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Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-26 · 151 added, 163 removed, 225 unchanged (58% of the section changed)

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You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes and the other financial information appearing elsewhere in this Annual Report on Form 10-K, as well as the other financial information we file with the SEC from time to time.

Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties.

Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties relating to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements.

As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

This section generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019.

Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 may be found in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our prospectus for our initial public offering, dated June 26, 2019 filed with the SEC on June 27, 2019.

We are advancing the field of immune-driven medicine by harnessing the inherent biology of the adaptive immune system to transform the diagnosis and treatment of disease.

Our immune medicine platform applies our proprietary technologies to read the diverse genetic code of a patient’s immune system and understand precisely how it detects and treats disease in that patient.

Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 may be found in Part II, Item 7 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019.

We are advancing the field of immune medicine by harnessing the inherent biology of the adaptive immune system to transform the diagnosis and treatment of disease.

We believe the adaptive immune system is nature’s most finely tuned diagnostic and therapeutic for most diseases, but the inability to decode it has prevented the medical community from fully leveraging its capabilities.

Our immune medicine platform applies our proprietary technologies to read the diverse genetic code of a patient’s immune system and aims to understand precisely how the immune system detects and treats disease in that patient.

We capture these insights in our dynamic clinical immunomics database, which is underpinned by computational biology and machine learning, and use them to develop and commercialize clinical products and services that we are tailoring to each individual patient.

We have two commercial products and services and a robust pipeline of clinical products and services that we are designing to diagnose, monitor and enable the treatment of diseases such as cancer, autoimmune conditions and infectious diseases.

We have commercial products and services and a robust pipeline of clinical products and services that we are designing to diagnose, monitor and enable the treatment of diseases, such as cancer, autoimmune conditions and infectious diseases.

Our immune medicine platform is the foundation for our expanding suite of products and services.

The cornerstone of our platform and core immunosequencing product, immunoSEQ, serves as our underlying research and development engine and generates revenue from academic and biopharmaceutical customers.

Our first clinical diagnostic product, clonoSEQ, is the first test authorized by the FDA for the detection and monitoring of MRD in patients with MM and ALL and is being validated for patients with other blood cancers.

Leveraging our collaboration with Microsoft to create the TCR-Antigen Map, we are also developing a diagnostic product, immunoSEQ Dx, that may enable early detection of many diseases from a single blood test.

We have established proof of concept for immunoSEQ Dx in acute Lyme disease, such that we can proceed to clinical validation, and continue to pursue signals for other disease states.

Our therapeutic product candidates, being developed under the Genentech Agreement, leverage our platform to identify specific immune cells to develop into cellular therapies in oncology.

Since our inception, we have devoted a majority of our resources to research and development activities to develop our immune medicine platform, which enables the delivery of our products and services for life sciences research, clinical diagnostics and drug discovery customers.

For our life science research customers, we provide two categories of products and services using immunoSEQ, our core sequencing and immunomics tracking technology.

The cornerstone of our platform and core immunosequencing product, immunoSEQ, serves as our underlying research and development engine and generates revenue from biopharmaceutical and academic customers.

Our first clinical diagnostic product, clonoSEQ, is the first test authorized by the FDA for the detection and monitoring of MRD in patients with MM, ALL and CLL and is also available as a CLIA-validated LDT for patients with other lymphoid cancers.

We are using the TCR-Antigen Map to develop research solutions and diagnostic products, such as immunoSEQ T-MAP and T-Detect, formerly known as immunoSEQ Dx.

T-Detect COVID, for which we have applied for EUA, confirms past SARS-CoV-2 infection, the virus that causes COVID-19, and is also the first indication for the T-Detect product line.

We are finalizing clinical validation of T-Detect for acute Lyme disease, have identified a clinical signal for Crohn’s disease and continue to pursue signals for other disease states, in parallel.

Our therapeutic product candidates, being developed under the Genentech Agreement, leverage our platform to identify specific receptors on immune cells to develop into cellular therapies in oncology.

We also recently extended our platform to identify highly potent neutralizing antibodies against SARS-CoV-2 and we believe this differentiated approach may be leveraged across multiple disease states.

Since our inception, we have devoted a majority of our resources to research and development activities to develop our immune medicine platform.

For our life sciences research customers, we provide two categories of products and services using immunoSEQ.

First, we provide immunosequencing services, the revenue from which we record as sequencing revenue.

Second, we provide certain research customers professional support, for which we may receive payments upon those customers achieving specified milestones.

We record these support activities as development revenue.

For our clinical diagnostics customers, we sell our clonoSEQ diagnostic tests, which include our immunosequencing services and are thus recorded as sequencing revenue.

In the future, we intend to sell other diagnostics products and services, which we also expect to record as sequencing revenue.

Second, we provide certain research customers professional support, for which we may receive nonrefundable upfront or recurring payments.

We may receive additional payments upon those customers achieving specified milestones.

Revenue related to these activities are recorded as development revenue.

For our clinical diagnostics customers, we sell our clonoSEQ diagnostic test and T-Detect COVID test, which include our immunosequencing services and are thus recorded as sequencing revenue.

In the future, we intend to sell other diagnostics products and services, including other indications for T-Detect, which we also expect to record as sequencing revenue.

For our current drug discovery collaborator, Genentech, we screen, identify and characterize TCRs in support of our collaboration.

We record revenue from this collaboration as development revenue.

Historically, we have sold immunoSEQ as a fee-for-service offering to academic centers and biopharmaceutical customers and further deepened those relationships over time by supporting their development initiatives.

Historically, we have sold immunoSEQ as a fee-for-service offering.

These research offerings have comprised the majority of our revenue to date, although our business is pursuing broader opportunities.

As we continue to expand the use of our clonoSEQ diagnostic tests, develop and commercialize immunoSEQ Dx and develop and commercialize therapeutic product candidates with our drug discovery collaborator, we expect our mix of revenue to shift to clinical products and services, which we believe will become our largest sources of revenue.

As we continue to expand the use of our clonoSEQ diagnostic tests, develop and commercialize T-Detect and develop and commercialize therapeutic product candidates with our drug discovery collaborator, we expect our mix of revenue to shift to clinical products and services, which we believe will become our largest sources of revenue.

We are actively pursuing opportunities to deepen our relationships with current customers and initiate relationships with new customers.

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We are focused on establishing and maintaining collaborative relationships with payors, developing health economic evidence and building billing and patient access infrastructure to expand reimbursement coverage for our clinical diagnostics.

We continue to seek expanded coverage of our clonoSEQ diagnostic test and, in 2019, we successfully expanded coverage through contractual agreements or positive medical policies with Medicare and several of the largest national private health insurers in the United States.

We generated revenue of $85.1 million and $55.7 million for the years ended December 31, 2019 and 2018, respectively.

Our net losses were $68.6 million and $46.4 million for the years ended December 31, 2019 and 2018, respectively.

We have funded our operations to date principally from the sale of convertible preferred stock and common stock, including the sale of common stock in our initial public offering, and, to a lesser extent, sequencing and development revenue.

We continue to seek expanded coverage of our clonoSEQ diagnostic test and have successfully expanded coverage through contractual agreements or positive medical policies with Medicare and several of the largest national private health insurers in the United States.

We generated revenue of $98.4 million and $85.1 million for the year ended December 31, 2020 and 2019, respectively.

Our net losses were $146.2 million and $68.6 million for the year ended December 31, 2020 and 2019, respectively.

We have funded our operations to date principally from the sale of convertible preferred stock and common stock and, to a lesser extent, sequencing and development revenue.

As of December 31, 2020 and 2019, we had cash, cash equivalents and marketable securities of $806.8 million and $682.3 million, respectively.

In December 2018, we entered into the Genentech Agreement pursuant to which we received a $300.0 million initial upfront payment in February 2019, may be eligible to receive approximately $1.8 billion over time, including payments upon achievement of specified development, regulatory and commercial milestones, and may receive additional royalties on sales of products commercialized under this agreement.

Initial Public Offering

On July 1, 2019, we completed our initial public offering in which we issued and sold 17,250,000 shares of common stock, including shares issued upon the exercise in full of the underwriters’ over-allotment option, at a public offering price of $20.00 per share.

We received $315.9 million in net proceeds, after deducting underwriting discounts and commissions of $24.1 million and offering expenses of $5.0 million.

Immediately prior to the completion of our initial public offering, 93,039,737 shares of convertible preferred stock then outstanding converted into an equivalent number of shares of common stock.

Follow-On Offering

In July 2020, we completed an underwritten public offering of our common stock in which we issued and sold 7,200,000 shares of common stock at a public offering price of $40.00 per share.

We received $271.8 million in net proceeds, after deducting underwriting discounts and net offering expenses paid by us.

Components of Results of Operations

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Sequencing revenue.

Sequencing revenue reflects the amounts generated from providing sequencing services through immunoSEQ to research customers and from providing testing services through clonoSEQ to clinical and research customers.

For our research customers, which include biopharmaceutical customers and academic institutions, delivery of the sequencing results may include some level of professional support and analysis.

Terms with biopharmaceutical customers generally include non-refundable upfront payments, which we record as deferred revenue.

For all customers, we recognize revenue as we deliver sequencing results.

From time to time, we offer discounts in order to gain rights and access to certain datasets.

Revenue is recognized net of these discounts and costs associated with these services are reflected in cost of revenue.

Sequencing revenue reflects the amounts generated from providing testing services through clonoSEQ to clinical and research customers and from providing sequencing services through immunoSEQ to research customers.

For our clinical customers, we derive revenue from providing our clonoSEQ test report to ordering physicians.

We bill commercial payors and medical institutions based on tests delivered to ordering physicians.

Amounts paid for clonoSEQ diagnostic tests by commercial payors and medical institutions vary based on respective reimbursement rates and patient responsibilities, which may vary from our targeted list price.

We bill medical institutions and commercial and government payors based on tests delivered to ordering physicians.

Amounts paid for clonoSEQ diagnostic tests by medical institutions and commercial and government payors vary based on respective reimbursement rates and patient responsibilities, which may differ from our targeted list price.

To date, the majority of our clonoSEQ diagnostic test revenue has been received from medical institutions.

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Until 2019, we did not have reimbursement available to us through any government payors for clonoSEQ.

In January 2019, clonoSEQ received Medicare coverage aligned with the FDA label and NCCN guidelines for longitudinal monitoring in MM and ALL.

We bill Medicare for an episode of treatment when we deliver the first eligible test results.

For our clonoSEQ coverage under Medicare, we bill an episode of treatment when we deliver the first eligible test results.

This billing contemplates all necessary tests required during a patient’s treatment cycle, which is currently estimated at approximately four tests per patient, including the initial sequence identification test.

Revenue is recognized at the time the initial billable test result is delivered and is based upon cumulative tests delivered to date.

Any unrecognized revenue from the initial billable test is recorded as deferred revenue and recognized as we deliver the remaining tests in a patient’s treatment cycle.

Revenue recognition commences at the time the initial billable test result is delivered and is based upon cumulative tests delivered to date.

Any unrecognized revenue from the initial billable test is recorded as deferred revenue and recognized as we deliver the remaining tests in a patient’s treatment cycle or when it becomes remote that a patient will receive additional testing and we have not delivered our estimate of total tests.

For our research customers, which include biopharmaceutical customers and academic institutions, delivery of the sequencing results may include some level of professional support and analysis.

Terms with biopharmaceutical customers generally include non-refundable upfront payments, which we record as deferred revenue.

For all customers, we recognize revenue as we deliver sequencing results.

From time to time, we offer discounts in order to gain rights and access to certain datasets.

Revenue is recognized net of these discounts and costs associated with these services are reflected in cost of revenue.

Development revenue .

Development revenue primarily represents regulatory or development support services, other than sequencing revenue, that we provide to biopharmaceutical customers who seek access to our platform to support their therapeutic development activities.

Additionally, we generate development revenue from the achievement of regulatory milestones.

We enter into collaboration and similar agreements with these customers.

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These agreements may also include substantial non-refundable upfront payments, which we recognize as development revenue over time as we perform the respective services .

Additionally, we generate development revenue from the achievement of regulatory milestones.

We expect revenue to increase over the long term, particularly as the mix of revenue migrates to clinical diagnostics and drug discovery.

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Our revenue may fluctuate from period to period due to the uncertain nature of delivery of our products and services, the achievement of milestones by us or our customers, timing of expenses incurred, changes in estimates of total anticipated costs related to our Genentech Agreement and other events not within our control, such as the delivery of customer samples or customer decisions to no longer pursue their development initiatives.

Due to the ongoing uncertainties related to the COVID-19 pandemic, we may continue to experience variability in revenue in the near term as our customers’ abilities to procure samples for their research initiatives change, as customer initiatives evolve and as clinical testing is impacted.

Cost of Revenue

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Additionally, costs to support our Genentech Agreement are a component of our research and development activities.

We expect cost of revenue to increase in absolute dollars as we grow our sequencing volume but the cost per sample to decrease over the long term due to the efficiencies we may gain as sequencing volume increases from improved utilization of our laboratory capacity, automation and other value engineering initiatives.

We expect cost of revenue to increase in absolute dollars as we grow our sequencing volume and make increased investments in laboratory automation and facilities, but the cost per sample to decrease over the long term due to the efficiencies we may gain as sequencing volume increases from improved utilization of our laboratory capacity, automation and other value engineering initiatives.

If our sample volume throughput is reduced as a result of the COVID-19 pandemic or otherwise, cost of revenue as a percentage of total revenue may be adversely impacted due to fixed overhead costs.

Research and Development Expenses

Research and development expenses consist of laboratory materials costs, personnel-related expenses, allocated facility costs, information technology and contract service expenses.

Research and development activities support further development and refinement of existing assays and products, discovery of new technologies and investments into our immune medicine platform.

We also include in research and development expenses the costs associated with software development activities to support laboratory scaling and workflow, as well as development of applications to support future commercial opportunities.

Research and development expenses consist of laboratory materials costs, personnel-related expenses, equipment costs, allocated facility costs, information technology expenses and contract service expenses.

Research and development activities support further development and refinement of existing assays and products, discovery of new technologies and investments in our immune medicine platform.

We also include in research and development expenses the costs associated with software development of applications to support future commercial opportunities, as well as development activities to support laboratory scaling and workflow.

We are currently conducting research and development activities for several products and services and we typically use our laboratory materials, personnel, facilities, information technology and other development resources across multiple development programs.

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However, we expect research and development expenses to decrease as a percentage of revenue in the long term, although the percentage may fluctuate from period to period due to the timing and extent of our development and commercialization efforts.

While the pace and priorities of our research and development initiatives may continue to be impacted by the COVID-19 pandemic, we expect to continue to increase expenses in both the near and long-term to support our ongoing initiatives, which include our initiatives with respect to COVID-19.

Sales and Marketing Expenses

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General and administrative expenses consist primarily of personnel-related expenses, including share-based compensation, salaries and benefits for our personnel in executive, legal, finance and accounting, human resources and other administrative functions, including third-party billing services.

In addition, these expenses include insurance costs, external legal costs, accounting and tax service expenses, consulting fees and allocated facilities costs.

We expect our general and administrative expenses to continue to increase in absolute dollars as we increase headcount and incur costs associated with operating as a public company, including expenses related to legal, accounting, regulatory matters, maintaining compliance with exchange listing and requirements of the SEC, director and officer insurance premiums and investor relations.

In addition, these expenses include insurance costs, external legal costs, accounting and tax service expenses, consulting fees and allocated facility costs.

We expect our general and administrative expenses to continue to increase in absolute dollars as we increase headcount.

Though expected to increase in absolute dollars, we expect these expenses to decrease as a percentage of revenue in the long term as revenue increases.

Results of Operations

The following table sets forth our results of operations for the periods presented:

Statements of Operations Data and Other Financial and Operating Data

The following table sets forth our statements of operations data and other financial and operating data for the periods presented:

Year Ended December 31,

(in thousands)

(in thousands, except share and per share amounts)

Statements of Operations Data:

Sequencing revenue

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Amortization of intangible assets

Restructuring

Total operating expenses

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Interest and other income, net

Fair value adjustment to Series E-1 convertible preferred

stock options

Fair value adjustment to Series E-1 convertible preferred stock options

Net loss attributable to common shareholders

Comparison of the Years Ended December 31, 2019 and 2018

Net loss per share attributable to common shareholders, basic and diluted

Weighted-average shares used in computing net loss per share attributable

to common shareholders, basic and diluted

Other Financial and Operating Data:

Adjusted EBITDA (1)

(1) Adjusted EBITDA is a non-GAAP financial measure that we define as net loss adjusted for interest and other income, net, income tax (expense) benefit, depreciation and amortization and share-based compensation expenses.

Please refer to “Adjusted EBITDA” below for a reconciliation between Adjusted EBITDA and net loss, the most directly comparable GAAP financial measure, and a discussion about the limitations of Adjusted EBITDA.

C omparison of the Years Ended December 31, 20 20 and 201 9

Year Ended December 31,

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Total revenue was $98.4 million for the year ended December 31, 2020, compared to $85.1 million for the year ended December 31, 2019, representing an increase of $13.3 million, or 16%.

Sequencing revenue increased to $43.5 million for the year ended December 31, 2019, representing an increase of $10.5 million, or 32%.

The increase in sequencing revenue was attributable to an increase of approximately $6.3 million in revenue generated from biopharmaceutical and academic customers, inclusive of a decrease in revenue recognized from cancelled customer projects of $1.5 million, and a $4.2 million increase in revenue generated from clinical customers.

Research sequencing volume increased by 18% to 35,491 sequences delivered in the year ended December 31, 2019 from 30,200 sequences delivered in the year ended December 31, 2018.

Sequencing revenue decreased to $41.4 million for the year ended December 31, 2020, representing a decrease of $2.1 million, or 5%.

The decrease in sequencing revenue was attributable to an $8.6 million decrease in revenue generated from biopharmaceutical and academic customers, inclusive of a $0.9 million decrease in revenue recognized from cancelled customer projects, which was partially offset by a $6.5 million increase in revenue generated from clinical customers.

This increase was inclusive of a $0.6 million increase in revenue related to Medicare that was recognized from our deferred revenue because of our determination that additional testing for specific patients was remote.

Research sequencing volume decreased by 36% to 22,663 sequences delivered in the year ended December 31, 2020 from 35,491 sequences delivered in the year ended December 31, 2019.

The reduction in research sequencing volume was driven partly by the expiration of a translational agreement with a biopharmaceutical customer in the fourth quarter of 2019 and trial enrollment delays and project deferrals from our biopharmaceutical and academic customers.

The impact of the COVID-19 pandemic on the operating capacity of our biopharmaceutical and academic customers was a large contributing factor to trial enrollment delays.

Clinical sequencing volume increased by 50% to 15,216 clinical tests delivered in the year ended December 31, 2020 from 10,168 clinical tests delivered in the year ended December 31, 2019.

Development revenue increased to $56.9 million for the year ended December 31, 2020, representing an increase of $15.4 million, or 37%.

The increase was primarily attributable to $35.1 million of revenue generated from the Genentech Agreement, which generated no revenue in 2018, partially offset by a $7.1 million decrease in development revenue generated from translational agreements and a $9.1 million decrease in development revenue generated from MRD agreements, which includes an $8.0 million decrease in regulatory milestones.

The increase was primarily attributable to a $17.7 million increase in revenue generated from the Genentech Agreement, partially offset by a $2.0 million decrease in revenue generated from translational agreements.

Cost of Revenue

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Cost of revenue

Cost of revenue was $22.3 million for the year ended December 31, 2019, compared to $19.7 million for the year ended December 31, 2018, representing an increase of $2.6 million, or 13%.

The increase in cost of revenue was primarily attributable to an increase of $1.5 million in the cost of overhead due to the production laboratory expansion and a $1.0 million increase in the cost of materials due to increased sample volumes.

Cost of revenue was $22.5 million for the year ended December 31, 2020, compared to $22.3 million for the year ended December 31, 2019, representing an increase of approximately $0.3 million, or 1%.

The increase was primarily attributable to a $5.8 million increase in labor and overhead costs, a $0.8 million increase in cost of materials resulting from product mix and a $0.6 million increase in biopharmaceutical partner support and other expenses, all of which were mostly offset by a $5.9 million decrease related to higher usage of our production laboratory to process research and development samples versus revenue samples, as well as a $1.1 million decrease in materials cost resulting from decreased revenue sample volume.

Research and Development

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Depreciation and other expenses

Research and development expenses were $70.7 million for the year ended December 31, 2019, compared to $39.2 million for the year ended December 31, 2018, representing an increase of $31.5 million, or approximately 81%.

The increase was primarily attributable to $17.4 million in additional cost of materials and allocated production laboratory expenses, which primarily related to supporting our TCR drug discovery efforts, TCR-Antigen Map development and clonoSEQ development.

Research and development expenses were $116.1 million for the year ended December 31, 2020, compared to $70.7 million for the year ended December 31, 2019, representing an increase of $45.4 million, or 64%.

The increase was primarily attributable to an $18.4 million increase in cost of materials and allocated production laboratory expenses, a $17.4 million increase in personnel costs and a $6.7 million increase in depreciation and other expenses.

The increase in cost of materials and allocated production laboratory expenses was primarily related to supporting investments in our T-Detect and TCR-Antigen Map development and immune medicine platform, as well as our drug discovery efforts.

Sales and Marketing

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Sales and marketing

Sales and marketing expenses were $38.5 million for the year ended December 31, 2019, compared to $24.5 million for the year ended December 31, 2018, representing an increase of $14.0 million, or 57%.

The increase was primarily attributable to $8.2 million in additional personnel costs, $2.9 million in additional travel, entertainment and customer event related expenses and $2.4 million in additional consulting and marketing fees.

Sales and marketing expenses were $61.4 million for the year ended December 31, 2020, compared to $38.5 million for the year ended December 31, 2019, representing an increase of $22.9 million, or approximately 60%.

The increase was primarily attributable to $14.5 million in additional personnel costs and $8.7 million in additional marketing expenses.

Our clonoSEQ marketing efforts were the largest driver of this $8.7 million increase, followed by increased shared corporate marketing services and, to a lesser extent, additional marketing expenses related to T-Detect and life sciences research.

These increases were partially offset by a $1.9 million decrease in travel and customer event related expenses.

General and Administrative

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General and administrative expenses were $49.5 million for the year ended December 31, 2020, compared to $30.3 million for the year ended December 31, 2019, representing an increase of $19.2 million, or 63%.

The increase was primarily attributable to $4.3 million in additional personnel costs, $1.2 million in additional business taxes, largely due to the Genentech upfront payment received in February 2019, and a $2.0 million increase in insurance expense primarily related to public company director and officer coverage.

The increase was primarily attributable to a $10.9 million increase in personnel costs, a $4.6 million increase in legal, accounting and tax fees and a $2.3 million increase in insurance costs, both of which were largely due to the effect of operating as a public company for the full year ended December 31, 2020.

Interest and Other Income, Net

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Interest and other income, net

Interest and other income, net was $9.8 million for the year ended December 31, 2019, compared to $3.3 million for the year ended December 31, 2018, representing an increase of $6.5 million, or approximately 196%.

The increase was primarily attributable to an $8.8 million increase in interest earned on and investment amortization of a larger portfolio, partially offset by the $2.3 million impact of revaluing a convertible preferred stock warrant liability in 2019.

Quarterly Results of Operations

The following tables set forth our unaudited condensed quarterly statements of operations data for each of the eight quarters in the 24-month period ended December 31, 2019.

The information for each of these quarters has been prepared in accordance with GAAP and on the same basis as our audited financial statements included elsewhere in this Annual Report on Form 10-K.

In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of results of operations data for these periods.

This data should be read in conjunction with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Our historical quarterly operating results are not necessarily indicative of our operating results for the full year or any future period.

Three Months Ended

September 30,

(in thousands, except per share amounts)

Sequencing revenue

Development revenue

Total revenue

Operating expenses

Cost of revenue

Research and development

Sales and marketing

General and administrative

Amortization of intangible assets

Total operating expenses

Loss from operations

Interest and other income, net

Fair value adjustment to Series E-1 convertible preferred

stock options

Net loss attributable to common shareholders

Net loss per share attributable to common shareholders,

basic and diluted

Three Months Ended

September 30,

(in thousands, except per share amounts)

Sequencing revenue

Development revenue

Total revenue

Operating expenses

Cost of revenue

Research and development

Sales and marketing

General and administrative

Amortization of intangible assets

Total operating expenses

Loss from operations

Interest and other income, net was $6.6 million for the year ended December 31, 2020, compared to $9.8 million for the year ended December 31, 2019, representing a decrease of $3.2 million, or 33%.

The decrease was primarily attributable to a $5.6 million decrease in net interest income and investment amortization resulting from reductions in interest rates and related yields, partially offset by the $2.3 million impact of revaluing a convertible preferred stock warrant liability in the year ended December 31, 2019.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we define as net loss adjusted for interest and other income, net, income tax (expense) benefit, depreciation and amortization and share-based compensation expenses.

Management uses Adjusted EBITDA to evaluate the financial performance of our business and the effectiveness of our business strategies.

We present Adjusted EBITDA because we believe it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry and it facilitates comparisons on a consistent basis across reporting periods.

Further, we believe it is helpful in highlighting trends in our operating results because it excludes items that are not indicative of our core operating performance.

Adjusted EBITDA has limitations as an analytical tool and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP.

We may in the future incur expenses similar to the adjustments in the presentation of Adjusted EBITDA.

In particular, we expect to incur meaningful share-based compensation expense in the future.

Other limitations include that Adjusted EBITDA does not reflect:

all expenditures or future requirements for capital expenditures or contractual commitments;

changes in our working capital needs;

income tax (expense) benefit, which may be a necessary element of our costs and ability to operate;

the costs of replacing the assets being depreciated and amortized, which will often have to be replaced in the future;

the non-cash component of employee compensation expense;

the impact of earnings or charges resulting from matters we consider not to be reflective, on a recurring basis, of our ongoing operations.

In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

The following is a reconciliation of our net loss to Adjusted EBITDA for the periods presented (in thousands):

Year Ended December 31,

Interest and other income, net

Fair value adjustment to Series E-1 convertible preferred

stock options

Net loss attributable to common shareholders

Net loss per share attributable to common shareholders,

basic and diluted

Depreciation and amortization expense

Share-based compensation expense (1)

Adjusted EBITDA

(1) Represents share-based compensation expense related to option and restricted stock unit awards.

See Note 13 to our financial statements included elsewhere in this Annual Report on Form 10-K for details on our share-based compensation expense.

Liquidity and Capital Resources

We have incurred losses since inception and have incurred negative cash flows from operations from inception through December 31, 2018.

We have incurred losses since inception and have incurred negative cash flows from operations from inception through December 31, 2018, and again in the year ended December 31, 2020.

As of December 31, 2020, we had an accumulated deficit of $511.6 million.

In December 2018, we entered into the Genentech Agreement pursuant to which we received a $300.0 million initial upfront payment in February 2019, may receive approximately $1.8 billion over time, including payments upon achievement of specified development, regulatory and commercial milestones, and may receive additional royalties on sales of products commercialized under this agreement.

We have funded our operations to date principally from the sale of convertible preferred stock and common stock and, to a lesser extent, sequencing and development revenue.

As of December 31, 2020, we had cash, cash equivalents and marketable securities of $806.8 million.

We believe our cash flows from operations and our existing cash, cash equivalents and marketable securities will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 12 months.

We believe our existing cash, cash equivalents and marketable securities will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 12 months.

We may consider raising additional capital to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons.

We plan to utilize the existing cash, cash equivalents and marketable securities on hand primarily to fund our commercial and marketing activities associated with our clinical products and services, continued research and development initiatives for our pipeline candidates and drug discovery initiatives, ongoing investments into our immune medicine platform and scaling of our laboratory operations with our anticipated growth.

Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation.

Currently, our funds are held in money market funds and marketable securities consisting of U.S.

government debt securities, commercial paper and corporate bonds.

As revenue from sales of immunoSEQ and clonoSEQ is expected to grow, we expect our accounts receivable and inventory balances to increase.

Any increase in accounts receivable and inventory may not be completely offset by increases in accounts payable and accrued expenses, which could result in greater working capital requirements.

Moreover, we expect to incur additional costs associated with operating as a public company, including expenses related to legal, accounting, regulatory matters and exchange listing and SEC compliance matters, as well as director and officer insurance premiums and investor relations.

If our available cash, cash equivalents and marketable securities balances and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or convertible debt securities, enter into a credit facility or another form of third-party funding or seek other debt financing.

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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.

This additional capital may not be available on reasonable terms, or at all.

We plan to utilize the existing cash, cash equivalents and marketable securities on hand primarily to fund our commercial and marketing activities associated with our clinical products and services, continued research and development initiatives for our pipeline candidates and drug discovery initiatives and ongoing investments in our immune medicine platform .

We also expect to make increased capital expenditures in the near term related to the expansion of our office and laboratory space and expect to increase investment in laboratory equipment and operations to support our anticipated growth.

Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to capital preservation and liquidity.

Currently, our funds are held in money market funds and marketable securities consisting of U.S.

government debt securities and corporate bonds.

Our contractual obligations as of December 31, 2020 include operating lease obligations of $149.6 million, reflecting the minimum commitments for our office and laboratory spaces in Seattle, Washington and South San Francisco, California, a commitment to an office lease in New York City, New York and a commitment for server space in Seattle, Washington.

See Note 10 to our financial statements included elsewhere in this Annual Report on Form 10-K for more information, including the timing of cash payments related to these lease obligations.

Additionally, we have purchase commitments for cloud data storage through our collaboration with Microsoft, software and service license commitments, which are generally fulfilled within one to three years, royalty commitments and minimum commitments for laboratory material suppliers, which are generally fulfilled within one year.

Furthermore, in connection with one of our lease agreements, we have an existing letter of credit of $2.1 million with one of our existing financial institutions.

While we may experience reductions in our revenue in the near term as a result of the COVID-19 pandemic or otherwise, as long-term revenue from sales of our current and future products and services is expected to grow, we expect our accounts receivable and inventory balances to increase.

Any increase in accounts receivable and inventory may not be completely offset by increases in accounts payable and accrued expenses, which could result in greater working capital requirements.

The following table summarizes our uses and sources of cash for the years ended December 31, 2020 and 2019 (in thousands):

Year Ended December 31,

Net cash provided by (used in) operating activities

Net cash (used in) provided by investing activities

Net cash (used in) provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Operating Activities

Cash used in operating activities during the year ended December 31, 2020 was $149.7 million, which was primarily attributable to a net loss of $146.2 million and a net change in our operating assets and liabilities of $40.8 million, which were partially offset by non-cash share-based compensation of $24.8 million, non-cash depreciation and amortization of $9.2 million and noncash lease expense of $3.3 million.

The net change in our operating assets and liabilities was primarily due to a $43.4 million reduction in deferred revenue primarily related to revenue recognized from the Genentech Agreement, a $5.0 million increase in inventory, a $1.4 million increase in prepaid expenses and other current assets and a $0.9 million decrease in operating lease liabilities.

These changes were partially offset by an increase in accounts payable and accrued liabilities of $7.5 million and a reduction in accounts receivable, net of $2.6 million.

Cash provided by operating activities during the year ended December 31, 2019 was $205.4 million, which was primarily attributable to a net change in our operating assets and liabilities of $254.9 million, non-cash share-based compensation of $13.1 million, non-cash depreciation and amortization of $3.3 million and a $2.3 million fair value adjustment of our convertible preferred stock warrant liability due to an increase in valuation of our common stock, partially offset by a net loss of $68.6 million.

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These increases were partially offset by an increase in accounts receivable of $7.8 million, primarily due to an increase in clinical billings, as well as an increase in revenue paid in arrears rather than upfront by biopharmaceutical customers, an increase in prepaid expenses and other current assets of $8.6 million, primarily due to prepaid software, prepaid insurance and interest receivables, an increase in inventory of $1.2 million to support growth in lab operations and $0.6 million in security deposits.

Cash used in operating activities during the year ended December 31, 2018 was $32.3 million, which was primarily attributable to a net loss of $46.4 million, partially offset by non-cash share-based compensation of $11.1 million and non-cash depreciation and amortization of $4.8 million, and a net change in our operating assets and liabilities of $1.7 million.

The net change in our operating assets and liabilities reflects an increase in inventory of $3.0 million to support growth in our laboratory, an increase in accounts payable and accrued liabilities of $2.2 million due to increased headcount, a decrease of $0.6 million in deferred revenue due to increased development revenue and a decrease of $0.5 million in deferred rent due to increases in cash rental payments.

Investing Activities

Cash used in investing activities during the year ended December 31, 2020 was $117.0 million, which was primarily attributable to purchases of marketable securities of $695.0 million and purchases of property and equipment of $18.8 million, partially offset by proceeds from sales and maturities of marketable securities of $596.7 million.

Cash used in investing activities during the year ended December 31, 2019 was $481.7 million, which was primarily attributable to purchases of marketable securities of $884.2 million and purchases of property and equipment of $11.2 million, partially offset by proceeds from maturities of marketable securities of $413.7 million.

Cash provided by investing activities during the year ended December 31, 2018 was $0.7 million, which was primarily attributable to proceeds from maturities of marketable securities of $153.5 million, partially offset by purchases of marketable securities of $146.5 million and purchases of property and equipment of $6.3 million.

Financing Activities

Cash provided by financing activities during the year ended December 31, 2019 was $319.9 million, which was primarily attributable to proceeds from the initial public offering, net of underwriting discounts and commissions, of $320.9 million and proceeds from the exercise of stock options of $4.1 million, partially offset by payment of deferred initial public offering costs of $5.0 million.

Cash provided by financing activities during the year ended December 31, 2018 was $1.2 million, which was primarily attributable to proceeds from the exercise of stock options.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2019, which represents contractually committed future obligations (in thousands):

Expected Payments by Period

More Than 5 Years

Operating lease obligations (1)

Purchase commitments (2)

Operating lease obligations reflect remaining minimum commitments for our office and laboratory spaces in Seattle, Washington and South San Francisco, California and a commitment to an office lease in New York City, New York.

Please see Note 10 of our financial statements for additional information pertaining to operating lease commitments.

Purchase commitments include commitments for cloud data storage through our collaboration with Microsoft, commitments to support clinical trials utilizing clonoSEQ, software and service license commitments, and minimum commitments for laboratory material suppliers.

Furthermore, in connection with one of our lease agreements, we entered into a letter of credit of $2.1 million with one of our existing financial institutions.

Cash provided by financing activities during the year ended December 31, 2020 was $293.6 million, which was primarily attributable to $271.8 million in proceeds, after deducting underwriting discounts and net offering expenses paid by us, received from our underwritten public offering completed in July 2020, as well as $21.7 million in proceeds from the exercise of stock options.

Cash provided by financing activities during the year ended December 31, 2019 was $319.9 million, which was primarily attributable to proceeds from our initial public offering, net of underwriting discounts and commissions, of $320.9 million and proceeds from the exercise of stock options of $4.1 million, partially offset by payment of deferred initial public offering costs of $5.0 million.

Net Operating Loss Carryforwards

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If there should be an ownership change, our ability to utilize our NOL carryforwards and credits could be limited.

We have completed a Section 382 analysis and have determined there are no permanent limitations on the utilization of approximately $225.4 million of our federal NOLs as of December 31, 2018.

Under the newly enacted federal income tax law, federal net operating losses incurred in 2018 and future years may be carried forward indefinitely, but the deductibility of such federal NOL is subject to an annual limitation.

We have completed a Section 382 analysis for changes in ownership through December 31, 2018 and an analysis is ongoing for ownership changes through December 31, 2020.

Based on these analyses, we do not expect to have any permanent limitations on the utilization of our federal NOLs.

Under the TCJA, federal net operating losses incurred in 2018 and future years may be carried forward indefinitely, but the deductibility of such federal NOL is subject to an annual limitation.

Net operating losses generated prior to 2018 are eligible to be carried forward up to 20 years.

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Accordingly, management applied a full valuation allowance against net deferred tax assets as of December 31, 2020.

Off-Balance Sheet Arrangements

As of December 31, 2019, we have not had any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

In March 2020, under the newly enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), NOLs arising in tax years beginning after December 31, 2017 and before January 1, 2021 may be carried back to each of the five tax years preceding the tax year of the loss.

Additionally, the CARES Act temporarily removes the 80% limitation, reinstating it for tax years beginning after 2020.

However, none of these provisions have an impact on our tax provision.

Critical Accounting Policies and Estimates

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In determining the appropriate amount of revenue to recognize as we fulfill our obligations under these agreements, we perform the following steps to determine the amount of revenue to be recognized:

( 1 ) identification of contract or contracts;

( 2 ) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract;

( 3 ) measurement of the transaction price, including the constraint on variable consideration;

( 4 ) allocation of the transaction price to the performance obligations based on estimated selling prices;

and ( 5 ) recognition of revenue when (or as) we satisfy each performance obligation.

(1) identify the contract or contracts;

(2) determine whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract;

(3) measure the transaction price, including the constraint on variable consideration;

(4) allocate the transaction price to the performance obligations based on estimated selling prices;

and (5) recognize revenue when (or as) we satisfy each performance obligation.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers .

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To select the measure of progress, we consider the expectations of the performance period which may be based on customer-dependent estimates of samples or internal estimates of the performance period based on both the customer and our expected development timeframes.

For our collaboration with Genentech, we estimate the extent of progress using a proportional performance model that uses an input method based on costs incurred relative to the total estimated costs of research and development efforts to pursue both the Shared Product and Personalized Product pathways.

These estimates are based on our internal estimates and development timeframes, which are subject to revision based on the potential outcomes for both product pathways, decisions made by Genentech, regulatory feedback or other factors not currently known.

We regularly review our expectations of the extent of progress, including whether any variable consideration is no longer constrained, and, if any changes in estimates are made, we recognize revenue using the cumulative catch-up method.

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We measure share-based compensation expense for stock options granted to our employees and non-employee directors on the date of grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award.

We estimate the fair value of stock options granted to our employees and non-employee directors on the grant date, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model.

We estimate the fair value of stock options granted to our employees and non-employee directors on the grant date using the Black-Scholes option-pricing model.

The Black-Scholes option-pricing model requires the use of assumptions regarding a number of variables that are complex, subjective and generally require significant judgment to determine.

The assumptions used to calculate the fair value of our stock options were:

The assumptions used to calculate the grant date fair value of our stock options were:

Fair value of common stock

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Black-Scholes assumptions

The estimated fair value of options granted during the periods presented was estimated using the Black-Scholes option-pricing model with the following assumptions :

The estimated grant date fair value of options granted during the periods presented was estimated using the Black-Scholes option-pricing model with the following assumptions :

Year Ended December 31,

Grant date fair value

Fair value of common stock

$17.68 - $55.23

$7.80 - $47.81

Expected term (in years)

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64.3% - 72.9%

65.0% - 69.2%

Expected dividend yield

As of January 1, 2018, we adopted Accounting Standards Update 2016-09, Compensation—Stock Compensation (Topic 718) and elected to account for forfeitures as they occur rather than estimate expected forfeitures over the vesting period of the respective grant.

We account for forfeitures as they occur, rather than estimate expected forfeitures over the vesting period of the respective grant.

We use judgment in evaluating the assumptions related to our share-based compensation on a prospective basis.

As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future share-based compensation expense.

At December 31, 2019, unrecognized share-based compensation expense related to unvested stock options was $33.3 million, which was expected to be recognized over a remaining weighted-average period of 2.9 years.

As of December 31, 2020, unrecognized share-based compensation expense related to unvested stock options was $74.9 million, which was expected to be recognized over a remaining weighted-average period of 3.0 years.

Common Stock Valuations

For periods prior to the closing of our initial public offering, the estimated fair value of the common stock issuable upon exercise of our stock options was determined by our board of directors, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant, and factors that may have changed from the date of the most recent valuation through the date of the grant, which intended all options granted to be exercisable at a price per share not less than the fair value per share of our common stock issuable upon exercise of those options on the date of grant.

For periods prior to the closing of our initial public offering, the estimated fair value of the common stock issuable upon exercise of our stock options was determined by our board of directors, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant, and factors that may have changed from the date of the most recent valuation through the date of the grant, which intended all options granted to be exercisable at a price per share not less than the fair market value per share of our common stock issuable upon exercise of those options on the date of grant.

We believe our board of directors had the relevant experience and expertise to determine the fair value of our common stock.

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To date, we have not recognized any impairment of goodwill.

JOBS Act Accounting Election

We are an “emerging growth company” within the meaning of the JOBS Act.

The JOBS Act allows an emerging growth company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.

We have elected to use this extended transition period and, as a result, our financial statements may not be comparable to companies that comply with public company effective dates.

We also intend to rely on other exemptions provided by the JOBS Act, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

We will remain an emerging growth company until the earliest of (1) December 31, 2024 (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

Recent Accounting Pronouncements

See Note 2 to the financial statements included elsewhere in this Annual Report on Form 10-K for more information.

See Note 2 to our financial statements included elsewhere in this Annual Report on Form 10-K for more information.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis