by the Company for general tax purposes or the Company’s corporate law
firm as of the day prior to the effective date of the Change in Control shall make all determinations required to be made under
this Section 5. If the professional firm so engaged by the Company is serving as accountant or auditor for the individual, entity
or group effecting the Change in Control, the Company shall appoint a nationally recognized independent registered public
accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the
determinations by such professional firm required to be made hereunder.
(d)
The professional firm engaged to make the determinations hereunder shall provide its calculations,
together with detailed supporting documentation, to the Company and Executive within fifteen (15) calendar days after the date
on which Executive’s right to a Transaction Payment is triggered or such other time as reasonably requested by the Company or
Executive. If the professional firm determines that no Excise Tax is payable with respect to the Transaction Payment, either
before or after the application of the Reduced Amount, it shall furnish the Company and Executive with detailed supporting
calculations of its determinations that no Excise Tax will be imposed with respect to such Transaction Payment. Any good faith
determinations of the professional firm made hereunder shall be final, binding and conclusive upon the Company and Executive.
6. Other Employment Terms and Conditions. The employment relationship between the parties shall be governed by
the general employment policies and procedures of the Company, including those relating to the protection of confidential
information and assignment of inventions; provided, however, that when the terms of this Agreement differ from or are in
conflict with the Company’s general employment policies or procedures, this Agreement shall control.
7
7. Dispute Resolution.
(a) Executive and the Company agree that any and all disputes, claims, or causes of action, in law or equity, including but
not limited to statutory claims, arising from or relating to the enforcement, breach, performance, or interpretation of this
Agreement, Executive’s employment with the Company, or the termination of Executive’s employment, shall be resolved
pursuant to the Federal Arbitration Act, 9 U.S.C. § 1-16 (“FAA”), to the fullest extent permitted by law, by final, binding and
confidential arbitration conducted by JAMS or its successor, under JAMS’ then applicable rules and procedures for employment
disputes before a single arbitrator (available upon request and also currently available at http://www.jamsadr.com/rules-
employment-arbitration/), in San Jose, California. Executive acknowledges that by agreeing to this arbitration procedure,
both Executive and the Company waive the right to resolve any such dispute through a trial by jury or judge or
administrative proceeding.
(b) All claims, disputes, or causes of action under this arbitration agreement, whether by Executive or the Company, must
be brought in an individual capacity, and shall not be brought as a plaintiff (or claimant) or class member in any purported class
or representative proceeding, nor joined or consolidated with the claims of any other person or entity. The arbitrator may not
consolidate the claims of more than one person or entity, and may not preside over any form of representative or class
proceeding. To the extent that the preceding sentences regarding class claims or proceedings are found to violate applicable law
or are otherwise found unenforceable, any claim(s) alleged or brought on behalf of a class shall proceed in a court of law rather
than by arbitration.
(c) This arbitration agreement shall not apply to any action or claim that cannot be subject to mandatory arbitration as a
matter of law, to the extent such claims are not permitted by applicable law(s) to be submitted to mandatory arbitration and the
applicable law(s) are not preempted by the Federal Arbitration Act or otherwise invalid (collectively, the “Excluded Claims”). In
the event Executive intends to bring multiple claims, including one of the Excluded Claims listed above, the Excluded Claims
may be filed with a court, while any other claims will remain subject to mandatory arbitration. Executive will have the right to
be represented by legal counsel at any arbitration proceeding.
(d) Questions of whether a claim is subject to arbitration under this agreement shall be decided by the arbitrator.
Likewise, procedural questions which grow out of the dispute and bear on the final disposition are also matters for the arbitrator.
The arbitrator shall: (i) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief
as would otherwise be permitted by law; and (ii) issue a written statement signed by the arbitrator regarding the disposition of
each claim and the relief, if any, awarded as to each claim, the reasons for the award, and the arbitrator’s essential findings and
conclusions on which the award is based. The arbitrator shall be authorized to award all relief that Executive or the Company
would be entitled to seek in a court of law. The Company shall pay all JAMS arbitration fees in excess of the administrative fees
that Executive would be required to pay if the dispute were decided in a court of law. Nothing in this arbitration agreement is
intended to prevent either Executive or the Company from obtaining injunctive relief in court to prevent irreparable harm pending
the conclusion of any such arbitration. Any awards or orders in such arbitrations may be entered and enforced as judgments in
the federal and state courts of any competent jurisdiction.
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8. Miscellaneous Provisions.
(a) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment
contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that Executive may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the
modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of the Company
(other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this
Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or
provision at another time.
(c) Whole Agreement. No agreements, representations or understandings (whether oral or written and
whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party
with respect to the subject matter hereof. This Agreement supersedes any agreement (or portion thereof) concerning similar
subject matter dated prior to the date of this Agreement, and by execution of this Agreement both parties agree that any such
predecessor agreement (or portion thereof) shall be deemed null and void. For the avoidance of doubt, the parties agree that this
Agreement does not supersede the provisions of Executive’s Offer Letter that do not address termination or severance benefits or
Executive’s Employee Confidential Information and Invention Assignment Agreement with the Company.
(d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be
governed by the laws of the State of California without reference to conflict of laws provisions, and the parties hereto submit to
the exclusive jurisdiction of the state and federal courts of the State of California.
(e)
Severability. If any term or provision of this Agreement or the application thereof to any circumstance
shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such
jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to
which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefor to carry out,
insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision.
incurred in connection with the execution of this Agreement.
(f)
Legal Fees and Expenses. The parties shall each bear their own expenses, legal fees and other fees
(g) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall
not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor’s process, and any action in violation of this Section
8(g) shall be void.
9
original, but all of which together will constitute one and the same instrument.
(h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an
[REMAINDER OF THIS PAGE LEFT BLANK – SIGNATURE PAGE TO FOLLOW]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written above.
/s/ Richard Chen
Dr. Richard Chen
Address: 35 Knightwood Lane
Hillsborough, CA 94010
Date: 9/26/2023
PERSONALIS, INC.
/s/ Stephen Moore
By: Stephen Moore
Title: Vice President, General Counsel and Secretary
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Exhibit 10.15
PERSONALIS, INC.
SECOND AMENDED AND RESTATED EXECUTIVE SEVERANCE AGREEMENT
(SENIOR VICE PRESIDENT, VICE PRESIDENT, OR EQUIVALENT INDIVIDUAL CONTRIBUTOR)
This Second Amended and Restated Executive Severance Agreement (the “Agreement”), effective as of September 18,
2023, amends, supersedes and restates in its entirety that certain First Amended and Restated Executive Severance Agreement by
and between Stephen Moore (“Executive”) and Personalis, Inc. (the “Company”) dated March 18, 2022. This Agreement is
intended to provide Executive with certain benefits described herein upon the occurrence of specific events.
RECITALS
A. The Company’s Board of Directors (the “ Board”) believes it is in the best interests of the Company and its
shareholders to retain Executive and provide incentives to Executive to continue in the service of the Company.
B. The Board further believes that it is imperative to provide Executive with certain benefits upon termination of
Executive’s employment, which benefits are intended to provide Executive with financial security and sufficient income and
encouragement to Executive to remain with the Company.
C. To accomplish the foregoing objectives, the Board has directed the Company, upon execution of this Agreement by
Executive, to agree to the terms provided in this Agreement.
Now therefore, in consideration of the mutual promises, covenants and agreements contained herein, the parties hereto
agree as follows:
1. At-Will Employment. Executive’s employment is at-will, which means that the Company may terminate
Executive’s employment at any time, with or without Cause or advance notice. Similarly, Executive may resign Executive’s
employment at any time, with or without advance notice, and with or without Good Reason. Executive shall not receive any
compensation of any kind, including, without limitation, equity award vesting acceleration and severance benefits, following
Executive’s last day of employment with the Company, except as expressly provided herein.
2. Benefits Upon Termination of Employment.
(a) Termination in Connection with or Following a Change in Control. If Executive’s employment is
terminated without Cause (as defined below) (and other than as a result of Executive’s death or disability), or Executive resigns
for Good Reason (as defined below), in either case within twelve (12) months after the effective date of a Change in Control (as
defined below), and provided such termination constitutes a “separation from service” (within the meaning of Treasury
Regulation Section 1.409A-1(h), such termination a “Separation from Service”), and provided further that Executive signs and
allows to become effective a general release of all claims in favor of the Company in a form provided by the Company (the
“Release”), within sixty (60)
1
days after Executive’s Separation from Service (the date that the Release becomes effective and may no longer be revoked by
Executive is referred to as the “Release Date”), then the Company shall provide Executive with the following severance benefits
(the “Change in Control Separation Benefits”):
(i) The Company shall pay Executive cash severance in an amount equal to nine (9) months of
Executive’s then-current base salary, ignoring any decrease in base salary that forms the basis for Good Reason, less all
applicable withholdings and deductions, paid on the Company’s first regular payroll date following the Release Date.
(ii) The Company shall pay Executive further cash severance in an amount equal to seventy-five
percent (75%) of Executive’s target annual bonus for the year in which the Change in Control is consummated, less all applicable
withholdings and deductions, paid on the Company’s first regular payroll date following the Release Date.
(iii)Should Executive timely elect to continue Executive’s medical, dental and/or vision insurance
benefits pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) or any analogous provisions of
applicable state law, the Company shall pay Executive’s COBRA premiums for Executive and Executive’s eligible dependents
(“COBRA Premiums”) for a period of nine (9) months following Executive’s Separation from Service (the “Change in Control
Benefits Payment Period”) or, if earlier, the date upon which Executive obtains coverage under a medical plan by a subsequent
employer. The Company’s obligation to pay any COBRA Premiums will be subject to the then-current requirements of COBRA
and any other laws affecting the payment of COBRA premiums by the Company. Notwithstanding the foregoing, if the
Company determines, in its sole discretion, that the Company cannot provide the COBRA Premiums without potentially
incurring financial costs or penalties under applicable law, the Company shall in lieu thereof pay Executive a taxable cash
amount, which payment shall be made regardless of whether Executive elects health care continuation coverage (the “Health
Care Benefit Payment”). The Health Care Benefit Payment shall be paid in monthly installments on the same schedule that the
COBRA Premiums would otherwise have been paid to the insurer. The Health Care Benefit Payment shall be equal to the
amount that the Company would have otherwise paid for COBRA Premiums (which amount shall be calculated based on the
premium for the first month of COBRA coverage), and shall be paid until the earlier of: (i) the date the Change in Control
Benefits Payment Period expires or (ii) the date upon which Executive obtains coverage under a medical plan by a subsequent
employer.
(iv)The Company shall accelerate the vesting of each of Executive’s then-outstanding unvested equity
compensation awards, effective immediately prior to such Separation from Service. In the event any such awards are based upon
performance of the Company and/or of Executive, such awards shall be vested at their respective target levels.
(b) Termination Not in Connection with or Following a Change in Control. If Executive’s employment is
terminated without Cause (and other than as a result of Executive’s death or disability), or Executive resigns for Good Reason, in
either case at any time that is not within twelve (12) months after a Change in Control, and provided such termination constitutes
a Separation from Service, and provided Executive signs and allows to become effective the Release within sixty (60) days after
Executive’s Separation from Service, then the Company shall provide
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Executive with the following severance benefits (collectively with the Change in Control Separation Benefits, the “Separation
Benefits”):
(i) The Company shall pay Executive cash severance in an amount equal to six (6) months of
Executive’s then current base salary, less all applicable withholdings and deductions, paid in a lump sum on the Company’s first
regular payroll date after the Release Date.
(ii) Should Executive timely elect to continue Executive’s medical, dental and/or vision insurance
benefits pursuant to COBRA, the Company shall pay the COBRA Premiums for a period of six (6) months following the
effective date of Executive’s Separation from Service (the “Benefits Payment Period”) or, if earlier, the date upon which
Executive obtains coverage under a medical plan by a subsequent employer. The Company’s obligation to pay any COBRA
Premiums will be subject to the then-current requirements of COBRA and any other laws affecting the payment of COBRA
premiums by the Company. Notwithstanding the foregoing, if the Company determines, in its sole discretion, that it cannot
provide the COBRA Premiums without potentially incurring financial costs or penalties under applicable law, the Company shall
in lieu thereof pay Executive the Health Care Benefit Payment in monthly installments on the same schedule that the COBRA
Premiums would otherwise have been paid to the insurer, which shall be paid until the earlier of: (i) the date the Benefits
Payment Period expires or (ii) the date upon which Executive obtains coverage under a medical plan by a subsequent employer.
3. Limitations and Conditions on Separation Benefits.
(a) Release Prior to Payment of Benefits. Prior to the payment or provision of any of the Separation
Benefits, Executive shall execute, and allow to become effective, the Release not later than sixty (60) days following Executive’s
Separation from Service. Such Release shall specifically relate to all of Executive’s rights and claims in existence at the time of
such execution and shall confirm Executive’s continuing obligations to the Company (including but not limited to obligations
under any confidentiality and/or non-solicitation agreement with the Company). No Separation Benefits will be paid prior to the
Release Date.
(b)
Income and Employment Taxes. Executive agrees that Executive shall be responsible for any
applicable taxes of any nature (including any penalties or interest that may apply to such taxes) that the Company reasonably
determines apply to any payment made hereunder, that Executive’s receipt of any benefit hereunder is conditioned on Executive’s
satisfaction of any applicable withholding or similar obligations that apply to such benefit, and that any cash payment owed
hereunder will be reduced to satisfy any such withholding or similar obligations that may apply.
(c) Compliance with Section 409A. It is intended that each installment of the payments and benefits
provided for in this Agreement is a separate “payment” for purposes of Treasury Regulation Section 1.409A-2(b)(2)(i). For the
avoidance of doubt, it is intended that Separation Benefits set forth in this Agreement satisfy, to the greatest extent possible, the
exemptions from, or comply with, the application of Section 409A of the Internal Revenue Code of 1986, as amended (the
“Code”) and Treasury Regulations 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9) (together, with any state law of similar
effect, “Section 409A”). However, if the
3
Company (or, if applicable, the successor entity thereto) determines that the Separation Benefits provided under this Agreement
constitute “deferred compensation” under Section 409A and Executive is, on the date of his or her Separation from Service, a
“specified employee” of the Company or any successor entity thereto, as such term is defined in Section 409A(a)(2)(B)(i) of the
Code (a “Specified Employee”), then, solely to the extent necessary to avoid the incurrence of the adverse personal tax
consequences under Section 409A, the timing of the Separation Benefits described herein, as applicable, shall be delayed as
follows: on the earlier to occur of (i) the date that is six (6) months and one (1) business day after Executive’s Separation from
Service, (ii) the date of Executive’s death, or (iii) such earlier date as permitted under Section 409A without the imposition of
adverse taxation (such earlier date, the “Delayed Initial Payment Date”). Upon the Delayed Initial Payment Date, the Company
(or the successor entity thereto, as applicable) shall pay to Executive a lump sum amount equal to the applicable benefit that
Executive would otherwise have received through the Delayed Initial Payment Date if the commencement of the payment of the
benefit had not been so delayed pursuant to this Section 3(c), and any remaining payments due shall be paid as otherwise
provided herein. No interest shall be due on any amounts so deferred. If the Separation Benefits are not covered by one or more
exemptions from the application of Section 409A and the Release could become effective in the calendar year following the
calendar year in which Executive has a Separation from Service, the Release will not be deemed effective any earlier than the
Release Date. To the extent that any provision of this Agreement is ambiguous as to its exemption or compliance with Section
409A, the provision will be read in such a manner so that all payments hereunder are exempt from Section 409A to the maximum
permissible extent. To the extent any payment under this Agreement may be classified as a “short-term deferral” within the
meaning of Section 409A, such payment shall be deemed a short-term deferral, even if it may also qualify for an exemption from
Section 409A under another provision of Section 409A. With respect to reimbursements or in-kind benefits provided to
Executive hereunder (or otherwise) that are not exempt from Section 409A, the following rules shall apply: (i) the amount of
expenses eligible for reimbursement, or in-kind benefits provided, during any one of Executive’s taxable years shall not affect the
expenses eligible for reimbursement, or in-kind benefit to be provided in any other taxable year, (ii) in the case of any
reimbursements of eligible expenses, reimbursement shall be made on or before the last day of Executive’s taxable year
following the taxable year in which the expense was incurred, and (iii) the right to reimbursement or in-kind benefits shall not be
subject to liquidation or exchange for another benefit.
(d) Related Matters. Executive further acknowledges and agrees that as a condition to receipt of any
Separation Benefits (i) Executive must comply with Executive’s obligations under Executive’s Employee Confidential
Information and Invention Assignment Agreement; and (ii) resign from all Company and or affiliate positions, including
membership on any Board (unless otherwise requested by the Company).
(e)
Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease,
merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume
the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner
and to the same extent as the Company would be required to perform such obligations in the absence of a succession. The terms
of this Agreement and all of Executive’s rights hereunder and thereunder
4
shall inure to the benefit of, and be enforceable by, Executive’s personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
(f)
Notice. Notices and all other communications contemplated by this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed notices to Executive shall be addressed to Executive at the home address which
Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be
addressed to its corporate headquarters, and all notices shall be directed to the attention of its Chief Executive Officer.
4. Definitions.
(a) Cause. For purposes of this Agreement, “Cause”, as determined by the Board acting in good faith and
based on information then known to it, shall mean the occurrence of one or more of the following: (i) Executive’s gross
negligence or knowing and willful action which is or is likely to be materially injurious to the Company; (ii) any intentional act
by Executive in connection with his responsibilities as an employee constituting fraud or a felony crime; (iii) Executive’s
consistent failure to report for work or perform his duties as directed by the Company’s Board of Directors; (iv) persistent or
repeated material breach of this Agreement or any agreement between Executive and the Company; (v) Executive becoming
disqualified from holding office through his own act or omission; (vi) an unauthorized use or disclosure by the Executive of the
Company’s confidential information or trade secrets, which use or disclosure causes material harm to the Company; or (vii) a
material failure by the Executive to comply with the Company’s written policies or rules which is or is likely to be materially
injurious to the Company.
a transaction or series of transactions that results in any of the following:
(b) Change in Control. For purposes of this Agreement, “Change in Control” means the consummation of
(i) a merger, consolidation or similar corporate transaction involving (directly or indirectly) the
Company and, immediately following which the stockholders of the Company immediately prior thereto do not own, directly or
indirectly, outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of
the surviving entity in such merger, consolidation or similar corporate transaction or more than fifty percent (50%) of the
combined outstanding voting power of the parent of the surviving entity in such merger, consolidation or similar corporate
transaction; or
occurs over a period of not more than twelve (12) months.
(ii) a sale or other disposition of all or substantially all of the consolidated assets of the Company that
However, a Change in Control will not include (1) any consolidation or merger effected exclusively to change the domicile of the
Company, or (2) any transaction or series of transactions principally for bona fide equity financing purposes in which cash is
received by the Company or any successor or indebtedness of the Company is cancelled or converted or a combination thereof.
In addition, no transaction will be a Change in Control unless it is also “change in ownership of a
5
corporation” or “change in ownership of a substantial portion of a corporation’s assets” as defined under in Treasury Regulations
Sections 1.409A-3(i)(5)(v) and (vii) without regard to any alternative definitions thereunder.
(c) Good Reason. For purposes of this Agreement, “Good Reason” for Executive’s resignation of his or her
employment will exist following the occurrence of any of the following without Executive’s written consent: (i) a material
reduction in Executive’s base salary, which the parties agree is a reduction of at least ten percent (10%) of Executive’s base salary
(provided, however, that such reduction will not be considered Good Reason if made in connection with an across-the-board
salary reduction affecting all members of management); (ii) a material reduction in Executive’s duties, responsibilities and/or
authority, provided, however, that a change in job position (including a change in title) after or in connection with a Change in
Control shall not be deemed a “material reduction” in and of itself unless Executive’s new duties are materially reduced from
Executive’s prior duties; (iii) a relocation of Executive’s principal place of employment to a place that increases Executive’s one-
way commute by more than fifty (50) miles as compared to Executive’s then-current principal place of employment immediately
prior to such relocation; or (iv) a material breach by the Company of this Agreement. In order to resign for Good Reason,
Executive must provide written notice to the Board within thirty (30) days after the first occurrence of the event giving rise to
Good Reason setting forth the basis for Executive’s resignation, allow the Company at least thirty (30) days from receipt of such
written notice to cure such event, and if such event is not reasonably cured within such period, Executive must resign from all
positions Executive then holds with the Company not later than thirty (30) days after the expiration of the cure period or the date
of notification to Executive that the Company will not so cure. Executive understands and agrees that the requirement for
Executive’s performance of services within twenty (20) miles of Palo Alto, California does not give rise to Good Reason.
5. Parachute Payments.
(a)
If any payment or benefit (including payments and benefits pursuant to this Agreement) that Executive
would receive in connection with a Change in Control from the Company or otherwise (“Transaction Payment”) would (i)
constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the
excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Company shall cause to be determined, before any
amounts of the Transaction Payment are paid to Executive, which of the following two alternative forms of payment would result
in Executive’s receipt, on an after-tax basis, of the greater amount of the Transaction Payment notwithstanding that all or some
portion of the Transaction Payment may be subject to the Excise Tax: (1) payment in full of the entire amount of the Transaction
Payment (a “Full Payment”), or (2) payment of only a part of the Transaction Payment so that Executive receives the largest
payment possible without the imposition of the Excise Tax (a “Reduced Payment”). For purposes of determining whether to
make a Full Payment or a Reduced Payment, the Company shall cause to be taken into account all applicable federal, state and
local income and employment taxes and the Excise Tax (all computed at the highest applicable marginal rate, net of the
maximum reduction in federal income taxes which could be obtained from a deduction of such state and local taxes). If a
Reduced Payment is made, (x) Executive shall have no rights to any additional payments and/or benefits constituting the
Transaction Payment, and (y) reduction in payments and/or benefits shall occur in the manner that results in the greatest
economic benefit to Executive as determined in this paragraph (the
6
“Reduction Method”). If more than one method of reduction will result in the same economic benefit, the portions of the
Transaction Payment shall be reduced pro rata (the “Pro Rata Reduction Method”).
(b) Notwithstanding any provision of subsection (a) above to the contrary, if the Reduction Method or the Pro
Rata Reduction Method would result in any portion of the Transaction Payment being subject to taxes pursuant to Section 409A
that would not otherwise be subject to taxes pursuant to Section 409A, then the Reduction Method and/or the Pro Rata Reduction
Method, as the case may be, shall be modified so as to avoid the imposition of taxes pursuant to Section 409A as follows: (i) as a
first priority, the modification shall preserve to the greatest extent possible, the greatest economic benefit for Executive as
determined on an after-tax basis; (ii) as a second priority, Transaction Payments that are contingent on future events (e.g., being
terminated without Cause), shall be reduced (or eliminated) before Transaction Payments that are not contingent on future events;
and (iii) as a third priority, Transaction Payments that are "deferred compensation" within the meaning of Section 409A shall be
reduced (or eliminated) before Transaction Payments that are not deferred compensation within the meaning of Section 409A.
(c)
The professional firm engaged by the Company for general tax purposes or the Company’s corporate law
firm as of the day prior to the effective date of the Change in Control shall make all determinations required to be made under
this Section 5. If the professional firm so engaged by the Company is serving as accountant or auditor for the individual, entity
or group effecting the Change in Control, the Company shall appoint a nationally recognized independent registered public
accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the
determinations by such professional firm required to be made hereunder.
(d)
The professional firm engaged to make the determinations hereunder shall provide its calculations,
together with detailed supporting documentation, to the Company and Executive within fifteen (15) calendar days after the date
on which Executive’s right to a Transaction Payment is triggered or such other time as reasonably requested by the Company or
Executive. If the professional firm determines that no Excise Tax is payable with respect to the Transaction Payment, either
before or after the application of the Reduced Amount, it shall furnish the Company and Executive with detailed supporting
calculations of its determinations that no Excise Tax will be imposed with respect to such Transaction Payment. Any good faith
determinations of the professional firm made hereunder shall be final, binding and conclusive upon the Company and Executive.
6. Other Employment Terms and Conditions. The employment relationship between the parties shall be governed by
the general employment policies and procedures of the Company, including those relating to the protection of confidential
information and assignment of inventions; provided, however, that when the terms of this Agreement differ from or are in
conflict with the Company’s general employment policies or procedures, this Agreement shall control.
7. Dispute Resolution.
7
(a)
Executive and the Company agree that any and all disputes, claims, or causes of action, in law or equity,
including but not limited to statutory claims, arising from or relating to the enforcement, breach, performance, or interpretation of
this Agreement, Executive’s employment with the Company, or the termination of Executive’s employment, shall be resolved
pursuant to the Federal Arbitration Act, 9 U.S.C. § 1-16 (“FAA”), to the fullest extent permitted by law, by final, binding and
confidential arbitration conducted by JAMS or its successor, under JAMS’ then applicable rules and procedures for employment
disputes before a single arbitrator (available upon request and also currently available at http://www.jamsadr.com/rules-
employment-arbitration/), in San Jose, California. Executive acknowledges that by agreeing to this arbitration procedure,
both Executive and the Company waive the right to resolve any such dispute through a trial by jury or judge or
administrative proceeding.
(b) All claims, disputes, or causes of action under this arbitration agreement, whether by Executive or the
Company, must be brought in an individual capacity, and shall not be brought as a plaintiff (or claimant) or class member in any
purported class or representative proceeding, nor joined or consolidated with the claims of any other person or entity. The
arbitrator may not consolidate the claims of more than one person or entity, and may not preside over any form of representative
or class proceeding. To the extent that the preceding sentences regarding class claims or proceedings are found to violate
applicable law or are otherwise found unenforceable, any claim(s) alleged or brought on behalf of a class shall proceed in a court
of law rather than by arbitration.
(c)
This arbitration agreement shall not apply to any action or claim that cannot be subject to mandatory
arbitration as a matter of law, to the extent such claims are not permitted by applicable law(s) to be submitted to mandatory
arbitration and the applicable law(s) are not preempted by the Federal Arbitration Act or otherwise invalid (collectively, the
“Excluded Claims”). In the event Executive intends to bring multiple claims, including one of the Excluded Claims listed above,
the Excluded Claims may be filed with a court, while any other claims will remain subject to mandatory arbitration. Executive
will have the right to be represented by legal counsel at any arbitration proceeding.
(d) Questions of whether a claim is subject to arbitration under this agreement shall be decided by the
arbitrator. Likewise, procedural questions which grow out of the dispute and bear on the final disposition are also matters for the
arbitrator. The arbitrator shall: (i) have the authority to compel adequate discovery for the resolution of the dispute and to award
such relief as would otherwise be permitted by law; and (ii) issue a written statement signed by the arbitrator regarding the
disposition of each claim and the relief, if any, awarded as to each claim, the reasons for the award, and the arbitrator’s essential
findings and conclusions on which the award is based. The arbitrator shall be authorized to award all relief that Executive or the
Company would be entitled to seek in a court of law. The Company shall pay all JAMS arbitration fees in excess of the
administrative fees that Executive would be required to pay if the dispute were decided in a court of law. Nothing in this
arbitration agreement is intended to prevent either Executive or the Company from obtaining injunctive relief in court to prevent
irreparable harm pending the conclusion of any such arbitration. Any awards or orders in such arbitrations may be entered and
enforced as judgments in the federal and state courts of any competent jurisdiction.
8. Miscellaneous Provisions.
8
(a) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment
contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that Executive may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the
modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of the Company
(other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this
Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or
provision at another time.
(c) Whole Agreement. No agreements, representations or understandings (whether oral or written and
whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party
with respect to the subject matter hereof. This Agreement supersedes any agreement (or portion thereof) concerning similar
subject matter dated prior to the date of this Agreement, and by execution of this Agreement both parties agree that any such
predecessor agreement (or portion thereof) shall be deemed null and void. For the avoidance of doubt, the parties agree that this
Agreement does not supersede the provisions of Executive’s Offer Letter that do not address termination or severance benefits or
Executive’s Employee Confidential Information and Invention Assignment Agreement with the Company.
(d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be
governed by the laws of the State of California without reference to conflict of laws provisions, and the parties hereto submit to
the exclusive jurisdiction of the state and federal courts of the State of California.
(e)
Severability. If any term or provision of this Agreement or the application thereof to any circumstance
shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such
jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to
which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefor to carry out,
insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision.
incurred in connection with the execution of this Agreement.
(f)
Legal Fees and Expenses. The parties shall each bear their own expenses, legal fees and other fees
(g) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall
not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor’s process, and any action in violation of this Section
8(g) shall be void.
9
original, but all of which together will constitute one and the same instrument.
(h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an
[REMAINDER OF THIS PAGE LEFT BLANK – SIGNATURE PAGE TO FOLLOW]
10
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written below.
/s/ Stephen Moore
Stephen Moore
Address: 3022 Valley of Hearts Delight Place
San Jose, CA 95136
Date: 9/20/2023
PERSONALIS, INC.
/s/ Susan Moriconi
By: Susan Moriconi
Title: VP of People, CHRO
Date: 9/21/2023
11
SUBSIDIARIES OF PERSONALIS, INC.
Exhibit 21.1
Name of Subsidiary
Jurisdiction of Incorporation
Personalis (UK) Ltd.
United Kingdom
Shanghai Personalis Biotechnology Co., Ltd.
China
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-276204 and 333-276206) and Form S-8 (Nos.
333-232233, 333-237386, 333-238080, 333-253528, 333-262998, 333-269971 and 333-271940) of Personalis, Inc. and subsidiaries (the “Company”) of our
report dated February 28, 2024, relating to the consolidated financial statements which appears in this Annual Report on Form 10-K.
Exhibit 23.1
/s/ BDO USA, P.C.
San Jose, California
February 28, 2024
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-276204 and 333-276206 on Form S-3 and Registration Statement Nos.
333-232233, 333-237386, 333-238080, 333-253528, 333-262998, 333-269971 and 333-271940 on Form S-8 of our report dated February 23, 2023, relating
to the consolidated financial statements of Personalis, Inc. and subsidiaries (the “Company”), appearing in this Annual Report on Form 10-K of the Company
for the year ended December 31, 2023.
Exhibit 23.2
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 28, 2024
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher Hall, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Personalis, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: February 28, 2024
By:
/s/ Christopher Hall
Christopher Hall
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Aaron Tachibana, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Personalis, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: February 28, 2024
By:
/s/ Aaron Tachibana
Aaron Tachibana
Chief Financial Officer and Chief Operating Officer
(Principal Financial and Accounting Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Personalis, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2023 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 28, 2024
By:
/s/ Christopher Hall
Christopher Hall
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Personalis, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2023 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 28, 2024
By:
/s/ Aaron Tachibana
Aaron Tachibana
Chief Financial Officer and Chief Operating Officer
(Principal Financial and Accounting Officer)
PERSONALIS, INC.
INCENTIVE COMPENSATION RECOUPMENT POLICY
Adopted By the Compensation Committee of the Board of Directors: November 1, 2023
Exhibit 97
1.
INTRODUCTION
The Compensation Committee (the “Compensation Committee”) of the Board of Directors (the “Board”) of PERSONALIS, INC., a
Delaware corporation (the “Company”), has determined that it is in the best interests of the Company and its stockholders to adopt this
Incentive Compensation Recoupment Policy (this “Policy”) providing for the Company’s recoupment of Recoverable Incentive
Compensation that is received by Covered Officers of the Company under certain circumstances. Certain capitalized terms used in this Policy
have the meanings given to such terms in Section 3 below.
This Policy is designed to comply with, and shall be interpreted to be consistent with, Section 10D of the Exchange Act, Rule 10D-
1 promulgated thereunder (“Rule 10D-1”) and Nasdaq Listing Rule 5608 (the “Listing Standards”).
2.
EFFECTIVE DATE
This Policy shall apply to all Incentive Compensation that is received by a Covered Officer on or after October 2, 2023 (the
“Effective Date”). Incentive Compensation is deemed “received” in the Company’s fiscal period in which the Financial Reporting Measure
specified in the Incentive Compensation award is attained, even if the payment or grant of such Incentive Compensation occurs after the end
of that period.
3.
DEFINITIONS
“Accounting Restatement” means an accounting restatement that the Company is required to prepare due to the material
noncompliance of the Company with any financial reporting requirement under the securities laws, including any required accounting
restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that
would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
“Accounting Restatement Date” means the earlier to occur of (a) the date that the Board, a committee of the Board authorized to
take such action, or the officer or officers of the Company authorized to take such action if Board action is not required, concludes, or
reasonably should have concluded, that the Company is required to prepare an Accounting Restatement, or (b) the date that a court, regulator
or other legally authorized body directs the Company to prepare an Accounting Restatement.
“Administrator” means the Compensation Committee or, in the absence of such committee, the Board.
“Code” means the U.S. Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.
“Covered Officer” means each current and former Executive Officer.
“Exchange” means the Nasdaq Stock Market.
“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.
“Executive Officer” means the Company’s president, principal financial officer, principal accounting officer (or if there is no such
accounting officer, the controller), any vice-president of the Company in charge of a principal business unit, division, or function (such as
sales, administration, or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-
making functions for the Company. Executive officers of the Company’s parent(s) or subsidiaries are deemed executive officers of the
Company if they perform such policy-making functions for the Company. Policy-making function is not intended to include policy-making
functions that are not significant. Identification of an executive officer for purposes of this Policy would include at a minimum executive
officers identified pursuant to Item 401(b) of Regulation S-K promulgated under the Exchange Act.
“Financial Reporting Measures” means measures that are determined and presented in accordance with the accounting principles
used in preparing the Company’s financial statements, and any measures derived wholly or in part from such measures, including Company
stock price and total stockholder return (“TSR”). A measure need not be presented in the Company’s financial statements or included in a
filing with the SEC in order to be a Financial Reporting Measure.
“Incentive Compensation” means any compensation that is granted, earned or vested based wholly or in part upon the attainment of
a Financial Reporting Measure.
“Lookback Period” means the three completed fiscal years immediately preceding the Accounting Restatement Date, as well as any
transition period (resulting from a change in the Company’s fiscal year) within or immediately following those three completed fiscal years
(except that a transition period of at least nine months shall count as a completed fiscal year). Notwithstanding the foregoing, the Lookback
Period shall not include fiscal years completed prior to the Effective Date.
“Recoverable Incentive Compensation” means Incentive Compensation received by a Covered Officer during the Lookback Period
that exceeds the amount of Incentive Compensation that would have been received had such amount been determined based on the
Accounting Restatement, computed without regard to any taxes paid (i.e., on a gross basis without regard to tax withholdings and other
deductions). For any compensation plans or programs that take into account Incentive Compensation, the amount of Recoverable Incentive
Compensation for purposes of this Policy shall include, without limitation, the amount contributed to any notional account based on
Recoverable Incentive Compensation and any earnings to date on that notional amount. For any Incentive Compensation that is based on
stock price or TSR, where the Recoverable Incentive Compensation is not subject to mathematical recalculation directly from the information
in an Accounting Restatement, the Administrator will determine the amount of Recoverable Incentive Compensation based on a reasonable
estimate of the effect of the Accounting Restatement on the stock price or TSR upon which the Incentive Compensation was received. The
Company shall maintain documentation of the determination of that reasonable estimate and provide such documentation to the Exchange in
accordance with the Listing Standards.
“SEC” means the U.S. Securities and Exchange Commission.
4.
RECOUPMENT
(a) Applicability of Policy. This Policy applies to Incentive Compensation received by a Covered Officer (i) after beginning
services as an Executive Officer, (ii) who served as an Executive Officer at any time during the performance period for such Incentive
Compensation, (iii) while the Company had
2
a class of securities listed on a national securities exchange or a national securities association, and (iv) during the Lookback Period.
(b) Recoupment Generally. Pursuant to the provisions of this Policy, if there is an Accounting Restatement, the Company must
reasonably promptly recoup the full amount of the Recoverable Incentive Compensation, unless the conditions of one or more subsections of
Section 4(c) of this Policy are met and the Compensation Committee, or, if such committee does not consist solely of independent directors, a
majority of the independent directors serving on the Board, has made a determination that recoupment would be impracticable. Recoupment
is required regardless of whether the Covered Officer engaged in any misconduct and regardless of fault, and the Company’s obligation to
recoup Recoverable Incentive Compensation is not dependent on whether or when any restated financial statements are filed.
(c) Impracticability of Recovery. Recoupment may be determined to be impracticable if, and only if:
(i)
the direct expense paid to a third party to assist in enforcing this Policy would exceed the amount of the applicable
Recoverable Incentive Compensation; provided that, before concluding that it would be impracticable to recover any amount of
Recoverable Incentive Compensation based on expense of enforcement, the Company shall make a reasonable attempt to recover
such Recoverable Incentive Compensation, document such reasonable attempt(s) to recover, and provide that documentation to the
Exchange in accordance with the Listing Standards; or
(ii)
recoupment of the applicable Recoverable Incentive Compensation would likely cause an otherwise tax-qualified
retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the requirements of Code
Section 401(a)(13) or Code Section 411(a) and regulations thereunder.
(d) Sources of Recoupment. To the extent permitted by applicable law, the Administrator shall, in its sole discretion, determine the
timing and method for recouping Recoverable Incentive Compensation hereunder, provided that such recoupment is undertaken reasonably
promptly. The Administrator may, in its discretion, seek recoupment from a Covered Officer from any of the following sources or a
combination thereof, whether the applicable compensation was approved, awarded, granted, payable or paid to the Covered Officer prior to,
on or after the Effective Date: (i) direct repayment of Recoverable Incentive Compensation previously paid to the Covered Officer; (ii)
cancelling prior cash or equity-based awards (whether vested or unvested and whether paid or unpaid); (iii) cancelling or offsetting against
any planned future cash or equity-based awards; (iv) forfeiture of deferred compensation, subject to compliance with Code Section 409A;
and (v) any other method authorized by applicable law or contract. Subject to compliance with any applicable law, the Administrator may
effectuate recoupment under this Policy from any amount otherwise payable to the Covered Officer, including amounts payable to such
individual under any otherwise applicable Company plan or program, e.g., base salary, bonuses or commissions and compensation previously
deferred by the Covered Officer. The Administrator need not utilize the same method of recovery for all Covered Officers or with respect to
all types of Recoverable Incentive Compensation.
(e) No Indemnification of Covered Officers. Notwithstanding any indemnification agreement, applicable insurance policy or any
other agreement or provision of the Company’s certificate of incorporation or bylaws to the contrary, no Covered Officer shall be entitled to
indemnification or advancement of expenses in connection with any enforcement of this Policy by the Company, including paying or
reimbursing such Covered Officer for insurance premiums to cover potential obligations to the Company under this Policy.
3
(f) Indemnification of Administrator. Any members of the Administrator, and any other members of the Board who assist in the
administration of this Policy, shall not be personally liable for any action, determination or interpretation made with respect to this Policy and
shall be indemnified by the Company to the fullest extent under applicable law and Company policy with respect to any such action,
determination or interpretation. The foregoing sentence shall not limit any other rights to indemnification of the members of the Board under
applicable law or Company policy.
(g) No “Good Reason” for Covered Officers. Any action by the Company to recoup or any recoupment of Recoverable Incentive
Compensation under this Policy from a Covered Officer shall not be deemed (i) “good reason” for resignation or to serve as a basis for a
claim of constructive termination under any benefits or compensation arrangement applicable to such Covered Officer, or (ii) to constitute a
breach of a contract or other arrangement to which such Covered Officer is party.
5.
ADMINISTRATION
Except as specifically set forth herein, this Policy shall be administered by the Administrator. The Administrator shall have full and
final authority to make any and all determinations required under this Policy. Any determination by the Administrator with respect to this
Policy shall be final, conclusive and binding on all interested parties and need not be uniform with respect to each individual covered by this
Policy. In carrying out the administration of this Policy, the Administrator is authorized and directed to consult with the full Board or such
other committees of the Board as may be necessary or appropriate as to matters within the scope of such other committee’s responsibility and
authority. Subject to applicable law, the Administrator may authorize and empower any officer or employee of the Company to take any and
all actions that the Administrator, in its sole discretion, deems necessary or appropriate to carry out the purpose and intent of this Policy
(other than with respect to any recovery under this Policy involving such officer or employee).
6.
SEVERABILITY
If any provision of this Policy or the application of any such provision to a Covered Officer shall be adjudicated to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Policy, and
the invalid, illegal or unenforceable provisions shall be deemed amended to the minimum extent necessary to render any such provision or
application enforceable.
7.
NO IMPAIRMENT OF OTHER REMEDIES
Nothing contained in this Policy, and no recoupment or recovery as contemplated herein, shall limit any claims, damages or other
legal remedies the Company or any of its affiliates may have against a Covered Officer arising out of or resulting from any actions or
omissions by the Covered Officer. This Policy does not preclude the Company from taking any other action to enforce a Covered Officer’s
obligations to the Company, including, without limitation, termination of employment and/or institution of civil proceedings. This Policy is in
addition to the requirements of Section 304 of the Sarbanes-Oxley Act of 2002 (“SOX 304”) that are applicable to the Company’s Chief
Executive Officer and Chief Financial Officer and to any other compensation recoupment policy and/or similar provisions in any
employment, equity plan, equity award, or other individual agreement, to which the Company is a party or which the Company has adopted
or may adopt and maintain from time to time; provided, however, that compensation recouped pursuant to this Policy shall not be duplicative
of compensation recouped pursuant to SOX 304 or any such compensation recoupment policy and/or similar provisions in any such
employment, equity plan, equity award, or other individual agreement except as may be required by law.
4
8.
AMENDMENT; TERMINATION
The Administrator may amend, terminate or replace this Policy or any portion of this Policy at any time and from time to time in its
sole discretion. The Administrator shall amend this Policy as it deems necessary to comply with applicable law or any Listing Standard.
9.
SUCCESSORS
This Policy shall be binding and enforceable against all Covered Officers and, to the extent required by Rule 10D-1 and/or the
applicable Listing Standards, their beneficiaries, heirs, executors, administrators or other legal representatives.
10. REQUIRED FILINGS
The Company shall make any disclosures and filings with respect to this Policy that are required by law, including as required by the
SEC.
*
*
*
*
*
5
PERSONALIS, INC.
INCENTIVE COMPENSATION RECOUPMENT POLICY
FORM OF EXECUTIVE ACKNOWLEDGMENT
I, the undersigned, agree and acknowledge that I am bound by, and subject to, the Personalis, Inc. Incentive Compensation Recoupment
Policy, as may be amended, restated, supplemented or otherwise modified from time to time (the “Policy”). In the event of any inconsistency
between the Policy and the terms of any employment agreement, offer letter or other individual agreement with Personalis, Inc. (the
“Company”) to which I am a party, or the terms of any compensation plan, program or agreement, whether or not written, under which any
compensation has been granted, awarded, earned or paid to me, the terms of the Policy shall govern.
In the event that the Administrator (as defined in the Policy) determines that any compensation granted, awarded, earned or paid to me must
be forfeited or reimbursed to the Company pursuant to the Policy, I will promptly take any action necessary to effectuate such forfeiture
and/or reimbursement. I further agree and acknowledge that I am not entitled to indemnification, and hereby waive any right to advancement
of expenses, in connection with any enforcement of the Policy by the Company.
Agreed and Acknowledged:
Name:
Title:
Date: