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, 2024
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
27-5411038
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
6600 Dumbarton Circle
Fremont, California
94555
(Address of principal executive offices)
(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
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.0001
PSNL
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
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 28, 2024, the last business day of the Registrant’s
most recently completed second fiscal quarter, was approximately $71,600,000 based on the closing price reported for such date on the Nasdaq Global Market.
88,263,269 shares of common stock were issued and outstanding as of February 21, 2025.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement relating to its 2025 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.
2
PERSONALIS, INC.
Form 10-K
For the Year Ended December 31, 2024
TABLE OF CONTENTS
Page
Note Regarding Forward-Looking Statements
3
PART I
Item 1.
Business
6
Item 1A.
Risk Factors
16
Item 1B.
Unresolved Staff Comments
55
Item 1C.
Cybersecurity
55
Item 2.
Properties
56
Item 3.
Legal Proceedings
56
Item 4.
Mine Safety Disclosures
56
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
57
Item 6.
[Reserved]
57
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
58
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
68
Item 8.
Financial Statements and Supplementary Data
69
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
100
Item 9A.
Controls and Procedures
100
Item 9B.
Other Information
100
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
100
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
101
Item 11.
Executive Compensation
102
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
102
Item 13.
Certain Relationships and Related Transactions, and Director Independence
102
Item 14.
Principal Accountant Fees and Services
103
PART IV
Item 15.
Exhibits, Financial Statement Schedules
104
Item 16.
Form 10-K Summary
106
Signatures
107
Table of Contents
3
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:
•
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 and our ability to obtain financing when needed;
•
future reimbursement and reimbursement rulings;
•
our business strategies, including our aim to focus on certain indications and the timing thereof;
•
the benefits of our products and services, including their ability to increase the probability of clinical trial success;
•
our ability to enter into and compete effectively in existing and new markets, with existing competitors and new market entrants;
•
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 sales, marketing and commercialization plans and strategies, including the expected benefits of and activities to be performed under our
Commercialization and Reference Laboratory Agreement with Tempus AI, Inc. ("Tempus");
•
our future business with the U.S. Department of Veterans Affairs' Million Veteran Program, Natera, Inc., Moderna, Inc. ("Moderna"), and
other collaboration partners and customers;
•
our belief that approval of personalized cancer therapies by the U.S. Food and Drug Administration may drive benefits to our business;
•
our ability to benefit from the scaling of our infrastructure and capacity at our headquarters facility in Fremont;
•
the impact our collaboration agreements and key opinion leaders may have on the broader use of our products in the future;
•
the potential impacts of inflation, macroeconomic conditions, and geopolitical conflicts on our business and operations;
•
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 previous reductions in force on our operations and operating results; 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 subsidiary, Personalis (UK) Ltd.
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4
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 Item 1A, “Risk Factors."
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.
•
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, or if we are unable to
generate sufficient reimbursement or coverage by insurance or governmental payors for our products, 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 two of our largest customers, Natera and Moderna, and in
the past have derived a substantial portion of our revenue from other large customers.
•
Building our clinical laboratory business is subject to a number or reimbursement challenges and we may not be able to establish the medical
necessity of our tests for coverage or reimbursement rates that cover our costs.
•
We are pursuing a partner-centric strategy and have key relationships with Tempus, Myriad Genetics, Inc, Moderna, and Merck & Co., Inc.,
among others. These and any other partnering and/or collaboration agreements that we have entered into or may enter into in the future may not
be successful, or may terminate, which could adversely impact our business or affect our ability to develop and commercialize our services and
products.
•
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.
•
We have a single facility and if it becomes damaged or inoperable, or we are required to vacate our facility, our ability to sell and provide our
services and pursue 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 achieving, 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
•
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.
•
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.
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5
•
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.
•
Competitors could take legal action against us for statements that are made by the company and/or its representatives, which may require us to
spend significant time and money, including damages, and could limit our ability to market our tests.
Intellectual Property Risks
•
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.
•
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
•
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 or holders of greater than five percent of our outstanding common stock 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.
Table of Contents
6
PART I
Item 1. Business.
Company Background
Personalis develops, markets, and sells advanced cancer genomic tests and services. Our services are used by pharmaceutical companies for
translational research, biomarker discovery, the development of personalized cancer therapies, and for clinical trials. Our tests are used by physicians to
detect residual or recurrent cancer in patients, monitor cancer response to therapy, and uncover insights for therapy selection. We also provide whole exome
and whole genome sequencing services for other diagnostic companies and population sequencing initiatives.
We perform our testing services in a large-scale, high quality, Clinical Laboratory Improvement Amendments of 1988 ("CLIA") certified and
College of American Pathologists (“CAP”) accredited, laboratory located in our 100,000 square foot headquarters 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"), therapy response and recurrence
monitoring, in solid tumor cancers. It delivers industry-leading, ultra-high sensitivity, which we believe allows for detection of cancer earlier than other
technologies. NeXT Personal helps answer these questions: Who are the right patients to enroll into a clinical trial? How are patients responding to the
investigational therapy? Can circulating tumor DNA ("ctDNA") potentially be used as an endpoint in clinical trials?
ImmunoID NeXT
ImmunoID NeXT is a tissue-based service that combines whole exome and whole transcriptome 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 (immuno) therapies and the next-generation of composite biomarkers to better predict patient response. ImmunoID NeXT helps answer
these questions: What are the markers and composite biomarkers in the tumor and the tumor microenvironment that contribute to therapy response and
resistance? What are the neoantigens in the tumor that can be used in individualized neoantigen therapy (INT)?
For cancer patients
NeXT Personal Dx
NeXT Personal Dx is a tumor-informed liquid biopsy test for the detection of MRD. We believe NeXT Personal Dx is the first ultra-sensitive test on
the market to detect MRD and monitor therapy response in patients with solid tumor cancers. NeXT Personal Dx has been shown to potentially detect
cancer recurrence ahead of traditional imaging and is designed to aid decision making throughout a patient's cancer journey. NeXT Personal Dx involves the
initial whole genome sequencing of matched tumor and normal samples from a patient in order to create a personalized detection assay for that patient
based on the biology of the patient's cancer and the subsequent use of that personalized assay to test one or more samples of the patient's blood/plasma.
NeXT Personal Dx helps answer these questions: Does the patient still have cancer after curative intent treatment? How is the patient's cancer responding
to therapy? And, importantly, has the cancer potentially recurred?
NeXT Dx
NeXT Dx is a comprehensive tumor profiling test that is used to help select therapy for a cancer patient and identify potential clinical trials for a
patient. It analyzes a patient’s exome and transcriptome with matched tumor-normal analysis. We believe it improves chances of finding an effective therapy
or help a doctor find an appropriate clinical trial. NeXT Dx helps answer the question: What are the tumor mutations with actionable therapies and clinical
trials for the patient?
For diagnostics companies and population sequencing initiatives
WES
We perform whole exome sequencing ("WES") of cancer tissue and matched blood samples for diagnostic companies as an input to their
products.
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7
WGS
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. ("Tempus") to co-commercialize NeXT Personal Dx in the clinical diagnostics market. In December 2024, we agreed to expand the relationship to
include biopharma industry customers. Under this expanded relationship, Tempus can offer our NeXT Personal MRD product to pharmaceutical and biotech
customers who wish to bundle our tumor-informed MRD testing with other Tempus offerings in a given study.
The principal markets for our products are in the United States, Europe (including the U.K.), and rest of the world, including Asia-Pacific, which
accounted for 96%, 3%, and 1%, respectively, of our revenue for the year ended December 31, 2024.
Clinical Evidence and Reimbursement
Generating clinical evidence is critical for driving adoption of our tests in the clinical market (i.e., for cancer patients) and establishing
reimbursement by Medicare and private insurance companies. 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 services in our key
indications. Because of the ultra-high sensitivity of our technology, we are initially focusing on three indications: breast cancer, lung cancer, and
immunotherapy (IO) monitoring. We currently have collaborations with Cancer Research UK, University College London, and the Francis Crick Institute (the
TRACERx study); Institut Curie, The Royal Marsden; the Vall d'Hebron Institute of Oncology (VHIO); the University of California, San Diego, Duke
University; Vanderbilt University and Johns Hopkins University (the PREDICT study); the Dana-Farber Cancer Institute; the University of Texas M.D.
Anderson Cancer Center; University Medical Center Hamburg-Eppendorf (also known as UKE); and Criterium and the Academic Breast Cancer Consortium.
Furthermore, generating clinical evidence is crucial to obtaining reimbursement coverage from Medicare and other payors. One of our 2025 goals
is to submit for Medicare reimbursement for NeXT Personal Dx upon publication of compelling clinical evidence, and receive Medicare coverage, in at least
two of our three key indications. 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.
Competition
Our principal competition comes from commercial and academic organizations that employ various approaches to produce information that is
similar to the information that we generate for our customers. Some of our present or potential competitors include Adela, Inc., BostonGene Corporation,
Caris Life Sciences, Inc., DELFI Diagnostics, Inc., Exact Sciences Corporation, Foresight Diagnostics Inc. (“Foresight”), Foundation Medicine, Inc.,
Freenome, Inc., Fulgent Genetics, Inc., Geneseeq Technology Inc., GRAIL, Inc., Guardant Health, Inc., Haystack Oncology, Inc., which was acquired by
Quest Diagnostics Incorporated in June 2023, Laboratory Corporation of America Holdings, MedGenome Inc., Myriad Genetics, Inc., Natera, Inc.
("Natera"), NeoGenomics, Inc., Novogene Corporation, Predicine, Inc., Roche Molecular Systems, Inc., SAGA Diagnostics AB, Tempus, 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 our differentiated technology, such as our ultra-sensitive approach for MRD that is able to
detect cancer recurrence many months before imaging or other technologies, comprehensive data and variant calling we provide to our biopharmaceutical
customers, high-quality results, and exceptional service.
Intellectual Property
Protection of our intellectual property is fundamentally important in our business. Specifically, our success is dependent on our ability to obtain and
maintain proprietary protection for our unique technology, processes, and approaches, 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 protect our research and
development investments, inventions, and unique processes 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.
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8
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:
•
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 therapy treatment, or detect the recurrence of disease at
the earliest possible timepoint;
•
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
•
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;
•
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).
As of December 31, 2024, we own 30 issued U.S. patents and 16 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 Moderna, Inc. ("Moderna") by providing genomic testing in its ongoing clinical trials
evaluating a personalized cancer therapy and Natera, Inc. ("Natera") under our partnership to provide advanced tumor analysis for use in Natera's MRD
testing offerings. Natera accounted for 30% and 43% and Moderna accounted for 28% and 5% of our revenue for the years ended December 31, 2024 and
2023, 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 9% and 13% of our revenue for the years ended December 31, 2024
and 2023, respectively. Our top five customers, including the VA MVP, Moderna and Natera, accounted for 81% and 74% of our revenue for the years ended
December 31, 2024 and 2023, respectively.
Segments
We manage our business as one operating segment, which is providing advanced cancer genomic tests and services for precision oncology
applications, personalized testing, and other tests. We derive revenue primarily in the United States and manage our business activities on a consolidated
basis. Our chief executive officer (“CEO”) is our chief operating decision maker (“CODM”) who reviews consolidated operating results to make decisions
about allocating resources and assessing performance for the entire company.
Regulatory Environment
Coverage and Reimbursement
Our ability to commercialize diagnostic tests based on our technology will depend in large part on the extent to which coverage and
reimbursement for our tests can be achieved. Coverage and reimbursement of new products and services is uncertain, and whether we can obtain 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 is
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9
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. Additionally, the coverage and
reimbursement status of newly-approved or cleared laboratory tests, including our NeXT Personal Dx offering, is uncertain. The commercial success of our
current and 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 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 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. 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 as “high complexity” under CLIA
may develop, manufacture, validate, and market 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 U.S. Food and Drug Administration (“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 April 29, 2024, the FDA published final regulations to make explicit that IVD products are devices under the FDC Act, removing much of the
FDA’s historical enforcement discretion for most LDTs. In conjunction with this final rule, the FDA proposed to phase out its general enforcement discretion
approach for LDTs so that IVDs manufactured by a laboratory would generally fall under the same enforcement approach as other IVDs. This final rule also
provides that FDA intends to exercise enforcement discretion and generally not enforce premarket review and quality system requirements (except for
requirements under Part 820, subpart M (records)) for currently marketed IVDs offered as LDTs that were first marketed prior to April 29, 2024 and intends to
exercise enforcement discretion and generally not enforce premarket review requirements for LDTs approved by the New York State Clinical Lab Evaluation
Program (“NYS CLEP”). Additionally, pursuant to the final rule, the FDA will gradually end its general enforcement discretion approach in five stages over a
four-year period for other LDTs not approved by NYS CLEP and not already on market. Each stage of the proposed phaseout period would subject LDTs to
a set of regulatory requirements.
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
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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 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.
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:
•
restrictions on manufacturing processes;
•
restrictions on product marketing;
•
warning letters;
•
withdrawal or recall of products from the market;
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•
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, 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
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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).
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.
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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.
Further, on August 16, 2022, the Inflation Reduction Act of 2022 (“IRA 2022”) was signed 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 current 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
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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"), as
amended by Section 221 of the Continuing Appropriations and Extensions Act, 2025 the statutory phase-in of the payment reductions has been extended
through 2025 with a 0% reduction cap for 2021-2025 and a 15% reduction cap for 2026 through 2028. 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. Our core company values include striving to be:
•
Patient-centric
•
Teachers
•
Learners
•
Execution-oriented
•
Inclusive
At a foundational level, employees receive training related to workplace safety and emergency preparedness, awareness and expectations of
inclusion, 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, 2025, we had 229 employees, of which 228 were full-time employees. Of these full-time employees, 83 were in research and
development, 67 in laboratory operations, 40 in commercial operations and 38 in general and administrative functions. 226 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, 2025, more than 40% of our employees had
completed a Ph.D. or other advanced science or medical degree.
None of our employees are represented by a labor union or covered by collective bargaining agreements, and we have not experienced any labor
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 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 based 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, a Bloodborne Pathogens
Program, 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 evaluating our compliance with such regulations on a recurring basis.
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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. We also use our and our Chief Executive Officer's X (formerly Twitter) accounts (@personalisinc; @C_HallBiotech) and our Chief
Executive Officer’s LinkedIn accounts (https://www.linkedin.com/company/personalis-inc/; https://www.linkedin.com/in/christopher-hall-a982a0/) as channels
of distribution for important company information. Information on our website or our social media accounts 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.
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, 2024 and 2023, we had net losses of $81 million and $108
million, respectively. As of December 31, 2024, we had an accumulated deficit of $550 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, or if
we are unable to generate sufficient reimbursement or coverage by insurance or governmental payors for our products, 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:
•
generation of sufficient reimbursement or coverage by insurance or governmental payors for our products;
•
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
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•
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.
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 that employ various approaches 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., DELFI Diagnostics, Inc.,
Exact Sciences Corporation, Foresight Diagnostics Inc. (“Foresight”), Foundation Medicine, Inc., Freenome, Inc., Fulgent Genetics, Inc., Geneseeq
Technology Inc., GRAIL, Inc., Guardant Health, Inc., Haystack Oncology, Inc., which was acquired by Quest Diagnostics Incorporated in June 2023,
Laboratory Corporation of America Holdings, MedGenome Inc., Myriad Genetics, Inc., Natera, NeoGenomics, Inc., Novogene Corporation, Predicine, Inc.,
Roche Molecular Systems, Inc., SAGA Diagnostics AB, Tempus, 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, 2024, revenue under our agreement accounted for 30% 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. We expect our commercial relationship with Natera to wind down by mid-2025
and, if we are unable to grow our customer base and diversify our revenue concentration, 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. We may also have disputes with our present or potential
competitors. 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.”
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,
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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.
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 two of our largest customers,
Natera and Moderna, and in the past have derived a substantial portion of our revenue from other large customers.
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 30% and 43% of our revenue for the years ended December 31, 2024 and 2023,
respectively. We also derive a significant portion of our revenue from Moderna, which accounted for 28% and 5% of our revenue for the years ended
December 31, 2024 and 2023, respectively. We previously derived a significant portion of our revenue from the VA MVP, which more recently accounted for
9% and 13% of our revenue for the years ended December 31, 2024 and 2023, respectively. Our top five customers, including Natera, Moderna, and the VA
MVP, accounted for 81% and 74% of our revenue for the years ended December 31, 2024 and 2023, 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 Natera, Moderna, and the VA MVP, 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. See “—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.” 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, Moderna 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. We
expect our commercial relationship with Natera to wind down by mid-2025 and, if we are unable to grow our customer base and
diversify our revenue concentration, 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 test 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 2024, revenue under our agreement accounted for 30% of our total revenue. In December 2024, we amended our
agreement to extend minimum volume commitments through the second quarter of 2025. Upon expiration of the term of the amended agreement, we expect
our commercial relationship with Natera to terminate as we are aware that Natera plans to bring such services in-house in lieu of purchasing such services
from us. We are also aware of 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. 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
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Natera have fluctuated significantly and may continue to do so for the remainder of the term of the agreement, which could cause us to experience difficulty
in achieving such metrics from time to time, or to meet our other obligations under our agreement.
Additionally, Natera or other customers may allege that any failures to achieve the required metrics are a breach of our agreement and seek to
terminate our agreement prior to its expiration 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 in the future to
increase our laboratory’s capacity to process increased sample volumes from our other customers. Our activities under our agreement with Natera have had,
and activities with our other customers may in the future 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 or not renewed after expiration, and we are unable to grow our customer base and diversify our revenue concentration timely, 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 "2022 VA MVP Agreement"). 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 September 2024, we received a third task order with a value of up to $7.5 million. 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 annual orders received in subsequent years
had values of $10.0 million, or less, which represents a substantial decline. We have no certainty that funding will be made available for our services, or that
the VA MVP will honor its payment obligations under the current contract and task order, or 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 pandemic or federal
cost-cutting initiatives such as those recently announced and enacted by the current administration. 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 contracted orders
received in 2021 and later years compared to the September 2020 contract 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.
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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,
including Moderna. 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.
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.
Building our clinical laboratory business is subject to a number of reimbursement challenges and we may not be able to establish the
medical necessity of our tests for coverage or reimbursement rates that cover our costs.
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 not medically necessary, or 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 are pursuing a partner-centric strategy and have key relationships with Tempus, Myriad, Moderna and Merck, among others. These
and any other partnering and/or collaboration arrangements that we have entered into or may enter into in the future may not be
successful, or may terminate, which could adversely impact our business or 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 strategic alliances with Moderna and Merck; and our collaborations with Tempus; Myriad; ClearNote Health, Inc.; Cancer Research
UK, University College London, and the Francis Crick Institute (the TRACERx study); Institut Curie; The Royal Marsden; the Vall d'Hebron Institute of
Oncology (VHIO); the University of California, San Diego; Duke University; Vanderbilt University and Johns Hopkins University (the PREDICT study); the
Dana-Farber Cancer Institute; the University of Texas M.D.
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Anderson Cancer Center; 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;
•
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;
•
collaborators’ sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or criminal
proceedings; and
•
we may choose or our collaborators may request or require us to expand our facilities and/or establish new facilities domestically and/or
internationally, which may significantly increase our expenses and divert resources and management’s attention. See “—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.” and “—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.”
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.
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
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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 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.
We have a single facility and if it becomes damaged or inoperable, or we are required to vacate our facility, our ability to sell and
provide our services and pursue 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 facility is in Fremont, California. Our laboratory facility 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 laboratory facility is 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 use of our laboratory facility due to a failure of an electrical bus
duct serving that facility. Furthermore, our laboratory facility 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 facility 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 facility becomes 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
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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.
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 achieving, 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.
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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 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, 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. If there are changes to our leadership team, 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.
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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 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.
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,
information technology systems, 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 Fremont facility expanded our laboratory capacity and, in order to execute our business model, we will 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. In addition, we have experienced, and expect to continue to experience, significant
fluctuations in the timing of receipt and volume of samples from our customers and collaborators. These fluctuations have in the past adversely impacted,
and may in the future adversely impact, our ability to process samples timely and in an efficient fashion, particularly when the sample volume at any given
time exceeds our then current capacity.
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We expanded our laboratory facility 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.
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.
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 facility, 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
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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, 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 May 6, 2024, the FDA issued final regulations under which it intends to phase out its enforcement discretion approach to LDTs over a period of
four years (the "Final Rule"). We anticipate that we may be required to obtain PMA approval for certain of our tests by October 1, 2027. We may also be
subject to device registration and listing requirements, medical device reporting requirements and the requirements of the FDA’s Quality System Regulation.
We may be required to conduct clinical trials to support any premarket notification or applications to FDA, which would increase the costs to our business
and impair our profitability. 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
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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.”
The implementation of the Final Rule exposes us to additional regulatory controls and submissions for our tests or the possibility of enforcement
action, both of which would 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 facility in the U.S.) would not fall within the scope of such exemptions.
We believe that we do not currently offer tests or services 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, under the FDA's Final Rule or otherwise, 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
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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.
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 a European Union
("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:
•
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;
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•
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, 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.
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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 any of our services or products
fail to comply with FDA regulatory requirements as enforced, including the Final Rule, 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 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 with whom we work, 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 with whom we work, 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 with whom we work. 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 with whom we work, 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 products and services.
We and the third parties with whom we work are subject to a variety of evolving threats, including but not limited to social-engineering attacks
(including through deep fakes, which are 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. It may be difficult and/or costly to detect, investigate, mitigate, contain, and remediate a security incident. Our efforts to do so may not be
successful. Actions taken by us or the third parties with whom we work to detect, investigate, mitigate, contain, and remediate a security incident could result
in outages, data losses, and disruptions of our business. Threat actors may also gain access to other networks and systems after a compromise of our
networks and systems. 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
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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 parties 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 the third parties with whom we work
experience a security incident or other interruption, we could experience adverse consequences. While we may be entitled to damages if the third parties
with whom we work 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 that of the third parties with whom we work 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 connection with the adoption of new information technology, and our results of operations in
the first and second quarters of 2018 were adversely affected as a result. In 2024, we experienced downtime in our information technology systems due to
human error in connection with an upgrade by one of our third-party vendors to one of our information technology systems. Our results of operations were
not materially adversely affected in the case of the latter downtime. 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 with whom we work) to provide our 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 with whom we work). 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 with whom we work 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.
We employ a shared responsibility model where our customers and partners are responsible for configuring and implementing security measures
related to our platform. As part of this model, we make certain security features available to users that can be implemented at their discretion or identify
security areas or measures for which they are responsible. For example, users can choose whether to implement and enforce multifactor authentication to
access their accounts. In certain cases where users choose not to implement, or incorrectly implement, those features or measures, misuse our services, or
otherwise experience their own vulnerabilities, policy violations, credential exposure or security incidents, even if we are not the cause of a resulting
customer security issue or incident, our customer and partner relationships, reputation, and revenue may be adversely impacted.
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 with whom we work. A security incident or other interruption could disrupt our ability (and that of third parties
with whom we work) 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
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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, or we may voluntarily choose, to notify relevant stakeholders, including affected individuals,
regulatory authorities and our stockholders, of certain security incidents or to take other actions, such as providing credit monitoring and identity theft
protection services. Such disclosures and related actions can be costly, and the disclosure or the failure to comply with such applicable requirements could
lead to adverse consequences. If we (or a third party with whom we work) 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 products and services, deter new customers or partners from using our 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.
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 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
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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 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 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 and various related provincial
laws, as well as Canada’s Anti-Spam Legislation, 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
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. The U.S. is also
increasingly scrutinizing certain personal data transfers and may impose data localization requirements, for example, the Biden Administration’s executive
order Preventing Access to Americans’ Bulk Sensitive Personal Data and United States Government-Related Data by Countries of Concern.
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
also are 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
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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 with whom we work 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 or restrictions 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 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 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
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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:
•
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 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;
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•
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.
As a clinical laboratory, our business practices may face additional scrutiny from government regulatory agencies and authorities such as the
Department of Justice, the 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. 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.
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The growth of our business 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:
•
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.
Further, on August 16, 2022, the IRA 2022 was signed 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. 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
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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 2025 with a 0%
reduction cap for 2021-2023 and a 15% reduction cap for 2026 through 2028. 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, comprehensive tax legislation (the “Tax Cuts and Jobs Act”) was signed into law 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, 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
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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 during which EU rules
continued to apply. The U.K. and the EU have signed the EU-U.K. Trade and Cooperation Agreement 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 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 EU 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.
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 adopted rules designed to enhance and standardize climate-related disclosures, which have been stayed pending judicial review. If these rules or other
climate-related disclosures rules become effective, they may significantly increase our compliance and reporting costs and 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
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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 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;
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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.
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 2045. 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
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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;
•
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;
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•
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 have
been challenged or 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, and may in the future 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. For example, two of our patents were recently challenged and
subsequently invalidated during inter partes reviews initiated by Foresight. 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 have in the past been involved in legal proceedings to 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, in the past we filed complaints against Foresight for infringement of certain of our patents relating to detection
of MRD, which complaints we agreed to stipulate to dismiss, pursuant to a settlement agreement with Foresight in June 2024. In addition, our patents or the
patents of our licensors may become 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
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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. For example, two
of our patents were recently challenged and subsequently invalidated during inter partes reviews initiated by Foresight. 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 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.
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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, 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
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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:
•
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, Moderna and Natera, as our largest customers;
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•
the timing and amount of our investments in the growth of our business;
•
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,
most of our 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.
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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 now a larger regional 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 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 or holders of greater than five percent of our outstanding common stock may exercise significant control over our company
and will be able to influence corporate matters.
Our directors, executive officers and their affiliates, and holders of greater than five percent of our outstanding common stock, if they were to act
together, would be 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. In November 2023, we entered into a Commercialization
and Reference Laboratory Agreement (“Tempus Agreement”) (see Note 8 to our audited consolidated financial statements included in this Annual Report on
Form 10-K for additional information), pursuant to which, Tempus agreed to certain voting commitments that require Tempus to vote the shares it acquired
from exercising its warrants for our common stock in accordance with the recommendations of the majority of our board of directors with respect to director
nominations for any meeting of our stockholders occurring on or before December 31, 2025, as well as various compensation-related matters. These voting
commitments terminate on when the parties’ exclusivity obligations expire or terminate under the Tempus Agreement. In addition, in December 2024, we
entered into an Investment Agreement with Merck & Co.,
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Inc. (“Merck”) (see Note 8 to our audited consolidated financial statements included in this Annual Report on Form 10-K for additional information) pursuant
to which Merck agreed to certain voting commitments that require Merck to vote, subject to specified exceptions, any shares of our common stock that Merck
owns in accordance with the recommendations of our board of directors. Such voting commitments generally apply to director nominations for any meeting
of our stockholders, amendments to our charter to increase the authorized shares of our common stock, various compensation-related matters, and
ratification of our auditors. These voting commitments terminate upon the earlier of the second anniversary of the date of the investment agreement with
Merck and the first time that Merck and its affiliates no longer own at least 50% of our shares owned by Merck immediately following the date of the
investment agreement with Merck.
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, 2024, we had 85,171,146 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 will become eligible for sale in the public market in the future, subject to certain legal and
contractual limitations. 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.
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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, 2024, we had federal and state net operating loss carryforwards of approximately $324.1 million and approximately $302.5
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.
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:
•
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.
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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:
•
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.
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.
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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 currently 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 currently 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.
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 currently 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, encryption of data, penetration testing, 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, forensic investigators, 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 our executive leadership team and led by 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.
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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 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 moved all laboratory operations to the Fremont facility during the third quarter of 2023 and
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 12 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 21, 2025, there were approximately 47 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, market, and sell advanced cancer genomic tests and services. Our services are used by pharmaceutical companies for translational
research, biomarker discovery, the development of personalized cancer therapies, and for clinical trials. Our tests are used by physicians to detect residual
or recurrent cancer in patients, monitor cancer response to therapy, and uncover insights for therapy selection. We also provide whole exome and whole
genome sequencing services for other diagnostic companies and 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 neoantigen
therapies for cancer 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 therapy. 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 to commercialize our NeXT Personal Dx test. 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").
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 primarily 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); Institut
Curie; The Royal Marsden; the Vall d'Hebron Institute of Oncology (VHIO); the University of California, San Diego; Duke University; Vanderbilt University and
Johns Hopkins University (the PREDICT study); the Dana-Farber Cancer Institute; the University of Texas M.D. Anderson Cancer Center; 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.
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 350 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 approximately 500,000
human samples, of which approximately 200,000 were whole human genomes.
2024 Highlights
Total revenue of $84.6 million increased 15%, or $11.1 million, during 2024 compared to 2023, primarily driven by higher revenue from pharma
tests. Revenue from pharma tests was $50.9 million in 2024 compared to $31.9 million in 2023, an increase of 60%. This increase was partially offset by
lower revenue from enterprise sales, which declined $6.4 million, or 20%.
Key business accomplishments and financial updates in 2024 and early 2025 include:
•
Received Medicare coverage for NeXT Dx, our comprehensive tumor profiling test and we are currently seeking Medicare coverage for our
separate liquid biopsy molecular residual disease ("MRD") test, Next Personal Dx.
•
Delivered 3,285 total molecular tests in 2024, compared with 177 tests in the prior year.
•
Announced a new publication validating our NeXT Personal test, an ultra-sensitive, tumor-informed circulating tumor DNA (ctDNA) assay for
detecting MRD, monitoring therapy response, and detecting recurrence in patients diagnosed with solid tumor cancers.
o
The analytical validation study was published in Oncotarget on March 14, 2024.
o
The test demonstrated a detection threshold of 1.67 parts per million (PPM) of ctDNA with 100% analytical specificity; enabling an
ultra-sensitive range leading to early cancer detection.
•
Multiple clinical data results demonstrating the clinical performance of NeXT Personal were presented at the American College of Clinical
Oncology meeting in Chicago. Key presentations include:
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o
Compelling early-stage breast cancer detection results presented by Dr. Isaac Garcia-Murillas and team (Institute of Cancer Research,
London) and Prof. Nicolas Turner and team (Royal Marsden NHS Foundation Trust UK). In this study, they found:
▪
NeXT Personal enabled earlier detection of recurrence, with a ~15-month lead time over imaging.
▪
100% of patients that recurred were detected with NeXT Personal and 100% of patients that were ctDNA negative on
longitudinal testing were cancer-free.
o
A presentation by Dr. Rodrigo Toledo of the Vall d’Hebron Institute of Oncology (VHIO) highlighted the importance of NeXT Personal’s
use for immunotherapy monitoring. This data showed:
▪
Baseline levels and the changes in levels of ctDNA detected by NeXT Personal predict therapy response and clinical outcomes
for late-stage cancer patients receiving immunotherapy.
▪
NeXT Personal had an average lead time for detecting cancer progression of 81 days over imaging.
•
Highlighted clinical performance of NeXT Personal at the European Society of Medical Oncology (ESMO) Congress 2024 in Barcelona,
Spain:
o
Significant results from the TRACERx study presented by Professor Charles Swanton of University College London and the Francis
Crick Institute with an expanded study cohort of non-small cell lung cancer (NSCLC) patients with strong detection rates for residual
cancer in the challenging landmark period (first 10 to 120 days immediately after surgery).
o
Compelling data for late-stage cancer patients on immunotherapy presented by Dr. Rodrigo Toledo of the Vall d’Hebron Institute of
Oncology that accurately linked significant decreases in ctDNA levels in response to immunotherapy to longer overall survival than
patients who did not respond well.
•
Commenced NeXT Personal Dx commercialization efforts with Tempus.
•
Expanded Tempus collaboration to the biopharma industry, which enables Tempus to market NeXT Personal to Tempus' pharmaceutical and
biotech customers who wish to bundle MRD testing with other Tempus offerings in a given study.
•
Executed a cross-license agreement with Myriad Genetics, Inc. covering patent estates for tumor-informed approaches to detect MRD.
•
Entered into an agreement with Foresight Diagnostics Inc. to settle and dismiss pending claims of intellectual property infringement by
licensing our patents. Foresight agreed to pay a low single-digit tiered royalty on sales covered by the patents.
•
Raised approximately $35.0 million in net financing proceeds from Tempus, consisting of $18.4 million from Tempus’ exercise of all its
common stock warrants, at an average price of $2.00 per share, and $16.6 million net of expenses, from Tempus' purchase of common stock
at a price of $5.07 per share.
•
Raised an additional $30.1 million in net proceeds from selling common stock under our At-The-Market ("ATM") program at a weighted-
average price of $4.61 per share.
•
Advanced business strategy with investment of $50.0 million from Merck and extended collaboration with Moderna.
•
Received a new task order in the amount of $7.5 million from the VA MVP.
Factors Affecting Our Performance
We believe there are several important factors that we expect to impact our operating performance and results of operations, including:
•
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.
•
The adoption of ultra-sensitive MRD testing. We are pioneering the ultra-sensitive MRD testing market with the belief that an ultra-
sensitive approach will lead to earlier intervention and the ability to better trust that a negative MRD patient is likely cancer-free. There are no
assurances that the market will value ultra-sensitive testing over other ways to monitor cancer and look for recurrence and disease.
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•
Increasing adoption of our products and solutions by existing bio-pharma 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.
•
Obtaining coverage and reimbursement status of our diagnostic tests. Building our clinical laboratory business is subject to a number
or reimbursement challenges and we may not be able to establish the medical necessity of our tests (coverage) or payment rates that cover
our costs (reimbursement).
•
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 primarily from sales of genomic testing services to the following five 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.
•
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.
•
Clinical diagnostic includes sales of comprehensive tumor profiling test that is used to help select therapy for a cancer patient and identify
potential clinical trials for a patient, and sales of ultra-sensitive, tumor-informed diagnostic tests, ordered by healthcare providers for cancer
patients. Revenue in this category is derived from Medicare and private insurance reimbursements.
•
Other includes sales of genomic tests and analytics to universities and non-profits.
Our ability to increase revenue will depend on our ability to further increase sales to these groups of customers and expand our customer base
within each group. 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 services in our key indications, pursuing reimbursement coverage from Medicare and other payors; and seeking additional partnerships.
We market to biopharma customers and doctors through a small
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61
direct sales force. In late 2023, we entered into an agreement with Tempus to co-commercialize NeXT Personal Dx in the clinical diagnostics market and will
be leveraging Tempus' significantly larger sales force as a key vector to grow our clinical diagnostic business. In late 2024, we expanded our collaboration
partnership with Tempus to enable Tempus to market and sell NeXT Personal to Tempus' pharmaceutical and biotech customers who wish to bundle MRD
testing with other Tempus offerings in a given study.
We have one reportable segment which is providing advanced cancer genomic tests for precision oncology and personalized testing. 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 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
remain consistent in the short-term since the completion of our reductions in workforce in 2023.
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 since the completion of our reductions in workforce in 2023. But we expect them to
increase over the medium term as we commercialize our clinical diagnostic offerings.
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 reductions in workforce 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, cash equivalents and short-term 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 Tempus to purchase, in the aggregate, up to
9,218,800 shares of our common stock (the “Tempus Warrants”). Other income (expense), net consists primarily of a noncash loss related to the
remeasurement and settlement of the Tempus Warrants. Other income (expense), net also includes foreign currency exchange gains and losses.
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62
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.
Year Ended December 31,
2024
2023
2022
2021
2020
Consolidated Statements of Operations:
(in thousands, except share and per share data)
Revenue
$
84,614 $
73,481 $
65,047 $
85,494 $
78,648
Costs and expenses
Cost of revenue
57,789
55,273
51,697
53,837
58,534
Research and development
48,905
64,776
64,912
49,312
28,568
Selling, general and administrative
46,187
49,726
63,969
47,698
33,692
Lease impairment
—
5,565
—
—
—
Restructuring and other charges
—
8,077
—
—
—
Total costs and expenses
152,881
183,417
180,578
150,847
120,794
Loss from operations
(68,267 )
(109,936 )
(115,531 )
(65,353 )
(42,146 )
Interest income
5,510
5,901
2,396
367
949
Interest expense
(24 )
(110 )
(201 )
(184 )
(2 )
Other income (expense), net
(18,485 )
(4,068 )
61
(42 )
(24 )
Loss before income taxes
(81,266 )
(108,213 )
(113,275 )
(65,212 )
(41,223 )
Provision for income taxes
18
83
40
14
57
Net loss
$
(81,284 ) $
(108,296 ) $
(113,315 ) $
(65,226 ) $
(41,280 )
Net loss per share, basic and diluted
$
(1.37 ) $
(2.25 ) $
(2.48 ) $
(1.49 ) $
(1.20 )
Weighted-average shares outstanding, basic and diluted
59,251,013
48,175,201
45,704,805
43,886,730
34,374,903
(1) Includes related party revenue of $2.0 million for the year ended December 31, 2024.
(2) Includes related party sales and marketing expenses of $0.5 million for the year ended December 31, 2024.
(3) Includes related party other expense of $18.3 million in connection with the change in fair value of Tempus Warrants for the year ended December 31, 2024.
December 31,
2024
2023
2022
2021
2020
(in thousands)
Cash and cash equivalents, and short-term investments
$
185,009 $
114,179 $
167,658 $
287,064 $
203,290
Working capital
171,889
99,510
166,568
286,918
180,083
Total assets
270,268
225,099
292,700
396,528
244,842
Total debt
1,772
2,880
2,596
3,494
—
Long-term obligations
36,185
48,424
41,430
54,914
9,261
Total liabilities
67,311
95,658
74,561
86,227
49,897
Total stockholders' equity
202,957
129,441
218,139
310,301
194,945
Results of Operations
This section discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023.
Revenue
The following table shows revenue by customer type (in thousands, except percentages):
Year Ended December 31,
2024
2023
Change
Pharma tests and services
$
50,939 $
31,904 $
19,035
60%
Enterprise sales
25,364
31,729
(6,365 )
(20%)
Population sequencing
7,430
9,412
(1,982 )
(21%)
Clinical diagnostic
759
38
721
1897%
Other
122
398
(276 )
(69%)
Total revenue
$
84,614 $
73,481 $
11,133
15%
(1) Includes related party revenue of $2.0 million for the year ended December 31, 2024.
(1)
(2)
(3)
(1)
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63
The following table shows customers that made up at least 10% of total revenue in each year presented:
Year Ended December 31,
2024
2023
Natera, Inc.
30%
43%
VA MVP
*
13%
Moderna, Inc.
28%
*
* Less than 10% of revenue
Pharma tests and services
The primary driver for the increase in pharma tests and services revenue in 2024 was due to increases in revenue from one of our personalized
cancer therapy customers that ramped up clinical trial patient enrollments. Revenue from this customer increased $20.0 million in 2024 compared with the
prior year. Revenue from this customer is expected to decline over the next few quarters until this customer is ready to commercialize its personalized
cancer therapy program, or until other projects increase in size.
Enterprise sales
Revenue from enterprise sales decreased in 2024 due to lower average selling prices. The number of samples we processed for Natera increased
by over 7%, but such increase was offset by lower selling prices.
We launched a reduced-cost version of our exome product offering for Natera near the end of the first quarter of 2024 to support their requirement
for an overall reduction in price. Our agreement with Natera included minimum volume commitments through the end of 2024. We amended our agreement
with Natera during the fourth quarter of 2024 to extend minimum volume commitments through the second quarter of 2025.
Population sequencing
Revenue recognized each period from population sequencing is impacted by timing of our fulfillment of samples under each annual task order.
The decrease in revenue in 2024 was due to a decrease in the number of samples we processed in addition to a small decline in selling prices. Our annual
task orders received in 2024 and 2023 were $7.5 million and $7.5 million, respectively. Our contract with the VA MVP does not include specific testing
turnaround times. Therefore, we may modulate the volume of samples processed from the VA MVP to accommodate sample volumes from other customers,
which can vary from period to period. We anticipate fulfilling the new task order received in September 2024 during the first three quarters of 2025.
Clinical diagnostic
Clinical diagnostic revenue is generated from Medicare and private insurance payors, In January 2024, we received a Medicare coverage
determination for NeXT Dx, our ultra-comprehensive tumor genomic profiling assay. The revenue of $0.8 million in 2024 was mainly due to an increase in
NeXT Dx tests reimbursed by Medicare. We delivered a total of 3,285 molecular cancer tests in 2024.
Costs and Expenses
The following table shows costs and expenses (in thousands, except percentages):
Year Ended December 31,
2024
2023
Change
Cost of revenue
$
57,789 $
55,273 $
2,516
5%
Research and development
48,905
64,776
(15,871 )
(25%)
Selling, general and administrative
46,187
49,726
(3,539 )
(7%)
Lease impairment
—
5,565
(5,565 )
*
Restructuring and other charges
—
8,077
(8,077 )
*
Total costs and expenses
$
152,881 $
183,417 $
(30,536 )
(17%)
* Not meaningful
Cost of revenue
The increase in cost of revenue in 2024 was primarily due to higher revenue levels (revenue increased 15% over the same period). Cost of
revenue increased at a lesser rate as compared to the corresponding revenue increases primarily because of lower labor costs resulting from prior workforce
reductions and operational efficiencies. Specific components of the increase were a $4.0 million increase in direct material costs due to support higher
revenue levels, a $2.1 million increase in allocated facilities and equipment costs (mainly due to moving our laboratory from our Menlo Park facility to our
Fremont facility in the third quarter of 2023), partially offset by a
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$2.8 million decrease in labor costs and a $0.7 million decrease in shared laboratory costs due to greater usage of our laboratory capacity for R&D projects.
Research and development
The decrease in research and development expenses in 2024 was primarily due to cost savings from our workforce reductions in 2023 and lower
sample processing costs for product development, collaborations, and clinical evidence generation.
Specific components of the decrease include a $6.3 million decrease in personnel-related costs driven by our workforce reductions, a $4.7 million
decrease in allocated facilities costs (primarily due to a reduction in R&D usage of our facilities relative to other functions, as well as lower facilities costs in
general), and a $4.9 million decrease in sample processing costs incurred in our laboratory for product development, collaborations, and clinical evidence
generation.
Selling, general and administrative
The decrease in selling, general and administrative expenses was primarily due to lower professional outside services expenses and cost savings
from our workforce reductions in 2023.
Specific components of the decrease were a $3.1 million decrease in professional outside services, a $2.9 million decrease in personnel-related
costs driven by our workforce reductions, and a $0.5 million decrease in office equipment costs; partially offset by a $1.4 million increase in allocated
facilities costs, $1.0 million increase in other outside services and office expenses and a $0.6 million increase in other marketing costs, including 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
We reduced our workforce during the first quarter of 2023 and the fourth quarter of 2023 to reduce our cash burn and increase operating
efficiencies, which combined affected about 100 employees. 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
The following table shows interest income and expense, and other income (expense), net (in thousands, except percentages):
Year Ended December 31,
2024
2023
Change
Interest income
$
5,510 $
5,901
$
(391 )
(7%)
Interest expense
(24 )
(110 )
86
(78%)
Other income (expense), net
(18,485 )
(4,068 )
(14,417 )
354%
Total
$
(12,999 ) $
1,723
$
(14,722 )
(854%)
Interest income and interest expense
The decrease in interest income was due to lower average investment balances in 2024, partially offset by 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 ("Tempus Warrants") at an average exercise price of $2.00 per share. If Tempus acquired 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 would have been reduced by such shares.
Because the number of shares issuable upon settlement were subject to adjustment, the warrants were classified as liability instruments while outstanding
and were subject to remeasurement at each balance
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sheet date, with changes in fair value recognized as other income (expense), net. In August 2024, Tempus exercised in full the Tempus Warrants for $18.4
million in cash; as such there will be no further noncash gains or losses associated with the Tempus Warrants going forward.
Prior to the exercise, we recognized noncash losses of $18.3 million as a result of increases in the fair value of the Tempus Warrants in other
income (expense), net in the consolidated statements of operations during the year ended December 31, 2024.
The initial fair value at the time of issuance of the warrants of $6.9 million exceeded the total proceeds received from Tempus of $6.0 million,
which resulted in a loss of $0.9 million. In addition, we recognized noncash losses of $3.1 million as a result of increases in the fair value of the Tempus
Warrants after the issuance date in 2023. The increase in fair value, plus the immediate loss of $0.9 million, resulted in a $4.0 million expense, which was
recognized in other income (expense), net in the consolidated statements of operations during the year ended December 31, 2023.
Separately, upon dissolution of our China entity (Personalis (Shanghai) Ltd) during the first quarter of 2024, we reclassified an accumulated
foreign currency translation loss of $0.2 million to other income (expense), net.
Liquidity and Capital Resources
The following table presents selected financial information (in thousands):
December 31,
2024
2023
Cash and cash equivalents, and short-term investments
$
185,009
$
114,179
Property and equipment, net
48,274
57,366
Contract liabilities
3,100
7,216
Working capital
171,889
99,510
From our inception through December 31, 2024, we have funded our operations primarily from net proceeds from issuance of redeemable
convertible preferred stock, IPO, follow-on equity offerings, At-the-Market ("ATM") facility (see Note 2, Summary of Significant Accounting Policies for
additional information), Tempus exercising warrants and purchasing additional shares under an investment agreement, and Merck purchasing shares under
an investment agreement (see Note 8, "Related Party Transactions" in our consolidated financial statements for additional information), as well as debt
financings. As of December 31, 2024, we had cash and cash equivalents of $91.4 million and short-term investments of $93.6 million.
We have incurred net losses since our inception. We anticipate that our current cash and cash equivalents and short-term investments 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 supplement in December 2024, 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
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.
Cash Flows
Year Ended December 31,
2024
2023
Change
Net cash used in operating activities
$
(45,150 ) $
(56,258 ) $
11,108
(20%)
Net cash provided by (used in) investing activities
(35,069 )
13,099
(48,168 )
(368%)
Net cash provided by financing activities
114,672
11,031
103,641
940%
The $11.1 million decrease in cash used in operating activities in 2024 was primarily due to lower operating expenses, particularly lower payroll
expenses as a result of our workforce reductions in 2023 and higher gross margin, due to a combination of higher revenue levels and higher gross margin
percentage. These increases in operating cash flow were partially offset by changes in working capital. Notably, during the first half of 2023 we received
significant customer deposits in connection with our agreement with Moderna to support its ongoing clinical trials project for development of a personalized
cancer therapy and the customer deposit did not repeat in 2024. We also paid more in rent in 2024 as compared to 2023 for our Fremont headquarters due
to the end of a free rent period plus escalating rent payments. Furthermore, we paid more to vendors in 2024 as compared to 2023 due to timing of vendor
shipments and billings.
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The $48.2 million decrease in cash provided by investing activities in 2024 was due to increase in investments of our cash into short-term
investments by $17.8 million and reduction in maturities of our short-term investments by $40.0 million, partially offset by a $9.3 million reduction in capital
expenditures.
The $103.6 million increase in cash provided by financing activities was driven by $50 million from Merck purchasing shares under an investment
agreement, $36.2 million from Tempus exercising warrants and purchasing additional shares under an investment agreement, $26.6 million higher net
proceeds from sales of common stock under our ATM facility, and $2.1 million lower repayments of loans; partially offset by $1.2 million payments of costs
associated with the Tempus and Merck investments, and $0.6 million lower proceeds from our employee incentive plans. In addition, we received $6.0
million in proceeds from the issuance of Tempus Warrants and $3.4 million from loans in 2023, which did not occur in 2024.
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 $185.0 million as of December 31, 2024, as well as anticipated cash receipts from customers. To fund our material cash
requirements in the short-term 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 remain similar to the levels in 2024 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 our
spending in these areas to remain similar to the levels in 2024. On a long-term basis, we manage future cash requirements relative to our long-term
business plans.
Capital expenditures. Capital expenditures are expected to increase from 2024 levels as we expect to expand NeXT Personal Dx capacity. Going
forward, our capital expenditures are expected to consist primarily of laboratory equipment and computer equipment. We currently expect capital
expenditures to be approximately $8.0 million in 2025 and between $7 million to $10 million in each of the years 2026 and 2027.
Property leases. Our noncancelable operating lease payments were $70.5 million as of December 31, 2024. 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, 2024, we have an outstanding noninterest bearing loan that was used to finance the purchase of equipment for our
laboratory. We owe a total of $1.8 million, of which the majority is payable in 2025. 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 the sale of genomic testing 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.
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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 sequencing and the delivery of
each test to the customer is accounted for as one performance obligation.
Fees for our genomic testing 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.
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 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. In September 2022, the lease commencement date for our 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. Our concluded
incremental borrowing rate for this remeasured lease was 10.5%, which resulted in a lease liability and right-of-use asset of $31.8 million.
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. In August
2024, Tempus exercised the warrants in full to purchase 9,218,800 shares of Personalis common stock for $18.4 million in cash, at an average exercise
price of $2.00 per share.
The Tempus Warrants included a provision under which the total number of shares issuable upon settlement were subject to adjustment.
Consequently, prior to the exercise, the Tempus Warrants were classified as liability instruments while outstanding and subject to remeasurement at each
balance sheet date, with changes in fair value recognized as other income (expense), net in the consolidated statements of operations. Fair values of the
warrants were estimated using the Black-Scholes option-pricing model. 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.
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68
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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69
Item 8. Financial Statements and Supplementary Data.
PERSONALIS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets
70
Consolidated Statements of Operations
71
Consolidated Statements of Comprehensive Loss
72
Consolidated Statements of Stockholders’ Equity
73
Consolidated Statements of Cash Flows
74
Notes to Consolidated Financial Statements
Note 1. Company and Nature of Business
75
Note 2. Summary of Significant Accounting Policies
75
Note 3. Revenue
81
Note 4. Balance Sheet Details
82
Note 5. Fair Value Measurements
83
Note 6. Loans
84
Note 7. Leases
85
Note 8. Related Party Transactions
86
Note 9. Restructuring and Other Charges
89
Note 10. Stock-Based Compensation
89
Note 11. Segment and Geographic Information
93
Note 12. Commitments and Contingencies
94
Note 13. Basic and Diluted Net Loss Per Common Share
94
Note 14. Income Taxes
95
Note 15. Subsequent Events
97
Report of Independent Registered Public Accounting Firm
(BDO USA, P.C., PCAOB ID: 243)
98
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70
PERSONALIS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
2024
2023
Assets
Current assets
Cash and cash equivalents
$
91,415
$
56,984
Short-term investments
93,594
57,195
Accounts receivable, net
8,140
17,730
Inventory and other deferred costs
5,939
10,474
Prepaid expenses and other current assets
3,927
4,361
Total current assets
203,015
146,744
Property and equipment, net
48,274
57,366
Operating lease right-of-use assets
16,453
17,852
Other long-term assets
2,526
3,137
Total assets
$
270,268
$
225,099
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
$
6,397
$
14,920
Accrued and other current liabilities
21,629
23,941
Contract liabilities
3,100
3,288
Short-term warrant liability
—
5,085
Total current liabilities
31,126
47,234
Long-term operating lease liabilities
34,882
38,321
Long-term warrant liability
—
4,942
Other long-term liabilities
1,303
5,161
Total liabilities
67,311
95,658
Commitments and contingencies (Note 12)
Stockholders’ equity
Preferred stock, $0.0001 par value — 10,000,000 shares authorized; none issued
—
—
Common stock, $0.0001 par value — 200,000,000 shares authorized; 85,171,146 and
50,480,694 shares issued and outstanding, respectively
9
5
Additional paid-in capital
752,961
598,364
Accumulated other comprehensive loss
(23 )
(222 )
Accumulated deficit
(549,990 )
(468,706 )
Total stockholders’ equity
202,957
129,441
Total liabilities and stockholders’ equity
$
270,268
$
225,099
(1) Includes related party accounts receivable of $2.5 million as of December 31, 2024.
(2) Includes related party liabilities of $1.7 million as of December 31, 2024.
(3) Includes related party liabilities of $1.2 million as of December 31, 2024.
See notes to consolidated financial statements.
(1)
(2)
(3)
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71
PERSONALIS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended December 31,
2024
2023
Revenue
$
84,614
$
73,481
Costs and expenses
Cost of revenue
57,789
55,273
Research and development
48,905
64,776
Selling, general and administrative
46,187
49,726
Lease impairment
—
5,565
Restructuring and other charges
—
8,077
Total costs and expenses
152,881
183,417
Loss from operations
(68,267 )
(109,936 )
Interest income
5,510
5,901
Interest expense
(24 )
(110 )
Other income (expense), net
(18,485 )
(4,068 )
Loss before income taxes
(81,266 )
(108,213 )
Provision for income taxes
18
83
Net loss
$
(81,284 )
$
(108,296 )
Net loss per share, basic and diluted
$
(1.37 )
$
(2.25 )
Weighted-average shares outstanding, basic and diluted
59,251,013
48,175,201
(1) Includes related party revenue of $2.0 million for the year ended December 31, 2024.
(2) Includes related party sales and marketing expenses of $0.5 million for the year ended December 31, 2024.
(3) Includes related party other expense of $18.3 million in connection with the change in fair value of Tempus Warrants for the year ended December 31, 2024.
See notes to consolidated financial statements.
(1)
(2)
(3)
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72
PERSONALIS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year Ended December 31,
2024
2023
Net loss
$
(81,284 )
$
(108,296 )
Other comprehensive income (loss), net of tax
Changes in foreign currency translation adjustments:
Change during period
(35 )
19
Reclassification of adjustments to net loss due to dissolution of Personalis (Shanghai) Ltd
199
—
Net changes in foreign currency translation adjustments
164
19
Change in unrealized gain on available-for-sale debt securities
35
671
Comprehensive loss
$
(81,085 )
$
(107,606 )
See notes to consolidated financial statements.
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73
PERSONALIS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Accumulate
d
Additional
Other
Total
Common Stock
Paid-In
Comprehens
ive
Accumulate
d
Stockholder
s'
Shares
Amount
Capital
Income
(Loss)
Deficit
Equity
Balance—December 31, 2022
46,707,08
4 $
5 $
579,456 $
(912 ) $
(360,410 ) $
218,139
Proceeds from sales of common stock under ATM
facility, net of commissions
1,935,214
—
3,513
—
—
3,513
Proceeds from exercise of stock options
8
—
—
—
—
—
Proceeds from ESPP
999,194
—
1,344
—
—
1,344
Restricted stock units vested
839,194
—
—
—
—
—
Stock-based compensation
—
—
14,051
—
—
14,051
Foreign currency translation adjustment
—
—
—
19
—
19
Unrealized gain on available-for-sale debt securities
—
—
—
671
—
671
Net loss
—
—
—
—
(108,296 )
(108,296 )
Balance—December 31, 2023
50,480,69
4
5
598,364
(222 )
(468,706 )
129,441
Proceeds from sale of common stock under Merck
Investment Agreement, net of issuance costs
14,044,94
3
2
49,720
—
—
49,722
Exercise of Tempus Warrants
9,218,800
1
46,738
—
—
46,739
Proceeds from sale of common stock under Tempus
Investment Agreement, net of issuance costs
3,500,000
—
16,605
—
—
16,605
Proceeds from sales of common stock under ATM
facility, net of commissions
6,660,731
1
30,077
—
—
30,078
Proceeds from exercise of stock options
80,998
—
200
—
—
200
Proceeds from ESPP
583,695
—
571
—
—
571
Restricted stock units vested
601,285
—
—
—
—
—
Stock-based compensation
—
—
10,686
—
—
10,686
Foreign currency translation adjustment
—
—
—
164
—
164
Unrealized gain on available-for-sale debt securities
—
—
—
35
—
35
Net loss
—
—
—
—
(81,284 )
(81,284 )
Balance—December 31, 2024
85,171,14
6 $
9 $
752,961 $
(23 ) $
(549,990 ) $
202,957
See notes to consolidated financial statements
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74
PERSONALIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2024
2023
Cash flows from operating activities:
Net loss
$
(81,284 )
$
(108,296 )
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense
10,686
14,051
Depreciation and amortization
10,941
11,296
Noncash operating lease cost
1,399
1,859
Noncash charges related to liability classified Tempus Warrants
18,274
4,027
Amortization of discount on short-term investments
(2,667 )
(2,000 )
Noncash restructuring and other charges
—
3,605
Noncash lease impairment expense
—
5,565
Other
93
153
Changes in operating assets and liabilities
Accounts receivable
9,590
(1,088 )
Inventory and other deferred costs
4,425
(1,934 )
Prepaid expenses and other assets
1,139
3,748
Accounts payable
(8,924 )
5,178
Accrued and other current liabilities
(2,401 )
742
Contract liabilities
(4,116 )
5,952
Operating lease liabilities
(3,505 )
894
Other long-term liabilities
1,200
(10 )
Net cash used in operating activities
(45,150 )
(56,258 )
Cash flows from investing activities:
Purchases of available-for-sale debt securities
(121,708 )
(103,945 )
Proceeds from maturities of available-for-sale debt securities
88,000
127,955
Purchases of property and equipment
(1,603 )
(10,911 )
Proceeds from sales of property and equipment
242
—
Net cash (used in) provided by investing activities
(35,069 )
13,099
Cash flows from financing activities:
Proceeds from sales of common stock under ATM facility, net of commissions
30,079
3,513
Proceeds from issuance of Tempus Warrants
—
6,000
Proceeds from exercise of Tempus Warrants
18,438
—
Proceeds from sale of common stock under Tempus Investment Agreement
17,745
—
Proceeds from sale of common stock under Merck Investment Agreement
50,000
—
Payment of costs related to Tempus and Merck Investment Agreements
(1,230 )
—
Proceeds from loans
—
3,438
Repayments of loans
(1,130 )
(3,264 )
Proceeds from issuance of common stock under equity incentive plans
770
1,344
Net cash provided by financing activities
114,672
11,031
Effect of exchange rates on cash, cash equivalents and restricted cash
(22 )
(16 )
Net change in cash, cash equivalents and restricted cash
34,431
(32,144 )
Cash, cash equivalents and restricted cash, beginning of period
58,774
90,918
Cash, cash equivalents and restricted cash, end of period
$
93,205
$
58,774
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets:
Cash and cash equivalents
$
91,415
$
56,984
Restricted cash, included in other long-term assets
1,790
1,790
Total cash, cash equivalents and restricted cash
$
93,205
$
58,774
Supplemental cash flow information:
Cash paid for income taxes, net of refunds
$
38
$
64
Acquisition of property and equipment included in accounts payable and accrued liabilities
473
104
(1) Includes a change in related party receivable of $2.0 million for the year ended December 31, 2024.
(2) Includes a change in related party payable and accruals of $0.7 million for the year ended December 31, 2024.
See notes to consolidated financial statements.
(1)
(2)
(2)
(2)
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75
PERSONALIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Company and Nature of Business
Personalis, Inc. (the "Company" or "Personalis") develops, markets, and sells advanced cancer genomic tests and services. The services are
used by pharmaceutical companies for translational research, biomarker discovery, the development of personalized cancer therapies, and for clinical trials.
The tests are used by physicians to detect residual or recurrent cancer in patients, monitor cancer response to therapy, and uncover insights for therapy
selection. The Company also provides whole exome and whole genome sequencing services for other diagnostic companies and population sequencing
initiatives. The principal markets for the Company’s tests and 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, Restructuring and Other Charges, for further
information. The Company operates and manages its business as one reportable operating segment, which is providing advanced cancer genomic tests and
services for precision oncology applications, personalized testing, and other tests.
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 sales and marketing efforts. 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. Upon dissolution of Personalis (Shanghai) Ltd during the first quarter
of 2024, an accumulated foreign currency translation adjustment of $0.2 million was reclassified from accumulated other comprehensive loss to net loss
within other income (expense), net.
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.
At-the-Market Equity Offerings
In December 2021, the Company entered into an At-the-Market ("ATM") Sales Agreement with BTIG, LLC (“BTIG”), as amended in December
2023 (the “Sales Agreement”), under which it was permitted to offer and sell its common stock from time to time through BTIG as its sales agent. BTIG
agreed to 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 agreed to pay BTIG a commission of up
to 3% of the gross sales proceeds of any common stock sold through BTIG under the Sales Agreement. The Company was not obligated to make any sales
of common stock under the Sales Agreement.
The Company issued and sold 6,660,731 and 1,935,214 shares of its common stock at a weighted-average price of $4.61 and $1.85 per share
under the Sales Agreement and received $30.1 million and $3.5 million in proceeds, net of commissions, during 2024 and 2023, respectively.
In December 2024, the Company entered into an Amended and Restated At-the-Market Sales Agreement (the “Amended Sales Agreement”) with
Piper Sandler & Co. (“Piper”) and BTIG. The Amended Sales Agreement amends and restates the Sales Agreement with BTIG, previously entered into in
December 2021, as amended in December 2023, to add Piper as a sales agent (Piper and BTIG,
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76
together, the “Sales Agents”), among certain other changes. The Sales Agents have agreed to 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 the applicable Sales Agent a commission of up to 3% of the gross sales proceeds of any
common stock sold through such Sales Agent under the Amended Sales Agreement. The Company is not obligated to make any sales of common stock
under the Amended Sales Agreement.
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:
Revenue
Accounts Receivable
Year Ended December 31,
December 31,
2024
2023
2024
2023
Natera, Inc.
30%
43%
13%
36%
VA MVP
*
13%
*
*
Moderna, Inc.
28%
*
*
*
Merck & Co., Inc.
*
*
31%
*
Pfizer Inc.
*
*
25%
*
* Less than 10% of revenue or accounts receivable
Revenue Recognition
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, (“ASC Topic 606”).
The Company derives revenue from the sale of genomic testing 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 genomic testing services are the only distinct services that meet the definition of a performance obligation and are accounted for as one
performance obligation. 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.
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77
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.
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, benefits, payroll taxes, and stock-based compensation); 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
The Company measures and recognizes compensation cost for all share-based awards, including stock options, restricted stock awards ("RSAs"),
restricted stock unit awards ("RSUs"), performance stock awards ("PSAs") and employee stock purchases related to the Employee Stock Purchase Plan
("ESPP"). 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.
The Company’s 2019 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 its own stock price as well as 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.
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78
Income Taxes
The Company uses the asset and liability method under ASC Topic 740, Income Taxes, ("ASC Topic 740"), 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.
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.
Restricted Cash
Restricted cash includes cash pledged as collateral for a standby letter of credit related to a property lease. The letter of credit is required to be
maintained throughout the term of the lease. If the date of availability or disbursement is less than one year, restricted cash is reported within prepaid
expenses and other current assets on the consolidated balance sheets. If the date of availability or disbursement is longer than one year and the balances
are maintained under an agreement that legally restricts the use of such funds, restricted cash is reported within other assets on the consolidated balance
sheets. As of December 31, 2024, no amount has been drawn under the letter of credit. As of December 31, 2024 and 2023, the Company had restricted
cash balances of $1.8 million.
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, corporate debt
securities, 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
within accumulated other comprehensive income (loss) in the consolidated statements of stockholders’ equity. Realized gains and losses are reported within
other income (expense), net in the consolidated statements of operations. Accrued interest is excluded from both the fair value and amortized cost basis of
debt securities and included in prepaid expenses and other current assets in the consolidated balance sheets. 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.
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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. Certain of the Company’s financial instruments, including cash and cash equivalents, accounts payable, accrued expenses and other
current liabilities are carried at cost, which approximates their fair value because of their short-term nature.
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 part of selling, general and administrative expenses in
the consolidated statements of operations.
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. The Company periodically assesses the useful lives of the assets to determine
whether events or circumstances may indicate that a revision to the useful life is warranted.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets, including operating lease right-of-use assets, annually or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If such events or circumstances arise, the Company will compare the
carrying amount of the asset group comprising the long-lived assets to the estimated future undiscounted cash flows expected to be generated by the asset
group. If the estimated aggregate undiscounted cash flows are less than the carrying amount of the asset group, an impairment charge is recorded as the
amount by which the carrying amount of the asset group exceeds the fair value of the assets, as based on the expected discounted future cash flows
attributable to those assets. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. During the year
ended December 31, 2023, the Company recorded a lease impairment charge of $5.6 million related to one of its right-of-use assets. Refer to Note 7,
Leases, for more details. There were no impairments of long-lived assets during the years ended December 31, 2024.
Leases
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The Company determines if an arrangement includes a lease at inception and 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, 2024, 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.” At the lease
commencement date, 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 the Company 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.
Segments
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by
the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The
Company’s CODM is its Chief Executive Officer ("CEO"). The Company has determined that it operates in one operating and reportable segment, as the
CODM reviews financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating
financial performance. See Note 11, Segment and Geographic Information, for additional information.
Recent Accounting Pronouncements
New Accounting Pronouncements Adopted
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
("ASU 2023-07"), which requires an enhanced disclosure of significant segment expenses on an annual and interim basis. The Company adopted the new
guidance retrospectively in fiscal year 2024.
New Accounting Pronouncements Not Yet Adopted
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"),
which modifies the rules on income tax disclosures to require disaggregated information about a reporting entity’s effective tax rate reconciliation as well as
information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in
making capital allocation decisions. The guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. ASU
2023-09 should be applied on a prospective basis, but retrospective application is permitted. The Company is currently evaluating the potential impact of
adopting this new guidance on our consolidated financial statements and related disclosures.
In November 2024, the FASB issued ASU No. 2024-03, Income Statement–Reporting Comprehensive Income–Expense Disaggregation
Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses ("ASU 2024-03"), which requires the disclosure of additional information
related to certain costs and expenses, including amounts of inventory purchases, employee compensation, and depreciation and amortization included in
each income statement line item on an interim and annual basis. ASU 2024-03 also requires disclosure of the total amount of selling expenses and the
Company's definition of selling expenses. ASU 2024-03 is effective for annual reporting periods beginning after December 15, 2026, and interim reporting
periods beginning after December 15, 2027, with early adoption permitted. Although the new standard requires comparative disclosures for all periods
presented, entities will be permitted to begin applying the guidance prospectively. Therefore, comparative disclosures are not required for reporting periods
beginning before the effective date. Entities can elect to apply the new standard retrospectively to any or all prior periods presented in the financial
statements. The Company is currently evaluating the impact that adoption of ASU 2024-03 will have on its financial statement disclosures.
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Note 3. Revenue
The Company disaggregates revenue by the following five 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.
•
Clinical diagnostic includes sales of ultra-sensitive, tumor-informed diagnostics tests, ordered by healthcare providers for cancer patients,
that can detect cancer recurrence earlier and aids in treatment decision-making. Revenue is derived from Medicare and private insurance
reimbursements.
•
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 the Company's revenue disaggregated by customer type (in thousands):
Year Ended December 31,
2024
2023
Pharma tests and services
$
50,939
$
31,904
Enterprise sales
25,364
31,729
Population sequencing
7,430
9,412
Clinical diagnostic
759
38
Other
122
398
Total revenue
$
84,614
$
73,481
(1) Includes related party revenue of $2.0 million for the year ended December 31, 2024.
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.
December 31,
2024
2023
Opening balances:
Accounts receivable, net
$
17,730
$
16,642
Short-term contract liabilities
$
3,288
$
1,264
Long-term contract liabilities (included in other long-term liabilities)
3,928
—
Total contract liabilities
7,216
1,264
Closing balances:
Accounts receivable, net
$
8,140
$
17,730
Short-term contract liabilities
$
3,100
$
3,288
Long-term contract liabilities (included in other long-term liabilities)
—
3,928
Total contract liabilities
3,100
7,216
Remaining Performance Obligations
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. Remaining
(1)
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Performance Obligations ("RPO") are comprised mainly of contract liabilities, and to a lesser extent, unbilled service revenue from non-cancellable contracts
for which the Company has not invoiced and has an obligation to perform, and for which revenue has not yet been recognized in the financial statements. As
of December 31, 2024, amounts related to unfulfilled services under contracts with an original expected duration of more than one year was $1.3 million. The
Company expects to recognize the entire amount of $1.3 million in the next 12 months. Revenue recognized that was included in the contract liability
balance at the beginning of each reporting period was $4.7 million and $0.4 million for the years ended December 31, 2024 and 2023, respectively.
Note 4. Balance Sheet Details
Inventory and other deferred costs consist of the following (in thousands):
December 31,
2024
2023
Raw materials
$
3,976
$
5,661
Other deferred costs
1,963
4,813
Total inventory and other deferred costs
$
5,939
$
10,474
Property and equipment, net consists of the following (in thousands):
December 31,
2024
2023
Machinery and equipment
$
29,586
$
27,809
Computer equipment
17,088
17,923
Computer software
2,985
2,961
Furniture and fixtures
2,198
2,045
Construction in progress
899
3,485
Leasehold improvements
41,556
40,811
Total
94,312
95,034
Less: accumulated depreciation and amortization
(46,038 )
(37,668 )
Property and equipment, net
$
48,274
$
57,366
Depreciation and amortization expense for the years ended December 31, 2024 and 2023 was $10.9 million and $11.3 million, respectively.
Accrued and other current liabilities consist of the following (in thousands):
December 31,
2024
2023
Accrued compensation
$
8,544
$
12,816
Operating lease liabilities
7,696
7,761
Loans—current portion (Note 6)
1,669
1,646
Market Development Fees received from Tempus (Note 8)
1,400
—
Employee ESPP contributions
301
311
Accrued and other current liabilities
2,019
1,407
Total accrued and other current liabilities
$
21,629
$
23,941
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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, 2024 and 2023 (in thousands):
December 31, 2024
Adjusted
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
Fair Value
Level
Assets
Cash and cash equivalents:
Cash
$
1,152 $
— $
— $
1,152
Money market funds
44,524
—
—
44,524
Level 1
Commercial paper
39,291
—
(6 )
39,285
Level 2
U.S. agency securities
6,453
1
—
6,454
Level 2
Total cash and cash equivalents
91,420
1
(6 )
91,415
Short-term investments:
Commercial paper
8,697
1
(1 )
8,697
Level 2
Corporate debt securities
498
—
—
498
Level 2
U.S. agency securities
2,330
—
—
2,330
Level 2
U.S. government securities
82,042
33
(6 )
82,069
Level 2
Total short-term investments
93,567
34
(7 )
93,594
Total assets measured at fair value
$
184,987 $
35 $
(13 ) $
185,009
December 31, 2023
Adjusted
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
Fair Value
Level
Assets
Cash and cash equivalents:
Cash
$
3,649 $
— $
— $
3,649
Money market funds
14,968
—
—
14,968
Level 1
Commercial paper
34,416
—
(18 )
34,398
Level 2
U.S. agency securities
1,985
1
—
1,986
Level 2
U.S. government securities
1,983
—
—
1,983
Level 2
Total cash and cash equivalents
57,001
1
(18 )
56,984
Short-term investments:
Commercial paper
495
—
—
495
Level 2
U.S. agency securities
1,976
—
—
1,976
Level 2
U.S. government securities
54,720
7
(3 )
54,724
Level 2
Total short-term investments
57,191
7
(3 )
57,195
Total assets measured at fair value
$
114,192 $
8 $
(21 ) $
114,179
The amortized costs and fair value of marketable debt securities (excluding cash and money market funds), by contractual maturity, at December
31, 2024 are as follows (in thousands):
December 31, 2024
Amortized Cost
Fair Value
Less than 1 year
$
127,369
$
127,392
1 to 5 years
11,942
11,941
Total
$
139,311
$
139,333
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 at the date of issuance, November 28,
2023, and at each subsequent balance sheet date prior to their exercises in full in August 2024. 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
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rate was based on the U.S. Treasury yield curve over the expected term of the warrants. Refer to Note 8, Related Party Transactions, for further information
about the warrants issued to Tempus.
As of December 31,
2023
Expected term (in years)
1.00 - 2.00
Volatility
102.6 - 108.5%
Risk-free interest rate
4.23 - 4.79%
Dividend yield
–%
Total fair value of Tempus Warrants (in thousands)
$
10,027
The following table sets forth a summary of the changes in fair value of the Company's Level 3 financial instruments (in thousands):
Year ended December 31,
Warrant Liabilities
2024
2023
Beginning balance
$
10,027
$
—
Initial fair value of warrant liabilities upon issuance
—-
6,942
Change in fair value—recognized as loss within Other income (expense), net in the consolidated
statements of operations
18,274
3,085
Derecognition of warrant liabilities due to exercise in full
(28,301 )
—
Ending balance
$
—
$
10,027
Note 6. Loans
Amounts outstanding under loans are as follows (in thousands):
December 31,
2024
2023
Principal
$
1,772
$
2,904
Less: unamortized discount
—
(24 )
Total carrying amount
1,772
2,880
Less: current portion (included in accrued and other current liabilities)
(1,669 )
(1,646 )
Long-term portion (included in other long-term liabilities)
$
103
$
1,234
Equipment and Software Loans
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 an 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 repaid the financed amount in three equal payments of $1.0 million in July 2021, June 2022, and June 2023 for the first
agreement, and two equal payments of $0.4 million in September 2022 and September 2023 for the second agreement. The third payment of $0.4 million for
the second agreement, which was supposed to be paid in September 2024, was settled in January 2025. As of December 31, 2024, this amount was
included in the accrued and other current liabilities in the consolidated balance sheets. 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 of $2.2 million, comprised of $0.8 million related to April 2021 internal use
software license agreement, $1.0 million related to April 2021 computer hardware agreement, and $0.4 million related to July 2022 internal use software
license agreement, were presented as financing cash outflows during the year ended December 31, 2023 in the consolidated statements of cash flows.
Imputed noncash interest expense was immaterial and $0.1 million for the year ended December 31, 2024 and 2023, respectively.
Lab Equipment Loan
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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 the last payment due in January 2026, 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 was presented as proceeds from loans in the financing activities section of the consolidated statements
of cash flows during the year ended December 31, 2023. Such amounts were used to purchase lab equipment and are reflected as purchases of property
and equipment in the investing activities section of the consolidated statements of cash flows during the year ended December 31, 2023. Repayments,
including both the down payment and future monthly payments, were $1.0 million and $1.1 million during the years ended December 31, 2023 and 2024,
respectively, are presented as financing cash outflows in the consolidated statements of cash flows.
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 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 recorded a $5.6 million impairment loss
in its consolidated statements of operations during the year ended December 31, 2023 for operating lease right-of-use assets as a result of the change in
use of the Menlo Park office as mentioned below. The Company 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, 2024 and 2023, operating leases had a weighted-average remaining lease term of 9.9 years and 10.4 years, respectively and
a weighted-average discount rate of 10.6% and 10.5%, respectively. 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, 2024 were as
follows (in thousands):
Amount
2025
$
8,057
2026
7,230
2027
7,189
2028
5,215
2029
5,371
2030 and thereafter
37,426
Total future minimum lease payments
70,488
Less: imputed interest
(27,910 )
Present value of future minimum lease payments
42,578
Less: current portion of operating lease liability (included in accrued and other current liabilities)
(7,696 )
Long-term operating lease liabilities
$
34,882
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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, 2024 and 2023 was $8.1 million, and $6.0 million, respectively. Right-of-use assets obtained in exchange for new operating lease
liabilities during the years ended December 31, 2024 and 2023 were zero and $1.3 million, respectively.
Components of lease cost were as follows (in thousands):
Year Ended December 31,
2024
2023
Lease cost
Operating lease cost
$
6,028
$
6,793
Short-term lease cost
199
198
Variable lease cost
2,027
1,828
Total lease cost
$
8,254
$
8,819
Lease Impairment
As mentioned above, 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 during 2023. 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 in its consolidated statements of operations during the year ended December 31, 2023. 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.
Note 8. Related Party Transactions
The Company determined that Tempus and Merck Sharp & Dohme LLC ("Merck") are related parties because they own more than 10% of the
Company's common stock.
Tempus
Tempus acquired its ownership stake in August 2024 by exercising the Tempus Warrants and purchasing additional shares under the Investment
Agreement (defined below).
Overview of Tempus Agreement
In November 2023, the Company entered into a Commercialization and Reference Laboratory Agreement (the “Tempus Agreement”) with Tempus
pursuant to which Tempus markets the Company's NeXT Personal Dx test in the United States. The Company performs tests ordered by patients through
Tempus and the Company bills the patients or payors. The Company compensates Tempus for orders obtained and results delivered on a per-test basis.
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 30 months' prior written notice.
Under the Tempus Agreement, the Company conducted development activities to analytically validate NeXT Personal Dx in three indications:
breast cancer, lung cancer and immuno-oncology monitoring. In consideration of the Company performing such development activities, Tempus agreed to
pay the Company fees of $12.0 million (the "Market Development Fees"), consisting of an activation fee of $3.0 million, a first milestone fee of $3.0 million
(upon achievement of one clinical validation), and a second milestone fee payable in six quarterly installments totaling $6.0 million (upon achievement of the
two remaining 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 has achieved all three clinical validations, thus
both milestones have been met.
Separately, the parties are performing co-promotion activities and the Company is compensating Tempus for promotional and commercialization
services through the end of 2026 in an amount up to $9.6 million.
The Tempus Agreement also granted 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.
Pursuant to the Tempus 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
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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.
Additionally, as partial consideration of Tempus' obligations to the Company under the Tempus Agreement, the Company issued warrants to
Tempus. See "Tempus Warrants" section below.
Tempus Warrants
In consideration of Tempus’ obligations to Personalis under the Tempus 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 were
exercisable for cash at any time prior to the applicable expiration date, may be net exercised in certain circumstances, and automatically net exercisable 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 exceeds 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.
Since the Tempus Warrants included a provision under which the total number of shares issuable upon settlement were subject to adjustment, the
Tempus Warrants were classified as liability instruments while outstanding and subject to remeasurement at each balance sheet date, with changes in fair
value recognized as other income (expense), net 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 $6.0 million, a loss of $0.9 million was immediately recognized within other income (expense), net. None of the remaining Market Development
Fees of $6.0 million were allocated to the warrants as such proceeds are contingent upon the Company achieving additional clinical validation milestones.
Fair values of the warrants were estimated using the Black-Scholes option-pricing model. See Note 5, Fair Value Measurements for discussion of inputs
used in the measurements of the Tempus Warrants and the resulting noncash losses recognized in the consolidated statements of operations. After the
issuance of warrants in November 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), net in the
consolidated statements of operations during the year ended December 31, 2023. Prior to the exercise of Tempus Warrants in August 2024, the Company
recognized a charge of $18.3 million due to the increase in fair value of Tempus Warrants, which was recorded in other income (expense), net in the
consolidated statements of operations during the year ended December 31, 2024.
In August 2024, concurrently with the execution of the Tempus Investment Agreement (described below), Tempus exercised in full the Tempus
Warrants to purchase 9,218,800 shares of Personalis common stock for $18.4 million in cash, at an average exercise price of $2.00 per share, which is
presented as financing cash flows in the consolidated statements of cash flows for the year ended December 31, 2024. The fair value of Tempus Warrants
at the time of exercise was $28.3 million based on intrinsic value of Company's common stock at a per share price of $3.07, which is the difference between
the last reported closing price of the common stock and its average exercise price at the time of exercise.
Investment Agreement with Tempus
In August 2024, the Company entered into an investment agreement (the "Tempus Investment Agreement") with Tempus under which the
Company issued and sold 3,500,000 shares of common stock at a price per share of $5.07, representing the last reported closing price of the common
stock. The Company received $17.7 million of cash from the sale of the shares and incurred $1.1 million of issuance costs directly related to the sale, which
are presented as financing cash flows in the consolidated statements of cash flows for the year ended December 31, 2024.
Impact of Tempus Agreement on the 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 $6.0 million, consisting of the first milestone fee of $3.0 million and the activation fee of $3.0 million. These proceeds of $6.0
million were received in 2023 and treated as consideration for the Tempus Warrants. These proceeds were presented as financing cash inflows in the
consolidated statements of cash flows during the year ended December 31, 2023.
The remainder of Market Development Fees—$6.0 million, payable in six quarterly installments—are recorded as a liability when received and
offset against promotional fees as they are paid by the Company to Tempus. As of December 31, 2024, $3.0 million of such $6.0 million Market
Development Fees have been received.
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88
Amounts of transactions with Tempus during each income statement period presented, along with amounts due from or to Tempus as of the
balance sheet date, follows (in thousands):
Income Statement
Year Ended
December 31, 2024
Orders and results delivery fees and net promotional fees—Selling, general and administrative expenses
$
498
Noncash loss from remeasurement of Tempus Warrants—Other income (expense), net
(18,274 )
Balance Sheet
December 31, 2024
Accrued and other current liabilities:
Unamortized Market Development Fees
$
1,400
Accrued payable to Tempus
345
Total accrued and other current liabilities
$
1,745
Other long-term liabilities:
Unamortized Market Development Fees
$
1,200
Total other long-term liabilities
$
1,200
Merck Sharp & Dohme LLC
Investment Agreement with Merck
On December 19, 2024, the Company entered into an investment agreement (the "Merck Investment Agreement") with Merck under which the
Company issued and sold 14,044,943 shares of common stock at a price per share of $3.56, representing the last reported closing price of the common
stock. The Company received $50.0 million of cash from the sale of the shares and incurred $0.3 million of issuance costs directly related to the sale, which
are presented as financing cash flows in the consolidated statements of cash flows for the year ended December 31, 2024. Pursuant to the terms of the
Merck Investment Agreement, the Company agreed to reserve $10.0 million of the proceeds to open an ISO-certified laboratory in a region outside of the
United States, with such region mutually agreed upon by the Company and Merck. This cash was not legally restricted under the Merck Investment
Agreement and therefore included in cash and cash equivalents as of December 31, 2024.
Before Merck became a related party in December 2024, the Company entered into a Master Service Agreement (the “Master Agreement”), in
June 2017, as amended from time to time, with Merck for the performance of DNA and RNA sequencing analysis and data interpretation services, as well as
synthesis and/or analysis of chemical compounds, genetic material and related samples for preclinical research purposes. In February 2024, the Company
entered into an amendment whereby Merck engaged the Company to provide clinical laboratory services in connection with Merck's clinical studies.
After Merck became a related party in December 2024, the Company invoiced $2.0 million for genomic testing services, pursuant to the terms of
the Master Agreement and recorded as revenue in its consolidated statement of operations. As of December 31, 2024, $2.5 million was outstanding as a
receivable from Merck and included in accounts receivable in the consolidated balance sheets.
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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):
One-time
employee
termination
benefits
Other costs
(primarily China
asset disposals
and impairments)
Total restructuring
and other charges
Restructuring liability balance—December 31, 2022
$
— $
— $
—
Costs incurred and charged to expense
7,467
610
8,077
Costs paid or otherwise settled
(4,338 )
(610 )
(4,948 )
Restructuring liability balance—December 31, 2023
3,129
—
3,129
Costs paid or otherwise settled
(3,129 )
—
(3,129 )
Restructuring liability balance—December 31, 2024
$
— $
— $
—
Restructuring
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 in its consolidated statements of operations during the year ended December 31,
2023, 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 in its consolidated statements of operations during the year ended
December 31, 2023, comprising separation pay and healthcare benefits payable in cash. The Company paid $3.1 million of such expenses were paid during
the first quarter of 2024.
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 did not qualify for reporting as a discontinued operation because it did not represent a strategic shift that would 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 in the Company's consolidated statements of operations during the
year ended December 31, 2023, 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.
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 ("SARs"), RSAs, and 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 serves as the successor to the
2011 Plan. Pursuant to the 2019 Plan, 7,440,524 shares of common stock were initially reserved for grant, including any shares that were reserved and
available for issuance under the 2011 Plan at the time the 2019 Plan became effective, and any shares that become available upon forfeiture or repurchase
by the Company under the 2011 Plan, will be reserved for future issuance. No further grants were made under the 2011 Plan after the adoption of 2019
Plan.
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90
The 2019 Plan provides for the grant of ISOs, NSOs, SARs, RSAs, RSUs, PSAs, performance cash awards, and other forms of equity
compensation. 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. In addition, the number of shares of the Company's common stock
available for grant and issuance shall be increased on January 1 of each calendar year during the term of the Plan by the lesser of (i) five percent (5%) of the
number of shares of the common stock issued and outstanding on each December 31 immediately prior to the date of increase, or (ii) such number of shares
determined by the Board.
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, SARs, RSAs, RSUs, PSAs, 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. These Awards
must be approved by either a majority of the Company’s independent directors 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 the Nasdaq Marketplace Rules. Pursuant to the Inducement Plan, the aggregate number of shares of
Common Stock that may be issued will not exceed 1,000,000 shares.
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. Pursuant to the ESPP, 250,000 shares of common stock were initially reserved for future issuance. In addition, on
each January 1 for the first ten calendar years after the first offering date, the aggregate number of common stock reserved for issuance under the ESPP
shall be increased automatically by the number of shares equal to the lesser of (i) one percent (1%) of the total number of outstanding shares of common
stock on the immediately preceding December 31, or (ii) 500,000 shares of common stock. 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, 2024 were as follows:
December 31, 2024
Outstanding stock awards
9,312,702
Reserved for future award grants
4,827,765
Reserved for future ESPP
61
Total common stock reserved for stock awards
14,140,528
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91
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, 2024 and 2023 is as follows:
Outstanding Options
(in thousands, except share and per share data)
Number of
Shares
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
Balance—December 31, 2022
5,451,132 $
9.90
5.31 $
7
Options granted
2,638,500
2.61
Options exercised
(8 )
2.44
Options forfeited or expired
(2,284,038 )
7.84
Balance—December 31, 2023
5,805,586 $
7.40
6.90 $
64
Options granted
3,612,000
2.19
Options exercised
(80,998 )
2.46
Options forfeited or expired
(728,870 )
9.65
Balance—December 31, 2024
8,607,718 $
5.07
7.64 $
21,949
Options vested and exercisable as of December 31, 2024
4,491,161 $
7.29
6.45 $
8,233
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 $5.78 on December 31, 2024 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 $1.53 and $1.81 per share for the years ended December 31, 2024 and 2023,
respectively. As of December 31, 2024, the unrecognized stock-based compensation of unvested options was $6.5 million, which is expected to be
recognized over a weighted-average period of 1.9 years.
Valuation of Stock Options
The Company estimated the fair value of stock options 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:
Year Ended December 31,
2024
2023
Expected term (in years)
5.50 - 6.08
5.50 - 6.08
Volatility
72.61 - 83.68%
78.47 - 79.31%
Risk-free interest rate
3.48 - 4.65%
3.47 - 4.66%
Dividend yield
–%
–%
Performance-Based Stock Option Activity
During 2020, the Company granted 421,000 PSAs to the Company's then CEO which were vested in the same year due to fulfillment of the
performance condition. These PSAs expired at the end of 2023.
During 2024, the Company granted 271,500 PSAs to the executive leadership team. Vesting of the PSAs is based upon attainment of certain
Medicare reimbursement coverages by the end of 2025 and subject to continuous service by the executives. Fair value was estimated using the Black-
Scholes option-pricing model. Total grant-date fair value of the PSAs was $0.3 million.
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92
A summary of the Company’s performance-based stock option activity for the years ended December 31, 2024 and 2023 is as follows:
Outstanding Performance-Based Options
(in thousands, except share and per share data)
Number of
Shares
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual
Term (in
years)
Aggregate
Intrinsic
Value
Balance—December 31, 2022
421,000 $
5.10
1.00 $
—
Options expired
(421,000 )
5.10
Balance—December 31, 2023
— $
—
— $
—
Options granted
271,500
1.61
Balance—December 31, 2024
271,500 $
1.61
9.20 $
1,133
Options vested and exercisable as of December 31, 2024
— $
—
— $
—
RSU Activity and Valuation
A summary of the Company’s RSU activity for the years ended December 31, 2024 and 2023 is as follows:
Unvested Restricted Stock Units
(in thousands, except share and per share data)
Number of
Shares
Weighted-
Average
Grant Date
Fair Value
Aggregate
Fair Value
Balance—December 31, 2022
2,621,482 $
9.33 $
5,191
RSUs granted
24,500
2.18
RSUs vested
(839,194 )
9.91
1,520
RSUs forfeited
(552,962 )
8.89
Balance—December 31, 2023
1,253,826 $
8.99 $
2,633
RSUs granted
—
—
RSUs vested
(601,285 )
10.46
1,719
RSUs forfeited
(219,057 )
10.20
Balance—December 31, 2024
433,484 $
6.34 $
2,506
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 $5.78 on December 31, 2024.
As of December 31, 2024, the unrecognized stock-based compensation cost of unvested RSUs was $2.0 million, which is expected to be recognized over a
weighted-average period of 1.3 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.
ESPP Activity and Valuation
During the years ended December 31, 2024 and 2023, 583,695 and 999,194 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:
Year Ended December 31,
2024
2023
Expected term (in years)
0.5
0.5
Volatility
61.35 - 95.66%
69.23 - 84.88%
Risk-free interest rate
4.42 - 5.43%
5.14 - 5.51%
Dividend yield
–%
–%
Fair value
$0.51 - $2.14
$0.33 - $0.91
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93
Stock-based Compensation Expense
The following is a summary of stock-based compensation expense by function (in thousands):
Year Ended December 31,
2024
2023
Cost of revenue
$
658
$
1,761
Research and development
4,039
4,870
Selling, general and administrative
5,989
7,420
Total stock-based compensation expense
$
10,686
$
14,051
The following is a summary of stock-based compensation expense by award type (in thousands):
Year Ended December 31,
2024
2023
Service-based stock options
$
5,017
$
5,746
Performance-based stock options
112
—
RSUs
5,251
7,539
ESPP
306
766
Total stock-based compensation expense
$
10,686
$
14,051
Note 11. Segment and Geographic Information
The Company operates in one reportable segment, which is providing advanced cancer genomic tests for precision oncology and personalized
testing. The Company develops, markets, and sells these tests to pharmaceutical companies, biopharmaceutical companies, diagnostic companies,
universities, non-profits, and government entities. It derives revenue primarily in the United States from the sale of genomic testing services and manages its
business activities on a consolidated basis. The Company does not have intra-entity sales or transfers. The Company’s CODM is its CEO, who reviews
consolidated operating results, accompanied by disaggregated information about net revenues by customer types, as presented below, to make decisions
about allocating resources and assessing performance for the entire Company.
Consolidated net loss is used to monitor actual performance compared to plans and forecasts. The CODM assesses performance based on
revenue growth which is reported on the consolidated statements of operations. The accounting policies of the segment are the same as those described in
the summary of significant accounting policies. The measure of segment assets is reported on the consolidated balance sheet as total assets. Substantially
all of the Company’s long-lived assets are located in the United States.
The Company attributes revenues to geographic region based on the billing addresses of customers. The following table presents net revenues by
geographic region:
Year Ended December 31,
2024
2023
United States
96%
90%
Others
4%
10%
The following table provides information about reported segment revenue, segment loss, and significant segment expenses (in thousands):
Year Ended December 31,
2024
2023
Revenue
$
84,614
$
73,481
Less:
Payroll and related costs
66,910
86,463
Lab supplies and outside services
12,029
18,841
Facility costs
10,132
16,899
Professional services
9,079
12,448
Repairs and maintenance
8,210
8,479
Lease impairment
—
5,565
Restructuring and other charges
—
8,077
Change in fair value of the Tempus Warrants
18,274
4,027
Depreciation and amortization
10,941
11,770
Other segment items
35,833
15,109
Interest income
(5,510 )
(5,901 )
Segment and consolidated net loss
$
(81,284 )
$
(108,296 )
(a)
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(a) Other segment items included in segment net loss include materials cost related to cost of revenue, marketing expenses, office expenses, foreign currency exchange gain
and losses, and other overhead expenses.
Note 12. Commitments and Contingencies
Contingencies
In June 2024, the Company and Foresight entered into a Settlement and License Agreement (the "S&L Agreement") to settle litigation related to
alleged patent infringement by Foresight. The Company filed complaints against Foresight—one in August 2022 and a second in June 2023—for
infringement of certain of the Company's patents relating to detection of MRD. Foresight filed counterclaims and alleged that its solid tumor recurrence test
does not infringe the Company's patents and invalidated two of the Company's patents, and sought to invalidate certain of the Company's other patents,
through inter partes review proceedings with the U.S. Patent Trial and Appeal Board. Pursuant to the S&L Agreement, Foresight and the Company agreed to
dismiss the pending claims of infringement and related defenses and counterclaims, and to end the remaining inter partes review proceedings.
Under the S&L Agreement, the Company granted Foresight a non-exclusive, worldwide license under certain patents of the Company to develop,
manufacture, commercialize and otherwise exploit products and services that use whole genome sequencing and a variable content minimal/molecular
residual disease panel that utilizes phased variants in consideration for which Foresight agreed to pay the Company a low single-digit tiered royalty on sales
of products and services covered by patents licensed by the Company, subject to customary reductions. The license is perpetual and irrevocable, except in
certain limited circumstances, which apply on a patent-by-patent basis. Upon the occurrence of certain specified change of control events with respect to
Foresight, the highest percentage of the royalty tiers is subject to a low single-digit increase and Foresight will pay a one-time fee in the low single-digit
millions. The term of the S&L Agreement runs through expiration of the patents licensed by the Company to Foresight.
The Company is also subject to claims and assessments from time to time in the ordinary course of business, including claims from customers
and vendors, pending and potential legal actions for damages, governmental investigations and other matters. For example, the Company has received, and
may in the future continue to receive letters, claims or complaints from others alleging false advertising, intellectual property infringement, and/or violation of
employment practices. 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 two paragraphs of this Note 12, as of December 31, 2024, 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.
In accordance with the Company's bylaws and/or pursuant to indemnification agreements entered into with directors, officers and certain
employees, the Company has indemnification obligations to its directors, officers and employees for claims brought against these persons arising out of
certain events or occurrences while they are serving in such a capacity. The Company maintains a director and officer liability insurance coverage to reduce
its exposure to such obligations, and payments made under these agreements. To date, there have been no indemnification claims by these directors,
officers and employees.
Note 13. 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, and assumed issuance of common stock under the ESPP. The Company incurred net losses in the periods
presented, and as a result, potential common shares from stock options, RSUs, and ESPP issuances 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):
Year Ended December 31,
2024
2023
Net loss
$
(81,284 )
$
(108,296 )
Weighted-average common shares outstanding—basic and diluted
59,251,013
48,175,201
Net loss per common share—basic and diluted
$
(1.37 )
$
(2.25 )
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:
Year Ended December 31,
2024
2023
Tempus Warrants
—
9,218,800
Options to purchase common stock
8,879,218
5,805,586
Unvested RSUs
433,484
1,253,826
ESPP
61
513,881
Total
9,312,763
16,792,093
Note 14. Income Taxes
For financial reporting purposes, loss before income taxes includes the following components (in thousands):
Year Ended December 31,
2024
2023
Domestic
$
(81,312 )
$
(106,833 )
Foreign
46
(1,380 )
Loss before income taxes
$
(81,266 )
$
(108,213 )
Provision for Income Taxes
The provision for income taxes consists of the following (in thousands):
Year Ended December 31,
2024
2023
Current:
Federal
$
—
$
(9 )
State
4
3
Foreign
15
35
Total current
19
29
Deferred:
Foreign
(1 )
54
Total deferred
(1 )
54
Provision for income taxes
$
18
$
83
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:
Year Ended December 31,
2024
2023
Expected tax (benefit) at federal statutory rate
(21%)
(21%)
Effect of:
State taxes
(5%)
(7%)
Change in valuation allowance
20%
26%
Stock-based compensation
3%
3%
Research and development credit
(3%)
(3%)
Warrant revaluation
5%
0%
Other
1%
2%
Effective tax rate
–%
–%
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96
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):
December 31,
2024
2023
Deferred tax assets:
Net operating loss carryforwards
$
94,215
$
83,983
Research and development credits
26,196
22,669
Capitalized research and development
27,088
22,089
Property and equipment
73
—
Deferred revenue
332
362
Accruals and reserves
2,011
2,883
Stock-based compensation
4,084
4,614
Operating lease liabilities
11,828
13,124
Other intangibles
152
209
Other
299
132
Total gross deferred tax assets
166,278
150,065
Less: valuation allowance
(161,698 )
(144,861 )
Total deferred tax assets
4,580
5,204
Deferred tax liabilities:
Property and equipment
—
(113 )
Operating lease right-of-use assets
(4,571 )
(5,084 )
Total deferred tax liabilities
(4,571 )
(5,197 )
Net deferred tax assets
$
9
$
7
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 $16.8 million and $30.4 million during the years ended December 31, 2024 and 2023, respectively.
Net Operating Loss and Tax Credit Carryforwards
As of December 31, 2024, the Company had a net operating loss carryforward for federal income tax purposes of $324.1 million, of which $91.9
million is subject to expiration beginning in 2031. The Company had a total state net operating loss carryforward of $302.5 million, which will begin to expire
in 2031. Utilization of some of the federal and state net operating loss and credit carryforwards or other tax attributes, such as research tax credits, are
subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and similar state
provisions. Under Section 382 of the Code, "change in ownership" generally occurs if one or more stockholders or groups of stockholders who own at least
5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period.
Similar rules may apply under state tax laws. It is possible that an ownership change, or any future ownership change, could have a material effect on the
use of our net operating loss carryforwards or other tax attributes, which could adversely affect our operating results.
As of December 31, 2024, the Company has federal credits of $14.2 million, which will begin to expire in 2031 and state research credits of $12.0
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 in the balance sheet.
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):
December 31,
2024
2023
Beginning balance
$
5,701
$
4,240
Gross increase—tax position in prior periods
—
162
Gross increase—tax position in current period
882
1,299
Ending balance
$
6,583
$
5,701
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, 2024 and 2023, no interest or penalties were required to be recognized relating to unrecognized tax
benefits.
Note 15. Subsequent Events
Equipment and Software Purchases
In January 2025, the Company entered into a $2.9 million non-cancellable purchase agreement to acquire certain equipment and related
maintenance services. Under the agreement, the Company is required to make 20% down payment before the equipment is shipped, with the remaining
balance due by January 2026.
Additionally, the Company signed a separate purchase agreement with the same vendor for $2.8 million in software services and related support.
Under this agreement, the Company is also required to make three equal payments of $1.0 million in January 2026, January 2027 and January 2028 for a
60-month service term beginning from January 2025 to January 2030.
Software Loan
In January 2025, the Company entered into a payment agreement with a financing entity to finance a purchase of $2.8 million of internal-use
software licenses and related software support services from a vendor. The financing entity and vendor are not related. The payment agreement is non-
interest bearing and the Company is obligated to repay the financed amount in three installments of $0.7 million in February 2025, $1.2 million in February
2026 and $0.9 million in February 2027.
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98
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 sheets of Personalis, Inc. and subsidiaries (the Company) as of December 31, 2024 and 2023, the
related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years 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, 2024 and 2023, and the results of its operations and its cash flows for each of the years
then, 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 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 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 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 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 audits 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 audits provide 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 separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Transactions
As described in Notes 2 and 3 to the consolidated financial statements, the Company derives revenue from the sale of genomic testing services. The
genomic testing services are the only distinct services that meet the definition of a performance obligation and are accounted for as one performance
obligation. Revenue is recognized at a point in time when test results are transferred to the customer. The Company’s consolidated revenue was $84.6
million for the year ended December 31, 2024.
We identified the auditing of the occurrence of revenue transactions as a critical audit matter. Auditing the occurrence of revenue was especially challenging
due to the significant audit effort in performing procedures related to the occurrence of revenue transactions, given the significance of revenue, the large
volume of transactions, and the evaluation of the sufficiency of audit evidence.
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99
The primary procedures we performed to address this critical audit matter included:
•
Evaluating the occurrence of revenue transactions, on a sample basis, by obtaining and inspecting invoices, customer purchase orders,
delivery data from various sources including confirmation of transactions with customers, and cash receipts from customers, where applicable.
/s/ BDO USA, P.C.
We have served as the Company's auditor since 2023.
San Jose, California
February 27, 2025
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100
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, 2024, 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, 2024 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, 2024, 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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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
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 2025 Proxy Statement to be filed with the SEC within 120 days after December 31, 2024 in connection with the
solicitation of proxies for the Company’s 2025 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.
In February 2024, Mr. Moore was promoted to Senior Vice President and Chief Legal Officer. 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 commercial-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, including 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.
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102
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 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 2025 Proxy Statement to be filed with the SEC within 120 days after December 31, 2024,
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, 2024” and “Security Ownership
of Certain Beneficial Owners and Management” in the Company’s 2025 Proxy Statement to be filed with the SEC within 120 days after December 31, 2024,
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 2025 Proxy Statement to be filed with the SEC within 120 days after December 31, 2024, 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 2025 Proxy Statement to be filed with the
SEC within 120 days after December 31, 2024, and is incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Financial Statements and Schedules
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
Page
Consolidated Balance Sheets
70
Consolidated Statements of Operations
71
Consolidated Statements of Comprehensive Loss
72
Consolidated Statements of Stockholders’ Equity
73
Consolidated Statements of Cash Flows
74
Notes to Consolidated Financial Statements
75
Report of Independent Registered Public Accounting Firm
98
(b) Exhibits
Incorporated by Reference
Exhibit
Number
Description
Form
File No.
Exhibit
Filing Date
3.1
Amended and Restated Certificate of Incorporation of the Registrant.
8-K
001-38943
3.1
6/24/2019
3.2
Amended and Restated Bylaws of the Registrant.
8-K
001-38943
3.1
10/31/2022
4.1
Description of Securities of Personalis, Inc.
10-K
001-38943
4.1
2/25/2021
4.2
Form of Common Stock Certificate of the Registrant.
S-1/A
333-231703
4.1
6/7/2019
4.3
Investment Agreement, dated August 16, 2024, by and between the
Registrant and Tempus AI, Inc.
8-K
001-38943
4.1
8/16/2024
4.4
Investment Agreement, dated December 19, 2024, by and between the
Registrant and Merck Sharp & Dohme LLC.
8-K
001-38943
4.1
12/19/2024
10.1#
Personalis, Inc. 2011 Equity Incentive Plan, as amended, and forms of
agreements thereunder.
S-1
333-231703
10.1
5/23/2019
10.2#
Personalis, Inc. 2019 Equity Incentive Plan and forms of agreements
thereunder.
S-1/A
333-231703
10.2
6/7/2019
10.3#
Personalis, Inc. 2019 Employee Stock Purchase Plan.
S-1/A
333-231703
10.3
6/7/2019
10.4#
Personalis, Inc. 2020 Inducement Plan, as amended.
10-K
001-38943
10.4
2/28/2024
10.5#
Form of RSU Award Agreement under 2020 Inducement Plan.
10-K
001-38943
10.5
2/28/2024
10.6#
Form of Option Agreement under 2020 Inducement Plan.
10-K
001-38943
10.6
2/28/2024
10.7#
Form of Indemnification Agreement entered into by and between the
Registrant and each director and executive officer.
S-1/A
333-231703
10.4
6/7/2019
10.8#
Amended and Restated Non-Employee Director Compensation Policy,
dated February 27, 2024
10-Q
001-38943
10.1
5/8/2024
10.9#
Amended and Restated Employment Agreement dated March 7, 2023,
between the Company and Aaron Tachibana.
8-K
001-38943
10.1
3/8/2023
10.10#
Amended and Restated Offer Letter, dated March 7, 2023, between the
Company and Christopher Hall.
8-K
001-38943
10.2
3/8/2023
10.11#
Amended and Restated Employment Agreement dated March 8, 2023,
between the Company and Richard Chen.
8-K
001-38943
10.3
3/8/2023
10.12#
Second Amended and Restated Executive Severance Agreement, dated
September 25, 2023, between the Company and Christopher Hall.
10-K
001-38943
10.12
2/28/2024
10.13#
Third Amended and Restated Executive Severance Agreement, dated
September 25, 2023, between the Company and Aaron Tachibana.
10-K
001-38943
10.13
2/28/2024
10.14#
Third Amended and Restated Executive Severance Agreement, dated
September 25, 2023, between the Company and Richard Chen.
10-K
001-38943
10.14
2/28/2024
10.15#
Second Amended and Restated Executive Severance Agreement, dated
September 18, 2023, between the Company and Stephen Moore.
10-K
001-38943
10.15
2/28/2024
10.16Ω‡
Commercialization and Reference Laboratory Agreement, between the
Registrant and Tempus AI, Inc., dated November 25, 2023.
8-K
001-38943
10.1
11/28/2023
Table of Contents
105
10.17Ω‡
Amendment No. 1 to the Commercialization and Reference Laboratory
Agreement, dated August 16, 2024, by and between the Registrant and
Tempus AI, Inc.
8-K
001-38943
10.1
8/16/2024
10.18
Amendment No. 2 to the Commercialization and Reference Laboratory
Agreement, dated September 20, 2024, by and between the Registrant and
Tempus AI, Inc.
10-Q
001-38943
10.2
11/6/2024
10.19Ω*
Amendment No. 3 to the Commercialization and Reference Laboratory
Agreement, dated December 13, 2024, by and between the Registrant and
Tempus AI, Inc.
10.20
Lease, by and between MENLO PREHC I, LLC, MENLO PREPI I, LLC, TPI
INVESTORS 9, LLC and the Registrant, dated February 2, 2015.
S-1
333-231703
10.9
5/23/2019
10.21
First Amendment to Lease, by and between MENLO PREPI I, LLC and TPI
INVESTORS 9, LLC and the Registrant, dated April 8, 2020.
10-Q
001-38943
10.1
8/6/2020
10.22
Lease, by and between Ardenwood Ventures I, LLC and the Registrant,
dated August 25, 2021.
10-Q
001-38943
10.1
11/4/2021
10.23
Amendment No. 1 to Lease, by and between Ardenwood Ventures I, LLC
and the Registrant, dated December 8, 2021.
10-K
001-38943
10.16
2/24/2022
10.24
Amendment No. 2 to Lease, by and between Ardenwood Ventures I, LLC
and the Registrant, dated June 9, 2022.
10-Q
001-38943
10.1
8/3/2022
10.25
Amendment No. 3 to Lease, by and between Ardenwood Ventures I, LLC
and the Registrant, dated December 19, 2022.
10-K
001-38943
10.19
2/23/2023
10.26‡
Contract No. 36C24E22D0031, by and between the U.S. Department of
Veterans Affairs and the Registrant, dated September 30, 2022.
10-Q
001-38943
10.1
11/2/2022
19.1*
Insider Trading Policy.
21.1
Subsidiaries of the Registrant as of December 31, 2024.
23.1
Consent of Independent Registered Public Accounting Firm.
24.1
Power of Attorney (included on the Signatures page of this Annual Report
on Form 10-K).
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.
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.
32.1†
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.
32.2†
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.
97#
Incentive Compensation Recoupment Policy.
10-K
001-38943
97
2/28/2024
101*
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.
Table of Contents
106
Item 16. Form 10-K Summary
None.
Table of Contents
107
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 27, 2025
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
Title
Date
/s/ Christopher Hall
President, Chief Executive Officer and Director
February 27, 2025
Christopher Hall
(Principal Executive Officer)
/s/ Aaron Tachibana
Chief Financial Officer and Chief Operating Officer
February 27, 2025
Aaron Tachibana
(Principal Financial and Accounting Officer)
/s/ Karin Eastham
Director
February 27, 2025
Karin Eastham
/s/ Olivia Bloom
Director
February 27, 2025
Olivia K. Bloom
/s/ A. Blaine Bowman
Director
February 27, 2025
A. Blaine Bowman
/s/ Woodrow A. Myers, Jr.
Director
February 27, 2025
Woodrow A. Myers, Jr., M.D.
/s/ Lonnie Shoff
Director
February 27, 2025
Lonnie Shoff
/s/ Kenneth Widder
Director
February 27, 2025
Kenneth J. Widder, M.D.
Exhibit 10.19
In accordance with Item 601(b)(10)(iv) of Regulation S-K, information indicated with “[***]” has been redacted because it is both not material
and is the type that the registrant treats as private or confidential.
Amendment No. 3 to the
Commercialization and Reference Laboratory Agreement
This Amendment No. 3 (“Amendment”) is made as of the date of the last signature below (“Amendment Date”) between Personalis, Inc.
(“Personalis”) and Tempus AI, Inc. (“Tempus”) and amends that certain Commercialization and Reference Laboratory Agreement with the
effective date of November 25, 2023 (as previously amended, the “Agreement”). Tempus and Personalis are each a “Party” and together the
“Parties.”
WHEREAS, the Parties wish to modify the terms of the Agreement to expand the scope of Services provided by Personalis to
include research services.
NOW THEREFORE, in consideration of the mutual promises herein, the Parties, intending to be legally bound, hereby agree as
follows:
1.Research Services. The Agreement is amended add a new Exhibit H (Research Services), which is attached to this Amendment as
Attachment 1.
2.Data. The definition of “Data” under Exhibit F (Mutual Security Obligations) is amended to include Personal Data (as defined on
Exhibit H).
3.Incorporation. Except as otherwise provided in this Amendment, all terms and conditions previously set forth in the Agreement will
remain in effect as set forth in the Agreement. If this Amendment and the Agreement are inconsistent, the terms and provisions of this
Amendment will supersede the terms and provisions of the Agreement, but only to the extent necessary to satisfy the purposes of this
Amendment.
NOW THEREFORE, the Parties enter into this Amendment by signature of their authorized representatives below.
Personalis, Inc.
By: /s/ Stephen Moore
Name: Stephen Moore
Title: SVP, CLO & Corporate Secretary
Date: 12/13/2024
Tempus AI, Inc.
By: /s/ Ryan Bartolucci
Name:
Ryan Bartolucci
Title:
CAO
Date:
12/13/2024
Attachment 1 to Amendment
Exhibit H
Research Services
Background
The Parties wish for Personalis to perform Services in support of Tempus’ or its pharmaceutical, biotech, and academic research institution
customers’ (each a “Tempus Customer”) research projects. There are no [***] on the Services performed under this Exhibit. Tempus
Customers may be located, and Specimens and Personal Data may originate from, [***].
Agreement
1.
Research Services. Personalis will perform the Personalis Assay and/or such other mutually agreed upon Services in support of
Tempus’ and Tempus Customers’ research projects as described in a mutually executed statement of work between Personalis and
Tempus (each, as amended from time to time by the Parties, a “SOW”). Each SOW will be in a form substantially similar to the template
attached to this Exhibit as Appendix 1. For clarity, Services provided pursuant to this Exhibit H shall not be considered Services
provided under Exhibit B (Reference Laboratory Services) to the Agreement, and the terms and conditions of Exhibit B (including,
without limitation, with respect to requisition forms, results delivery, technical integration, reimbursement from third party payors,
compensation for Tempus Services, turnaround time or QNS rates) shall not apply to Services provided pursuant to this Exhibit H except
for (x) Section 1(a)(iii) (Representations, Warranties, and Covenants) (provided that subsections (a) and (h) of such Section shall apply
only to the extent the particular Personalis Services as set forth in the applicable SOW necessitate that Personalis’ facilities be accredited
by the CAP and compliant with the licensing and certification requirements of CLIA, and subsections (b), (c), (f), and (i) of such Section
shall apply only to the extent the particular Personalis Services as set forth in the applicable SOW call for the non-RUO version of the
Personalis Assay defined in Section 4(f)(i) of the agreement), and (y) Attachment 1 to Exhibit B (Personalis Specimen Requirements).
a.
Personalis Assay. For Services provided pursuant to this Exhibit H, the “Personalis Assay” shall mean the clinical version of
Personalis’ NeXT Personal® Dx assay performed in a CAP/CLIA laboratory environment in Personalis’ facilities unless the
applicable SOW specifies the Personalis Assay is the research use only (RUO) version of Personalis’ NeXT Personal® assay
performed in a RUO laboratory environment in Personalis’ facilities.
b.
Performance Standards. Personalis will perform the Services in (i) a professional, workmanlike manner in accordance with (x)
generally accepted industry best practices using personnel appropriately skilled and trained in the art of the Services described in
this Exhibit H, and, as necessary, holding all required credentials to perform the Services, (y) applicable federal, state, and local
laws and regulations, and (z) Tempus’ or Tempus Customer’s written instructions (provided that such instructions are consistent
with the foregoing (x) and (y), the accreditation, licensing and certification requirements described in (ii) below and the applicable
SOW, and provided further that such instructions do not expand the scope of the Personalis Services beyond what is set forth in the
applicable SOW), and (ii) facilities that, unless set forth otherwise in the applicable SOW, are accredited by the CAP and compliant
with the licensing and certification requirements of CLIA.
c.
Fees; Discount for Research Services. Tempus agrees to pay Personalis for all Services provided by Personalis pursuant to this
Exhibit H as set forth in each applicable SOW and, unless otherwise set forth in the applicable SOW, in accordance with Section
2(a) (Fees and Invoicing) of the Agreement. Personalis will provide a [***] for Services provided by Personalis pursuant to this
Exhibit H. For clarity, without limitation to Section 1 above, and except as otherwise set forth in the applicable SOW, Section 4
(Compensation for Tempus Services) of Exhibit B to the Agreement shall not apply to any Services provided pursuant to this
Exhibit H, and Tempus will not be entitled to any compensation from Personalis for its Services or other activities performed by it
under any SOW.
d.
Specimens. Tempus will coordinate Specimen (including manifest or requisition form) shipment and delivery to Personalis.
Personalis will use the Specimens solely to provide the Services and will not make the Specimens available to third parties without
Tempus’ prior written consent. Except as otherwise set forth in the applicable SOW, Specimens may be destroyed only with
Tempus’ prior written consent.
e.
Project Management. Personalis will be available to troubleshoot and promptly resolve any issues or questions arising under a
SOW or related to the Services. If any issues, errors, or unforeseen events occur that may affect the quality, integrity, cost, or
timelines of the Services, Personalis will promptly notify Tempus without undue delay and cooperate in good faith with Tempus or
applicable Tempus Customer in remediating the situation.
f.
Deliverables. Personalis will provide Deliverables (defined below) as set forth in the applicable SOW. Personalis will cooperate
with reasonable requests by Tempus or a Tempus Customer to document the technical aspects of Deliverable transmission
(sometimes referred to as data transfer specifications or data transfer agreement), including, upon request, documenting Deliverable
transmission directly with the applicable Tempus Customer.
g.
Personalis acknowledges that additional or different terms or conditions may be necessary or required for a particular project (for
example, due to Tempus Customer requirements). The terms and conditions of any fully executed SOW will supersede the body of
the Agreement, including this Exhibit, to the extent necessary to address a direct conflict.
4.
Tempus Customers.
a.
Tempus may offer Personalis’ Services under this Exhibit to Tempus Customers bundled with Tempus’ products and services on a
study-by-study basis provided that, in each case, such Tempus Customer has expressed a preference to contract for Personalis’
Services for such study only through Tempus and the Parties have mutually agreed that Tempus should offer Personalis’ Services
under this Exhibit to such Tempus Customer for such study, and excluding any study for which Personalis previously marketed or
sold performance of the Personalis Assay (each an “Excluded Study”). Personalis will provide Tempus with a list of Excluded
Studies on a quarterly basis and notify Tempus on an ad hoc basis throughout each quarter of new Excluded Studies. If a Tempus
Customer sponsoring an Excluded Study wishes to contract for Personalis’ Services only through Tempus, the Parties will work in
good faith to find a mutually acceptable solution.
b.
Tempus will be responsible for the preparation and negotiation of statements of work with Tempus Customers. Upon request,
Personalis will assist Tempus by providing a quote for the requested Services, any templates relevant to the Services, sample
guidelines, and technical support. Tempus agrees not to charge Tempus Customers [***] for the Personalis Assay. Nothing in the
Agreement (including this Exhibit) prohibits Tempus from charging Tempus Customers any other customary or standard fees,
costs, or expenses, including but not limited to project management fees, or pass
through costs. Where the Tempus Customer is an academic research institution requesting Personalis’ Services be provided [***],
Tempus will direct such Tempus Customer to Personalis who will be responsible for evaluating such study and opportunity directly
with the academic research institution and study investigator.
2.
Forecasting. On [***], Tempus will provide in good faith a rolling, non-binding [***] forecast of Tempus’ expected demand for
Services under this Exhibit. The Parties will use reasonable efforts to ensure each SOW provides a forecast of the expected Services
sufficient to enable Personalis to conduct capacity planning and manage its inventory.
3.
Deliverables. Notwithstanding Section 4(e) of the Agreement, any results, data, information, documentation, reports, and/or other items
or materials identified as a deliverable in the applicable SOW and any deliverables specified in Tempus’ agreement with an applicable
Tempus Customer, with all associated intellectual property rights (subject, and without prejudice or limitation, to Section 4(f) of the
Agreement, which shall control in the event of any conflict with the provisions of this Section H or any SOW), are (as between the
Parties) “Deliverables” belonging to Tempus. For clarity, such “Deliverables” shall exclude (and Personalis shall own) any and all (i)
Background Intellectual Property of Personalis (notwithstanding, and without regard to, the exclusion of “Deliverables” in the definition
of “Background Intellectual Property” in Section 4(f) of the Agreement), (ii) replacements, improvements, updates, enhancements,
derivative works, and other modifications to Personalis’ Background Intellectual Property and/or the Personalis Assay, and (iii)
operational and quality metrics related to Personalis’ Services. Personalis will assign and does assign to Tempus all right, title and
interest in and to all such Deliverables. If Tempus has rights to data generated from the Personalis Assay, Tempus will also share the
Personalis Assay data rights with Personalis at no charge.
4.
Personal Data. Each Party agrees to comply with all applicable laws and regulations relating to the collection, storage, handling,
processing, protection, security, and transfer of non-public information capable of identifying a natural person provided to or obtained
by Personalis on Tempus’ or a Tempus Customer’s behalf in the course of providing Services (“Personal Data”). Personalis will use
Personal Data only as necessary for the provision of Services. Upon request, Personalis will negotiate in good faith and enter into a Data
Protection Agreement, Standard Contractual Clauses, or such other agreement as may be necessary to comply with applicable law.
5.
Termination. Either Party may terminate a SOW if the other has committed a material breach that is not cured to the reasonable
satisfaction of the non-breaching Party within [***] of receipt of written notice from the non-breaching Party. Tempus may terminate a
SOW by providing [***] written notice to Personalis.
6.
Third Party Beneficiaries. Notwithstanding Section 9(d) of the Agreement, each Tempus Customer who is identified in a fully
executed SOW is an intended and express third-party beneficiary to the SOW and Agreement solely with regard to Services provided by
Personalis under the applicable SOW.
Appendix 1 to Exhibit H
Statement of Work Template
Statement of Work
Research Services - [Project Title]
This Statement of Work (“SOW”) is effective as of the date of the last signature below (“Effective Date”) between Personalis, Inc.
(“Personalis”) and Tempus AI, Inc. (“Tempus”). This SOW is incorporated as part of, and is governed by the terms and conditions of, that
certain Commercialization and Reference Laboratory Agreement with the effective date of November 25, 2023 between Tempus and
Personalis (as previously amended, the “Agreement”). Any capitalized undefined terms used in this SOW will have the meaning set forth in
the Agreement. In the event of a conflict between this SOW and the Agreement, this SOW will supersede solely to the extent necessary to
resolve the conflict.
1.
Project Description.
Tempus engages Personalis to provide the Services described in this SOW in support of Tempus’ study with protocol title [Study title]
(“Study”). [Instruction: Delete if this is a subcontractor arrangement]
or
Tempus wishes to engage Personalis as a subcontractor to provide the Services described in this SOW in support of [Study title]
(“Study”) sponsored by Tempus’ customer, [Insert customer name] (the “Tempus Customer”). [Instruction: Delete if this is not a
subcontractor arrangement]
2.
Services Description.
Personalis Assay Version: [RUO version of NeXT Personal® assay in a RUO laboratory environment in Personalis’ facilities or clinical
version of NeXT Personal® assay in CAP/CLIA Facilities]
Personalis will provide the following Services:
[Insert description, including any ancillary services such as project management, and timelines/turnaround times]
[Identify sample retention, return, destruction requirements]
3.
Deliverables.
For the Services performed under this SOW, Personalis will provide the following Deliverables:
[List deliverables. Note: Depending on the project, Personalis’ standard deliverables typically include a Test report, quality control
report, and data output (such as BAM/FASTQ/VCF file)]
Personalis will deliver Deliverables to [Identify recipient (Tempus/Tempus Customer), delivery timeline/turnaround time, and delivery
method].
4.
Pricing.
Tempus will pay the amounts set forth below for the Services in accordance with the payment terms in the Agreement.
[Insert]
*The fees set forth above are reflective of [***] for the Personalis Assay.
5.
Special Terms and Conditions.
The Parties agree to the terms and conditions set forth in this Section, which are applicable only to this SOW:
[add any flow down obligations or additional terms and conditions applicable to the project, including any from the applicable Tempus
customer (including if the Tempus customer contract grants them broader ownership rights than only the deliverables is listed in this
SOW)]
IN WITNESS WHEREOF, the Parties hereto have executed this SOW through their duly authorized representatives.
Personalis, Inc.
By:
Name:
Title:
Date:
Tempus AI, Inc.
By:
Name:
Title:
Date:
Exhibit 19.1
Personalis, Inc.
Insider Trading Policy
Adopted by the Audit Committee of the Board of Directors: May 23, 2019
Last Amended by the Board of Directors: August 2, 2023
I.
Introduction
During the course of your relationship with Personalis, Inc. (together with its consolidated subsidiaries, “Personalis”), you
may receive material information that is not yet publicly available (“material nonpublic information”) about Personalis or other
publicly traded companies that Personalis has business relationships with. Material nonpublic information may give you, or
someone you pass that information on to, a leg up over others when deciding whether to buy, sell or otherwise transact in
Personalis’ securities or the securities of another publicly traded company. This policy sets forth guidelines with respect to
transactions in Personalis securities by our employees, directors, and consultants who are advised that they are subject to this
policy (“designated consultants”) and the other persons subject to this policy as described below.
II. Statement of Policy
It is the policy of Personalis that an employee, director or designated consultant of Personalis (or any other person subject to
this policy) who is aware of material nonpublic information relating to Personalis may not, directly or indirectly:
1.
engage in any transactions in Personalis’ securities, except as otherwise specified under the heading “Exceptions to
this Policy” below;
2.
recommend the purchase or sale of any Personalis’ securities;
3.
disclose material nonpublic information to persons within Personalis whose jobs do not require them to have that
information, or outside of Personalis to other persons, such as family, friends, business associates and investors,
unless the disclosure is made in accordance with Personalis’ policies regarding the protection or authorized external
disclosure of information regarding Personalis; or
4.
assist anyone engaged in the above activities.
The prohibition against insider trading is absolute. It applies even if the decision to trade is not based on such material
nonpublic information. It also applies to transactions that may be necessary or justifiable for independent reasons (such as the
need to raise money for an emergency expenditure) and also to very small transactions. All that matters is whether you are aware
of any material nonpublic information relating to Personalis at the time of the transaction.
The U.S. federal securities laws do not recognize any mitigating circumstances to insider trading. In addition, even the
appearance of an improper transaction must be avoided to preserve
2
Personalis’ reputation for adhering to the highest standards of conduct. In some circumstances, you may need to forgo a planned
transaction even if you planned it before becoming aware of the material nonpublic information. So, even if you believe you may
suffer an economic loss or sacrifice an anticipated profit by waiting to trade, you must wait.
It is also important to note that the laws prohibiting insider trading are not limited to trading by the insider alone; advising
others to trade on the basis of material nonpublic information is illegal and squarely prohibited by this policy. Liability in such
cases can extend both to the “tippee”—the person to whom the insider disclosed material nonpublic information—and to the
“tipper,” the insider himself or herself. In such cases, you can be held liable for your own transactions, as well as the transactions
by a tippee and even the transactions of a tippee’s tippee. For these and other reasons, it is the policy of Personalis that no
employee, director or designated consultant of Personalis (or any other person subject to this policy) may either (a) recommend to
another person that they buy, hold or sell Personalis’ securities at any time or (b) disclose material nonpublic information to
persons within Personalis whose jobs do not require them to have that information, or outside of Personalis to other persons
(unless the disclosure is made in accordance with Personalis’ policies regarding the protection or authorized external disclosure
of information regarding Personalis).
In addition, it is the policy of Personalis that no employee, director or designated consultant of Personalis (or any other
person subject to this policy) who, in the course of working for Personalis, learns of or is otherwise aware of material nonpublic
information about another publicly traded company with which Personalis does business, including a customer, supplier, partner
or collaborator of Personalis or an economically linked company such as a competitor of Personalis, may trade in that company’s
securities until the information becomes public or is no longer material.
There are no exceptions to this policy, except as specifically noted above or below.
III. Transactions Subject to this Policy
This policy applies to all transactions in securities issued by Personalis, as well as derivative securities that are not issued by
Personalis, such as exchange-traded put or call options or swaps relating to Personalis’ securities. Accordingly, for purposes of
this policy, the terms “trade,” “trading” and “transactions” include not only purchases and sales of Personalis’ common stock in
the public market but also any other purchases, sales, transfers or other acquisitions and dispositions of common or preferred
equity, options, warrants and other securities (including debt securities), gifts or other contributions of securities, and other
arrangements or transactions that affect economic exposure to changes in the prices of these securities.
IV. Persons Subject to this Policy
This policy applies to you and all other employees, directors and designated consultants of Personalis and its subsidiaries.
This policy also applies to members of your immediate family who reside with you, persons with whom you share a household,
persons who are your economic dependents and any other individuals or entities whose transactions in securities you influence,
3
direct or control (including, e.g., a venture or other investment fund, if you influence, direct or control transactions by the fund).
The foregoing persons who are deemed subject to this policy are referred to in this policy as “Related Persons.” You are
responsible for making sure that your Related Persons comply with this policy.
V. Material Nonpublic Information
A.
Material information
It is not always easy to figure out whether you are aware of material nonpublic information. But there is one important factor
to determine whether nonpublic information you know about a public company is material: whether the information could be
expected to affect the market price of that company’s securities or to be considered important by investors who are considering
trading that company’s securities. If the information makes you want to trade, it would probably have the same effect on others.
Keep in mind that both positive and negative information can be material.
There is no bright-line standard for assessing materiality; rather, materiality is based on an assessment of all of the facts and
circumstances, and is often evaluated by relevant enforcement authorities with the benefit of hindsight. Depending on the specific
details, the following items may be considered material nonpublic information until publicly disclosed within the meaning of this
policy. There may be other types of information that would qualify as material information as well; use this list merely as a non-
exhaustive guide:
(a) financial results or forecasts;
(b) status of current or planned services, tests, assays or products or regulatory approvals;
(c) clinical data relating to current or planned services, tests, assays or products;
(d) acquisitions or dispositions of assets, divisions or companies;
(e) public or private sales of debt or equity securities;
(f) stock splits, dividends or changes in dividend policy;
(g) the establishment of a repurchase program for Personalis’ securities;
(h) gain or loss of a significant licensor, licensee or supplier;
(i)
changes to or new corporate partner relationships or collaborations;
(j) notice of issuance or denial of patents;
(k) regulatory developments;
(l)
management or control changes;
4
(m) employee layoffs;
(n) a disruption in Personalis’ operations or breach or unauthorized access of its
property or assets, including its facilities and information technology infrastructure;
(o) tender offers or proxy fights;
(p) accounting restatements;
(q) litigation or settlements; and
(r) impending bankruptcy.
B.
When information is considered public
The prohibition on trading when you have material nonpublic information lifts once that information becomes publicly
disseminated. But for information to be considered publicly disseminated, it must be widely disseminated through a press release,
a filing with the U.S. Securities and Exchange Commission (the “SEC”), or other widely disseminated announcement. Once
information is publicly disseminated, it is still necessary to afford the investing public with sufficient time to absorb the
information. Generally speaking, information will be considered publicly disseminated for purposes of this policy only after one
full trading day has elapsed since the information was publicly disclosed. For example, if we announce material nonpublic
information before trading begins on Wednesday, then you may execute a transaction in our securities on Thursday; if we
announce material nonpublic information after trading ends on Wednesday, then you may execute a transaction in our securities
on Friday. Depending on the particular circumstances, Personalis may determine that a longer or shorter waiting period should
apply to the release of specific material nonpublic information.
VI. Quarterly Trading Blackouts
Because our workplace culture tends to be open, odds are that the vast majority of our employees, directors and designated
consultants will possess material nonpublic information at certain points during the year. To minimize even the appearance of
insider trading among our employees, directors and designated consultants, we have established “quarterly trading blackout
5
periods” during which Personalis officers, directors, employees, designated consultants and their Related Persons—regardless of
whether they are aware of material nonpublic information or not—may not conduct any trades in Personalis securities. That
means that, except as described in this policy, all Personalis officers and directors, certain specified employees and designated
consultants and their Related Persons will be able to trade in Personalis securities only during limited open trading window
periods that generally will begin after one full trading day has elapsed since the public dissemination of Personalis’ annual or
quarterly financial results and end at the beginning of the next quarterly trading blackout period. Of course, even during an open
trading window period, you may not (unless an exception applies) conduct any trades in Personalis securities if you are otherwise
in possession of material nonpublic information.
For purposes of this policy, each “quarterly trading blackout period” will generally begin at the end of the day that is one
week before the end of each fiscal quarter and end after one full trading day has elapsed since the public dissemination of
Personalis’ financial results for that quarter. Please note that the quarterly trading blackout period may commence early or may
be extended if, in the judgment of the Chief Executive Officer, Chief Financial Officer or General Counsel, there exists
undisclosed information that would make trades by Personalis employees, directors and designated consultants inappropriate. It is
important to note that the fact that the quarterly trading blackout period has commenced early or has been extended should be
considered material nonpublic information that should not be communicated to any other person.
A Personalis officer, director, employee or designated consultant who believes that special circumstances require him or her
to trade during a quarterly trading blackout period should consult the Chief Financial Officer and/or General Counsel, each of
whom are referred to in this policy as a “Clearing Officer”. Permission to trade during a quarterly trading blackout period will be
granted only where the circumstances are extenuating, a Clearing Officer concludes that the person is not in fact aware of any
material nonpublic information relating to Personalis or its securities, and there appears to be no significant risk that the trade
may subsequently be questioned.
VII. Event-Specific Trading Blackouts
From time to time, an event may occur that is material to Personalis and is known by only a few directors, officers and/or
employees. So long as the event remains material and nonpublic, the persons designated by a Clearing Officer may not trade in
Personalis’ securities. In that situation, Personalis will notify the designated individuals that neither they nor their Related
Persons may trade in the Personalis’ securities. The existence of an event-specific trading blackout should also be considered
material nonpublic information and should not be communicated to any other person. Even if you have not been designated as a
person who should not trade due to an event-specific trading blackout, you should not trade while aware of material nonpublic
information. Exceptions will not be granted during an event-specific trading blackout.
The quarterly and event-driven trading blackouts do not apply to those transactions to which this policy does not apply, as
described under the heading “Exceptions to this Policy” below.
VIII.
Exceptions to this Policy
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This policy does not apply in the case of the following transactions, except as specifically noted:
1.
Option Exercises. This policy does not apply to the exercise of options granted under Personalis’ equity compensation
plans for cash or, where permitted under the option, by a net exercise transaction with the Company or by delivery to Personalis
of already-owned Personalis stock. This policy does, however, apply to any sale of stock as part of a broker-assisted cashless
exercise or any other market sale, whether or not for the purpose of generating the cash needed to pay the exercise price or pay
taxes.
2.
Tax Withholding Transactions. This policy does not apply to the surrender of shares directly to Personalis to satisfy tax
withholding obligations as a result of the issuance of shares upon vesting or exercise of restricted stock units, options or other
equity awards granted under Personalis’ equity compensation plans. Of course, any market sale of the stock received upon
exercise or vesting of any such equity awards remains subject to all provisions of this policy whether or not for the purpose of
generating the cash needed to pay the exercise price or pay taxes. However, the trading restrictions under this policy do not apply
to the sale of shares of common stock issued upon vesting of restricted stock units for the limited purpose of covering tax
withholding obligations (and any associated broker or other fees), provided that, prior to such sale, you irrevocably elect to sell
such shares to cover tax withholding obligations in a manner approved by a Clearing Officer.
3.
ESPP. This policy does not apply to the purchase of stock by employees under Personalis’ Employee Stock Purchase
Plan (“ESPP”) on periodic designated dates in accordance with the ESPP. This policy does, however, apply to any sale of stock
acquired pursuant to the ESPP.
4.
10b5-1 Automatic Trading Programs. Under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended
(“Exchange Act”), and as permitted by Personalis, officers, directors, employees at or above the Vice President level and certain
non-employee advisors and consultants may establish a trading plan under which a broker is instructed to buy and sell Personalis
securities based on pre-determined criteria (a “Trading Plan”). Any director and any “officer” for the purpose of Section 16 of
the Exchange Act as determined by the board of directors may only sell Personalis securities in the open market under a Trading
Plan; as a result, if any such person wishes to sell Personalis securities in the open market, they must establish a Trading Plan
pursuant to this policy. So long as a Trading Plan is properly established, sales of Personalis securities pursuant to that Trading
Plan are not subject to this policy. To be properly established, an eligible person’s Trading Plan must be established in
compliance with the requirements of Rule 10b5-1 of the Exchange Act and any applicable 10b5-1 trading plan guidelines of
Personalis at a time when they were unaware of any material nonpublic information relating to Personalis and when Personalis
was not otherwise in a trading blackout period. Moreover, all Trading Plans must be reviewed and approved by a Clearing
Officer before being established to confirm that the Trading Plan complies with all pertinent company policies and applicable
securities laws.
IX. Special and Prohibited Transactions
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1.Inherently Speculative Transactions. No Personalis employee, director or designated consultant may engage in short
sales, transactions in put options, call options or other derivative securities on an exchange or in any other organized market, or in
any other inherently speculative transactions (e.g., “day-trading”) with respect to Personalis’ stock.
2.Hedging Transactions. Hedging or monetization transactions can be accomplished through a number of possible
mechanisms, including through the use of financial instruments such as prepaid variable forwards, equity swaps, collars and
exchange funds. Such hedging transactions may permit a Personalis employee, director or designated consultant to continue to
own Personalis’ securities obtained through employee benefit plans or otherwise, but without the full risks and rewards of
ownership. When that occurs, the Personalis employee, director or consultant may no longer have the same objectives as
Personalis’ other shareholders. Therefore, Personalis employees, directors and designated consultants are prohibited from
engaging in any such transactions.
3.Margin Accounts and Pledged Securities. Securities held in a margin account as collateral for a margin loan may be sold
by the broker without the customer’s consent if the customer fails to meet a margin call. Similarly, securities pledged (or
hypothecated) as collateral for a loan may be sold in foreclosure if the borrower defaults on the loan. Because a margin sale or
foreclosure sale may occur at a time when the pledgor is aware of material nonpublic information or otherwise is not permitted to
trade in Personalis’ securities, employees, directors and designated consultants are prohibited from holding Company Securities
in a margin account or otherwise pledging Personalis’ securities as collateral for a loan.
4.Standing and Limit Orders. Standing and limit orders (except standing and limit orders under approved Trading Plans, as
discussed above) create heightened risks for insider trading violations similar to the use of margin accounts. There is no control
over the timing of purchases or sales that result from standing instructions to a broker, and as a result the broker could execute a
transaction when a Personalis employee, director or designated consultant is in possession of material nonpublic information.
Personalis therefore discourages placing standing or limit orders on Personalis’ securities. If a person subject to this policy
determines that they must use a standing order or limit order (other than under an approved Trading Plan as discussed above), the
order should be limited to short duration and the person using such standing order or limit order is required to cancel such
instructions immediately in the event restrictions are imposed on their ability to trade pursuant to the “Quarterly Trading
Blackouts” and “Event-Specific Trading Blackouts” provisions above.
5.Managed Accounts. If you have a managed account (where another person has been given discretion or authority to trade
without your prior approval), you should advise your broker or investment advisor not to trade in Company securities at any time.
X. Pre-Clearance and Advance Notice of Transactions
In addition to the requirements above, officers, directors and other applicable members of management who have been
notified that they are subject to pre-clearance requirements face a further restriction: Even during an open trading window, they
may not engage in any transaction
8
in Personalis’ securities without first obtaining pre-clearance of the transaction from a Clearing Officer or his or her designee at
least two business days in advance of the proposed transaction. A Clearing Officer or his or her designee will then determine
whether the transaction may proceed and, if so, will direct a Compliance Officer (as identified in Personalis’ Section 16
Compliance Program) to help comply with any required reporting requirements under Section 16(a) of the Exchange Act. So long
as directors and Section 16 officers have established a Trading Plan, then trades pursuant to such Trading Plan do not need to be
pre-cleared. Pre-cleared transactions not completed within five business days will require new pre-clearance. Personalis may
choose to shorten this period. Persons subject to pre-clearance (including directors and Section 16 officers) must also give
advance notice of their plans to exercise an outstanding stock option to the Clearing Officer (as identified in Personalis’ Section
16 Compliance Program) Once any transaction takes place, the officer, director or applicable member of management must
immediately notify a Compliance Officer (as identified in Personalis’ Section 16 Compliance Program) and any other individuals
identified under the heading “Notification of Execution of Transaction” in Personalis’ Section 16 Compliance Program so that
Personalis may assist in any Section 16 reporting obligations.
XI. Short-Swing Trading, Control Stock and Section 16 Reports
Officers and directors subject to the reporting obligations under Section 16 of the Exchange Act should take care to avoid
short-swing transactions (within the meaning of Section 16(b) of the Exchange Act) and the restrictions on sales by control
persons (Rule 144 under the Securities Act of 1933, as amended), and should file all appropriate Section 16(a) reports (Forms 3,
4 and 5), which are described in Personalis’ Section 16 Compliance Program, and any notices of sale required by Rule 144.
XII. Prohibition of Trading During Pension Plan Blackouts
No director or executive officer of Personalis may, directly or indirectly, purchase, sell or otherwise transfer any equity
security of Personalis (other than an exempt security) during any “blackout period’’ (as defined in Regulation BTR under the
Exchange Act) if a director or executive officer acquires or previously acquired such equity security in connection with his or her
service or employment as a director or executive officer. This prohibition does not apply to any transactions that are specifically
exempted, including but not limited to, purchases or sales of Personalis’ securities made pursuant to, and in compliance with, a
Trading Plan; compensatory grants or awards of equity securities pursuant to a plan that, by its terms, permits executive officers
and directors to receive automatic grants or awards and specifies the terms of the grants and awards; or acquisitions or
dispositions of equity securities involving a bona fide gift or by will or the laws of descent or pursuant to a domestic relations
order. Personalis will notify each director and executive officer of any blackout periods in accordance with the provisions of
Regulation BTR. Because Regulation BTR is very complex, no director or executive officer of Personalis should engage in any
transactions in Personalis’ securities, even if believed to be exempt from Regulation BTR, without first consulting with a
Clearing Officer.
XIII.
Company-Designated Broker
9
Except as otherwise approved by a Clearing Officer or his or her designee, securities issued to service providers from the
Company’s equity incentive plans, inducement plans or other similar equity plans may only be traded through the Company’s
designated broker, which is currently E*TRADE.
XIV.
Policy’s Duration
This policy continues to apply to your transactions in Personalis’ securities or the securities of other public companies
engaged in business transactions with Personalis even after your relationship with Personalis has ended. If you are aware of
material nonpublic information when your relationship with Personalis ends, you may not trade Personalis’ securities or the
securities of other applicable companies until the material nonpublic information has been publicly disseminated or is no longer
material. Further, if you leave Personalis during a trading blackout period, then you may not trade Personalis’ securities or the
securities of other applicable companies until the trading blackout period has ended.
XV. Individual Responsibility
Persons subject to this policy have ethical and legal obligations to maintain the confidentiality of information about
Personalis and to not engage in transactions in Personalis’ securities while aware of material nonpublic information. Each
individual is responsible for making sure that he or she complies with this policy, and that any family member, household
member or other person or entity whose transactions are subject to this policy, as discussed under the heading “Persons Subject to
this Policy” above, also complies with this policy. In all cases, the responsibility for determining whether an individual is aware
of material nonpublic information rests with that individual, and any action on the part of Personalis or any employee or director
of Personalis pursuant to this policy (or otherwise) does not in any way constitute legal advice or insulate an individual from
liability under applicable securities laws. You could be subject to severe legal penalties and disciplinary action by Personalis for
any conduct prohibited by this policy or applicable securities laws. See “Penalties” below.
XVI.
Penalties
Anyone who engages in insider trading or otherwise violates this policy may be subject to both civil liability and criminal
penalties. Violators also risk disciplinary action by Personalis, including termination of employment. Anyone who has questions
about this policy should contact their own attorney or a Compliance Officer, at compliance@personalis.com. Please also see
Frequently Asked Questions, which are attached as Exhibit A.
XVII.
Amendments
Personalis is committed to continuously reviewing and updating its policies and procedures. Personalis therefore reserves the
right to amend, alter or terminate this policy at any time and for any reason. A current copy of the Personalis’ policies regarding
insider trading may be obtained by contacting a Clearing Officer or by visiting our intranet at:
10
https://sites.google.com/personalis.com/intranet/departments/hr/handbooks-policies-new-hire-brochures.
11
Exhibit A
Insider Trading Policy
Frequently Asked Questions
1.
What is insider trading?
A: Generally speaking, insider trading is the buying or selling of stocks, bonds, futures or other securities by someone
who possesses or is otherwise aware of material nonpublic information about the securities or the issuer of the securities. Insider
trading also includes trading in derivatives (such as put or call options) where the price is linked to the underlying price of a
company’s stock. It does not matter whether the decision to buy or sell was influenced by the material nonpublic information,
how many shares you buy or sell, or whether it has an effect on the stock price. Bottom line: If you are aware of material
nonpublic information about Personalis or another publicly traded company that Personalis has business relationships with and
you trade in Personalis’ or such other company’s securities, you have broken the law.
2.
Why is insider trading illegal?
A: If company insiders are able to use their confidential knowledge to their financial advantage, other investors would
not have confidence in the fairness and integrity of the market. This ensures that there is an even playing field by requiring those
who are aware of material nonpublic information to refrain from trading.
3.
What is material nonpublic information?
A: Information is material if it would influence a reasonable investor to buy or sell a stock, bond future or other
security. This could mean many things: financial results, clinical or regulatory results, potential acquisitions or major contracts to
name just a few. Information is nonpublic if it has not yet been publicly disseminated within the meaning of our insider trading
policy.
4.
Who can be guilty of insider trading?
A: Anyone who buys or sells a security while aware of material nonpublic information, or provides material nonpublic
information that someone else uses to buy or sell a security, may be guilty of insider trading. This applies to all individuals,
including officers, directors and others who don’t even work at Personalis. Regardless of who you are, if you know something
material about the value of a security that not everyone knows and you trade (or convince someone else to trade) in that security,
you may be found guilty of insider trading.
5.
Does Personalis have an insider trading policy?
A:
Yes,
the
insider
trading
policy
is
available
to
read
on
our
website
at
https://sites.google.com/personalis.com/intranet/departments/hr/handbooks-policies-new-hire-brochures.
12
6.
What if I work in a foreign office?
A: The same rules apply to U.S. and foreign employees and designated consultants. The Securities and Exchange
Commission (the U.S. government agency in charge of investor protection) and the Financial Industry Regulatory Authority (a
private regulator that oversees U.S. securities exchanges) routinely investigate trading in a company’s securities conducted by
individuals and firms based abroad. In addition, as a Personalis director, employee or designated consultant, our policies apply to
you no matter where you work.
7.
What if I don’t buy or sell anything, but I tell someone else material nonpublic information and they buy or sell?
A: That is called “tipping.” You are the “tipper” and the other person is called the “tippee.” If the tippee buys or sells
based on that material nonpublic information, both you and the “tippee” could be found guilty of insider trading. In fact, if you
tell family members who tell others and those people then trade on the information, those family members and the “tippee” might
be found guilty of insider trading, too. To prevent this, you may not discuss material nonpublic information about the company
with anyone outside Personalis, including spouses, family members, friends or business associates (unless the disclosure is made
in accordance with Personalis’ policies regarding the protection or authorized external disclosure of information regarding
Personalis). This includes anonymous discussions on the internet about Personalis or companies with which Personalis does
business.
8.
What if I don’t tell them the information itself; I just tell them whether they should buy or sell?
A: That is still tipping, and you can still be responsible for insider trading. You may never recommend to another person
that they buy, hold or sell Personalis’ common stock or any derivative security related to Personalis’ common stock, since that
could be a form of tipping.
9.
What are the sanctions if I trade on material nonpublic information or tip off someone else?
A: In addition to disciplinary action by Personalis—which may include termination of employment—you may be liable
for civil sanctions for trading on material nonpublic information. The sanctions may include return of any profit made or loss
avoided as well as penalties of up to three times any profit made or any loss avoided. Persons found liable for tipping material
nonpublic information, even if they did not trade themselves, may be liable for the amount of any profit gained or loss avoided by
everyone in the chain of tippees as well as a penalty of up to three times that amount. In addition, anyone convicted of criminal
insider trading could face prison and additional fines.
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10.
What is “loss avoided”?
A: If you sell common stock or a related derivative security before negative news is publicly announced, and as a result
of the announcement the stock price declines, you have avoided the loss caused by the negative news.
11.
Am I restricted from trading securities of any companies other than Personalis, for example a customer, partner or
competitor of Personalis?
A: Possibly. U.S. insider trading laws generally restrict everyone aware of material nonpublic information about a
company from trading in that company’s securities, regardless of whether the person is directly connected with that company,
except in limited circumstances. Therefore, if you have material nonpublic information about another company, you should not
trade in that company’s securities. You should be particularly conscious of this restriction if, through your position at Personalis,
you sometimes obtain sensitive, material information about other companies and their business dealings with Personalis.
12.
So if I do not trade Personalis securities when I have material nonpublic information, and I don’t “tip” other people, I
am in the clear, right?
A: Not necessarily. Even if you do not violate U.S. law, you may still violate our policies. For example, employees and
consultants may violate our policies by breaching their confidentiality obligations or by recommending Personalis stock as an
investment, even if these actions do not violate securities laws. Our policies are stricter than the law requires so that we and our
employees, directors and designated consultants can avoid even the appearance of wrongdoing. Therefore, please review the
entire policy carefully.
13.
So when can I buy or sell my Personalis securities?
A: If you are aware of material nonpublic information, you may not buy or sell our common stock until one full trading
day has elapsed since the information was publicly disclosed. At that point, the information is considered publicly disseminated
for purposes of our insider trading policy. For example, if we announce material nonpublic information before trading begins on
Wednesday, then you may execute a transaction in our securities on Thursday; if we announce material nonpublic information
after trading ends on Wednesday, then you may execute a transaction in our securities on Friday. Even if you are not aware of
any material nonpublic information, you may not trade our common stock during any trading “blackout” period. Our
insider trading policy describes the quarterly trading blackout period, and additional event-driven trading blackout periods may
be announced by email.
14.
If I have an open order to buy or sell Personalis securities on the date a blackout period commences, can I leave it to my
broker to cancel the open order and avoid executing the trade?
A: No, unless it is in connection with a 10b5-1 trading plan (see Question 26 below). If you have any open orders when
a blackout period commences other than in connection with a 10b5-1 trading plan, it is your responsibility to cancel these orders
with your broker. If you have
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an open order and it executes after a blackout period commences not in connection with a 10b5-1 trading plan, you will have
violated our insider trading policy and may also have violated insider trading laws.
15.
Am I allowed to trade derivative securities of Personalis’ common stock?
A: No. Under our policies, you may not trade in derivative securities related to our common stock, which include
publicly traded call and put options. In addition, under our policies, you may not engage in short selling of our common stock at
any time.
“Derivative securities” are securities other than common stock that are speculative in nature because they permit a
person to leverage their investment using a relatively small amount of money. Examples of derivative securities include “put
options” and “call options.” These are different from employee options and other equity awards granted under our equity
compensation plans, which are not derivative securities for purposes of our policy.
“Short selling” is profiting when you expect the price of the stock to decline, and includes transactions in which you
borrow stock from a broker, sell it, and eventually buy it back on the market to return the borrowed shares to the broker. Profit is
realized if the stock price decreases during the period of borrowing.
16.
Why does Personalis prohibit trading in derivative securities and short selling?
A: Many companies with volatile stock prices have adopted similar policies because of the temptation it represents to
try to benefit from a relatively low-cost method of trading on short-term swings in stock prices, without actually holding the
underlying common stock, and encourages speculative trading. We are dedicated to building stockholder value, short selling our
common stock conflicts with our values and would not be well-received by our stockholders.
17.
Can I purchase Personalis securities on margin or hold them in a margin account?
A: Under our policies, you may not purchase our common stock on margin or hold it in a margin account at any time.
“Purchasing on margin” is the use of borrowed money from a brokerage firm to purchase our securities. Holding our
securities in a margin account includes holding the securities in an account in which the shares can be sold to pay a loan to the
brokerage firm.
18.
Why does Personalis prohibit me from purchasing Personalis securities on margin or holding them in a margin
account?
A: Margin loans are subject to a margin call whether or not you possess material nonpublic information at the time of
the call. If a margin call were to be made at a time when you were aware of material nonpublic information and you could not or
did not supply other collateral, you may be liable under insider trading laws because of the sale of the securities (through the
margin call). The sale would be attributed to you even though the lender made the ultimate determination to
15
sell. The U.S. Securities and Exchange Commission takes the view that you made the determination to not supply the additional
collateral and you are therefore responsible for the sale.
19.
Can I pledge my Personalis shares as collateral for a personal loan?
A: No. Pledging your shares as collateral for a personal loan could cause the pledgee to transfer your shares during a trading
blackout period or when you are otherwise aware of material nonpublic information. As a result, you may not pledge your shares
as collateral for a loan.
20.
Can I hedge my ownership position in Personalis?
A: Hedging or monetization transactions, including through the use of financial instruments such as prepaid variable
forwards, equity swaps, collars and exchange funds are prohibited by our insider trading policy. Since such hedging transactions
allow you to continue to own Personalis’ securities obtained through employee benefit plans or otherwise, but without the full
risks and rewards of ownership, you may no longer have the same objectives as Personalis’ other shareholders. Therefore, our
insider trading policy prohibits you from engaging in any such transactions.
21.
Can I exercise options granted to me under Personalis’ equity compensation plans during a trading blackout period
or when I possess material nonpublic information?
A: Yes. You may exercise the options for cash (or via net exercise transaction with the company) and receive shares,
but you may not sell the shares (even to pay the exercise price or any taxes due) during a trading blackout period or any time that
you are aware of material nonpublic information. To be clear, you may not effect a broker-assisted cashless exercise (these
cashless exercise transactions include a market sale) during a trading blackout period or any time that you are aware of material
nonpublic information
22.
Am I subject to trading blackout periods if I am no longer an employee or designated consultant of Personalis?
A: It depends. If your employment with or service to Personalis ends during a trading blackout period, you will be
subject to the remainder of that trading blackout period. If your employment with or service to Personalis ends on a day that the
trading window is open, you will not be subject to the next trading blackout period. However, even if you are not subject to our
trading blackout period after you leave Personalis, you should not trade in Personalis securities if you are aware of material
nonpublic information. That restriction stays with you as long as the information you possess is material and not publicly
disseminated within the meaning of our insider trading policy.
23.
What if I purchased publicly traded options or other derivative securities before I became a Personalis employee or
designated consultant?
16
A: The same rules apply as for employee stock options. You may exercise the publicly traded options at any time, but
you may not sell the securities during a trading blackout period or at any time that you are aware of material nonpublic
information.
24.
May I own shares of a mutual fund that invests in Personalis?
A: Yes.
25.
Are mutual fund shares holding Personalis common stock subject to the trading blackout periods?
A: No. You may trade in mutual funds holding Personalis common stock at any time.
26.
May I use a “routine trading program” or “10b5-1 plan”?
A: Yes, subject to the requirements discussed in our insider trading policy and any 10b5-1 trading plan guidelines,
eligible persons may use a routine trading program. A routine trading program, also known as a 10b5-1 plan, allows you to set up
a highly structured program with your stock broker where you specify ahead of time the date, price, and amount of securities to
be traded. If you wish to create a 10b5-1 plan, please contact our Stock Administration team to confirm you are an eligible person
and to obtain approval at stockadmin@personalis.com.
Additionally, if you are a director or an “officer” for purposes of Section 16 of the Securities Exchange Act of 1934, as
amended, as determined by the board of directors and you wish to sell in Personalis common stock in the open market, then you
may only do so via a 10b5-1 plan that complies with the insider trading policy and the 10b5-1 plan guidelines established by
Personalis.
27.
What happens if I violate our insider trading policy?
A: Violating our policies may result in disciplinary action, which may include termination of your employment or other
relationship with Personalis. In addition, you may be subject to criminal and civil sanctions.
28.
Who should I contact if I have questions about our insider trading policy or specific trades?
A: You should contact a Compliance Officer at compliance@personalis.com.
Exhibit 21.1
SUBSIDIARIES OF PERSONALIS, INC.
Name of Subsidiary
Jurisdiction of Incorporation
Personalis (UK) Ltd.
United Kingdom
Exhibit 23.1
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, 333-276206 and 333-281886) and
Form S-8 (Nos. 333-232233, 333-237386, 333-238080, 333-253528, 333-262998, 333-269971, 333-271940 and 333-277489) of Personalis, Inc. and
subsidiaries of our report dated February 27, 2025, relating to the consolidated financial statements which appears in this Annual Report on Form 10-K.
/s/ BDO USA, P.C.
San Jose, California
February 27, 2025
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.
I have reviewed this Annual Report on Form 10-K of Personalis, Inc.;
2.
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;
3.
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;
4.
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 27, 2025
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.
I have reviewed this Annual Report on Form 10-K of Personalis, Inc.;
2.
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;
3.
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;
4.
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 27, 2025
By: /s/ Aaron Tachibana
Aaron Tachibana
Chief Financial Officer and Chief Operating Officer
(Principal Financial and Accounting Officer)
Exhibit 32.1
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
In connection with the Annual Report of Personalis, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2024 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 27, 2025
By: /s/ Christopher Hall
Christopher Hall
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 32.2
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
In connection with the Annual Report of Personalis, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2024 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 27, 2025
By: /s/ Aaron Tachibana
Aaron Tachibana
Chief Financial Officer and Chief Operating Officer
(Principal Financial and Accounting Officer)